Too late to save Japan's deregulation from failure?

In order for Japan’s deregulation to work, the government needs to create a level playing field for all players in the energy sector.
Published: Tue 08 Nov 2016

In May of this year we wrote how the deregulation of Japan’s electricity sector could be part of the answer to the challenges that plague the country’s energy sector-both generation and retail. The change was expected to accelerate the innovation needed to modernize its energy sector, as well as bring prices down to boost an ailing economy. [Japan’s deregulation: When catastrophe leads to innovation in a stagnant energy market.]

But, reports show that 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. This could jeopardise the introduction of much needed competition in retail which means that customers are missing out on lower tariffs as well as improved and diverse services.

While it is early days and probably too soon to judge, the government has the opportunity to assess the scenario and change processes to support a more competitive environment in a market that was previously dominated by regional monopolies.

Low switching figures

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 this year, giving consumers a number of power suppliers to choose from. Consumers were no longer obliged to stay in contracts with the then 10 big power firms which monopolized supply to various regions.

The deregulation saw over 300 new entrants to the retail market from various non-electricity sectors, ranging from city gas suppliers such as Tokyo Gas and Osaka Gas to oil wholesalers like JX Nippon Oil & Energy and even telecom carriers like SoftBank. Some local governments even established power suppliers.

But, over six months later, households that have switched power supply contracts to new entrants account for less than 3% 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% located in the area formerly monopolized by Tokyo Electric Power and 20% in the area serviced by Kansai Electric Power. This could be a reflection of the small number of new market entrants in other parts of the country in comparison.

New entrants left high and dry

Intent on breaking open a stagnant market, the new suppliers offer a variety of new and innovative plans in order to win over customers. Some packages offer discounted deals on mobile phones and even shopping vouchers. There are even those that sell electricity generated predominantly by renewable sources.

While this generated a fair amount of consumer interest to start with-roughly 820,000 households switched their contracts to new suppliers-by the end of July, the excitement died down and the figures stopped climbing beyond 1.5 million.

This slow growth in new customers spells trouble for market entrants. Without the right level of switching and competition in the market, a full-scale power retail market is at risk, completely obliterating the purpose of deregulation.

But why are consumers not switching? A survey by Mitsubishi Research Institute quotes consumers as saying the procedure is too cumbersome, that the benefits offered by new firms are not clearly defined and that electricity charges are not that low in comparison to existing suppliers’.  Generally, a household can save up to a mere US$9 (¥1,000) a month by switching to a new entrant.

Government must facilitate competition

While the new power suppliers can address some of this skepticism through their own innovative efforts, such as simplifying the procedures for switching to their services and improving the way they publicize their plans, there are limits to the discounts they can offer against the services of the major power suppliers.

But, for competition to really kick off, the government needs to further establish a market environment that facilitates competition between the major existing power firms and new entrants. For instance, the government can create an electricity wholesale market where small suppliers that do not have power generation facilities can procure electricity for retail.

Reform of the country’s new electricity model is far from complete. There is still the separation of the former regional monopolies’ power generation facilities and power transmission and distribution segments by 2020 so the key will be ensuring fair access to the electricity transmission and distribution networks to all power retailers.  

 

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