Japan’s Koizumi Eyes Reform in a $15 Billion Power Market

(Bloomberg) -- In a couple of years, Japan will be paying the highest rates in the world to incumbent power utilities simply for maintaining generation capacity, including coal and nuclear plants, to help meet electricity demand in times of scarcity.

That windfall comes at a time when Japan is seeking to liberalize its market, encourage new entrants and boost the use of renewables. That’s why the extra billions to traditional power plants don’t sit right with Environment Minister Shinjiro Koizumi, who said Tuesday the system should be reformed so that it helps expand Japan’s clean energy capacity.

“I have heard from new entrants in power retailing that the system could deal a serious blow to their businesses,” Koizumi said during a briefing in Tokyo. “It needs to be reformed so that it will promote expansion of clean energy.”

At issue is the so-called power capacity market. That’s when regulators agree now to pay for securing future supply capacity, a necessity because in liberalized markets generators aren’t typically incentivised to maintain surplus generation.

Koizumi’s remarks came after Japan’s first auction that set the price at 14,137 yen ($134) per kilowatt for the surplus generation, a sum that is by far the world’s priciest, according to BloombergNEF. Koizumi’s call for reforms also helps burnish his image as someone working to strengthening the nation’s climate commitments.

Most of the benefits from the market will accrue to 10 big incumbents, which make up 79% of capacity owned by registered generation companies, according to a July BNEF report. Nearly 168 gigawatts of capacity for the year starting April 2024 was accepted in Japan’s first auction, meaning generators will get 1.6 trillion yen in subsidies.

More than 600 retailers, including clean-energy suppliers, have entered Japan’s power retailing business since the sector was liberalized in 2016, according to the Ministry of Economy, Trade and Industry. They buy about 85% of their power on the wholesale market.

The retailers must pay winning bidders via the nation’s grid manager to share the maintenance and renovation costs of generation facilities.

“We are aware of the necessity to reform the system,” said Kaname Ogawa, the director at the ministry’s electricity infrastructure division. “How to reform it will be decided after discussion at the experts’ panel.”

METI hasn’t disclosed which utilities, and which generation facilities, will get subsidies for the 2024 capacity. Of the total capacity of bidders at the first auction, 42% were gas-fired facilities, 25% were coal-fired facilities, and 4.2% were nuclear reactors, according to the ministry.

Potential changes to the capacity market system will be discussed at a future meeting. The subsidies are expected to raise costs for power retailers by almost 2 yen per kilowatt hour.

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