When office workers at Tokyo’s Shin-Marunouchi building turn on their computers or brew their morning coffee, they are not just performing routine chores. According to some Japanese reformers, they are chipping away at one of Japan’s most hidebound economic sectors: its monopoly-dominated electricity market.
Since 2010, the electricity that powers the modern 38-story tower in the heart of the Japanese capital, has been generated some 600km to the north, at a wind farm on the rugged coast of Aomori prefecture.
Mitsubishi Estate, which owns the building, took the rare step of bypassing Tokyo Electric Power, Tokyo’s main utility, and contracting with the wind farm’s owners, a “green energy” partnership established by Idemitsu, a Japanese oil company.
The deal, while legal, was unusual. In spite of a partial liberalisation of Japan’s electricity sector a decade ago, fewer than one in 20 large institutional customers have spurned established utilities such as Tepco in favour of independents.
“There is still no real competition,” says Hirokazu Okumura, a former industry regulator who teaches at Tokyo University.
Okumura says the insular nature of Japan’s electricity sector has contributed to prices that are among the world’s highest – and are rising after the Fukushima nuclear accident last year. Only two of Japan’s 50 nuclear reactors are operational as the nation grapples with safety questions in the wake of Fukushima, forcing many utilities to import expensive fossil fuels.
Yet the high cost of electricity may be about to change, as the atomic disaster lends momentum to a stalled deregulation process.
After Tepco, which owns the ruined Fukushima plant, was nationalised this year, formerly taboo topics – such as splitting its generation and distribution operations into separate companies – are being discussed by policy makers. Even Naomi Hirose, its new president, has begun to describe liberalisation as inevitable.
“The root cause of customers’ dissatisfaction is that they have no choice other than Tepco,” Hirose said last month, addressing complaints about a planned 8.5 per cent rate rise for residential users.
If more competition helped ease prices, businesses and the economy could have much to gain. The high cost of power is seen by many as a disincentive to investing in Japan. Rates are already twice those in the US and triple those in South Korea, according to Takahide Kiuchi, an economist at Nomura Securities.
The government estimates that a 17 per cent corporate rate rise announced by Tepco, could drag the economy down by 0.1 to 0.2 percentage points.
Liberalisation of Japan’s electricity sector began in the 1990s, but experts say it has fallen short in two respects.
First, only large users such as factories, office buildings or hospitals have the right to choose their provider. Tepco and other established utilities in 2005 blocked a plan to expand deregulation to households. Second, regional utilities still control Japan’s transmission grids, and impose what critics say are unreasonably heavy distribution charges on outsiders, making it hard for potential new entrants.
But with the incumbents’ influence weakened in the wake of the Fukushima disaster, both issues are up for review. That could encourage utilities to compete with one another as well as attract new market players.
Some potential competitors to Tepco are already positioning themselves. In March, a consortium led by Marubeni, a trading company that operates independent power plants outside Japan, announced plans to build a floating wind farm off the coast of Fukushima. It will install three turbines by 2015, but if all goes well 140 additional structures could be added by 2020, with the goal of generating 1 gigawatt of power – more than many nuclear reactors.
Masayoshi Son, the billionaire-founder of SoftBank, a telecoms group, is also looking to build a network of commercial-scale solar energy generating stations around the country, the first of which opened in Kyoto last month. Gas companies are eyeing expansion.
Still, breaking incumbents’ grip on the market and bringing down prices will take time, in part because of post-Fukushima supply shortages. And the debate about how far liberalisation should go is just starting.
Okumura argues that to have an impact on the market, generating facilities owned by Tepco and other incumbents should be sold off or split into many “baby utilities” – a move that may prove too radical for cautious politicians and regulators.