Comments on the Government’s System Design Based on the Review of Power System Reform

in Japanese

The Japanese government is currently discussing new institutional reforms based on the results of the review of the power system reform (the report was published in March 2025¹) and the Seventh Strategic Energy Plan.

This column introduces the comments submitted by Renewable Energy Institute in response to the government’s public call for opinions conducted in September 2025 as part of those discussions².

Background

The recent review of the electricity system reform was conducted in accordance with legal provisions, targeting the reforms that have been implemented step by step since 2012—specifically, the expansion of cross-regional grid operation, the full liberalization of electricity retail and generation sectors, and the further securing of neutrality in transmission and distribution sectors through legal unbundling, along with related systems.

It was the first review conducted after most of these institutional reforms had been implemented.

Based on the results of this review, the government identified key issues and presented them to a newly established expert committee³. The public consultation conducted this time organized the discussion points, including newly added topics based on the deliberations in that committee (see Table 1)⁴.

The issues under consideration include the coordinated development of transmission networks, which is becoming increasingly important for the large-scale introduction of renewable energy.

On the other hand, the proposed reforms place greater emphasis on the role of conventional large-scale power sources such as thermal and nuclear power, while introducing new obligations for retail electricity businesses and creating new markets.

These developments raise concerns that they may increase uncertainty in the business environment where diverse players are expected to exercise creativity, and may negatively affect the building of a decentralized electricity system.

This emphasis on conventional large-scale power sources aligns with the outlook for the power generation mix in fiscal year 2040 (approximately 40–50% renewables, 20% nuclear, and 30–40% thermal) presented in the 7th Strategic Energy Plan, which was discussed and formulated around the same time as this review.

Table 1. Issues for Institutional Design Based on the Review of the Power System Reform

Contents of the Comments

1. Addressing Financing Issues for Investment in Decarbonized Power Sources (1.(1))

(Government Proposal)
For long-term and large-scale power source investments, the government will further consider concretizing measures for facilitating fund procurement, including those to supplement private financing quantitatively, such as utilizing government creditworthiness to provide loans, among others. 

(Comment)
The category of “long-term and large-scale power sources” subject to measures for “facilitating investment fund procurement” should include offshore wind power.

(Rationale)
The need for large-scale investment toward decarbonization and the importance of ensuring smooth financing for such investments are beyond dispute. Offshore wind power is a type of large-scale generation developed with the goal of reducing costs, and investment scales range from several hundred billion to trillions of yen.

Due to the global surge in material prices and the immaturity of related industries and supply chains in Japan, development costs for offshore wind have risen sharply, and the impact on investment is becoming evident.

It is therefore essential to establish a financing framework that enables investors to make investments with confidence, including not only fixed-bottom but also floating offshore wind projects.
 

2. Maintenance of Power Sources Important for Grid Operation (1.(3))

(Government Proposal)
When securing grid stability, system operators may use operating power sources to maintain voltage, ensure synchronous stability, and avoid grid overloading.
If a power source essential for grid operation is suspended or decommissioned without sufficient coordination with the system operator, such operation could face critical disruption.
Therefore, it is necessary to examine the issues related to conduct regulations and take necessary measures to ensure proper information sharing and consultation between system operators and power generation businesses.

(Comments)
1.　When discussing the relationship between grid stability and power plant operation, the specific roles that power sources play must be clearly distinguished. If information sharing between system operators and generators is genuinely necessary, it should be conducted through the Organization for Cross-regional Coordination of Transmission Operators (OCCTO).

2.　There currently exists a system in which general transmission and distribution operators procure power sources important for grid stability through public bidding (the “Public Tender for Power Sources in Specified Areas”). This mechanism requires power producers to maintain the awarded power source “until the completion of countermeasure construction work for grid stabilization.” However, the timeframe for “until completion” is unclear and should be specified.
Additionally, countermeasure works should also consider contributions from renewable energy generation and storage systems toward grid stabilization.

(Rationales)
Point 1:
In ensuring grid stability, three examples of the roles played by power sources are presented: voltage maintenance capability, synchronous stability, and avoidance of grid overloading.

However, these three functions represent entirely different aspects, and in the context of electrical engineering, they are generally discussed separately and independently from one another.

For example, the capability to maintain voltage is a local matter within each voltage level of the transmission network (such as 500 kV, 66 kV, or 6.6 kV)⁵, whereas synchronous stability concerns frequency maintenance and involves all generators and loads across entire synchronous networks (50 Hz for Hokkaido/Eastern Japan, 60 Hz for Western Japan/Okinawa).

