Japan's Electricity System Restructuring: Review and Points for Discussion (No.2) Evaluating Electricity Retail Liberalization

in Japanese

(originally published in Japanese on 21 August 2024)

Eight years have passed since the full liberalization of the retail electricity market in Japan. How should we evaluate the outcomes of this liberalization?

Outcomes of Retail Liberalization

What did the electricity system reform seek to achieve through retail liberalization in the first place? According to the Report of the Electricity System Reform Expert Subcommittee in 2013, the purpose was to realize “the provision of new menus of services and rates, and affordable retail prices” through market competition. The background to this proposal was the “nuclear power plant incident resulting from the Great East Japan Earthquake, and the subsequent pressures on electricity supply” in 2011. In this unprecedented crisis, “public demand to ‘have a choice in electricity services’ grew” and “through the implementation of power-saving measures and preparation for planned outages, many consumers realized that limiting electricity use at peak times had significant economic value.”

To evaluate the outcomes, it is thus necessary to ascertain if a wider variety of options such as new electricity providers to choose from are available to consumers, if they are being offered new rate options and services such as demand response, and whether or not lower retail prices are realized.

Firstly, concerning the choice of an electricity provider, Electricity Transaction Report from the Electricity and Gas Market Surveillance Commission (EGC) shows that new providers accounted for around 17.5% of total electricity sales as of April 2024. This share was around 23% in the low-voltage sector, which includes residential households. In April 2016, the share was around 5.2% overall and just 0.1% in the low-voltage sector, so market competition has advanced considerably.

However, these figures also mean that the remaining 82.5% and 77% shares respectively are held by the former major power companies (the former “General Electricity Utilities”). Surely this may be regarded as an “oligopoly.” The market share of new providers certainly increased after 2016, but it has been on a downward trend after peaking in August 2021 at 22.6% (overall) and in August 2022 at 27.5% (low voltage). As explained later, there was a spike in the spot price of power in January 2021¹, and in 2022 the Russian invasion of Ukraine led to higher fossil fuel prices internationally and higher spot power prices in Japan, which continued for more than a year, contributing to the deterioration in business conditions for new power providers. This is thought to have prompted a migration of customers to the former major power companies (“deemed electricity retailers”). A study by Teikoku Databank found that as of March 2024, 32 of the 706 new electricity providers had gone bankrupt or closed, while 87 had withdrawn from the market, and 69 had suspended contracts.²

As for pricing, secondly, the introduction of options such as fully usage-based rates, power-saving discounts, and 100% renewable energy plans has certainly resulted in more diversified pricing, which can be evaluated as a positive outcome of retail liberalization. In a separate column we will look at the actual scale of these changes, demand response and other effects, as well as renewable energy value trading.

Thirdly, retail prices were largely steady between 2015 and 2021, but they rose continuously in 2022.⁴ The context was the abovementioned escalation of fossil fuel prices related to the invasion of Ukraine, but the rise itself was attributable in large part to a power mix problem, namely the reliance on thermal power generation. As other developed countries have experienced similar impacts, the issue will be difficult to resolve through liberalization in the short term. A medium- to long-term solution can be sought by achieving a power mix with a higher proportion of renewable energy, which has zero marginal cost.

Inadequate Fair Competition in the Retail Market

In light of the current situation as outlined above, the primary issue appears to be that the retail market has not fully developed an environment of fair competition. The declining market share of the new providers and the large number of providers withdrawing and going bankrupt would not be problems if they were a product of fair competition, but this is highly unlikely to be the case.

The abovementioned spike in electricity spot prices in January 2021 was mainly due to the former major power companies holding back from selling in the day-ahead previous day’s spot market. An investigation by the EGC did not find any problem in terms of competition, but this could hardly be called a full explanation. At the beginning of 2023, a power retail cartel was uncovered in breach of the Anti-Monopoly Act.⁵ Chubu Electric Power and other parties are disputing the matter in the courts, but it is the result of a multi-year investigation by the Japan Fair Trade Commission (JFTC) based on self-reporting by Kansai Electric Power. Surely it is more natural to assume that there was some competition issue at play here.⁶

Retail cartels are not the only problem. An infringement of the Electricity Business Act in the form of a data leak by general electrical transmission and distribution operators utilities also came to light in March 2023.⁷ The retail arms of the former major power companies⁸ were found to be routinely accessing competitors’ customer information—which should usually be impossible to obtain—from group network companies that are supposed to be independent. This case demonstrates that the legal unbundling intended to achieve neutrality of transmission and distribution operators utilities has not worked. Additionally, in January 2024, the JFTC published a list of problems in wholesale competition related to the generationarms of the former major power companies. but On the whole, a more natural view is that the former major power companies are still bundling generation and transmission in their operations, placing new electricity providers in a structurally disadvantageous position.

