The most significant energy market reform in Japan since 1950s are now taking place. April 1st this year was an significant date for the energy industry in Japan. From this date all consumers – from single households to manufacturing industries like Toyota – can freely choose electricity suppliers apart from the traditional incumbent power utilities.
This marks the second stage in a three-stage fundamental reform of the electricity – and from next year also gas – market in Japan. The first stage was last year with enactment of the new Electricity Business Act and establishment of the new electricity market regulators, the Electricity Market Surveillance Committee (EMSC) and the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO).
The third, and most controversial stage will be the so-called unbundling of the incumbent power utilities, meaning separating the power generation business from retiling and from operation of the distribution and transmission grid. This will be enacted during 2019-2021. In essence – dismantling of the current oligopolistic electricity supply structure. The objectives – and hopes – for this whole exercise is to introduce competition on generation and retail to lower electricity prices, promote deployment of renewable energy and lower the carbon footprint of the industry.
Opportunities for Norwegian companies
The 8 trillion JPY (610 billion NOK – 20 times larger than Noway) Japanese electricity market is among the largest in the world, and from that perspective attracts foreign investors and technology/service providers. The industry is traditionally very conservative and introvert, making it hard to penetrate the market from outside. Norwegian companies have had some success in the renewables area, in the solar space, the offshore wind space and the geothermal space. However, as stated above, we are looking at an paradigm shift in the energy market, which will break open opportunities at least for a limited time window in the following areas:
- Renewable energy
Although the governmental incentives- the FIT – is decreasing substantial for solar PV, the Japanese market is still one of the world’s most attractive. Land based wind energy deployment will soon be complimented by offshore wind – bottom fixed and floating, creating a substantial demand for maritime energy technology and experience. Norwegian expertise in maritime operations: towing and anchoring, base technologies, assembly, maintenance and access vessels, material technology etc. will be sought. The Norwegian offshore energy clusters on the west coast and mid-Norway has already established contacts with counterparts in Japan – well supported by Innovation Norway Tokyo office.
- Energy generation
The hydro power potential in Japan is pretty well developed – at least larger scale, but the hydro dams and pumped storage facilities has largely been designed as complements to the nuclear power generation. Nuclear reactors has to run “flat out”, so surplus power during low demand at night was stored in hydro reservoirs to be used during peak hours in daytime. In a liberalized power market this relation is broken, the market will balance supply and demand. Knowledge and systems for operating hydro assets in a market context has long been established in Norway, and this expertise has transfer value to Japan. Companies like Powel Data, Markedskraft, Brady Energy, eSmart systems and even Statkraft and other utilities have much sought competence that may be capitalized on in Japan. Relations with the incumbent utilities, government and its institutions are key to market entry – Innovation Norway has the network.
- Transmission and distribution – smart energy
Being a technology savvy country, Japan has ambitious road maps for implementing smart energy concepts – including at least 4 large Smart City initiatives. These include elements of energy storage, smart grid concepts, smart meter, combination of energy carriers like electricity, gas, heat and hydrogen based on extensive use of IoT and big data processing. Japan is leading on battery technology and deployment of hydrogen society, which Norwegian companies is recognizing. Norwegian companies with proven concepts and/or novel ideas such as the industry and R&D clusters around Lyse, in Halden and in Trondheim may have attractive offerings for suitable Japanese partners.
Implication for stakeholders
For the incumbent utilities, this will be the most significant game changer since the establishment of the 10 regional publicly traded power companies in 1951. The vertically integrated companies will be forced to split up into at least three separate entities – generation, retail and so-called TDSO (Transmission and Distribution system operator). While the TDSO remains monopolistic, both generation and retail business will be exposed to fierce competition from a large number of new, independent companies.
Today, more than 260 companies has registered as so-called independent power producers (IPPs) and retailers. These “newcomers” ranges from small renewable energy power plans (solar PV, wind, bio, geothermal etc.) via other service provision companies like telecom giant SoftBank to energy giants from the gas and oil industry.
For consumers, April 1st is the start of a period of high expectations and high confusion. Expectations for lower prices and greener energy, and confusion of all the complex rate offers they get from the 260+ retailers. The bottom line is that the underlying cost of energy – the “wholesale price” – is more or less the same for all – IPPs, retailers and power utilities – so the retailers must bundle the electricity contracts with other services – gas, telephone, cable, security, etc. in a manner where the actual power price somehow is hidden.. Some consumers will shift, but given the Japanese psyche of risk adverseness most will stay with the incumbents for a long time.
On the wholesale side, new generating companies will challenge the dominant power suppliers, and with a vitalization of the national power exchange, JEPX, we may see an functioning wholesale market such as the Nordic Nordpool market. In fact, the design of the wholesale market is much influenced by the Nordic, and Nordpool Consulting, Innovation Norway, Nasdaq OMX and DNV GL has given important consulting services to the government on market design and implementation.
My expectation – based on observations from the reforms in the Nordics in the ‘90s and northern Europe in the 00’s, is that we will see a flurry of marketing, product development, consolidations and financial acrobatics to make profitable business models in an already margin-thin market until the “dust settles” and we see more sustainable businesses.
Written by Per Christer Lund, Science & Technology Counelor at Innovation Norway office in Singapore.