Natural gas in the Asian Pacific region : market behavior and the Japanese electricity market

Abstract: This dissertation consists of four main chapters, all related to the Asian Pacific natural gas market, and the role of the Japanese electricity sector. The natural gas market in Asia Pacific is heavily dependent on the demand from Japan, which imports around 75% of the gas traded as LNG (liquefied natural gas) in the region. The demand for natural gas in Japan is, in turn, almost exclusively driven by the electricity industry that consumes around 70 % of the imported natural gas. On the supply side we find seller concentrations with only six countries exporting LNG in the region. The first main chapter analyzes the market structure of the Asian Pacific natural gas market, the next two relate to the usage of natural gas in the Japanese fossil-fueled electricity production, and the final study investigates the demand for electricity in the residential sector in Japan. The first chapter argues that the buyers in Japan, through cooperation, have the potential to exert the market power that their large market share provides them with. This could be offset by the monopoly power that the six present sellers have. In the chapter four, the solutions for the four imperfect competition cases of, monoposony, monopoly, bilateral monopoly, and the Cournot model are simulated. Neither of the model solutions comes close to the both the actual market price, and the actual gas volumes. The model that best mimics the actual price is the bilateral monopoly model, while the monopsony model comes closest to the actual volumes. Giving some mixed evidence of how the Asian LNG market works. Given the indication of market power, the second study analyzes the fossil-fuel mix efficiency in the power sector in Japan. If the power sector is able to exert the alleged market power, it may be the case that they minimize costs according to shadow prices instead of actual market prices. Such behavior could cause the fossil-fuel mix used for power generation to be inefficient. The analysis is based on a Translog model that assumes cost minimization according to shadow prices, instead of actual market prices. Given this assumption, relative price efficiency with respect to the fossil-fuel mix is tested. The results from the model indicate that the null hypothesis of relative price efficiency in the fossil-fuel mix cannot be rejected. Hence, if the Japanese LNG buyers exercise some market power in the LNG market the model provides no evidence for the notion that they use natural gas efficiently, relative other fossil fuel, in electricity generation. The third chapter analyzes the impact that Japanese energy policy has had on the fossil-fuel choice in the power industry in Japan. Due to energy security and environmental concerns, the energy policy in Japan has been favoring natural gas as fuel in fossil-fueled electricity production. The study uses a restricted flexible cost function approach to analyze the impact on fuel costs when the volume of natural gas is exogenous – due to the energy policy – to the electricity producer’s choice of fossil-fuel mix. By deriving the shadow price of natural gas, the optimal (cost minimizing) consumption of natural gas is estimated. The results indicate that too much gas is used. Hence, the fossil-fuel mix is inefficient from a pure cost perspective. The results also shows that short-term substitution between the unrestricted fossil-fuels – coal, crude oil, and fuel oil - have occurred, illustrated by negative own-price, and positive cross-price elasticities of reasonable magnitude. The study also shows that the combination of technological change and energy policy has been fuel-saving with respect to crude oil, and fuel-using for coal and fuel oil in fossil-fueled electricity production. The fourth chapter uses an error-correction model to estimate long- and short-run electricity demand elasticities in the residential sector in Japan. The results show low long-run price elasticities, indicating that the proposed deregulation of the electricity sector in Japan –with projected lower prices – will have a relatively low impact on the electricity demand in the residential sector.

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