The increase in the number of customers of new entrants to the electricity retail market following the market deregulation in April appears to be slowing down rapidly. It may be too early to judge whether this endangers the purpose of the deregulation — to introduce greater competition in power retail and benefit consumers through lower charges and better and more diverse services. Still, the government should assess the situation and see what more needs to be done to ensure a competitive environment in the market previously dominated by regional monopolies.
Capping a series of market liberalization since the late 1990s, electricity retail to small-scale users such as households and small shops was opened up for new entrants to the business in April, enabling consumers to choose the power suppliers they want, no longer bound by the contracts with 10 big power firms that each monopolized supply to the region they service. The deregulation led more than 300 new entrants to the power retail market from various non-electricity sectors, ranging from city gas suppliers such as Tokyo Gas and Osaka Gas, oil wholesalers like JX Nippon Oil & Energy and telecom carriers such as SoftBank. Some of the new power suppliers have been established by local governments.
More than five months on, households across the country that have switched power supply contracts to new entrants account for less than 3 percent of the total, according to the Organization for Cross-Regional Coordination of Transmission Operations, which adjusts electricity supply and demand on a nationwide basis. Most of the customers of the new suppliers are concentrated in the greater Tokyo area and the Kansai region — with roughly 60 percent of them in the area formerly monopolized by Tokyo Electric Power and 20 percent in the area serviced by Kansai Electric Power — likely a reflection of the still limited number of new market entrants in other parts of the country.
To crack open a market that has been dominated by regional monopolies for decades, the new suppliers offer various new plans to attract customers — in most cases packaging at discount their own services such as gas and mobile phones with power supply to households. Some of the plans enable customers to accumulate points usable for shopping in accordance with their payment of electricity charges. Some of the new suppliers sell electricity that to a large portion has been generated by renewable sources such as solar and wind.
The market liberalization seemed to generate enough consumer interest. In April alone, roughly 820,000 households switched their contracts to new suppliers. But the pace of increase has since slackened, with the number standing at around 1.5 million as of the end of July.
Slow growth in the number of customers spells trouble for many of the new entrants to the business. Unless there are enough customers and sales for the new participants in the market, the purpose of the deregulation — to develop a full-scale power retail market — may be at risk. Experiences in other advanced economies that have already liberalized retail electricity do not seem to bode well for Japan — in many countries the market deregulation resulted in major power companies dominating the market over time.
A survey by Mitsubishi Research Institute quotes consumers as saying that they do not consider switching contracts to new power suppliers because they think that the procedure is too cumbersome, that it’s hard to see the benefits of the plans offered by the new firms and that electricity charges would not go down significantly after all.
The new power suppliers can address some of this skepticism on the part of the consumers through their own efforts, such as simplifying the procedures for switching to their services and improving the way they publicize their plans. On the other hand, there will be limits to the discounts they can offer against the services of the major power firms. A household is generally said to save up to about ¥1,000 a month in electricity charges by switching the power supply contract to one of the new suppliers. That relatively modest amount may not be as attractive for consumers as, for example, discount smartphone services.
There will be various things that can and should be done to promote development of the power retail market in this country. The government, for its part, should further establish a market environment that facilitates competition between the major power firms and new entrants to the business. One idea would be to expand an electricity wholesale market where small suppliers that do not have power-generation facilities can procure electricity for retail.
Reform of the nation’s electricity business is not yet complete. Separation of the former regional monopolies’ power-generation facilities and power transmission and distribution segments is planned in 2020. The key will be ensuring fair access to the electricity transmission and distribution networks to all power retailers so that they compete on an equal footing. The government must not lose track of the purpose of the power sector reforms in proceeding with these measures.
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