TOCOM Energy

In observing the Japan power markets since 2016 and the full liberalization of the market, Japan has steadily morphed to start looking like other global deregulated markets.  At the outset in 2016 the initial rush was to get a Ministry of Economy, Trade and Industry (METI) retail PPS license and dive into the newly liberalized retail market.  Some 900+ licenses were issued and yet these new retailers faced a challenging market on day one.  The biggest challenge, and major difference in how other global markets started, was the lack of a robust wholesale marketplace.

As a result of limited liquidity and no hedging options in the early years, most retailers relied on the Japan Electric Power Exchange (JEPX) spot for power supplies.  The risk issue of course is retailers were selling a monthly price but buying on a day ahead 30-minute basis.  While risky, this didn’t blow retailers up until extreme volatility due to LNG price spikes as a result of an unexpectedly cold winter season and the Ukraine conflict.  This blew a couple hundred Japanese retailers out of the water and also resulted in record losses at utilities.

Even before the LNG spike, Tokyo Commodity Exchange (TOCOM) recognized the need for a futures market to enable hedging.  They launched the first Japanese power futures market in 2019, followed the next year by an exchange in overseas.   From the outset TOCOM focused on Japanese utilities and retailers while the other focused on European trading house members who were already trading in Europe.   Not surprisingly the overseas’ one jumped out to a larger market share because European traders were used to spec trading and Japanese traders and retailers were new to both hedging and spec trading.

Since the LNG spike blew out many retailers, the 700+ remaining retailers and utilities alike got religion on the need to manage price risk.  Among other things this meant sorting out how to use futures to hedge.  The education of Japanese players has initially been slow as using financial instruments is totally new and different.  The pace of adoption has been picking up steadily and I predict 2025 will be a banner year for TOCOM growth.

There are several key factors behind this growth prediction.

A. Most utilities are now trading. While volumes are still a bit small, once utilities get comfortable and experience the benefits of hedging, volumes will definitely grow.

B. Retailers are starting to add new customer price plans that utilize hedging. Plans such as fixed price, variable with caps, and others commonly seen in internation markets are still early in Japan.  Based on global retail market benchmarking, these hedge-based plans will grow to be larger than the current monthly variable, fuel cost adjustment and market-based plans of today.

C. TOCOM has made significant modifications to the exchange that will result in much bigger volumes. A highlight of changes include;

  1. Adding MUFG as a clearing member. This is significant as some European traders and large Japanese utilities were uncomfortable using the smaller Japanese clearing members.  MUFG solves that issue.

        a. An early example of this impact was EDF Trading joined TOCOM shortly after the MUFG announcement.

  2. TOCOM and JEPX launched the JJ Link linking futures to the physical spot market. This will absolutely appeal to retailers and of course traders.  Not only does JJ Link solve the hedge accounting rules, it will help the transition to fixed price contracts for consumers. Hedge accounting has been a barrier to the utilization of futures contracts. To address this issue, TOCOM, in collaboration with stakeholders including the METI, has been working towards solutions by holding discussion meetings. A report summarizing these discussions was published this past February.

  3. In 2024 TOCOM upgraded its market maker programs. This simplified many aspects that resulted in an immediate jump in volume.

  4. Soon TOCOM will launch fiscal year contracts well in advance of the annual industrial bidding cycle, which starts in November each year. This is important as most industrial buyers enter into annual supply contracts that start April 1^st to coincide with their fiscal year. TOCOM’s launch of a fiscal contract will be a direct fit and trading volumes reflecting this will no doubt increase dramatically.

All these changes are already seeing results as about 45% of TOCOM trading volume comes from international firms.  Japanese utility trading is only about 15% of the volume, but no doubt will grow substantially in 2025 and beyond.

In 2024 all Japan futures trading was only about 7% of spot market trading.  Compare this to Germany, which financial trading is about 7X physical market trading.  Even if Japan never reaches 7X, its easy to forecast financial trading in Japan will grow at least 5X in the next couple of years.

TOCOM’s futures market has been experiencing a consistent increase in trading volume since October 2024, when, as above mentioned, MUFG Bank’s participation served as a catalyst for market growth. As recently as this March 13^th, the exchange saw a surge in trading volume with large orders leading to record-breaking power futures daily volume reaching 9,780 contracts (or around 711GWh); as an indication of growing demands for fixed fiscal year prices ahead of the fiscal year starting April, sizable Tokyo Area Baseload synthetic Fiscal Year 2025 annual contracts using monthly contracts from April 2025 to March 2026 were changed hands.