Proposed Reforms Bring Benefits, But Will Utilities Play Along?
BMI View : The Japanese government is pushing for the reform and liberalisation of the country's electricity sector to: lower electricity prices; address a fundamental grid weakness; achieve greater transparency; and facilitate integration of renewables. However, we note that there are still many challenges and uncertainties surrounding these reforms, and that the country's regional were successful in stalling reforms in the past.
On February 8 2013, a committee appointed by the Japanese government released a report recommending that the country's 10 regional utilities should spin off their transmission and distribution (T&D) networks between 2018 and 2020. The plan also calls for: setting up a new regulator by the end of 2015 to police competition among power producers; and the liberalisation of the electricity retail market in 2016 to increase competition. This would allow households to select their own electricity suppliers, and the government would issue separate licenses for energy generation and transmission. The report is expected to go to Toshimitsu Motegi, the Minister of Economy, Trade and Industry (METI), for review and could be subjected to change. The METI is currently planning to submit a bill to revise the electricity business law during the ongoing Diet session.
We believe that there are four main motivations behind these planned reforms:
Lower Electricity Prices: Electricity prices in Japan are among the highest in the world, and can be attributed in part to the monopolistic position of the country's ten regional utilities across all parts of the electricity value chain. Each utility operates as a monopoly within its locality, and there is no pressure for companies to price electricity competitively. By allowing new entrants in 2016, and stripping T&D assets from generation companies, competition within regions would increase, thus forcing "power companies to compete on services" including electricity pricing, according to Hiroshi Takahashi, one of the panel's 11 members and a research fellow at Fujitsu Research Institute.
Address A Fundamental Grid Weakness: Japan's power grid is extremely fragmented, and operates on two separate frequencies. All of eastern Japan, including Tokyo and the disaster-struck region to the north, is standardised on 50Hz supply while the rest of the country uses 60Hz. There are three frequency changing stations in the country, but with a total capacity of just 1GW. This severely limits the ability of utilities in western Japan to support the power needs of Tokyo and eastern Japan, with this weakness exposed during the Fukushima crisis ( see our online service, August 09 2011, 'Japan To Wade Through Oil And Gas To Renewable Future'). If reforms on the T&D sector take place, greater competition in the sector would likely incentivise firms to develop a greater number of interconnections within the two systems, increasing the stability of the grid across the country.
Achieve Greater Transparency: Since the Fukushima nuclear disaster in 2011, the public has demanded greater independent oversight over the utilities. For example, the disaster showed that TEPCO had ignored warnings of earthquake and tsunami risk as well as falsified maintenance reports for decades. The country's ten regional utilities are all extremely opaque in their operations, and the proposed reforms could significantly improve transparency in the sector.
Facilitate A Greater Integration Of Renewables: We believe that privatisation of the T&D market could help Japan integrate a greater amount of renewable energy in its electricity mix. The country has embarked on an ambitious plan to increase the share of renewable energy to approximately 25-35% of its energy mix by 2030, though a final figure has yet to be set ( see 'Bullish Outlook, But With Many Risks', January 17 2013). At present, the government has already launched a project to build new power transmission grids under a 10-year project, which is scheduled to be launched in April 2013. According to an estimate, public and private sectors will spend about JPY310bn (US$3.2bn) on the transmission grids project. By introducing reform to the T&D sector, the government would find it far easier to attract investment in T&D infrastructure.
|Fragmented National Transmission System|
|Japan National Line Connections, As of June 30 2010|