When trying to understand the state of the Japanese power market, it is necessary to understand the country’s deregulation process and systemic changes that took place after the 2011 Fukushima Daiichi Nuclear Power Plant accident. That’s why we’ve already covered the topic on this blog a couple of times in the past:

• Japan’s Deregulated Power Market: Year Five (September 2020)
• New Structures in Japan’s Deregulated Electricity Market (August 2020)

With an unprecedented price spike on the Japanese Electric Power Exchange (JEPX) earlier this year having put some of the market’s structural problems back in the spotlight, we decided to revisit the topic.

In this article, we take a closer look at how the country is doing in relation to the plans it set out in its power system reform legislation, which was approved by the Japanese government in 2013. First, however, let’s take a step back and see what the Japanese power market was like right before the 2011 disaster.

Japanese Power Market in the Pre-Fukushima Era

Prior to the disaster, nuclear, coal, and LNG contributed about a quarter of Japan’s total power generation each. With a significant portion of the generation coming from nuclear, Japan relied on foreign fossil fuel imports for 65% of its power generation in 2010 as opposed to 75% in 2019.

Additionally, with the LCOE of nuclear power generation being lower than that of other means of generation back in 2010, Japan was able to produce power relatively cheaply. While the global LCOE of solar was $248/MWh in 2010, the LCOE of nuclear was just $96/MWh. The LCOE of onshore wind ($124/MWh) and coal ($111/MWh) generation was considerably higher than that of nuclear generation back then as well.

The Fukushima disaster, however, led to the shutdown of all of Japan’s nuclear power plants, costing the country about a quarter of its generation capacity. For two weeks following the disaster, TEPCO, the owner of the Fukushima Daiichi Nuclear Power Plant, lost as much as 40% (21 GW) of its capacity and was left with no choice but to implement scheduled blackouts in the Tokyo grid zone.

Power System Reform: Developing a More Stable and Reliable Power Supply

In the aftermath of the nuclear disaster, power prices in Japan increased as the country imported more fossil fuels to make up for the lost nuclear capacity. More importantly, the disaster pointed to systemic issues that prevented Japan from being able to secure reliable power supply throughout the country in the case of a disaster.

To prevent similar issues in the future the Japanese government approved Power System Reform legislation in 2013. Its main goals were to establish a more stable power supply system and to lower power prices through deregulation.

Let’s take a look at the progress that has been made since the start of the reform.

Establishment of a Stable Power Supply System

To help establish a more stable power supply system, the Japanese government took a two-pronged approach, relying on a well-balanced power generation mix and better integration of the country’s islanded grid zones.

In 2015, it set FY2030 targets for its power generation mix that include a considerable increase in renewable power generation as well as the growth of the share of nuclear power generation to near pre-Fukushima levels. Reaching the targets is expected to not only ensure a more stable and distributed power supply system but also reduce Japan’s reliance on fuel imports.

As of the publication of this article, however, only four nuclear power plants are in operation (one in the Kansai and three in the Kyushu grid zone). Numerous nuclear power plants are struggling to meet revised regulatory standards and pass regular inspections, resulting in delays in their resumption of operations. That said, over the last decade, Japan has seen considerable growth in renewable generation – primarily solar generation incentivized by the government’s feed-in-tariff (FIT) scheme.

Below is an overview of the government’s FY2030 targets and the way in which Japan’s power generation mix has evolved since 2010. (The 2030 targets are expected to be revised in mid-2021.)

In addition to setting new power generation mix targets, the Japanese government established the Organization for Cross-Regional Coordination of Transmission Operators (OCCTO) in 2015. This organization’s role is to enhance the level to which Japan’s power grid is integrated.

The organization had a chance to demonstrate its importance between mid-December 2020 and January 2021 when parts of Japan experienced a power supply shortage. During that period, OCCTO instructed eight T&D companies (excluding those in Hokkaido and Okinawa, regions unaffected by the shortage) to procure power from other grid zones. As a result, 307 GWh of power was transmitted through the grid zone interconnections for balancing purposes, almost three times the volume transmitted for balancing purposes after a power shortage caused by the 2018 Hokkaido Eastern Iburi Earthquake.

During the shortage, OCCTO also made the decision to open up previously restricted capacity on the Chubu – Kansai interconnection line to allow more power to be transmitted to Kansai, where some nuclear power plants had failed to be restarted as originally planned due to issues found during inspections.

 

 

Mid-term, OCCTO’s objective of making Japan’s power grid more integrated includes the expansion of interconnection capacity between certain regions.

The capacity between Tohoku and Tokyo is expected to be increased from the current 5,150 MW to 9,700 MW by FY2027. The capacity between Chubu and Tokyo is expected to increase from the current 1,200 MW to 3,000 MW by FY 2027. This spring, OCCTO is also expected to reveal details of further interconnection capacity expansion to be done to prepare the grid for an upcoming increase in offshore wind generation.

