Opening up a new era through “horizontal” electricity liberalization linking users
August 20, 2012
It has been decided that plans for the full-scale liberalization of the electricity retail sector, which had been frozen since 2005, should go ahead, and a policy of separating electricity distribution from other functions has also been indicated. The liberalization of Japan’s electricity market began with the deregulation of the power generation sector in 1995. In 2000, companies that both generate electric power and sell it on a retail basis, known as PPS (power producer and suppliers), were permitted to enter the market. However, 10 years later, the PPS still command only 3.5% of the market and it should be recognized that past attempts at liberalization have failed. The most important reason for this lack of success is that, under the banner of ensuring stability of supply and of the utilities’ management, existing business structures such as the power generation portfolios of the utilities, vertical integration, and the framework whereby each regional utility had a monopoly on supply in its own area were preserved, and that the liberalization of retailing to small lot users, which is the source of the utilities’ profit, was stopped.
The liberalization of Japan’s electric power sector has finally been relaunched, but given the experience of the early days of market liberalization overseas, there is little prospect that a highly competitive market will emerge. Even if the retail market is fully liberalized, and distribution is separated from retail, small-scale market entrants with power generation assets producing only 2 million kW will still find themselves in competition with utilities that hold assets producing as much as 200 million kW. The European experience indicates that it is necessary to pursue competition in the retail sector and in the power generation market simultaneously and in parallel. Moreover, to create a competitive power generation market, it will be necessary not only to split off distribution, but also to separate generation from retail.
Meanwhile, with growing awareness of the energy problem and technical innovation in recent years, a growing number of users are adopting home generation or supply control functions, and it is becoming difficult to make a clear distinction between suppliers and users. One reason why the position of users has changed is the advances made in distributed energy technologies. It is important that information & communications technology be incorporated into these technologies, to form a new market based on a new concept in which users can take an active part. Just as the opening-up of the telecommunications market was a factor in the emergence of new markets such as mobile telephony and the Internet, this should lead to the emergence of a new market centering on energy.
When determining the best approach to liberalization in Japan, there are two key aspects to be considered: the “vertical” and the “horizontal”. The first is the successful completion of “vertical” liberalization linking suppliers and users, which started in 2000. The second is the design of a system for “horizontal” liberalization that allows free evening out of the electricity supply on the user side. Individual users have little weight alone, but “aggregators” can bring users together to support the free exchange of energy and create a large power generation pool. To support these developments, it is important to strive to create conditions favorable to the development of specific business models, and there are hopes that new demand-side models can be developed not only for the domestic market but also as infrastructure and systems products for export to smart cities in other countries. To allow the elaboration of systems and know-how for this purpose, a market system that allows “horizontal” liberalization will be required.
Given that the competitiveness of Japan’s electricity sector has been declining for the past 20 years and that the Great East Japan Earthquake has completely invalidated the Japanese model for energy systems, “liberalization” is unlikely to allow Japan to catch up with the West. The “full-scale” liberalization that Japan really needs today is to offer the world advanced electricity business models centering on next-generation distributed energy, and to create new industries that will capture global market share through the export of infrastructure and systems.