Japan’s power futures get boost as utilities hedge price risk

Japanese power futures are gaining popularity as companies seek to manage price risk amid fuel volatility. Daily, weekend and weekly contracts traded on Japan's main platform, the European Energy Exchange (EEX), almost tripled in July compared to a year earlier, hitting a record high of over 10,000 lots. Leo Takai, a research manager at EEX, explained that the surge is partly due to the unpredictable Iran crisis affecting fuel markets, prompting traders to shift towards futures products like daily contracts, which are less influenced by fuel price changes.

The trend is especially notable in day contracts, which set new all-time highs in June and July. Thermal power remains the main source of electricity in Japan, making spot prices vulnerable to fluctuations in fuel costs, such as liquefied natural gas (LNG). The volatile benchmark LNG price for the Northeast Asia region, known as the Japan Korea Marker, has been impacted by the Iran conflict, with the Strait of Hormuz nearly closed since late February.

This has constrained LNG supply, a crucial trade route that previously accounted for a fifth of global shipments.

In July, EEX trading volumes were nearly equivalent to 44% of spot volumes on the Japan Electric Power Exchange, a 4 percentage point increase from June and the second consecutive month of growth. These futures contracts are traded by a mix of domestic power companies, international commodity traders and financial institutions. Misao Endo, a senior researcher at the Tokyo-based Central Research Institute of Electric Power Industry, noted that the uptick may also reflect opportunistic attempts to profit from short-term price volatility, as market participants trade power prices or spreads between electricity and fuel costs.