Japan’s solar splurge may result in cooler power costs this summer

Japan’s conundrum of peak power prices may begin to ease as the country’s solar-power expansion taps scorching summers to displace fossil fuels.

The resource-poor country, which has boosted solar capacity more than sevenfold since 2011, may follow a similar path as Germany, where electricity prices fell along with fossil fuel use during high consumption periods, according to Trevor Sikorski, an analyst at Energy Aspects Ltd. in London.

“Japanese power system is starting to mimic exactly what happened in the German power system following its burst of solar capacity development,” Sikorski said. “The summer demand peaks start to disappear, as solar powered generation meets most of the air-cooling demand that the country needs.”

German power for delivery during demand peaks lost half its value in the past five years. For the 12-1 p.m. hour, average prices last year fell to about €32 ($36.48) per megawatt hour, from almost €41 in 2013. This has helped push many gas-fired power plants, which would traditionally produce during demand peaks, into mothballing.

Japan’s sun-generated output accounted for about 3.6 percent of total power production in the June to August period in 2015. That compares with the 3.1 average for the full year, up from 1.8 percent in 2014, as the country builds out its solar-generation capacity.

Japan’s installed solar generation capacity stood at 36.5 gigawatts at the end of last year, compared with 5.2 gigawatts in 2011, according to data from Bloomberg New Energy Finance. As a share of total generation capacity, Japan’s 16 percent is second only to Germany’s 21 percent, according to BNEF.

Solar projects typically generate power below nameplate capacity compared with sources such as coal or nuclear, because panels can only produce when the sun shines.

The world’s third-largest economy is aiming to derive about 7 percent of its electricity from solar by 2030, according to the Ministry of Economy, Trade and Industry. The country may reach its target as early as 2018, driven by both projects linked to the power grid as well as individual rooftop panels, according to Ali Izadi-Najafabadi, a Tokyo-based analyst at BNEF.

While that may cut power prices in Japan, it could also be bad news for fossil fuel producers who supply the world’s biggest liquefied natural gas buyer and third-biggest coal importer.

Spot LNG in Asia has already fallen more than 65 percent since September 2014, and coal prices are down about 40 percent since the end of 2013, amid global supply gluts. Demand for those fuels tend to peak in summer and winter in most of the biggest markets for cooling and heating.

Gas turbines and oil-fired plants tend to operate to meet peak demand, analysts at Energy Aspects wrote in a May 23 note. “The size of peak summer demand has been shrinking, driven by a strong build up in solar power generation,” they wrote. “As such, less generation from both sources should be expected.”

Growing use of renewable energy sources will reduce the need for fossil fuels to meet seasonal peaks, according to James Taverner, an analyst for IHS Inc. in Tokyo. “This is already making a small difference in Japan’s fossil fuel needs, and the impact will be greater as renewables become a larger share of the overall total.”

Besides solar, the return of Japan’s nuclear power and overall declining consumption will also cut back fossil fuel demand in the summer, according to BNEF’s Izadi-Najafabadi.

“This summer Japan will have two reactors on online, more solar online and power consumption is going down,” he said. “That kills off some demand from fossil fuels.”

Via Bloomberg

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