[NGW Magazine] Japan's retail revolution

Japan has opened up its retail electricity supply market to competition, drawing hundreds of entrants. Some are also eyeing the younger, competitive gas supply market.

In the last couple of years, Japanese electricity and gas markets have been fundamentally shaken up with the advent of greater competition. The Japanese retail electricity market was fully deregulated April 1, 2016 and its 84mn residential and small commercial customers now have freedom to switch service providers. 

Before the deregulation, the Japanese market was dominated by regional utilities. Previously, the 10 vertically integrated electricity power companies (EPOCs), including Tokyo Electric Power and Kansai Electric Power were the sole providers for their areas. But with the opening up of the sector, a wide range of companies can now sell power. 

The drawbacks to a regional monopoly system controlled by ten EPCOs were revealed in the great earthquake of 2011. There was no system to transmit electricity beyond regions; there was little competition and strong price controls; and there was limited scope for handling the change in the energy mix including the rising use of renewables. 

But one of world’s biggest electricity markets, worth over $70bn/yr, is now open and it is possible for foreign companies to obtain the licences needed for retail electricity supply – and almost 400 companies of all kinds have registered to take advantage.

Before the electricity market was fully liberalised, the Japanese government went in for significant policy shake up. The Organisation for Cross-regional Co-ordination of Transmission Operators Japan (OCCTO) was established in April 2015 to monitor the grid. In September 2015, a new regulatory authority called the Electricity Market Surveillance Commission was established. In April 2016, gas surveillance was added as a function of this authority, and its name was changed to the Electricity and Gas Market Surveillance Commission (EGC).

Some of the world’s biggest names in the business have entered the Japanese market in the last couple of years. In August 2015, Texas energy company, Spark Energy, formed a partnership with Japanese energy company eRex, to form eRex Spark Marketing. In February 2016, eRex Spark Marketing entered into new service agreement with Kanematsu Corporation and Tanita Health Link to provide sale of electricity power for residential use.

In July 2017, Ambit Energy, the world’s largest direct seller of energy and a leading US retail energy provider, expanded into Japan, the company’s first international market. Ambit offers services in nine utility areas throughout Japan, including Tokyo, Kansai, Chugoku, Chubu, Kyushu, Shikoku, Tohoku, Hokkaido and Hokuriku.

Another North American player is Just Energy Group from Canada, specialising in electricity and natural gas. In November 2017, it became the latest to venture into the Japanese market. Even though the market now looks hyper-competitive, the company believes that the size and dynamics of the Japanese electricity market present ripe opportunities for companies that can innovate and execute.  

Joint CEO James Lewis told NGW in an email: “These are two areas where Just Energy excels. While commodity products have been at the core of our offerings, we’ve gone well beyond commodity supply to become a leader in more broad-ranging energy management solutions. If you look globally, we’ve seen the demise of several companies with soft trading, risk, and settlement capabilities.  These are key supports and the bedrock of a sound organisation, well-positioned for longevity. Just Energy has been in the energy management business for over 20 years, and that says something. We look forward to providing new alternatives and solutions for consumers in Japan.”

The launch in Japan marks Just Energy’s first expansion into Asia, and is the company’s third new geographic launch outside of North America over the past twelve months. Just Energy expanded beyond North America in 2012 when it began marketing electricity to commercial customers in the UK under its Hudson Energy brand. In 2013, the company launched Green Star Energy which markets electricity and natural gas to UK residential consumers. Just Energy entered Germany in 2016 and most recently expanded into Ireland in September 2017. 

Serving the full Japanese market – with the exception of Okinawa – Just Energy will provide residential, and small to medium-sized commercial customers with energy management products, which Lewis says, will offer customers more control over their energy demand.  

“We realise that everyone is different, so we design products to fit the unique needs of consumers. With our fixed, flat and index products, we eliminate rate uncertainty as customers gain the benefit of predictability. In a world concerned about climate change and greater eco-consciousness, consumers can also access renewable energy options that help them mitigate their environmental impact. The size of the market and the uniformity of the rules make the Japanese market extremely exciting to us. Conversely, we anticipate that consumers will welcome more choice through the options we bring, better control over their usage and related energy costs, and the benefits that new competition presents,” says Lewis. 

When it comes procuring electricity for the Japanese market, Just Energy is supported by a robust group of suppliers. In addition to these global relationships, Just Energy has contracted with local suppliers including the Japanese Power Exchange.  

Lack of true wholesale market

Although the Japanese electricity market offers great opportunities, it has some unique challenges for new entrants.

“We recognise that the lack of a true wholesale marketplace will be a challenge. When you look at other markets around the world, most, if not all, of successful deregulated markets have a robust wholesale marketplace. Another factor is the lack of experience within deregulated energy, and recruiting suitable, prepared job candidates may be a challenge. We will address this with mindful, comprehensive training over the next few years,” says Lewis. 

Gas market next for Just Energy?

Exactly a year after opening up of electricity market, Japanese gas market was liberalised in April 2017. With the two tightly knit markets now liberalised, bigger integrated players are expected to emerge. Many entities are looking to be a one-stop provider of gas and electricity. With Japanese gas market also deregulated, Japanese incumbents are entering the retail gas space.  It is expected that former power monopolies will be looking to garner a chunk of Japan’s city gas market. At present, the former monopolies such as Tepco are the ones importing most of the LNG.

“We will approach the gas market in the same manner as the electricity market. Do we believe there is an opportunity for us to differentiate ourselves in the minds of consumers? Is there a viable market for gas supply? Are the logistics for gas delivery in place? If we can answer an unqualifiable yes to these, then the gas market will be next,” says Lewis. 

Increased competition in the Japanese retail gas market can boost the number of companies buying LNG. On this issue Lewis says: “We believe in competitive market environments. Liberalisation of the market serves to force entrenched monopolies to confront new competition from traditional suppliers as well as new entrants, and that can spell good news for everyday consumers. Through competition, customers can benefit from new product offerings; better, new diversified services; pressure to decrease prices; and new ways of doing business. Given that Japan is a net importer of gas and among the largest LNG buyers in the world, this could be a very good thing in the long run in terms of the impact on price, and greater attention from providers to quality service.”

Shardul Sharma