While synchronous generators (e.g., thermal plants) undoubtedly contribute to stability, discussing these technically distinct concepts together is inappropriate from both technical and academic perspectives.

Therefore, if grid stability achieved through synchronous generators is to be discussed, the scope of the discussion should first be clearly defined, and the technical issues should be identified before proceeding with the debate. Otherwise, even if information sharing between system operators and generators were implemented, it could be meaningless or lead to unnecessary information exchange.

From the perspective of conduct regulations under legal unbundling, it would also be more appropriate for such information sharing to be conducted through a neutral body such as OCCTO rather than directly by system operators.

Point 2:
Renewable energy and storage systems can contribute to both voltage and frequency stability. Early exploration of these options could serve as countermeasures in the event that synchronous generators are suspended or decommissioned.

These technologies and requirements are already in practical use in regions such as Europe and Australia, where renewable deployment is rapidly progressing⁶. However, in Japan’s grid codes, system operators have not yet embraced the proactive use of inherent functions in renewable and storage systems—such as instantaneous active power injection during frequency drops or reactive power adjustment for voltage fluctuations⁷. Although OCCTO has begun discussions on this, the implementation is expected around 2030⁸, which is too late.

As a first step, efforts should be initiated with renewable energy generation facilities and storage systems that are connected to the central load dispatch center via dedicated lines, such as those on extra-high-voltage networks⁹.

Furthermore, if the system operator determines it necessary, a mechanism should be considered for introducing equipment such as STATCOMs and synchronous condensers as grid stabilization measures¹⁰, and for recovering the associated costs.
 

3. Coordinated Development of Intra-Regional Networks (2.)

(Government Proposal)
Toward proactive and coordinated development of intra-regional networks, the government will examine frameworks under which general transmission and distribution operators formulate and implement development plans.

(Comment)
In developing intra-regional networks, the framework should allow general transmission and distribution operators and transmission operators to formulate and implement plans, with some degree of involvement by public institutions such as the government.

(Rationale)
Since the establishment or reinforcement of grid infrastructure takes considerable time, it is necessary to formulate a comprehensive plan that takes into account the potential and deployment pace of renewable energy in order to develop intra-regional transmission lines in a planned and efficient manner. The government should establish a framework involving OCCTO and general transmission and distribution operators, and formulate and publish a nationwide plan that further develops the existing master plan. This enhanced master plan should include the regional plans of each operator’s service area. In formulating this plan, it would be appropriate to aggregate the plans within each general transmission and distribution operator’s service area and, under the coordination of the government and OCCTO, optimize the overall plan with a view to ensuring future flexibility in both power generation and the grid system.

The government’s proposal calls for examining a framework in which general transmission and distribution operators develop and implement plans, taking reference from existing schemes such as the Cross-regional Network Development Plan for inter-regional interconnections. We support this direction. At the same time, the framework for plan formulation should be further refined by considering an appropriate degree of involvement from public institutions, including the national government, as an essential element.

The government has presented a draft policy under which, for intra-regional backbone networks that are not integrated with inter-regional interconnections but contribute to wide-area electricity transactions, OCCTO would consider initiating a planning process in collaboration with general transmission and distribution operators in each area. If such a process were to be launched, a Cross-regional Network Development Plan would be formulated, and its progress would be reviewed on a regular basis¹¹. We strongly urge that the examination be advanced promptly.

Furthermore, to accelerate intra-regional grid development, it would be beneficial to incorporate alternative perspectives and business models beyond those of existing transmission operators.

For backbone intra-regional networks linked with inter-regional lines or serving wide-area transactions (as outlined by the bold box in Table 2 below), the planning and development entities should include not only general transmission and distribution operators but also independent transmission companies.

Table 2. Current Status of Transmission and Distribution Network Development
 

 

4. Ensuring Quantitative Supply Capacity of Retail Electricity Operators (3-①)

(Government Proposal)
As an obligation for securing supply capacity to be fulfilled by retail electricity suppliers, quantitative supply capability (in kWh) will be added as a requirement. Specifically, the government will proceed with deliberations based primarily on a proposal to require retail electricity suppliers to secure supply capacity equivalent to 50% of their projected demand for the supply year three years in advance, and 70% one year in advance. Alongside continued discussions on key issues such as the required level of secured capacity and possible exemptions for small-scale suppliers, further coordination among related systems will be pursued with the goal of starting to verify compliance with these obligations from fiscal year 2030.

(Comment)
Cautious consideration is needed regarding the obligation for retail electricity operators to secure quantitative supply capacity in kWh.

