Last Chance for True Electricity System Reform

Hiroshi Takahashi, Professor, Hosei University

5 July 2023

in Japanese

(Japanese original published on 12 April 2023)

Impact of Cartels, Information Leaks and Unauthorized Access

After all, the major electric power companies have had no intention of changing the power system based on a regional monopoly and a vertical integration of electricity generation and transmission. One after another, illegal activities such as cartels, information leaks, and unauthorized access have surfaced. Although I am often harsh on major electric power companies, I have always had a certain amount of trust in their overall strength and their attitude toward stable supply. It is unfortunate, however, that something like this has happened.

First, the cartel is a collusion among major electric power companies to respect each other's business areas and is a denial of market competition. As a former monopoly company, it is inevitable that it has opposed liberalization, but it is difficult to understand how a major Japanese company, and not just some employees at a retail sales site, but top management, could have led such an act in violation of the Anti-Monopoly Law. It would be unimaginable, for exapmple, for the head of a cell phone carrier to promise to restrict trade.

Second, the information leaks and unauthorized viewing indicate that the power transmission and distribution business, which will continue to be allowed to monopolize, was not neutralized. Although the major power companies were supposed to have accepted the (legal) separation of power transmission and distribution in 2013, many employees appeared to have actually thought that it was okay to share competitors' customer information within the company. Using that information for sales purposes is out of the question, but even if it was for "customer service" purposes, the new power suppliers would not have been able to do the same and therefore be unfair. It would not be surprising, for example, if a certain airline would not be able to see the information that air traffic controllers have on their competitors' operations.

The following is my own understanding of the real feelings of major electric power companies on these acts. In the first place, electricity is a commodity that does not lend itself well to market competition. Liberalization may lower prices, but it will threaten stable supply. Many of the new power companies do not have their own power plants, and there is no telling when they will exit the market. Renewable energy is so unstable that such power sources should not be connected to their power grids. Only major electric power companies with vertically integrated power systems are responsible for stable supply, including in the event of disasters, and everything about electricity should be left to "us." In this way, there would be no other option than a regional monopoly system, and the existing power system would remain unchanged.

Advantages and Disadvantages of Electric Power System Reform

However, this perception of the power system is outdated compared to Europe and other countries, and is not correct in an era of energy transition. In Europe, which is at the forefront, power system reform has been pursued for the following two reasons.

First, market competition contributes to stable supply as well as to lower prices. The market mechanism is the most rational method of adjusting supply and demand in economic transactions. When prices go up, there is an incentive to start up power plants that are shut down and to conserve electricity. Trans-regional power trading will also flourish, making effective use of the nation's large and diverse power plants and demand-side resources. Because supply-demand adjustment is critically important for electric power, it should be left to market mechanism rather than the long-standing intuition of the major power companies. This is common sense in Europe, such as in Nordpool in Scandinavia. In other words, regional monopolies are vulnerable to stable supply.

Second, for the market mechanism to work, the power transmission and distribution network must be open. As a prerequisite for express bus companies to compete on an equal footing, it would be a given that expressways should be free for all to use. The means to achieve this is the separation of power transmission and distribution, but since legal unbundling has proven to be insufficient, the only way left is to separate ownership. Without a separate company in terms of capital, the power transmission and distribution business will not be fully neutralized. Many European countries have implemented ownership unbundling, and stable supply has been maintained. Nor do they receive support from retail companies in the event of a disaster. Rather, variable renewables are connected at a rate many times higher than in Japan, and independent transmission companies (TSOs) are doing their best to integrate them into the power system.

Electricity system reform also has its disadvantages: the market share of former incumbents within their region, which used to be 100%, is decreasing. Those incumbents are not accustomed to competition, and may find it difficult to improve and diversify their services, and maximize their profit. If ownership is separated, the size of the company will become smaller and it will no longer be able to expect stable income from transmission fees. The identity of employees as members of a large company that represents the region will collapse. With all these disadvantages, it is spiritually understandable that the major electric power companies are opposed to power system reform.

On the other hand, there are advantages for the major power companies. If they can adapt to the new market environment, it can motivate employees and generate company growth. They can expand internationally as a global company instead of being confined to the “Galapagos market.” It is not a dream to transform into a leading decarbonization company like Ørsted in Denmark, specializing in renewable energy. The power transmission and distribution sector, in particular, would increase the value of the company if it became independent. It is a growth industry with great investment potential and the promise of stable revenues based on the full cost coverage principle. In Europe, transmission companies have become prime investment targets.

True Power System Reform is Essential for Energy Transition

The cartel and information leaks were competition policy issues. At the same time, power system reform is also irreversible for the energy transition. Humanity now needs an energy transition centered on renewables to address both climate change and the energy crisis. This will require the construction and utilization of a wide variety of renewable energy power plants by a diverse range of operators, including major electric power companies. European countries have introduced market competition and neutralized transmission businesses for this purpose too.

Japan has been lagging far behind in these policy developments. The situation where market competition is not working and the transmission and distribution businesses are not neutralized is how it was 20 to 30 years ago in Europe. Because of the lack of progress in power system reform, Japan has made little progress in introducing renewable energy and still relies on thermal power for 75% of its power supply. This has resulted in soaring electricity prices and the current scandal. Power system reform has been inadequate to date, and it has come to a complete standstill.

Nevertheless, Japan cannot abandon its energy transition. The Japanese government has also made an international pledge to be carbon neutral by 2050. Although there are strong hopes for nuclear power and CCS, renewables are at the forefront of the world's energy transition. The author has repeatedly pointed out the need for true power system reform, but my voice has not reached the government. This is truly the last chance to overhaul the power system. I would go so far as to assert that Japan will have no future unless the ownership unbundling is realized and the market mechanism is allowed to function.

External Links

  • JCI 気候変動イニシアティブ
  • 自然エネルギー協議会
  • 指定都市 自然エネルギー協議会
  • irelp
  • 全球能源互联网发展合作组织

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