It is reasonable natural that liberalization may push uncompetitive retail operators out of the market. However, without proper development of the market environment on which competition is predicated, this cannot be said to be fair. Simply opening the market up positions the former monopoly operators at an overwhelming advantage over newcomers, so it is essential to take corrective actions through competition policy. This is the responsibility of the national government, but just as the EGC was not aware of the cartel identified by the JFTC, the monitoring of competition by regulatory authorities is far from adequate at present.

Provision of a fair competitive environment is at the heart of electricity system reform, and radical strengthening in this area is essential in the retail market as well. Specifically, the major priorities are tougher penalties on unlawful conduct such as cartels and improper data access, and stricter supervision of other anticompetitive conduct. The EGC has sought to ensure equal treatment between subsidiary retailers and third-party retailers in recent years, and but this work also needs to be strengthened and accelerated. As a precondition for these advancements, the EGC’s authority needs to be bolstered and monitoring systems expanded.

Other Issues: The Regulated Price System and Electrical Power Subsidies

Finally, let me touch on two other issues related to the environment for competition in the retail market.

The first is how to evaluate the regulated price system. In the low-voltage sector centered on domestic households, regulated price options have remained in place even since the full liberalization of 2016. This is an interim measure designed to protect consumers, and it requires the former major power companies to undergo a price investigation by the EGC prior to raising prices, as well as imposing upper limits on fuel cost adjustments. Regulated pricing usually ends up higher than unregulated pricing, so it should be eventually abolished. In addition, in the context of steep price rises in 2022, a reverse phenomenon was observed whereby the unregulated price without upper limits rose higher than the regulated price with an upper limit, leading to some calls for immediate abolition of the regulated price system on the ground that it distorts market competition.

Taking account of the competitive environment in the retail market examined in this column, however, abolition at this stage may be premature. As shown in the Figure, only around one half of low-voltage consumers have switched to unregulated pricing as of April 2024. This proportion had been increasing gradually, but has plateaued since 2022. The price reversal is undoubtedly a problem, but it is also possible to point to the activation of consumer protection measures in response to unprecedentedly high prices. The top priority is surely to secure fairness in the competitive environment.

Figure: Change in percentage of consumers using unregulated pricing nationwide
(i.e., covered by the 10 former major power companies) (April 2016 to April 2024)

The second issue is evaluation of the electrical power subsidy system that began in January 2023. Under this system the Ministry of Economy, Trade and Industry has been paying subsidies via power retailers as a “measure to ease the dramatic change” caused by the major rise in electricity rates in 2022.⁹ This subsidy is part of the government’s response to the sharply rising cost of living, and certainly has a degree of social significance in terms of relief for households struggling financially. However, the subsidy needs to be abolished promptly.

This is because the subsidy works against energy saving and other rational responses by consumers. The high electricity rates are a product of elevated fuel costs for thermal power generation: a market signal of the risks associated with fossil fuels. Under normal circumstances, rising electricity rates encourage efforts such as power saving and installation of solar panels, but these effects are impeded if rates are lowered artificially. Ultimately electrical power subsidies are funded by taxpayers, so they may lead to pork-barreling, and once introduced are often difficult to abolish for political reasons. The current subsidy, which was originally planned to expire in September 2023, was extended once, finally abolished in May 2024, then reinstated again in an announcement just one month later.

The above two issues are further evidence that the prerequisite for retail liberalization—the existence of a fair competitive market—is not yet in place. Consequently, retail consumers do not have access to a wide variety of options through which to exercise rational consumer behavior. These conditions will surely lead to a heavier electricity rate burden in the medium to long term. The national government needs to revisit the original purpose of the electrical power system reform and put itself in consumers’ shoes as it strengthens competition policy.
 

[Column Series] Japan’s Electricity System Restructuring: Review and Points for Discussion