What Happened in the Japanese Energy Industry in 2019 and What Does It Mean for 2020?
With an imperial transition from Emperor Akihito to Emperor Naruhito, preparations for the Tokyo 2020 Olympics being fully underway, and a number of violent typhoons hitting the country, 2019 has been a busy year for Japan overall.
Causing long-lasting power outages, it is the last of those – combined with several important changes in the regulatory framework – that made the year busy for the energy industry in the country as well.
Below, we will take a look at the three most important things that happened in the Japanese energy industry in 2019 and at what effect those will have on the industry this year.
#1: Typhoons Test Power Supply’s Resilience
From a long-term perspective, the biggest event in the electricity industry in 2019 may have been the autumn typhoon season. Typhoons no. 15 (Faxai) and no. 19 (Hagibis) were unusually destructive, and they resulted in extended power outages.
The outages were especially notable in Chiba Prefecture in the Tokyo metropolitan area where even a week after one of the typhoons, over 70,000 households were still without power. Full restoration took shocking two-and-a-half weeks. That didn’t come without political damage, and since then, “resilience” has been the buzzword in the trade press.
A bright spotlight has been shone on the importance of microgrids.
In Mutsuzawa, one of the typhoon-hit towns, the lights stayed on at a public housing development and nearby community recreational facilities because the town had established its own electricity retail company and constructed a distribution grid which can be islanded from TEPCO. Using PV generation, a gas turbine, and solar water heating systems, the town was able to offset some of the demand that couldn’t be met by the nation’s largest power company.
Attention has also been given to the microgrid on Miyakojima, an island in Okinawa Prefecture which is nearly 300 kilometers from the Okinawan main island and which is not connected to the grid linking the archipelago’s more tightly grouped islands. In addition to solar generation, it includes storage and demand response, and it continues to evolve in scope and sophistication.
Okinawa’s EPCO has long taken significant losses powering Miyakojima and other similarly isolated islands, because it cannot pass the cost of shipping fuel for the islands’ power plants through to consumers. As such, rather than being a threat to the EPCO, this microgrid has offset a substantial portion of an unprofitable segment of their business.
As in Mutsuzawa, Miyakojima’s microgrid was developed as a public-private partnership.
In 2020, we’ll be looking at the efforts that many municipal governments are making to decarbonize and build greater resilience into their electricity infrastructure, and at the different types of public-private partnerships which have been arising as a result.
Another extremely important result of the extended outages caused by the typhoons was a statement by an expert committee at the Ministry of Economy, Trade and Industry (METI) that the government should seriously consider creating a regulatory framework under which existing distribution grids can be bought, owned, and operated by non-utility companies. The creation of such a framework has already been put on the agenda of the Diet (Japan’s parliament) for 2020.
Once such a framework is in place, it will be possible to spread the resilience benefits of microgrids far beyond edge cases like Miyakojima and Mutsuzawa.
We expect a marked increase in real commercial opportunities – not simply one-off pilot projects – for technologies and business models which facilitate microgrids or require microgrid environments.
This is certainly an area to keep following.
#2: Changing Renewables Landscape
Another key topic in the year ahead will undoubtedly be the trajectory of renewable development.
In 2019, as the feed-in-tariff contracts for a large number of residential rooftop solar installations began to end, many non-utility electricity companies have approached homeowners with new price structures under which they’ll continue to buy their excess rooftop generation.
As the tapering-off of the solar feed-in-tariff scheme continues for grid-scale solar as well, and the government looks at moving from FIT to a feed-in-premium (FIP) framework, it’s going to be extremely interesting to see which developers are able to continue growing their portfolios by selling corporate PPAs. In Japan, land for large scale solar installations is limited, and the levelized cost has been stubbornly resistant to decreasing. That said, the more capable developers have been preparing for this.
We’ll see what they have in store.
Some developers who did well by locking in high tariffs in the early days of solar FIT are now shifting their focus to offshore wind, biomass, and geothermal because of favorable FIT rates. Each of those forms of generation, particularly offshore wind and geothermal, come with their own unique challenges, but FIT provides developers a strong incentive to overcome them.
#3: Further Steps Towards Deregulation
Interesting things are afoot in wholesale and retail as well.
Electricity futures trading started on the Tokyo Commodities Exchange (TOCOM) in September 2019. Although volumes are still low, in the mid- to long-term this could be a gamechanger in terms of the hedging mechanisms it provides to retailers who don’t own any generation and others with the greatest exposure to market fluctuations. The European Energy Exchange has announced that in May 2020 it will launch its Power Derivatives platform in Japan, creating new options for managing risk.
On the consumer retail side, the Energy and Gas Market Surveillance Commission has been clamping down on companies that it sees as bad actors by handing down corrective action and temporary halt of sales activity orders – and even shutting one or two companies down altogether.
In 2017, when the number of licensed retailers broke 400, METI enacted stricter screening criteria in its licensing process. Now, with the number approaching the 700 mark, METI is proactively turning the screws wherever it sees compliance issues, and it’s considering revoking more than 200 licenses which it granted to companies who have yet to exercise them.
In April 2020, METI was set to abolish tariff, meaning that the incumbent utilities will be able to lower their rates for customers still on legacy rate plans from before the market was deregulated in 2016, but it appears that this will be delayed. The utilities are also required to “legally unbundle,” breaking their former vertical monopolies into generation, transmission and distribution (T&D), and retail companies in the new fiscal year.
How quickly and how drastically these changes will affect the competitive environment is hard to say. METI retains the authority to make adjustments and manage the transition but the abolition of tariff is certain to add new fuel to the fire of price competition once it happens.
While the three things above are some of the most exciting things that happened in the energy industry in Japan in 2019 – and that will have an effect on the industry in 2020 – there are other developments worth talking about as well.
Going forward, we will keep you posted about those.
Among other things, over the next few months, we will dive deeper into the following:
- Feed-in-Tariff and the further deployment of renewable generation
- METI committee activity and the resulting policy and regulation as drivers of emerging business opportunities
- Local public-private partnership initiatives
- Innovation – where it’s happening in the Japanese energy industry, the companies and institutions driving it forward, and areas where more innovation is needed