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Weak Yen Threatens Runaway Power Bills for Japanese Households

·5 min read

(Bloomberg) -- The rapidly weakening yen means Japan’s utilities may no longer be able to protect households from the worst of the global energy crisis, setting the stage for a winter of higher power bills in a country not yet accustomed to rampant inflation.

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While fuel prices catapulted to new highs this year, the impact on Japan’s households has so far been limited by government regulations which cap price increases. Import costs for coal have tripled in the last year and the price of natural gas has doubled, yet residents in Tokyo are only paying about 25% more.

Now, several Japanese utilities -- which buy overseas fuel in dollars to produce electricity -- are considering asking the government to allow them to raise prices further and remove curbs, according to people with knowledge of the matter.

While the companies have not disclosed specific plans, executives say they’re left with few options as fuel prices soar and the yen plunges.

“The impact of the fuel price surge is an order of magnitude that far exceeds our limits,” Natsuhiko Takimoto, the president of Chugoku Electric Power Co., said to reporters on Tuesday, according to the Nikkei. “We have tried to keep power prices at current rates. If this situation continues, we must raise them.”

While regional utilities have tried to pass on the higher costs to consumers through what’s called a fuel cost adjustment system, all of them have reached their caps. The last time Tokyo Electric Power Co., the nation’s top electricity supplier, hit the limit was in 1997.

Utilities may ask for a removal of caps on fuel cost adjustments or seek to increase base rates altogether, although it’s also possible that authorities will reject or delay their requests to shield households -- at least through the winter.

If price caps are removed, power bills for an average Tokyo household could increase at least another 10% as soon as this winter, then spiral higher, according to Bloomberg calculations. Changes to base rates could also result in much larger hikes.

“If the cap is removed, it may set the precedent for prices to increase to levels that might be challenging to bring back down,” said David Thoo, a power & renewables analyst at Fitch Solutions.

TEPCO is also considering price hikes for extra-high voltage and high-voltage industrial customers, according to a release last month, which could burden factories and manufacturers.

The energy crisis is set to get worse this winter, when temperatures drop and global fuel consumption peaks. Europe and Asian nations are competing for a finite amount of fuel, as Russia moves to curb vital supplies to hit back against sanctions. Resource-poor Japan is particularly vulnerable, importing 97.8% of the natural gas it consumes.

“The weakening of the yen has clearly aggravated the problem since fuel imports make up such a large part of the primary energy mix,” said Yuriy Humber, president of Yuri Group, which publishes reports on the Japanese energy markets. “Japan may spend more on fuel imports this year than it earns from machinery exports.”

The surge in energy prices has also meant Japan, after years of grappling with deflation, is finally seeing prices go up, albeit without the virtuous cycle of wage hikes and demand growth that officials had hoped for. Tokyo’s core inflation rate has been at its highest in three decades excluding tax hike years, and energy prices account for nearly half the gains seen in the latest national data.

The Japanese government is trying to do all it can to soften the blow to the nation’s most vulnerable, who are also facing higher food costs. Prime Minister Fumio Kishida has promised a new economic package in October, in addition to 50,000 yen ($347) handouts for low-income households to help them cope with higher energy bills and food prices.

“The most worrying part for consumers will be how long this peak lasts,” Humber said. “Other than a global recession, there are not many factors that could break the upward price trend in the near term.”

But if Japanese utilities aren’t able to boost rates, then they are headed for a world of pain -- and not just for this winter, with the energy crisis seen continuing for most of this decade.

The inability to immediately pass on fuel costs to consumers means utilities are facing the worst financial situation in a decade. Analysts surveyed by Bloomberg expect all 10 of the regional utilities to post a combined annual net loss of roughly 325 billion yen ($2.3 billion), the largest since the year following the 2011 Fukushima nuclear disaster.

Kyushu Electric Power Co. and Chugoku Electric Power Co. were forced to scrap dividends for shareholders this week, resulting in a drop in stock prices.

One possible solution could be a government subsidy similar to the strategy deployed to keep gasoline prices in check, according to Yuri Group’s Humber. Utilities could be provided capital to keep rates artificially low.

Other countries are taking more drastic measures. The U.K. is poised to spend hundreds of billions of dollars to freeze power bills at current rates, while several European governments have bailed out utilities grappling with unsurmountable costs.

“With no sign of global fuel prices significantly easing soon, utilities will ask either for higher rates or subsidies,” said the Yuri Group’s Humber.

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