IEEJ e-NEWSLETTER
No. 219(Based on Japanese No. 217)

Published: October 28, 2021
The Institute of Energy Economics, Japan(As of October 23, 2021)

Sources:(1) DOE-EIA(2) Investing.com

Sources:(1) Ministry of Finance "Japan Trade Statistics"(2) World Bank (Netherland Title Transfer Facility)(3) DOE-EIA, NYMEX (Front-month Futures)

Source: x-rates.com

Sources:(1) Finance. Yahoo.com(2) Investing.com

Contents
Summary【Global Monitoring】
1. US: California ISO Supply Crunch
2. EU: Soaring Electricity and Gas Prices
3. China: Mid- to Long-term Plan for Pumped-Storage Hydropower Announced:
3.8-fold Growth in 10 Years
4. ME: Regional Diplomacy in Full Swing with U.S. Withdrawal
5. Russia: A Gas Power’s Role Revisited with the Rising International Criticism
of Putin’s Authoritarianism

Summary【Global Monitoring】
1. US: California ISO Supply Crunch
A supply crunch has hit again this year, causing California ISO to issue eight energy use
reduction requests so far. This summer, batteries assisted supply capacity to some extent.
2. EU: Soaring Electricity and Gas Prices
In Europe, natural gas prices are soaring due to a supply crunch amid low stock levels.
Wholesale electricity prices are also climbing due to low wind power availability and soaringgas prices. Effects on industry and electricity tariffs are starting to be seen in some areas.
3. China: Mid- to Long-term Plan for Pumped-Storage Hydropower Announced:
3.8-fold Growth in 10 Years
China released its medium- to long-term plan for pumped-storage hydroelectric power
through 2035. The target of increasing pumped-storage hydropower to 120 GW, or 3.8 times
the level in 2020, by 2030 was set. The challenge for meeting this ambitious target will be
securing enough land.
3. ME: Regional Diplomacy in Full Swing with U.S. Withdrawal
With the sudden change in the situation in Afghanistan caused by the U.S. withdrawal,
diplomatic activity is accelerating among Middle Eastern countries to stabilize the region.
Negotiations to rebuild the Iran nuclear deal are also slated to resume soon.
5. Russia: A Gas Power’s Role Revisited with the Rising International Criticism of
Putin’s Authoritarianism
As gas prices soar in Europe, Russia’s role is receiving attention. A lower house election washeld but was severely criticized for its undemocratic process. Amid tense political relations
between Europe and Russia, the question – whether or not Russia could contribute tostabilization of the European gas market - deserves attention.

1. US: California ISO Supply Crunch
Junichi OGASAWARA, Senior Research Fellow
Manager, Electric Power Group
Assistant Director
Electric Power Industry & New and Renewable Energy Unit

A supply crunch has led to eight energy use reduction requests so far this year at the
California ISO, which implemented rotating outages last summer. Users were requested to cut
back on energy use in the evening on June 17 and 18, July 9, 10, 12, 28, and September 8 and
9. While these requests were triggered by a surge in demand due to heat waves, the peak load
this summer of 43.94 GW is similar to 44.30 GW in the summer of 2019 and is not particularlyhigh historically (the largest output in the last decade was 50.12 GW, in the summer of 2017).
The supply crunch had been predicted by the North American Electric Reliability
Corporation (NERC) in its summer reliability assessment report, which warned that the peakload was expected to increase in many regions in the West, and would cause a supply shortage
throughout the region if a once-in-a-decade heat wave were to occur. The rotating outages lastsummer were caused by a wide-area heat wave that caused restrictions on imports from otherregions. This year, large-scale heat waves hit from as early as June, triggering a decrease inimports and tightening the supply-demand balance for an extended period from June to
September.
Because concerns about tight supply and demand emerged early this summer, the state
government and the California ISO discussed the response together, enhancing the demand
response and trying to secure supplies from outside the area. Nevertheless, imports dropped
significantly on the day on which energy curtailment requests had to be issued. Most of the
supplies needed to make up for the decrease in imports were gas-fired thermal power, namely,
fossil-fuel generation that has come to be despised in the state. With the net load curve (demandminus wind and solar power) toward the evening steepening each year, the lack of supplies tokeep up with this change likely led to the issuing of requests.
Meanwhile, battery capacity has grown to around 1,500 MW in the California ISO’s service
area. For example, batteries have supplied around 720–1,420 MW per day, in August, serving
as a supply source to support peak demand. Since August 17, the ISO has been releasing thedemand trend in five-minute increments and resource adequacy for the next seven days (withand without wind and solar PV for both forecasts), allowing battery owners to charge anddischarge accurately using the ISO’s information without having to forecast the supply-demandbalance by themselves. An additional 1,500 MW of battery capacity is expected to be installed
this year; the importance of batteries as a flexible supply source is likely to increase.
Since early September, the day-ahead spot electricity price in Europe has soared due totighter supply and demand in the UK and skyrocketing natural gas prices. But it is also true thatthe supply situation has become tighter in general due to the expansion of variable renewableenergies in climate-focused countries and regions and the decrease in extra thermal power
capacity. Pursuing the dual goals of decarbonization and stable supply requires a difficultbalancing act.