In addition to the two initiatives above, the use of demand response and virtual power plant services has been growing in Japan, helping to further distribute and stabilize the country’s power supply. The market for these services is expected to grow from 3.5 billion yen in FY2018 to 19.2 billion yen in FY2030.

Minimizing Power Price

Setting aside the January 2021 price spike (covered in J-Enerlytics Power Market Monitor February 2021 Issue), wholesale electricity prices in Japan have, on average, decreased compared to their pre-deregulation levels. The number of licensed retailers competing in the market has also increased more than twofold, from around 300 in the first year after deregulation to 698 at the end of 2020.

In spite of that, the price paid by consumers has failed to decrease. In fact, it has grown steadily over the last few years. This increase can, in part, be attributed to the increase in the renewables levy which is paid by the end-users and meant to finance the FIT scheme. While the levy was only 0.22 yen/kWh in FY2012 when the FIT scheme was introduced, in FY2019, the levy was, at 2.95 yen/kWh, thirteen-times higher. It is expected to peak in FY2030 at between 3.5 and 4.1 yen/kWh, and from there on, it is expected to gradually decrease as FIT contracts start expiring.

Additionally, while the amount of renewable power generation has grown considerably, reaching 60 GW of installed capacity in 2017, the LCOE of solar has failed to decrease as rapidly in Japan as it has in other parts of the world over the last decade due to the high cost of land and difficult-to-access terrain, along with a variety of other reasons.

Continued Lack of Market Transparency

So far, Japan’s power system reform has helped put in place mechanisms that, to some extent, allow for Japan’s power supply to be more stable and distributed and for power prices to start decreasing once the renewables levy decreases. That said, the Japanese power market is still lacking the level of transparency necessary for it to work efficiently and facing challenges with conflicts of interest between the power generation and other arms of the former regional monopolies.

Firstly, it’s questionable whether the Japanese government’s decision to unbundle the T&D divisions from the incumbent utilities is serving to adequately ensure neutrality and allow for fair access to the grid. The T&D companies of seven of the nine mainland EPCOs remain subsidiaries of the respective power generation and retail companies (see Structure 2 on the image below), allowing for potential for conflicts of interest.

A similar situation exists between the power generation and retail arms of the former monopolies. The government planned to abolish regulated tariff in 2020, but it decided to extend it due to the lack of sufficient competition (at least two competitors with a 5%+ share) in all zones.

The Electricity and Gas Market Surveillance Commission (EMSC) surveyed the former utilities in 2020 and found out that other than TEPCO and Chubu EPCo, none of the former utilities managed their business by division. Instead, they managed their financials on a company-wide scale.

In other words, the power generation department did not have any internal contracts with the retail department and could not present any materials detailing the difference between their terms and conditions when dealing with their own retail department and with other retailers. Masanori Maruo, a Managing Director at SMBC Nikko Securities and a member of the EMSC committee, was “very surprised that this situation continues four years after the full deregulation.”

Another area where more transparency could lead to a more efficient market and lower power prices is the disclosure of the operational status of power plants. While JEPX has implemented a system for that purpose, the system’s use by power generators is not consistent enough to provide an accurate picture of the situation at any given time.

This is partly caused by the fact that while 100MW+ power plants are required to disclose scheduled and unscheduled shutdown information on a “timely basis,” LNG power plants usually wait until the last minute to disclose such information. Doing so allows them to prevent information that could indicate their fuel stockpile levels from becoming public and thus put them into a disadvantageous position when negotiating fuel procurement contracts.

Lastly, the inefficiencies of the market and the lasting power of the former monopolies were also demonstrated in Japan’s first capacity market auction, which took place in 2020 (covered in J-Enerlytics Power Market Monitor October 2020 Issue). While the target price for the auction was set at 9,425 yen/kW, the accepted bid was 14,137 yen/kW, just one yen lower than the maximum allowed bid price of 14,138 yen/kW.

Upon investigation, EMSC pointed out that power generators included maintenance costs for multiple years in their bid calculation rather than the single year expected by the government. In other words, the bidders ignored some of the unwritten rules which were expected to be followed in good faith. The main bidders supplying the majority of the capacity are assumed to be the former utilities.

Going Forward

With its aims to achieve a well-balanced and cleaner power generation mix over the next decade and to better integrate its power grid, Japan appears to be on the path to securing a more distributed and stable power supply.

That said, so far, deregulation has failed to result in lower power prices for end-users. While part of that can be explained by the relatively high LCOE of renewables in Japan compared to other parts of the world, the lack of transparency and the lasting power of the incumbents are to be blamed as well.

Considering the results of the capacity auction as well as the winter price spike which was, to an extent, caused by lack of timely data about LNG stockpiles, the topic of transparency is certainly going to be a point of discussion in the industry over the next year. We will be watching developments in this area closely and keeping you informed both through this blog as well as our monthly report.