Comments on the Proposal of New Rules for the Balancing Market

in Japanese

(originally published in Japanese on 9 March 2026)

Renewable Energy Institute has recently submitted comments on two public comment processes related to the balancing market. This column provides an overview of them.

•  “Guidelines for Proper Electric Power Trade (Draft Revision)” and “Balancing Market Guidelines (Draft Revision)”¹

  Discussed at the Electricity and Gas Market Surveillance Commission (hereinafter referred to as “the EGC”) Specialized Meeting for Policy Design and Monitoring (Public comment period: from December 26, 2025 to January 29, 2026)

•  “Twenty-Third Interim Report (Draft) of the Working Group on System Review under the Subcommittee on the Development of a Foundation for Next-Generation Electricity and Gas Businesses”²

  Discussed at the Working Group on System Review under the Subcommittee on the development of a Foundation for Next-Generation Electricity and Gas Businesses, Electricity and Gas Industry Committee, Advisory Committee for Natural Resources and Energy, Ministry of Economy, Trade and Industry (METI) (Public comment period: from January 27, 2026 to February 25, 2026)

Summary

• (Comment 1) The basic policy had been to secure balancing capacity primarily through the balancing market. However, due to the utilization of residual capacity associated with the capacity market framework and the expansion of negotiated procurements for pumped-storage hydropower, the situation has diverged significantly from that policy. In particular, if the positioning of measures “for the time being” and the treatment of negotiated procurements remain unclear, the predictability and competitiveness of the market may be undermined. The fundamental policy for procuring balancing capacity should therefore be clarified again, and consistency should be verified whenever related institutional changes are made.
• (Comment 2) As insufficient bids continue in the balancing market, when procurement outside the market is conducted, procurement methods that are efficient and ensure a high level of transparency—such as public tenders and the use of the intraday market—should also be reconsidered.
• (Comment 3) The proposal to deduct capacity market revenues from bid prices in the balancing market effectively assumes participation in the capacity market, even though such participation is voluntary, and therefore may not be consistent with the design of the two market systems. Rather than addressing this as an issue of price discipline in the balancing market, a comprehensive discussion should be conducted that takes into account the relationship between the markets, after organizing the purposes and participation requirements of each market.
• (Comment 4) Because the balancing market has a significant impact on the formation of electricity prices and its participants are becoming increasingly diverse, the government should proceed with institutional consideration toward legally positioning the market operator under the Electricity Business Act, in the same way as the wholesale electricity exchange.
• (Comment 5) The proposal to change the method for calculating bid prices from a basis of “assumed contracted volume” to one based on “assumed bid volume” could lead to arbitrariness by operators, increased monitoring costs, and a chilling effect on new market entry if the concept of fixed-cost recovery and the basis for the calculation remain unclear. To ensure the rationality of the “assumed bid volume,” clearer rules should be considered—for example, calculating an assumed contract rate by multiplying an assumed value based on operational performance by a certain rate specified by the government.
• (Comment 6) If the prior consultation system for bid prices (Type B power source consultation) is abolished and the monitoring of bid prices shifts to an ex-post approach, it may become more difficult for newly entering power sources to assess the appropriateness of their pricing, and the risk of sanctions could constitute a barrier to entry. Therefore, it is important for the EGC to widely communicate its willingness to respond to consultations and inquiries regarding bid prices, and to clarify operational arrangements that allow consultations in advance.

Background

Expanding the deployment of renewable energy requires flexibility in the power system. From a technical perspective, in addition to conventional power sources such as thermal power generation and large-scale hydropower, it is desirable that renewable energy sources such as solar and wind power, as well as interconnection lines and battery energy storage systems (BESS), also provide balancing capacity. In Japan, in recent years in particular, efforts have been made to secure system flexibility by promoting the introduction of BESS through subsidies and other measures. The market where balancing capacity, supplied by resources such as BESS, is traded is the balancing market.

