Electricity and gas liberalization

The Diet last month enacted two bills to finalize the liberalization of the electricity and city gas industries. The government should do its utmost to ensure not only fair treatment of all entrants into the markets but also the stable supply of electricity and city gas to consumers.

Under a revision of the Electricity Business Law, the culmination of the liberalization of the power industry will come in April 2020, when power transmission and distribution sections will be separated from the nation’s nine major power firms, which now enjoy regional monopolies. An earlier stage of reform started in April when the Organization for Cross-regional Coordination of Transmission Operations was established to facilitate power transmission between western and eastern Japan in case of an emergency. OCCTO’s establishment was prompted by the experience of what happened in the wake of the March 2011 crisis at Tokyo Electric Power Co.’s Fukushima No. 1 nuclear power plant. Moving power to disaster-hit eastern Japan was made difficult by the difference in the frequency of electricity between the two regions.

In April 2016, retail sale of electricity to households and other small-lot users will be opened to new entrants. Since the gradual liberalization of electricity sales began in 1995, businesses from various other sectors have been selling electricity to large-scale users such as plant operators and have already taken a market share worth 3 million kilowatts of electricity — equivalent to the output capacity of three nuclear power plants combined.

To help push the liberalization of electricity retail sales for small-lot users, OCCTO will work to increase competition among power suppliers beyond traditionally demarcated service areas. It will also make it easier to transmit electricity generated from renewable energy sources such as wind and solar facilities over long distances, for example between eastern and western Japan.

Currently 1.2 million kW electricity can be transmitted between the country’s western and eastern regions. OCCTO plans to eventually increase the capacity to 3 million kW by beefing up frequency conversion facilities. Major power firms have already started a project to raise the capacity to 2.1 million kW by the end of fiscal 2020.

Liberalization of the gas industry will follow deregulation of the power sector. A revision of the Gas Business Law will liberalize the gas retail market in 2017 at the earliest and will spin pipe management divisions off the major city gas firms in Tokyo, Nagoya and Osaka in April 2022 so that new entrants to the business can have better access to gas pipes.

These changes will facilitate not only the entry of new businesses into the electricity and gas markets but also help power and gas companies enter each other’s markets. It is hoped that increased competition will result in lower electricity and gas bills for consumers and help initiate new services such as price discounts through the package sale of gas and mobile phone services, and coupon points accumulated through electricity purchases. Some new entities may attract eco-minded consumers by selling power from green sources.

Behind the decision by the Ministry of Economy, Trade and Industry to separate power transmission and distribution sections from the major utility firms is the view that new entrants would face difficulty entering the market unless they can use transmission lines now effectively monopolized by the major firms under more equitable conditions.

Still, doubts remain as to whether the competition between the major firms and new entrants will be fair because the spun-off power transmission and distribution businesses will be under the umbrella of holding companies that also control the power-generating firms that will be spun off the major power companies. A new committee that will be established to oversee transactions in the power and gas industries must keep a close eye on them and ensure the competition is fair.

The revised Electricity Business Law contains a supplementary provision that says that the power supply and demand situation will be reviewed when the separation of transmission and distribution sections from the major utilities is carried out and “necessary steps” should be taken in view of the situation. This means that depending on the supply and demand situation, the separation may be delayed. For example, major utilities might cite a delay in the restart of nuclear power plants — mostly idled in the wake of the Fukushima disaster — as an excuse to seek a delay of the separation. The ministry should not allow the firms to link nuclear power generation to the implementation of the deregulation measure.

The Abe administration, which is pushing for the reactivation of the idled nuclear power plants, plans to have nuclear power account for 20 to 22 percent of Japan’s electricity generation in 2030. But increased competition through deregulation can raise the cost of nuclear power relative to other sources of electricity. Since liberalization of the power-sector is meant to promote market-based competition under equitable conditions, the government should be aware that any preferential treatment for nuclear power plants to keep them competitive would defeat the purpose of the deregulation measure.

The government should also keep watch if liberalization of the power market causes any disadvantages to consumers. It needs to eliminate the possibility of major problems, such as power outages that could result from a lack of proper cooperation and coordination among power companies in the liberalized environment. In addition, electricity charges might rise unreasonably in areas where demand for power is low, such as small communities in mountainous areas. The government needs to take adequate steps when necessary to prevent the deregulation from having adverse effects on consumers.