The Cabinet approved a bill on Tuesday that will separate electricity generation from its transmission in April 2020, the third and final stage of a shake-up of Japan's power industry in the wake of the 2011 Fukushima nuclear crisis.
The bill, which the government aims to enact during the current ordinary Diet session, would oblige power companies to spin off their power transmission and distribution sections into separate units so power grids become more accessible to new entrants and power suppliers can compete more fairly.
The government has been pushing for reform in the power sector after the nuclear disaster exposed the vulnerability of the nation's power grid and pushed up electricity prices.
The first step comprised a law that was enacted in 2013 under which an independent entity will be set up next month to coordinate electricity supply across regions.
The second stage will see an opening up of the nation's household electricity market, which has been dominated by regional monopolies for the past 60 years. From April 2016, households and other small consumers will be free to choose their supplier.
The Cabinet also approved a bill that would enable full liberalization of the city gas retail market around 2017.
The bills include a plan to set up a committee to monitor and ensure fair competition in the electricity and gas sectors, so spun-off transmission and distribution companies will not favor electricity producers in the same group.
Currently, 10 regional utilities handle all aspects of electricity operations within specified regions, from generation to transmission and distribution.