IEEJ：January 2017ｃ IEEJ 2017
○Special Bulletin
A Japanese Perspective on the International Energy Landscape (305)January 5, 20172017 Energy Outlook for Japan and the WorldKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe 2017 New Year opened after 2016 ended as the year of surprise. How would this year be?
Based on seven outlooks that the Institute of Energy Economics, Japan, released on December 22, I
would like to summarize energy outlook for Japan and the world in 2017.
First, the international oil market will slowly go in the direction of rebalancing in 2017. Whileglobal oil demand this year will increase by 1.2 million barrels per day, non-OPEC oil supply willslacken under low prices. Toward the second half of the year, particularly, oversupply will be
gradually removed. If an agreement between the Organization of the Petroleum Exporting Countries
and non-OPEC oil producing countries on coordinated production cuts late last year turns out to be
successful, the rebalancing will be accelerated. Given that whether oil producing countries wouldcomply with their production quotas is uncertain, however, no optimism can be warranted. In suchsupply and demand environment, crude oil prices will moderately increase. The key West Texas
Intermediate futures price will average $54 per barrel in the first half of this year and $59/bbl in thesecond half. However, crude oil prices could continue volatile fluctuations depending on oil
producing countries’ compliance with production quotas, U.S. shale oil production under the new
Donald Trump administration, and political and economic conditions in major countries such as theUnited States and European countries.
Second, the international gas/LNG market will remain oversupplied in 2017. While LNG
demand will expand mainly in Asia in response to price drops, oversupply will accelerate on thelaunch of LNG production under large-scale LNG projects for which investment decisions weremade amid high LNG prices in the past. Such situation will continue beyond 2017. As Asian LNG
prices are mostly indexed to crude oil prices, however, Asian LNG prices will rise in line withmoderate crude oil price hikes as described above. The imported price of LNG in Japan will increase
from $6.8 per million British thermal units in the January-October 2016 period to $7.7/MMBtu in2017. Adversely, however, spot LNG prices which reflect the supply-demand balance will fall toaround $6/MMBtu. Oil-indexed LNG prices’ deviation from spot prices could trigger debate on theAsian LNG pricing approach between the market stakeholders.
Third, changes could arise in regard to Japan’s electricity market reform. After last April’s fullderegulation of electricity retail market, the total share for all customers (both large-lot and otherusers) switching from traditional electricity suppliers rose by 2.7 percentage points from March 2016
to 7.9% in August. Amid the changing market environment, areas where new electricity market
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IEEJ：January 2017ｃ IEEJ 2017○entrants increase remarkably could change. A government panel will continue to consider
institutional revisions to promote the electricity system reform. While discussions will continue onwholesale market vitalization measures (including a baseload electricity market and a cross bidding
system), a capacity market, a non-fossil electricity value market and other new institutions, how tosecure consistency between new institutions will be a key challenge in policy discussions in 2017.
The gas market will be fully deregulated in April 2017. As new entrants in the gas retail market are
required to secure competitive LNG procurement, it may be challenging for any entity to enter thegas retail market. Attracting attention will be how competition pressure would arise through the gas
retail deregulation. We must also pay attention to the deregulation’s influences on LNG procurement
and trading as well.
Fourth, renewable energy will continue robust expansion in 2017. As renewable energy power
generation costs have declined rapidly in overseas markets, global renewable energy power
generation capacity is likely to increase by 120-130 GW during 2017 to top 2,200 GW at the end of
the year. Driving renewable energy expansion will be Asia, including China and India. Whilerenewable energy continues expanding, many regions are adopting quantitative control on renewablegeneration capacity under competitive auction and other systems with the quantitative expansion
under feed-in-tariff and other incentives fading away. While renewable generation costs are expected
to decline further over a medium term, Japanese renewable generation costs are still two to threetimes as high as the global average. Equipment distribution and installation problems peculiar toJapan must be resolved to lower costs. Japan will revise the operation of the FIT system to holddown surcharge growth accompanying a rapid increase in solar photovoltaics generation. Japan andthe world will be required in 2017 to promote renewable energy while pursuing economic rationality.
Fifth, every participating country to the Paris Agreement will start full-fledged efforts toprevent global warming this year after the Agreement took effect in November 2016. However, theabsence of any clear direction in U.S. climate change policies under the incoming Trumpadministration has led to uncertainties about global climate change policies. Attracting global
attention are policy developments under the incoming U.S. administration known for its negative
stance on the Paris Agreement and the Obama administration’s legacy including the Clean Power
Plan. Very important in China will be energy initiatives regarding climate change under the 13th
five-year plan and a nationwide emissions trading system starting in 2017.
Sixth, the most important point regarding nuclear energy in Japan will continue to be how
nuclear power plants will be restarted. Around February this year, the Osaka High Court is expected
to give a ruling on Kansai Electric Power Co.’s suit seeking to repeal the Otsu District Court’sinjunction against the operation of Units 3 and 4 at the company’s Takahama nuclear power station.
The decision could exert various effects on the future restart of nuclear plants and will attract muchattention. Also attracting attention this year will be nuclear plant operators’ decision on whether toapply for the extension of operations for existing reactors that went online nearly 40 years ago.
Outside Japan, China will continue new nuclear plant construction. China will boost its nuclear
power generation capacity beyond 43 GW in March 2018, replacing Japan as the third largest
nuclear power generator in the world. Aggressive international expansion by the Chinese and2

IEEJ：January 2017ｃ IEEJ 2017○

Russian nuclear industries will also attract attention from those in nuclear industry circles.
Seventh, primary energy supply in Japan in FY2017 will decline for the fourth straight year to468 million tons of oil equivalent (down 9% from FY2010) despite an economic pickup. While thetotal primary energy supply will decrease, non-fossil energy’s share of primary supply will increase
due to the expansion of renewable energy and the restart of nuclear power plants. As a result, Japan’senergy-related carbon dioxide emissions in FY2017 will fall to 1,105 million tons, slipping below
the level before the 2011 Great East Japan Earthquake. Electricity and gas sales in FY2017 will
increase for the second straight year, while oil demand will fall for the fifth consecutive year to 172
million kiloliters. Attention should be paid to how the restart of nuclear power plants would
influence overall energy supply and demand and how the renewable energy expansion would
increase economic costs.
Through this bulletin, I would like to follow up on how energy situations in Japan and theworld would be in 2017.

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