The balancing market is a market in which general transmission and distribution operators (TDSOs) procure the services necessary for supply–demand balancing and for maintaining system stability. It was established in FY 2021, and currently five products and one composite product are traded. At the time of its launch, trading began with one product (tertiary balancing power II), and the range of products as well as the scope of cross-regional operation and procurement have gradually expanded. From FY 2026, all products will be traded in 30-minute time blocks, procurement timing will be unified as day-ahead procurement, and cross-regional operation will be implemented for all products.³ With this, the final piece of the market reforms implemented under the electricity system reform that began in 2016 will be put in place.

Figure 1: Schedule for the Introduction of Products in the Balancing Market

The services traded in the balancing market are those in which power generation companies stand by so that TDSOs can supply the electricity necessary to adjust supply and demand and maintain system stability. When they receive a dispatch instruction from the TDSO, they generate or suppress the requested amount of electricity (the value of this is expressed as ΔkW). In other words, it is a market in which power generation companies sell to TDSOs the right to remain on standby.

One of the technologies attracting attention in the balancing market is BESS. BESS can contribute to the effective use of renewable electricity and the balancing of supply and demand by charging during periods when renewable electricity is abundant and discharging during periods when electricity demand increases. It is also a technology that can contribute to the stabilization of frequency and voltage required for a stable electricity supply, and it has been actively introduced in countries accelerating the use of renewable energy. In Japan’s balancing market, BESS can respond not only to Tertiary reserve Type 2 (Replacement Reserve for FiT), which is procured to adjust FiT power sources, but also to Primary Reserve (Frequency Containment Reserve) (offline control), which requires a rapid response within seconds from dispatch instruction to service provision.

Since the launch of the balancing market in 2021, many BESS have participated in the balancing market. However, the high clearing prices have been regarded as an issue because they increase the cost of procuring balancing capacity.

In addition, in some areas and products, the bid volume is significantly smaller than the required procurement volume, and such situations have occurred on a regular basis, which has also become an issue.

Against this background, the EGC and a national advisory body (the Working Group on System Review under the Subcommittee on the Development of a Foundation for Next-Generation Electricity and Gas Businesses, Electricity and Gas Industry Committee, Advisory Committee for Natural Resources and Energy, METI) have proposed revisions to the balancing market. Specifically, the proposal consists broadly of the following four points, and it suggests implementing them all at once.

• Proposal 1: Lower the ΔkW price cap for Primary Reserve, Secondary Reserve Type 1 (synchronized frequency restoration reserve, S-FRR), and composite products.
• Proposal 2: Significantly reduce the market procurement volume for Primary Reserve and Secondary Reserve Type 1.
• Proposal 3: Change the method for calculating fixed costs that can be included in bid prices under the Balancing Market Guidelines.
• Proposal 4: Abolish the prior consultation on bid prices.

Proposals 1 and 2 aim to reduce the cost of procuring balancing capacity under the current situation in which many contracts are concluded at the ΔkW price cap. Indeed, given the present market conditions, the current price cap of 19.51 JPY/ΔkW per 30 minutes for Primary Reserve and Secondary Reserve Type 1 has created strong incentives for technologies such as BESS. In some cases, it has even led to situations where BESS investments can reportedly be recovered within two to three years. While it is appropriate to correct incentives that have become somewhat excessive, implementing this together with the reduction in procurement volume proposed in Proposal 2 undermines the predictability of the market.

Furthermore, if the institutional design allows negotiated procurement for pumped-storage hydropower—whose future direction remains unclear—to have a large impact on the procurement volume in the balancing market, it may become unclear even to what extent procurement through the market will be ensured. This could have a significant negative impact on new investment. In addition, Proposals 3 and 4 may also have a large impact on investment recovery and could become a major source of concern for new market entrants. Therefore, careful consideration is necessary.

A summary of the comments submitted by the institute regarding these proposals is as follows.

Comments

Comment 1: Reaffirm and clarify the core policy for balancing capacity procurement.

Balancing capacity is necessary for the stable operation of the power system. However, even under the current situation where the procurement volume in the balancing market has continuously fallen short of the required volume, no blackouts have occurred. This is because TDSOs are able to make adjustments by utilizing the “residual capacity” of power generation facilities that power generation companies operate in order to supply electricity to retail electricity providers.