2. EU: Soaring Electricity and Gas Prices
Ichiro KUTANI, Senior Research Fellow, Manager
Global Energy Group 1, Assistant to Managing Director
Strategy Research Unit
Electricity and gas prices are skyrocketing in Europe. According to media reports, on
September 20, the wholesale electricity prices (day-ahead) in the UK and Germany were$222.68/MWh and $175.70/MWh (or approximately 24 yen/kWh and 19 yen/kWh, at 110 yen
to the dollar) and the wholesale natural gas prices (day-ahead) were $25.89/Mbtu and$25.28/Mbtu. The electricity price for the UK has come down from $418.12/MWh on
September 13 but remains far higher than the average price of $48/MWh in 2020. The same istrue for natural gas, whose average price last year was $3.2/Mbtu for the natural gas hubs in the
UK and Germany.
There are two main factors behind the rise. The first is the global rise in natural gas prices.
On the demand side, economies are gradually recovering and natural gas demand is increasing,though the impact of the pandemic persists. Meanwhile, on the supply side, various eventsoccurred simultaneously and caused the current situation, including the slower-than-usual
filling of gas in underground storages in Europe due to the bitter cold last winter, the decreasein natural gas supplies from the main supplier, Russia, via Ukraine, the drop in supply from theregion’s largest gas producer, Norway, due to facility outages, and the LNG supply crunch in
Asia. Higher natural gas prices inevitably push up electricity tariffs in the EU (including theUK), where gas-fired thermal power accounted for 22% of electricity supply in 2020.
The second is the tight electricity supply in Europe. Europe is expanding the use of renewableenergy while closing coal-fired thermal plants in an effort to decarbonize. However, calm
weather conditions occurred in the area spanning from the North Sea to the Baltic Sea, causinga drop in output from the many wind power plants in this region. Wind power accounts for 15%(in 2020) of electricity supply in the EU (including the UK), and so has a significant impact.
The effects are playing out, for example, in the form of suspension and reduction of operations
by ammonia and fertilizer plants that use natural gas as an ingredient. In Spain, the governmentis stepping in to distribute the extra revenues from soaring electricity tariffs gained by powercompanies to consumers.
What lessons can Japan draw from this? It is that the growth in variable renewable energies(VRE) must be accompanied by maintaining backup energy sources and progress in energy
storage technologies; also, the market should be designed carefully. If VRE grows faster thanbackup resources or storage technologies, it will cause wholesale electricity prices to fluctuate
wildly, not only hurting the economy in some cases but also disrupting stable energy supplies
in the worst case. The situation for coal-fired thermal power is becoming increasingly severe,but if Europe had enough coal power capacity left, it could have mitigated the impact of theenergy price surge on the economy and the supply stability concerns. Although expansion of
VRE is essential for achieving carbon neutrality, it is crucial also to consider securing stableenergy supplies.

