Brokers, Hedgers Among Pioneers in Japan Power Futures Debut

(Bloomberg) -- More than 30 companies will be eligible to start futures trading in one of the world’s biggest power markets when the Tokyo Commodity Exchange debuts Japan electricity contracts this month, including at least two foreign firms.

Nine are brokers and more than 20 are hedgers, Tocom President Takamichi Hamada said in an interview Tuesday in Tokyo, declining to provide names. While incumbent utilities including Tepco aren’t participating yet, they will probably join later via brokers because they need to hedge the risk of selling wholesale power below-cost, he said.

While physical trade on Japan Electric Power Exchange has boomed, accounting for about 30% of total electricity demand in Japan, hedging has been difficult without exchange-traded derivatives, leaving new retailers exposed to price swings and overseas traders waiting on the sidelines. Foreign firms, including Royal Dutch Shell Plc, have shown interest in Japan’s $133 billion power market, which span four distinct seasons and two interconnected grids and requires enormous fossil fuel imports.

“Companies with experience of power sales in deregulated markets, such as the U.S. and Europe, will likely enter Japan and become players on Tocom,” Hamada said. “The country is the single largest, fully liberalized market of the world.”

New Entrants

About 600 companies have registered as power retailers since the government fully liberalized sales in 2016. Those new entrants source more than 70% of their power from JEPX, Hamada said. That contrasts with Tepco, Japan’s largest utility and officially known as Tokyo Electric Power Co. Holdings Inc., which relied on the wholesale market for less than 9% of its power last fiscal year.

There have been other efforts to help small retailers hedge their exposure to volatile pricing on JEPX, including European Energy Exchange AG’s plans to offer clearing for cash-settled power contracts starting in the first half of next year. The Japan government also held its first baseload electricity auction last month, which enables market hopefuls to purchase power at fixed prices.

Tocom has been lacking support from the nation’s regional utilities, who supply more than 80% of Japan’s electricity and are seen as key to making the market. Tepco, Kansai, Chubu, Tohoku, Shikoku, Hokuriku and Hokkaido electric power companies said they have no plans to participate now, but they’re keeping it under consideration and monitoring the market’s development. Chugoku and Kyushu declined to comment.

Tocom plans to list the power futures on Sept. 17.

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