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Policy Review

Japan's Power Sector Reforms: Launched to promote clean and affordable energy [free access]

August 1, 2013

The recent victory of the ruling government under the leadership of Shinzo Abe in Japan’s Upper House of Parliament (Diet) will boost the economic reform agenda being pursued by the government since it came into power in December 2012. The government has been working aggressively on the Japan Revitalization Strategy involving three ‘arrows’ or policies to revive the country’s long-stagnant economy. This strategy is popularly being termed as ‘Abenomics’. The idea is to mobilise idle talents, goods and funds to achieve an average GDP growth rate of 3 per cent in nominal terms and 2 per cent in real terms over the next decade.

 

The first two arrows in the form of aggressive monetary policy and massive stimulus funding (flexible fiscal policy) are showing some promising initial results with improving business confidence, positive stock market response and a rise in GDP growth rate. The Japanese economy posted an annualised growth of 4.1 per cent in the first quarter of 2013. The third arrow is the new growth strategy comprising a plan for revitalisation of Japanese industry, a strategic market creation plan and a strategy of global outreach.

 

One of the key policies under the strategic market creation plan is to realise a clean and economical energy supply through electricity system reforms. This is sought to be achieved by allowing absolute retail choice, liberalisation of power generation, unbundling, free competition and integration of various interlinked sectors such as electricity, gas and telecommunications. The plan is to restructure the electricity sector, which is currently serviced by nine power companies, by establishing the Organisation for Nationwide Coordination of Transmission Operators (ONCT) and developing dispersed power systems with a focus on renewable energy and storage cells. In the process, the ultimate goal is to capture domestic and international energy technology sales of JPY26 trillion by 2020 from the current JPY8 trillion level.

 

The electricity sector has been under severe pressure since the closure of 48 of the country’s 50 nuclear reactors after the Fukushima disaster in March 2011. The dependence on fossil fuels has drastically increased, as nuclear power earlier served over a quarter of the country’s electricity demand. The electricity rates are rising and there is a tight demand-supply situation.

 

In this scenario, Japan has been reviewing its energy policies on the basis of zero-based thinking. It is also laying a lot of emphasis on the introduction of renewable energy as a part of the new energy policy.

 

An advisory panel appointed by the government made several recommendations earlier this year for implementing electricity reforms. Most of these recommendations have been approved by the government, which released the official policy on Electricity System Reform on April 2, 2013.

 

The key objectives of this policy are to secure stable supply of electricity, suppress electricity rates to the maximum extent possible, and expand choices for consumers and business opportunities. The affordability objective will be achieved by promoting competition, using generation in merit order and optimising investments in power generation facilities through consumers’ demand response.

 

Given the drastic change of the business system being planned, it is necessary to promote reform in a cautious manner based on full preparation including the amendment of relevant laws and regulations. The reforms have therefore been divided into three stages.

 

In the first stage, the ONCT was to be established by 2015. For this, the plan was to submit the bill for setting up the ONCT in the ordinary Diet session, which ended on June 26, 2013. However, this did not take place due to political developments in the country. Now that the government has won the elections in the Upper House held on July 21, 2013, it will push the reform agenda in the extraordinary Diet session in autumn this year.

 

The bill for the full liberalisation of the electricity retail business will be submitted in the ordinary Diet session in 2014 and enforced by 2016. This will be the second stage.

 

This will enable all consumers to choose an electricity supplier. In order to facilitate this, adequate provision of information by the government and utilities will be ensured so that consumers can choose a suitable electric supply company, rate plan and power source among other things. Introduction of smart meters will also be undertaken in this regard. Further, initiatives will be taken to raise trading volumes of electricity in wholesale power exchange markets. The government will also consider adding electricity to the coverage of the Commodity Futures Trading Act.

 

In the third and final stage, nine of the ten regional power utilities or general electricity utilities (GEU) will be unbundled into generation, transmission and distribution companies and liberalisation of retail electricity rates will be implemented between 2018 and 2020. For the tenth region (Okinawa region), a system based on the specific area features will be established. The timing of the implementation of liberalised retail tariffs will be re-examined if the consumers are negatively impacted due to various factors such as lack of fair competition among retailers. The related bill for unbundling will be submitted in the ordinary Diet session in 2015.

