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LNG has taken a more strategic role in Japan’s latest draft of its new seventh strategic energy plan as Tokyo shifts its policy priorities from decarbonization to energy security.

The latest draft, released last month, included for the first time a risk scenario requiring more LNG supplies for the world’s second-largest LNG importer to ensure stable energy supplies, should nascent decarbonization technologies, such as carbon capture and storage (CCS) and hydrogen, not progress as expected.

Local LNG industry watchers have been hoping to see more favorable language underlining the importance of LNG, a departure from labeling LNG as a transitional fuel, with its implication that it could become a stranded asset in the future.

Japan’s shift to energy security stems from the country’s concerns over recent geopolitical volatility from the tensions in the Middle East and the energy crisis exacerbated by Russia’s ongoing war in Ukraine. This contrasts sharply its attitude toward the state of the world in 2021, when Tokyo released the sixth strategic energy plan after pledging its carbon-neutrality goal in 2020.

Japan is also anticipating an increase in the country’s electricity consumption for the first time in two decades, driven by artificial intelligence, semiconductors and data centers, meaning that it needs to maximize all power sources.

Japan’s electricity consumption rose marginally by 0.5% year on year in 2024, partly due to a long period of warm temperatures extending past the typical summer months, according to consultancy Wood Mackenzie.

The Kyushu region reported a 2% growth in its power demand due to a new semiconductor factory built by Taiwan Semiconductor Manufacturing. Meanwhile, Tokyo and Kansai, key hubs for the data center industry, reported increases of 1% and 0.8%, respectively. “This indicates that we are already witnessing a rising demand trend, which is expected to continue through 2030 and beyond,” Woodmac tells Energy Intelligence.

More LNG May Be Needed

LNG is expected to fill the supply gap if nuclear and renewables fail to meet the targets set by the upcoming seventh strategic energy plan, which is expected to be approved by Japan's cabinet next month.

The new draft for the energy plan still uses a reference scenario that the country will achieve its provisional nationally determined contribution (NDC) target of reducing its greenhouse gas emissions by 73% by the 2040 fiscal year compared to 2013.

The draft plan acknowledges under its “risk scenario” the uncertainties over the pace of the development and costs of decarbonization technologies — such as CCS, hydrogen and offshore wind — which could prevent Japan from meeting its NDC target.

Under this scenario, the draft plan estimates that 110 million kiloliters, or 74 million tons, of LNG supplies would be required by 2040 compared to the 54 million-60.5 million tons needed under the reference case.

“Although simply written, this is very important from the perspective of LNG procurement,” a Japanese industry source says.

Energy Intelligence's Research and Advisory arm estimates show that under its base case, Japanese LNG demand will fall from 68.7 million tons in 2024 to 57.6 million tons in 2030 and 51 million tons in 2040, according to its latest long-term supply-demand outlook report published in December.

Renewables, Nuclear Targets

Unlike previous plans, Tokyo did not allocate specific targets for each separate fossil fuel in its energy mix. The draft plan expects fossil fuels to reach a 30%-40% share in the energy mix, with 40%-50% for renewables and 20% for nuclear by fiscal year 2040, which ends on Mar. 31, 2041.

Critics of the draft plan believe some of the targeted shares are overly optimistic, in particular for nuclear. The draft’s 20% nuclear share target would require restarting all of Japan’s 33 operable reactors and building replacements for decommissioned units, which is time consuming and costly. To date, only 14 reactors have restarted since 2011.

Similarly, to achieve the draft plan’s renewables share target, Japan is planning to increase its offshore wind capacity to 10 gigawatts by 2030 and 30-45 GW by 2040, but cost challenges might deter such rapid expansion. The country’s deep coastal waters do not support fixed offshore turbines and, therefore, require expensive floating wind farms.

More Term Deals?

The draft plan should encourage Japanese buyers to commit to more LNG term supplies in anticipation of the increase in electricity demand, market observers say.

“Given the expected increase of the entire power generation demand and expected retirement of inefficient coal power plants, the share of thermal fuels seems to incentivize buyers to sign long-term contracts,” a local energy analyst says.

Under the current sixth strategic energy plan, Tokyo reduced the 2030 expected LNG share to 20% from 27% previously, which made buyers reluctant to commit to new deals or renew expiring contracts. Around 20 million tons per year of Japan’s current 60 million ton/yr LNG contracted portfolio will expire by 2030, according to data from commodity analytics firm Kpler.

Japanese buyers may prefer to not over commit to long-term supplies and turn to the spot market for additional supplies as a less costly option, as happened after the Fukushima disaster in 2011, according to Kpler analyst Go Katayama.

The Japanese government and LNG buyers are expected to continue to push for greater destination flexibility in long-term LNG contracts. Tokyo is also considering introducing an index to assess the stability of Japan’s LNG supply relative to its needs and other measures that would help buyers in committing to new contracts.

To guard against potential supply disruptions, the government is also considering expanding its strategic buffer LNG scheme aimed at meeting peak demand in winter and summer from three cargoes to 12 cargoes annually. State-owned Jogmec is in charge of administering a fund that would cover losses from emergency sales or retain profits, if any.

Potential New Terminal

Gas utility Hokkaido Gas said last month it is considering building a new LNG import terminal at Tomakomai city in Japan’s northernmost prefecture, with an eye on the future introduction of hydrogen and e-methane. Last year, the utility signed a 10-year LNG supply deal with Australia’s Santos for 400,000 tons/yr starting from 2027.

“Hokkaido is one of the few regions (if not the only region in Japan) which has a gradual structural demand growth potential due to limited gas connectivity and intense winter conditions,” Masa Odaka, an analyst with consultancy Rystad Energy, says. “Unlike the main [Honshu] island, it is not as well supplied with gas as of now.”

In the medium term, Rystad expects Japan’s LNG demand to remain weak due to improving energy efficiency, higher nuclear generation, renewable adoption and a declining population. Rystad estimates the base LNG demand for Japan at 60 million tons in 2027, remaining stable through 2032 in a 2.2°C scenario or a "late" energy transition scenario. Beyond 2030, Japan’s LNG demand will be dependent on the pace of nuclear restarts, tech development in renewables and whether coal-fired power generation will be phased out or boosted, Odaka says. The country’s rapidly declining population is also a big uncertainty for its overall energy demand, he adds.

The weather will also play a major part in Japan’s power consumption this year, especially if the prolonged summer temperatures reappear as it did in 2023 and 2024, Odaka says. “The restarts of Chugoku Electric’s Shimane No. 2 and Tohoku Electric’s Onagawa No. 2 [nuclear reactor] units would improve generation economies for both utilities and incentivizes them to generate with lower costs from its additional baseload,” he adds.