The utilization of such residual capacity had already been practiced before the introduction of the balancing market. However, in the discussions on the institutional design of the balancing market, the policy presented was that the procurement of balancing capacity would be based primarily on the balancing market, with procurement through other means being used only in a limited manner. For example, at the 9th Working Group on Technical Review of the Subdivision of Balancing Capacity and Cross-Regional Procurement of the Organization for Cross-regional Coordination of Transmission Operators (hereinafter referred to as “OCCTO”), held on December 26, 2017, the following was stated.

Source: OCCTO, 9th Working Group on Technical Review of the Subdivision of Balancing Capacity and Cross-regional Procurement, Material 2, Slide 11

In addition, at the 11th Subcommittee on Balancing Market Design of OCCTO, held on April 25, 2019, the handling of the additional start-up of power sources was organized as follows.

Source: 11th Subcommittee on Balancing Market Design, Material 2, Slide 36

However, the situation changed with the introduction of the capacity market (bidding began in FY2020 and the mechanism started in FY2024).  Balancing-capable resources contracted in the capacity market (power sources to which TDSOs can directly send output adjustment instructions) are required to conclude contracts that allow TDSOs to utilize their residual capacity for system operation when such surplus exists (“Residual capacity utilization contracts”). At the same time, chronic shortages of bid volumes occurred for some products in the balancing market after 2024, and these shortages have been supplemented by power sources under residual capacity utilization contracts.

Furthermore, there has been a move to resolve procurement shortages in the market by allowing TDSOs to procure pumped-storage hydropower through negotiated contracts.

Such developments differ significantly from the policy for procuring balancing capacity that had been envisioned when the balancing market was established.

In the current “Twenty-Third Interim Report (Draft),” it is stated that “for the time being, it has been determined that it is necessary to use procurement methods for balancing capacity outside the market (power sources with residual capacity utilization contract and negotiated procurement for pumped-storage and others) in combination.⁴” However, two aspects of this remain unclear.

1. The contracted volume under negotiated procurements for pumped-storage is deducted from the procurement volume assumed for the balancing market (the equivalent of 1σ of the required balancing capacity). In other words: ​(Procurement volume in the balancing market = 1σ equivalent of required balancing capacity – contracted volume under negotiated procurements for pumped-storage and others).​The greater the volume of negotiated procurements for pumped-storage, the smaller the amount of balancing capacity procured through the balancing market. The procurement volume of the balancing market would be greatly affected by whether such negotiated procurements are temporary or become a continuing institutional arrangement. Under such circumstances, it is unclear whether the balancing market can function as a transparent market. In particular, it is not clear how long “for the time being” actually refers to― it could mean one or two years, or even five to ten years.
2. The use of residual capacity utilization contracts may be unavoidable to some extent. However, there are two types of residual capacity utilization:
   1. natural residual capacity power sources (the difference between the rated capacity of a generator in operation and its actual operating output), and
   2. residual capacity power sources requiring additional start-up.

Figure 2: Reduction in Procurement Volumes for Primary Reserve, Secondary Reserve Type I & II, and Tertiary Reserve Type I (in the Case of Composite Products

In order for the balancing market to develop into a competitive market in which diverse businesses and power sources participate, the predictability of institutions and rules is important. Moreover, it cannot be considered sustainable unless there is a mechanism through which market participants can earn a certain level of profit through competition among power sources. Based on this line of thinking, it was established during the discussions on the design of the market that balancing capacity would be secured primarily through the market. Nevertheless, the current situation differs from that principle, which leads to reduced predictability for market participants.

For this reason, it is important to reconfirm the fundamental policy for securing balancing capacity. At the same time, whenever changes are made to systems with significant impacts—particularly the capacity market and negotiated procurements for pumped-storage and other resources—the consistency of the overall institutional framework should be discussed and confirmed in committees and other relevant forums.

Comment 2: Ensure competitive off-market procurement.

As pointed out in Comment 1, in the current balancing market, procurement that includes out-of-market procurement is being carried out on a routine basis due to insufficient bid volumes and other factors, and the system is gradually shifting toward one that assumes such arrangements. In the first place, if balancing capacity procurement is to follow such a policy, the basic policy itself should be reconfirmed, as stated in Comment 1. On that basis, if procurement outside the market is conducted, it should also be carried out in a competitive manner. In other words, methods such as negotiated procurements may be inappropriate.

