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.
|Fragmented National Transmission System|
|Japan National Line Connections, As of June 30 2010|
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.
|Share Of Renewables To Increase|
|Japan - Generation By Type, TWh|
An Uphill Battle For Reform
While the proposed reforms could lead to a number of improvements in the Japanese electricity sector, we note that there are still many challenges and uncertainties, and it remains to be seen whether they will be implemented. Most of the regional utilities are against the reforms for several reasons.
One of the concerns raised by the Japanese Federation of Electric Power Companies was that the separation of distribution activities would make investors uneasy, and it would make it more difficult for power generation companies to raise funds at current costs in financial markets. Additionally, the industry group also estimated that the restructuring would cost about JPY410bn (US$4.4bn), which would put a damper on depressed earnings. Eight of the ten regional utilities which operate nuclear reactors are forecasting losses for the financial year of 2012/13 (April-March) as almost all their nuclear plants remain idled following the Fukushima disaster in 2011. Kansai Electric, Japan's most nuclear reliant utility, expects to have a net loss of JPY265bn for FY2012/13.
We also believe that the regional utilities maintain great influence over policy-makers and regulators in the country, and have had great success in stalling reforms in the past. Japan had kicked off efforts to liberalise its electricity market in the 1990s, but several factors such as political backstopping and lobbying by the utilities has prevented significant progress from being made at the time of writing. To be sure, new entrants accounted for just 3.6% of the electricity sold to large-lot users in FY2011/12, amid high costs to access the existing power grid.
Furthermore, we believe that the government could prefer quick fixes (e.g. restarting nuclear plants, increasing renewables) to help support the improving economy, rather than engage in reforms that could be difficult to implement politically. The ruling Liberal Democratic Party has stated its intentions to restart and possibly build new nuclear reactors during the December 2012 elections, further reducing the incentive to ensure these reforms take place. To date, there have been four significant attempts at reforming Japan's power market, but no progress has been made.