TOCOM Energy

The Japan power market has been undergoing massive changes since 2016 when the market was fully liberalized. A few key change elements of full liberalization include

• All 86 million meters can select a supplier other than the incumbent utility
• Every customer has a 30-minute smart meter

Since liberalization in 2016, Japan has also passed Net Zero and associated laws to reduce GHG to 46% below 2013 levels by 2030 and zero by 2050. Industrial customers must now report their GHG emissions and submit plans to reduce their emissions every year.

Key Market Changes

Between liberalization and net zero game-changing laws, the emergence of several key aspects of the Japan power market have occurred.

1. The physical spot market, JEPX, has grown from the pre-liberalization level of 2% of the supply market to about 40% of the market.
2. OCCTO, the wholesale system operator established just prior to liberalization, manages all scheduling of physical wholesale transactions, the switching activities between retailers, customers, and the utility, provide meter data to retailers, run a capacity market, and is responsible for transmission siting and overall system reliability.

• TOCOM, now a business unit of JPX, launched its electricity futures market in September 2019, followed by EEX, who launched its Japan futures market in 2020.

1. METI, the market regulator, changed the renewable generation rules from a Feed in Tariff system to a Feed in Premium system. Now developers need to either find corporate offtakers or take market pricing risks.
2. Electricity demand in Japan is steadily growing, primarily due to the significant addition of data centers needed to support Japan’s technology growth.

Focus on Risk Management

During the first several years of liberalization, the spot market was somewhat predictable being based on seasonality and weather patterns. This changed dramatically at the outset of the Ukraine war as LNG prices soared, causing extreme volatility in the Japan power markets.

Most of the new retail companies and all the incumbent utilities lost significant sums of money due primarily to a lack of risk management practices. This prompted several key changes.

1. METI pushed for all energy companies to adopt risk management practices.
2. About 25% of new retailers went out of business due to losses.

• Utilities pushed for and got large rate increases.

1. Utilities and retailers alike began to implement risk practices, especially for hedging price risk.
2. A steady stream of international trading companies has and are entering the Japan market.
3. As a result of these activities, futures market trading has increased dramatically, and other wholesale market transactions, such as bilateral trading and derivatives, have emerged.

Generation Mix

Liberalization can be attributed to the Fukushima tsunami and resulting nuclear disaster, which prompted the government to shut down all nuclear plants in Japan. Liberalization was intended to utilize competition as a change driver to both manage consumer prices and change the generation mix.

Prior to Fukushima nuclear power was about 30% of the generation mix with coal and LNG generation comprising most of the rest. Currently nuclear is coming back online and renewable generation has grown significantly. and METI is pushing to reduce or eliminate coal and LNG over the next 20 years.

Newer forms of generation are growing rapidly. Biomass has received generous subsidies, and rules to prompt more rooftop solar are now in place. Demand response has moved out of its early pilot status and has been growing over the past few years. The battery market is still in its infancy with expectations of high growth over the next decade and beyond..

While the hydrogen market is in its very early stages, METI has increased subsidies and is pushing hard to turn hydrogen into a potential replacement for coal and LNG generation.

Energy Software Systems

Liberalization and net zero have, and will continue, to drive changes in energy technology. Essentially most pre-liberalization software systems are now obsolete. New systems from both international entrants and Japanese software companies are changing how energy is managed.

1. Billing and customer care: while utilities still use legacy CIS systems, all new entrants have adopted new solutions.
2. Energy trading and risk management (ETRM): Although adoption is still in the early stages, demand for ETRM is growing rapidly.

• Analytics: A wide variety of new solutions are emerging in this area. METI and OCCTO continue to expand the amount of data available to the market.

1. Forecasting: Newer solutions are emerging to address wholesale market growth, generation mix changes, and trading complexities.
2. AI: The application of AI for the power markets is just emerging.
3. Blockchain: There are several examples in the Japan energy market utilizing blockchain solutions.

• Algorithmic trading solutions: These are ramping up rapidly in EU markets, but the practice is in its infancy in Japan.

Customer Choice

Pre-liberalization customer choice either self-generate or buy power at tariff. Today, as behavior changes, customers have a wide variety of options.

1. Continue to buy from the utility on a tariff.
2. Buy from a retailer with different price plans, such as fixed price among others.

• One of the above, plus on-site solar.

1. Participate in demand response.
2. Install EV charging.
3. Buy a PPA or VPPA either through their retail or utility supplier or directly from a renewable developer.

• Some very large customers have also formed an energy subsidiary to take control of their energy mix, and in many cases, own renewable generation assets.

What’s Next

In eight short years, Japan has nearly caught the US, EU, and AU markets that were liberalized more than 20 years ago. A key reason is Japan market structure, that is, one regulator, one system operator, and an efficient regulatory and legal model. In addition, Japan is investing heavily in innovation, including a much more open environment for international participation. The Japan model and structure is very likely to result in catching and surpassing other markets.

By Peter Weigand, CEO, Skipping Stone