In addition, it is not easy to evaluate the level of competition in the balancing market. As the balancing market uses a multi-price auction⁵, comparisons between the average clearing price and the price of out-of-market procurement may be insufficient. Accordingly, if balancing capacity is to be secured through a combination of market procurement and out-of-market procurement, a mechanism should be pursued that ensures efficient and transparent procurement, including clarification of the criteria used to assess whether procurement is competitive.

For example, regarding negotiated procurements for pumped-storage hydropower, reconsidering procurement through open tendering⁶could be one possible approach. Furthermore, in 2023, OCCTO examined issues related to conducting additional procurement of Tertiary Reserve Type 2 through the intraday market. In light of the transition to 30-minute time blocks for balancing capacity starting in FY 2026, it may be worthwhile to resume discussions on procuring balancing capacity through the intraday market as well.⁷

Power sources that submit bids to the balancing market are all subject to monitoring from the perspective of ensuring an appropriate market environment. According to the “Balancing Market Guidelines (Draft Revision)” proposed by EGC in this case, certain power sources that meet specific conditions would be required to submit bids at prices that deduct capacity market revenues, regardless of whether they actually participate in the capacity market.

Participation in the capacity market is voluntary. Nevertheless, requiring all power sources that meet certain conditions to determine their bid prices in the balancing market on the assumption that they will bid into the capacity market—regardless of whether they actually participate in it—does not align with the design of the capacity market system. Some may expect that such a proposal could encourage power sources to participate in the capacity market. However, if such a direction is intended, it should be addressed within the design of the capacity market itself, and it is not appropriate to address it through measures that affect bid prices in the balancing market.

Behind this proposal appears to lie issues arising from the differences in requirements imposed on power sources by each market. While power sources that win contracts in the capacity market are subject to multiple requirements, power sources that participate only in the balancing market are not subject to those requirements imposed on capacity market winners. Nevertheless, in the balancing market, power sources that did not participate in the capacity market may be able to bid at higher prices than those awarded capacity contracts. This could raise concerns about fairness among power sources.

Even so, if such issues are to be discussed, it would require consideration of other regulatory questions, such as whether all power sources participating in the balancing market should be obligated to bid into the capacity market. Addressing this issue through the balancing market guidelines, which are intended to establish price discipline, may be seen as a somewhat narrow and ad hoc response. Instead, discussions should return to the original purposes for which each market was established, organize the relationships between the markets and the conditions required of participants from a comprehensive perspective, and aim to create a market framework that is clear and consistent with its underlying principles.

Comment 4: Provide a clear legal basis for the operator of the balancing market.

The balancing market is expected to enable the efficient procurement of balancing capacity by becoming a competitive market in which diverse players participate, not only the large-scale power sources that have traditionally provided balancing capacity. In addition, prices in the balancing market are reflected in imbalance prices and, ultimately, affect wholesale electricity prices. Therefore, there is a strong need to ensure appropriate price formation. The diversification of market participants and the need for proper price formation can be said to resemble the situation when the wholesale electricity exchange was designated as a specified corporation through amendments to the Electricity Business Act.⁸

Comment 5: Clarify how fixed costs are calculated in bidding prices for balancing market resources.

Until now, it has been permitted to use an assumed contracted volume when calculating the amount of fixed costs that can be included in bid prices in the balancing market. From the perspective of operators, bids they submit are not necessarily guaranteed to be awarded. Therefore, in order to ensure recovery of fixed costs, they have assumed a certain contracted volume and determined bid prices accordingly. In contrast, the method proposed this time for calculating bid prices is to take into account the assumed bid volume.

For example, suppose there is an operator who expects to win contracts for only 6 time blocks out of the 48 time blocks in a day. The contract rate would be 16.6%, and the operator would assume that fixed costs are recovered through those 16.6% of awarded time blocks; therefore, the bid price would be set relatively high. However, when using the assumed bid volume, the bid price must be set based on the number of time blocks for which the power source is capable of submitting bids (for example, 24 time blocks). In this example, the portion of fixed costs reflected in the bid price would fall to one-quarter.

