In preparation for the attack on Ukraine, Gazprom only fulfilled its contractual obligations, but did not fill up the gas storages in Europe after the cold winter 2020-2021 marked by little wind. With low levels of gas stored, gas prices increased already during 2021, long before the war started.
As fossil gas is often used for marginal electricity generation it also increased the electricity price. France made this more frequent, as the nuclear reactors in the country had a lot of reliability problems. In recent months, a quarter of the nuclear capacity has often been missing, and France has been a net power importer from Germany in the first two months of 2022 – every day except one.
After the Russian invasion into Ukraine the situation has become even more uncertain. The risk of further sanction imposed by western countries on energy trade with Russia has made fuel prices reach high levels, as fuel saved in storages would become very valuable in case of sanctions would actually be imposed – or pipelines destroyed in the conflict.
High gas prices has been the primary driver. But as electricity producers have turned to coal fired plants increasing the demand for coal, coal prices followed as a result.
There are at least two ways this reaches Japan’s electricity market:
First, Russia is a major energy supplier in the world: About 1/10 of all oil is extracted in Russia, as well as close to 1/5 of all fossil gas. Russia, Kazakhstan and Uzbekistan together control about 1/20 of all coal extracted and more than half of all Uranium mined in the world, and Rosatom supplies about 35% of global enriched uranium.
If Russian exports are reduced or even cut, global energy supply will decrease increasing the prices of all fuels globally.
Second, Japan is importing gas in a liquified form transported by ships. The supply is largely coming according to long term contracts, often indexed to oil prices with some time lag. So, gas prices in Japan are not directly affected by the dramatic price increase of gas in Europe.
However, as European companies need more gas and are unable or simply unwilling to buy Russian gas at current high prices, they may turn to Japanese companies and buy shiploads with, still cheaper, LNG from them. If the value of resold LNG is very high compared to the value on the Japanese market, why bring the gas to Japan?
This market logic tends to result in prices becoming as high in Japan as in other parts of the world. With a high price of fossil gas in Japan, electricity prices will then increase as well.
So, all fuel-based electricity generation becomes more expensive because of the Russian attack on Ukraine.
But not electricity production using solar and wind energy!
When solar and wind plants have been built without subsidies, the owners can enjoy wonderful profits when prices are at these high levels.
When operating under FIT or CFD systems this potential profit is instead shared among electricity customers. This is now happening in Europe where electricity prices in many countries are now higher that the tariffs provided even years ago.
Germany, with it increased renewable electricity generation has enjoyed lower prices than many neighboring countries during the crises, and is a net exporter of power. Unlike what many in Japan seem to believe, Germany has exported electricity to France every day except one during 2022 up until mid March.
The German government has reacted to the crises by accelerating the development of renewable electricity generation, increasing annual installation 2 or 3 times in order to reach 100% Renewable power by 2035 instead of 2050. The total consumption of fossil gas in Germany has decreased only slightly since 2010, while nuclear and coal has fallen dramatically. In the coming years reduction of gas will likely accelerate.
In northern Scandinavia, northern Sweden and Norway, large increase in wind power capacity has directly resulted in continued low prices while transmission capacity to continental Europe is used at full power. This is especially true during the windy winter months where wind power now often is the largest source of electricity.
So, Putin has helped the world see the advantage of solar and wind power by magnifying the effect. These energy resources are free and domestic. Once the investments are made, the cost of the electricity they deliver is unaffected by wars on the other side of the globe.