3. China: Mid-/Long-term Plan for Pumped-Storage Hydropower Announced:
3.8-fold Growth in 10 Years

Li ZHIDONG, Visiting Researcher
Professor at Graduate School
Nagaoka University of Technology

On September 17, the National Energy Administration of China released its medium- to longterm plan for pumped-storage hydroelectric power for 2021 through 2035. A draft was offered for
public comment from August 6 through 16. The plan, which was finalized after a comment periodof just 10 days, describes pumped-storage hydropower as the most mature, cost-effective green
technology that is best suited for large-scale development to ensure grid stability, and stated that its
development must be accelerated urgently for establishing the new electric power system, in which
renewables are the main power sources, and achieving net-zero emissions by 2060.
The draft for public comment set a new pumped-storage hydropower construction target of 180
GW for 2021–2025, 80 GW for 2026–2030, and 40 GW for 2031–2035, and an installed capacity
target of 62 GW in 2025, 200 GW in 2030, and 300 GW in 2035. On the other hand, the plan itself
does not include any specific new construction targets. The change was probably made to avoid therisk of missing any target and because new construction is not a target in itself but is a means toachieve the capacity targets. The plan sets a capacity target of 62 GW and over in 2025 and 120
GW in 2030. The 2030 target was 80 GW lower than that in the draft for public comment, but isambitious nevertheless as it is a 3.8-fold increase from the capacity in 2020 (31.49 GW). The target
for 2035 was worded as “expand to the level as necessary for making renewables the main powersource,” without mentioning any numbers. In addition, another target of fostering an internationallycompetitive pumped-storage hydropower industry and several large development companies wasset, with a view to expanding internationally in the future.
As of August 2021, pumped-storage hydropower has a total capacity of 87.62 GW with 32.49
GW already installed and 55.13 GW under construction, so the target for 2025 is likely to be reached.
However, the target for 2030 onwards will not be so easy. A key will be how many new plants canbe built, and where. A siting survey was conducted nationwide in December 2020. 1,500 locations
amounting to 1,600 GW were selected based on geographical, geological, and hydrologicalconditions, the land area that will be submerged by dams, the difficulty of purchasing land andrelocating residents, ecological impacts, and other factors, and 285 sites with a total capacity of 372
GW were designated as focus development sites and their data were included in the draft for publiccomment. Meanwhile, in the plan, the number of focus development sites was increased to 340 witha capacity of 421 GW, but no site information was released whatsoever. It was good to select more
focus development sites anticipating difficulty in purchasing land, but not disclosing site
information might actually make it harder to purchase land and decide the plant locations.
Securing economic efficiency and investors is also crucial. The National Development andReform Commission issued an opinion on further improving the price mechanism for pumpedstorage hydropower on May 7 and a notice on further improving the time-of-use electricity tariffmechanism on July 29 (see the September edition of this Newsletter). The former stipulated that theoperation cost incurred for pumping and generation will be passed onto electricity tariffs, and othercosts and reasonable profits will be charged through capacity rates. The latter stipulated a rise in
the peak-to-valley price ratio, which would benefit pumped-storage hydropower by lowering thepumping cost and increasing the sales at peak times. The plan welcomed the participation of social
capital in the development of pumped-storage hydropower. Thus, China has begun serious efforts
to expand pumped-storage hydropower. The efforts will continue to be monitored.

4. ME: Regional Diplomacy in Full Swing with U.S. Withdrawal
Sachi SAKANASHI, Senior Research Fellow
Assistant Director, JIME CenterWith the sudden change in the situation in Afghanistan brought by the U.S. withdrawal,
diplomatic activity is accelerating among Middle Eastern countries. On August 28, the Baghdad
Conference for Cooperation and Partnership was convened in Iraq attended by the
representatives of Middle Eastern countries (and France), bringing together countries that haverecently been adversaries, such as Saudi Arabia and Iran, and the UAE and Qatar. After severingties in January 2016, Saudi Arabia and Iran chose Iraq as the country for resuming dialog in
April this year, drawing much attention. With the Conference, Iraq once again demonstrated to
the world that it is capable of bringing together various countries in the region to the table tosolve conflicts between them.
The momentum among Middle Eastern countries toward holding dialogs continued at the76th UN General Assembly held on September 21. Along with the General Assembly, a followup meeting for the Baghdad Conference was also held, reportedly joined by senior government
officials of Turkey, Qatar, the UAE, and Egypt, in addition to the foreign ministers of Saudi
Arabia, Iran, Kuwait, Jordan, and France. The meeting was moderated by Iraqi Foreign Minister
Fuad Hussein and the parties have reportedly agreed to hold the second meeting in Jordan.
There is no doubt that the weakening US involvement in the Middle East, notably
Afghanistan, is accelerating the momentum toward intra-regional dialog; how to ensure
regional stability as the US withdraws is a common agenda for all countries. For the UAE,
which is due to hold the Dubai expo this October, or Qatar, the host of the World Cup soccer
games in November next year, rising tension leading to regional turmoil needs to be avoided.
In Iran, President Raisi was inaugurated on August 3, and following the approval of his
cabinet by the parliament, the new administration was fully launched on August 25. Unlike its
reputation as a conservative hardliner, the Raisi administration places better relations with its
neighbors as the country’s top priority. Accordingly, Iran’s official participation in the Russiaand China-led Shanghai Cooperation Organization (SCO) was announced on September 17.
The SCO member states are expected to strengthen cooperation with each other, aiming toachieve stability in Iran’s neighbor to the east, Afghanistan.
Regarding the negotiations to rebuild the Iran nuclear deal which was suspended in June, theBiden administration continues to make positive comments, and even Israel and Saudi Arabia,
which did not support the 2015 nuclear deal, admit its benefits today. On September 14, Israeli
Defense Minister Benjamin Gantz expressed support for rebuilding the nuclear deal, followed
on September 22 by a comment to the same effect by King Salman of Saudi Arabia. Iran has
also announced that the negotiations are to restart in October. Developments must be monitored.

