The Tokyo Commodities Exchange (TOCOM) started an electricity futures market in September this year after many years of waiting for regulatory approval. The new market is on a three-year trial basis and will be limited to monthly contracts. Figure 1 below shows the contract specifications of the new futures market. The main products are peak and baseload futures for East (Tokyo) and West (Kansai) regions.
|Baseload (0:00-24:00)||Peak (Weekday 8:00-20:00)|
|Price Base (JEPX Avg Price)||Tokyo||Kansai||Tokyo||Kansai|
|Contract Term||Monthly, up to 15 months ahead|
|Min. Tick Size||JPY 0.01/kWh|
|Settlement Price||Monthly average of relevant JPEX price area|
|Last Tradable Day||Day before last tradable business day|
|Settlement Day||First business day of following month|
Session 1: 08:45-15:15
Session 2: 16:30-19:00
Single price auction at open/close of each session
Continuous trading during sessions
Figure 1: Japan electricity futures contracts specifications. Source: Tokyo Commodities Exchange (TOCOM)
Japan has frequently referenced European power market liberalization to better understand power futures, which we will take a look at. In figure 2, we can see that there are four different types of transactions: OTC bilateral, OTC cleared, Spot Exchange and Futures Exchange.
Regulated power markets like Japan are historically the first type, OTC bilateral, where the power generator sells directly to the retailer (which, until recently in Japan and other non-liberalized power markets, is usually the utility itself).
Demerits to these types of contracts are that both parties bear counterparty risk and maintain high prices from lack of price transparency. In July 2019, the European Energy Exchange (EEX) received regulatory approval to offer the second type of product, OTC cleared contracts. This allows a third-party to bear counterparty risk. The third type is a spot exchange, which started in 2004 at the Japan Electric Power Exchange (JEPX). Traded volume has taken off, at one point reaching 30 percent of total volume in April 2019, starting when the market deregulated down to around 50kW in 2016.
In September 2019, with the introduction of a futures market, TOCOM set the last piece of a liberalized power market in place. This is vital for new power retailers to hedge against increasing spot price volatility, such as during the heatwave this past summer and in 2018 and make long-term power procurement easier. Hedging will also become vital once Japan deregulates power price tariffs allowing for further price volatility.
What’s clear from Figure 2 above is that there is no prescribed or universal path to how a given market liberalizes their power market. Although Germany has a very significant futures market, that market is still dominated by OTC bilateral contracts. Meanwhile, Italy is dominated by the spot market and OTC clearing. Japan will therefore take its own path that is adapted to its own market.
So, how is the new futures market faring since September? Figure 3 shows the total volume for each monthly contract since the market started trading in September. Volume remains low, and it will likely remain largely an OTC bilateral market until the incumbent utilities begin to engage more in the market-driven exchanges.
Of the four different power future products on offer from TOCOM in Figure 3, East Baseload dominates power procured. The East Baseload area is where most of the new power retailers are active and looking for stable power prices during the volatile winter season. The futures price was around JPY 10-11/kWh. Using our EPSI model, we can see that the Tokyo area is expected to increase in price over this time, with several price spikes between January and February. Buying baseload power during these times will protect retailers from these price spikes.
Nearly half of the East Baseload trading volume occurred ‘off floor,’ or through block trading. ‘Off floor’ trading is usually for very large traded volumes that would have material impact on price, so they are done off market and use the exchange to manage counterparty risk. Many of the block traded purchases are through non-Japanese organizations to procure large amounts of power. As companies outside Japan increase activity in the market, there is hope that the futures and other exchanges for the newly liberalized Japan power market will become more active and transparent.
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