The situation in Iran is impacting the global electricity market

Tensions surrounding Iran have begun to affect the electricity market. Concerns about the supply of fuels such as liquefied natural gas (LNG) are intensifying due to the de facto blockade of the Strait of Hormuz and the military attack on Qatar. On March 2nd, electricity futures prices in Japan and Europe rose by 20% compared to the previous weekend. On March 3rd, LNG spot (immediate contract) prices for Asia rose to 1.7 times the previous day’s level.

“The timing of Qatar’s production halt has become the biggest focus,” noted Takeshi Katayama, chief analyst at the European research firm Kpler.

Qatar’s state-owned company, Qatar Energy, announced on March 2nd that it was halting LNG and other production due to the Iranian attack. With an annual capacity of 77 million tons, it is considered the world’s largest production base. The company stated on March 3rd that it would also halt the production of chemical products such as urea, which use natural gas as a feedstock.

Natural gas prices surged following the US and Israeli attacks on Iran.

The Platts JKM LNG spot price benchmark for Asia, published by US research firm S&P Global Energy, rose to $25.39 per 1 million BTU (British thermal units) on March 3rd, an increase of approximately $10.33 (68.5%) compared to the previous day’s closing price. This is the highest level since the end of December 2022, when the Russian invasion of Ukraine led to supply and demand tensions.

The spot price of Dutch TTF, a benchmark for European natural gas, also continued to rise on the evening of March 3rd (Japan time).

On March 2nd, Iranian Revolutionary Guard officials stated that the Strait of Hormuz had been blocked. Due to the inability to ensure navigational safety, most ships will remain on hold.

Atsuko Kawasaki, an expert at S&P Global Energy, believes that “with LNG from Qatar and the UAE unable to reach buyers and no signs of a resolution, the market has become aware of the supply and demand tensions.”

Amid concerns about a potential fuel shortage, hedging against future risks has also increased. One central area is the electricity futures market. This is a financial derivatives transaction involving the buying and selling of future electricity at a fixed price, with power generation companies and electricity retailers participating.

Looking at electricity futures listed in Japan on the European Energy Exchange (EEX), the world’s largest electricity exchange, the next-month contract rose to 12.75 yen per kilowatt-hour on the 2nd, a 16% increase from the previous weekend. In Europe, the futures prices for the next-month contracts in Germany and France also rose by as much as 25%.

In Japan, the global fuel shortage caused by the Russia-Ukraine conflict in 2022 led to a surge in electricity prices.

In the oil sector, after the two previous oil crises, national strategic reserves have been well-established to cope with supply disruptions and price increases in emergencies. However, “LNG lacks such an international reserve system,” said Hiroshi Shirakawa, a gas analyst at the International Energy Agency (IEA).

Currently, Japan only has privately held stocks, equivalent to 2-4 weeks of LNG consumption, held by power and gas companies, a far cry from the approximately 250-day oil reserves.