5. Russia: A Gas Power’s Role Revisited with the Rising International
Criticism of Putin’s Authoritarianism
Shoichi ITOH, Manager, Senior Analyst
Global Energy Group 2, Strategy Research Unit
On September 10, Gazprom announced that the construction of the Nord Stream-2 gas
pipeline with the annual delivery design capacity of 55 bcm, which crosses the Baltic Sea to theEuropean market, is now complete. The company stated that 5.6 bcm of gas could be suppliedby the end of 2021. Given the need to obtain certification from German regulators and the final
approval from the European Commission, however, the Nord Stream-2’s gas supply is likely to
begin in 2022 at the earliest. On the 15th of the same month, Presidential Press Secretary Dmitry
Peskov commented that the rapid startup of Nord Stream 2 could help decrease gas prices in
Europe.
Amid soaring natural gas prices in Europe, on September 21, the IEA issued a statement
calling on Gazprom to boost exports to Europe to increase its gas storage levels ahead of thewinter high demand season and to alleviate the tight supply-demand balances, which would inturn prove Russia’s credentials as a “reliable supplier.” Gazprom supplied 298 bcm of natural
gas to Europe between January and July 2021 (up 18% year-on-year), fulfilling its supply
obligations under a long-term contract (as per an August announcement by Gazprom; thebreakdown by destination country is undisclosed). And yet, just as hopes rise for Gazprom toprovide more gas to the European spot market, opinions are divided within Russia over the pros
and cons of doing so. President Putin claims that Russia should re-establish its regional presence
as a gas producer by not granting Europe’s request so readily. By contrast many energy experts
argue that unnecessary hostility using gas as a “diplomatic weapon” would not benefit Russia
in the long term.
As the economic slump and confrontation with the West persist, causing publicdissatisfaction with the Putin government, the lower house election was held on September 1719. However, the election was severely criticized at home and abroad as “the most undemocratic”
election in post-Soviet Russia. In June 2021, the Putin administration has illegalized the support
group of the government opposition leader, Alexei Navalny, who has been imprisoned since
January of the same year, as an “extremist group” and banned his supporters from running in
the election, while cracking down on government critics in every stratum of society as“foreign agents.” The ruling political party, United Russia, won 324 seats in the election—more
than two-thirds of all 450 seats, satisfying the requirement for constitutional amendment though
19 seats less than the previous election. However, with reports of “forced” voting at workplaces
and ballot stuffing, criticisms are mounting across the country. While many in Russia anticipate
that President Putin will strengthen his authoritarian rule heading toward the presidential
election in 2024, it has been pointed out that the rising criticism and push-back against suchrule could catapult Russia back into political instability.
On September 21, the European Court of Human Rights said it has proof that Russianauthorities were involved in the assassination of a former Russian spy, Alexander Litvinenko
in 2006. As Russia’s role in the European gas market receives renewed attention, we must watch
how political distrust between Europe and Russia affects gas transactions and whether Russia
can make a breakthrough in improving relations with Europe and the United States.

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