In the guidelines (Draft Revision) proposed by EGC, particularly for BESS, it is stated that the calculation should be made “based on the ΔkW that can be bid in the relevant fiscal year, taking into account charging and discharging constraints, and considering operating patterns and past performance.” However, the guidelines do not specify how the rationality of the assumed bid volume—calculated by the bidding operator based on “operating patterns and past performance”—will be evaluated, leaving ambiguity. If operators can determine this themselves, it would not be impossible for them to underestimate the assumed bid volume and thereby raise their bid prices. In other words, this could lead to increased monitoring costs for EGC.

On the other hand, if the rationality of the assumed bid volume is assessed based on what is generally expected from similar types of power sources, new power sources with limited examples or operational records may find it difficult to understand the criteria under which they might be subject to a Business Improvement Order by METI or other measures, which could discourage market entry.

As explained by EGC, it is indeed problematic that operators could inflate the fixed-cost component by deliberately underestimating the assumed contracted volume, and improvements should be made. However, in order to reduce the issues described above, consideration should be given to calculating an assumed contract rate by multiplying the assumed bid volume—calculated based on the operating patterns and past performance of the relevant power source—by a certain rate predetermined by the government, and using this value in the calculation.

Comment 6: Raise awareness that EGC can be consulted on bid price discipline.

Until now, when setting bid prices that included the costs necessary to recover fixed costs, operators were required to consult with EGC in advance (a system referred to as the Type B power source consultation). In other words, as long as bids were submitted at prices equal to or below those discussed in advance with the Commission, they would not be subject to corrective measures such as Business Improvement Orders. This framework played an important role in creating an environment that enabled new power sources—whose facilities had been built only recently and whose investments had not yet been fully recovered—to participate in transactions with confidence.

However, the recent proposal by the Commission abolishes this prior consultation system and shifts the monitoring of bid prices in the balancing market primarily to ex-post monitoring. The reason given is that prior consultations require considerable time and effort, while power sources that submit high bid prices discussed in advance are relatively unlikely to be awarded contracts in the market, making the cost of such consultations disproportionate to their benefits.

However, as noted in Comment 5, for newly entering power sources there are still few accumulated examples or operational precedents, and benchmark standards or guiding principles are difficult to discern. Under such circumstances, when submitting bids to the balancing market, the only reference for determining whether the level of the bid price is appropriate would be the guidelines themselves. Moreover, if there were an error in interpreting the underlying principles, the operator could become subject to sanctions, which some may view as a business risk. From the perspective of encouraging participation by new power sources, this could become a barrier to entry.

During the discussions at the Working Group, the Commission explained that it would carefully respond to questions from operators regarding the contents of the proposed guideline revisions and that it would accept inquiries. It is important to widely communicate and implement operational practices that allow advance consultation regarding the bid prices of new power sources.

Conclusion

The current proposed revisions to the balancing market involve multiple measures being introduced simultaneously, each of which alone could potentially have a significant impact on the market. Moreover, these proposals were presented at the same time that all products in the balancing market are scheduled to shift to 30-minute intervals and day-ahead procurement starting in FY2026. These institutional changes can be considered sufficient to make market participants recognize that Japan’s balancing market carries the possibility of sudden and major institutional changes (= risks). It is therefore understandable that strong opposition to the proposed changes emerged across the discussion at both EGC and METI’s committees. The basic policy should be to encourage participation by diverse operators, including new entrants, and to enhance competition in the provision of balancing capacity. However, it must be said that many aspects of the current proposals risk running counter to that objective.

The balancing market has undergone repeated institutional revisions in the past, and measures such as setting price caps and reducing procurement volumes have been implemented in response to issues such as procurement volumes not being met and increases in procurement costs. While correcting institutional shortcomings is necessary, if such revisions become frequent and involve dramatic changes, they may run counter to the objective of encouraging participation by diverse operators, including new entrants, which is a serious concern. If institutional changes undermine confidence in Japan’s electricity market and are perceived as risks by new entrants and their investors, there is a possibility that new entry will cease. For this reason, EGC and METI are strongly urged to build a market framework that ensures predictability