Blog August 26, 2019

Japan experienced a flurry of activity in liberalizing its power markets in recent years. In 2016, the power market fully liberalized below 50kW to allow households to choose their own electricity provider for the first time. Government regulated tariffs are scheduled to be abolished by 2020, and the vertically integrated utilities will also start to debundle their generation, transmission, and distribution.Figure 1 shows the numerous different markets rolling out. Many of these moves are intended to level the playing field for new entrants against incumbent utilities.

Japan liberation plans
Figure 1: Japan Market Liberation plans over time. Source: Ministry of Economy Trade and Industry (METI)

Japan also just announced the results of bids for its first baseload market in early August 2019. Baseload power consists of plants using coal, run-of-river hydro, nuclear, and geothermal that excel at producing stable power generation at low cost. Figure 2 shows the amount of power plant capacity in Japan from the power plant database in our EPSI Platform for Japan. Out of 358GW of capacity either currently operational or mothballed, there is 109.1GW, or 31 percent, of available capacity considered as baseload. The baseload market in Japan will secure 12-month contracts, with this first round for contracts from April 2020 to March 2021. There will be auctions again in September and November of 2019.

Total power plant capacity by fuel type
Figure 2: Total power plant capacity by fuel type (GW). Source: EPSI Platform

There is a good case for this initiative. As Japan liberalized its power market, stated previously, setting up structures that create a more equal playing field is increasingly important.The purpose for the baseload market is to provide lower cost power owned primarily by the incumbent utilities to growing number of small power retailers in the market. Figure 3 shows the ownership of the baseload capacity in Japan. Of the 109.1GW of baseload capacity 92.7GW or 85 percent is owned by incumbent utilities. Most small retailers do not have the means to build these types of plants themselves, so procuring from a baseload market makes sense in theory. Japan claims to emulate a similar baseload market that France introduced in 2010. The Regulated Access to Incumbent Nuclear Electricity (ARENH) mechanism requires 100TWh (or around 25 percent total) of nuclear power to be available to retailers at a fixed price of EUR 42/MWh (compared to an average power price of EUR 54.8/MWH in 2018). France generates 75 percent of its power from nuclear held by incumbent utilities. As with the baseload market in Japan, ARENH aims to provide power retailers with access to cheaper power electricity to create a more level playing field.

National average hourly power prices (JPY/kWh)
Figure 3: Ownership of baseload power by owner in Japan. Source: EPSI, Genscape

The results of the first Baseload Market auction in Japan did not indicate a success, however. In Figure 4, we have the price and volume of bids from the August 2019 baseload power auction. We can see that there is only a 12-15 percent savings in the settlement price compared to the average of the 2018 spot price. Prices in ARENH were 23 percent lower than the France 2018 average (Japan prices overall were around double that of France). The 1.6TWh contracted in Japan is only 1.3 percent of the total power purchased by small retailers in 2018. Meanwhile, demand outstripped the 100TWh in ARENH by 33TWh in November 2018 (this total is close to the 2018 total retail market in Japan).

  Volume (kW) Price (JPY/kWh) 2018 Average (JPY/kWh) Price Difference (%)
Hokkaido 12,700 12.47 14.63 15%
Tokyo 88,200 9.77 11.09 12%
Kansai 83,400 8.7 10.19 15%
Total 184,300      
Generated Annually 1,614,468,000      
2018 Retail Power Volume 122,600,000,000      
Percentage of Total Volume 1.3%      
(ARENH) 100,000,000,000 4.9 6.45 23%

Figure 4: Results of baseload auction. Source: JEPX, METI, Genscape

The lack of success is due to the high settlement prices. The price mixes all the different baseload power sources into one price (ARENH is solely a nuclear price). These prices also include the fixed costs of mothballed nuclear plants shut down because of concerns related to the March 2011 earthquake. Incumbent utilities are losing money due to offline nuclear capacity. Tokyo Electric, for example, paid JPY 604bn in 2016 alone. In Figure 5 we have the available capacity excluding the mothballed capacity from Figure 2. Our EPSI database has only 10GW of the total 40.5GW of nuclear capacity. We can also see that the government has an even narrower definition of available baseload capacity for the tradable market. By mixing coal and hydro with fixed costs of mothballed nuclear plants, auction prices are unfairly high for those who are bidding. 

Japan baseload capacity by different definitions
Figure 5: Japan baseload capacity by different definitions. Source: EPSI, Genscape

While the baseload market purpose is to provide small retailers access to cheaper power, retailers clearly do not find pricing favourable in its current structure with fixed costs included in the price. While this is only the first auction of many moving forward, future changes may make the market more attractive. Tokyo Electric, Chubu Electric, Hitachi, and Toshiba recently announced a new company that will handle O&M for their nuclear plants. This could allow utilities to take mothballed plants off their balance sheet and provide justification to remove them from the baseload price auction. Additionally, the ARENH system is interesting for comparison but may not be practical for Japan to emulate.

Japan has a major portion of its nuclear plants offline with unclear and possibly no restart dates. French utilities also complained that the ARENH prices are too low and give retailers an unfair advantage. The French government plans to increase the price slightly in ARENH while also expanding the available capacity to 150TWh. ARENH also had strong volatility; in 2015 and 2016 volume reached near zero because suppliers were able to make their purchases well under the EUR 42/MWH; because of a collapse in power prices. The ARENH mechanism is only an interim measure to encourage competition in the French market and will expire in 2025. Japan still has work to do on streamlining its fledgling Baseload Market to benefit its intended users, and the solution will likely be unique to its own market.

Genscape’s PowerRT and EPSI platform gives you the ability to model and understand circumstances like these, with a real-time view allowing you to act on changes. To learn more or to request a demo, please click here.