 

Simultaneously, the monitoring function of the government will be further enhanced to fully prepare for the paradigm shift. This will include formulating rules for electricity trading in the liberalised market, strict implementation of tariff regulation and code of conduct of transmission and distribution businesses, and securing a stable supply during both emergencies and normal circumstances. To ensure this, a new, independent regulatory authority with high-level expertise will be set up to perform regulatory functions within two years.

 

The business categories of the present-day GEUs and wholesale electricity utilities, which own over 70 per cent of Japan’s generation capacity and control transmission and distribution networks, will be revised in line with the full retail choice. The necessary changes with respect to the public services privileges and related tax systems will be made such that the generation companies and retailers will be responsible for stable supply while the transmission and distribution companies will be obligated to maintain the demand-supply balance as per the new laws and framework.

 

The financial implications on the vertically integrated GEUs will have to be considered. The financial health of the GEUs has already taken a hit and has worsened due to various factors including the suspension of nuclear power station operations. The government plans to take necessary measures, while unbundling the utilities, to handle the GEUs’ financial liability including secured bonds.

 

In the transitional phase, the tariff regulation on GEUs will be continued after the full liberalisation of entry into the electricity retail market until it is confirmed that free competition has been achieved. Further, measures for protecting consumers will also be taken after the abolishment of tariff regulation, such as transmission and distribution grid operators undertaking the last resort service of supply and securing a stable supply in isolated islands at prices comparable to that of the mainland.

 

Post unbundling, the transmission and distribution businesses will remain regional monopolies and return on investments will be guaranteed through tariff regulations for these companies. They will be obliged to maintain high quality power supply including stable frequency and voltage and demand-supply balance of the electrical system.

 

A separate framework will also be put in place to enable the unbundled transmission and distribution companies, which perform load despatch functions, to respond appropriately to disasters and restore the demand-supply balance while maintaining the frequency with cooperation from all grid entities. During contingencies, the roles of all organisations such as the government, the ONCT and utilities will be clearly defined to ensure requisite measures are taken for stable supply.

 

While legal unbundling is the preferred option, in case insurmountable problems arise during discussion and implementation of the new framework, the government is also open to only functional unbundling. Under this, the planning and operation functions of the transmission and distribution system of GEUs will be transferred to the ONCT.

 

Under the proposed framework, the ONCT would be responsible for centrally obtaining information regarding grid entities, formulating a supply-demand plan and electrical grid plan, promoting the development of an infrastructure for transmission such as frequency converters and interconnection lines between areas, and managing nationwide system operations in both normal and contingency situations. It would also have to neutrally provide interconnection to new power sources and operate under the supervision of the government.

 

The electricity system reform will be carried out in conjunction with other related energy policies including the nuclear power policy. If required, necessary changes will be made to these related policies to ensure active competition in the electricity market after liberalisation. The present government is planning to take a decision on whether the nuclear plants could be restarted within the next three years.

 

Recognising the importance of electricity for economic revival, the government has announced huge investment plans of JPY30 trillion for the sector over the next decade. While the details on the areas of investment are yet be known, transmission and clean energy are expected to get a sizeable share.

 

Of late, investors and lenders in Japan have shown a keen interest in the country’s renewable energy sector. On its part, the government has announced that it will take measures including speedy environmental assessment processes to accelerate investments in wind, geothermal and other renewable sources. According to estimates, Japan’s solar market is pegged at close to JPY2 trillion in the next three years. The country aims to reduce solar generation costs to less than JPY7 per unit by 2030 from more than JPY30 per unit presently. Further, it intends to become the first country to commercialise floating offshore wind power technology by around 2018. Some critics, however, opine that reform without specific commitments and targets for renewables may not be adequate.

 

The next three years will be crucial for policy making and redefining the laws and regulations as far as the electricity sector is concerned. Only time will tell whether Abenomics will be able to achieve the much-needed and long-awaited economic turnaround.

 

(JPY1=USD0.010)