(Rationale)
According to the government, this obligation aims to suppressing sharp fluctuations in power source costs—which impact electricity prices—and strengthen mid- to long-term incentives for fuel procurement¹².

However, it is doubtful whether securing “70% of expected demand” will truly stabilize electricity prices.

Even if 70% of fuel is secured under long-term contracts, the final electricity price is determines by the remaining 30% of fuel prices. Therefore, the proposed requirement may not align with the stated purpose of “suppressing sharp fluctuations in power source costs.” Increasing the obligation ratio, on the other hand, would impose excessive burdens on retailers’ portfolios and pricing flexibility. Thus, it would be difficult to set a meaningful and appropriate level of obligation to achieve the system’s goals.

The government cites the rising share of short-term spot market procurement by retailers and the social unacceptability of large retail price swings as justifications. However, retail price fluctuations encourage behavioral change among consumers and promote appropriate energy consumption and conservation.

Instead of merely suppressing price variation, its meaning and benefits should be socially shared.

Moreover, price risks can be hedged through long-term bilateral contracts or futures markets, and short-term spot price spikes do not directly translate into higher retail electricity prices. The current limitation of hedging tools available to retailers must be addressed first.

Imposing quantitative supply capacity obligations could restrict retailers’ freedom in pricing and menu design, thereby undermining the core principle of power system reform—encouraging innovation through competition and creativity.
 

5. Considerations Toward Developing Mid- to Long-Term Trading Markets (3-②)

(Government Proposal)
To establish widely referable, appropriate, and stable electricity price indices and to promote stable mid- to long-term procurement of supply capacity by retailers, a new “mid- to long-term trading market” will be developed, open to broad participation by retail electricity operators.

(Comment)
Introduction of a mid- to long-term trading market should be approached with caution.

(Rationale)
We support this direction of promoting medium- to long-term electricity trading that contributes to the formation of a widely referable, fair, and stable electricity price index. However, creating new markets incurs social costs and increases institutional complexity, and therefore requires careful consideration.

Given the current inactivity of forward and baseload markets on the Japan Electric Power Exchange (JEPX), launching another market without addressing the underlying causes of low trading activity is questionable. 

The causes of this issue have been discussed in the past, and some measures have already been taken. However, the current discussions should also clarify whether further improvements can be made.

If non-discriminatory access and fair competition are ensured, bilateral contracts would naturally expand.

If JEPX’s spot market maintains sufficient liquidity, appropriate price indices emerge. Moreover, greater use of futures for hedging would also lead to price index formation in the futures market. Therefore, it is doubtful whether establishing an additional mid- to long-term market provides meaningful value beyond these existing mechanisms.

Only five years have passed since the full liberalization of power generation and retail markets, and there are still certain market participants that have not yet matured in their trading practices. Rather than creating new markets that would increase the burden on market participants, it is necessary to avoid the excessive proliferation of markets, develop a simpler and more user-friendly market environment, and continue efforts to support the maturation of market participants.
 

6. Development of Markets Enabling Optimal Short-Term Supply-Demand Operations (4.)

(Government Proposal)
Under the current system, retail electricity suppliers procure electricity (kWh) through the spot and intraday markets, while general transmission and distribution operators procure balancing capacity (ΔkW) through the balancing market. At present, a number of challenges have emerged, including surges in market prices in the wholesale and balancing markets, insufficient bidding volumes, and growing uncertainty in the system operation tasks of general transmission and distribution operators. As the introduction of variable renewable energy sources continues to expand, it is expected that the required amount of balancing capacity, renewable energy curtailment, and grid congestion will all increase, making supply–demand operations more difficult. To address these challenges, the government aims to introduce a “Simultaneous Market” that enables the joint trading and clearing of electricity (kWh) and balancing capacity (ΔkW), thereby allowing for flexible generation operation that can optimally allocate energy and balancing resources while taking grid constraints and changes in supply–demand forecasts into account.

(Comment)
Among the issues the simultaneous market seeks to address, those manageable under the current market framework should be tackled without waiting for its introduction.

(Rationale)
While the concept of integrating kWh and ΔkW markets to efficiently clear transactions is one possible approach to increasing balancing flexibility amid growing renewable shares, whether it will truly enhance efficiency or solve problems depends on the detailed design.

Alternative measures already exist and should continue to be explored in parallel with discussions on the Simultaneous Market.

In particular, if each market participant maintains its current operational responsibilities¹³, achieving balanced positions between generation and retail through existing transactions can already reduce balancing requirements and associated costs.

Examples of specific issues to consider include: