Revision of the Electric Utility Industry Law (2): Competition for Better Services as a Key to Full Liberalization of the Retail Market in Japanese

The Electric Utility Industry Law was revised on June 11, 2014. It is the second stage of the electricity system reform which started last year, and aims to realize a full liberalization of the electricity retail market. The revision has drawn significant attention from various newcomers, who expect that it will lead to the opening of the seven trillion yen market, which has been dominated by major utilities, to small users. However, we need to be skeptical about the idea that this revision will lead to competition easily.

First of all, in the market for large users which has been already liberalized, almost no competition has occurred. In the retail market, while the liberalized areas have been gradually expanded since 2001, the share of newcomers is still limited to 4.2%. Likewise, in the liberalized areas, although electric power companies are allowed to engage in cross-border sales of electricity, there has been only one example of such cross-border trade. According to a questionnaire survey by the Agency for Natural Resources and Energy, even if consumers approach electric power companies in other regions for retail possibilities, many electric power companies show reluctance towards such trades. As monopolies enjoy an overwhelming advantage from the starting point, the abolition of a legal monopoly alone would not end the current situation of de facto monopolies.

What is necessary along with liberalization is a competition policy. Such competition policies may include, for example, expanding wholesale power markets, and for that purpose, requiring electric power companies to provide inputs and sell power facilities. Furthermore, policies to create a competitive environment such as thoroughly implementing the opening of grids and having companies disclose data on their smart meters are necessary. Such policy items are common in Europe and the United States, where independent regulatory bodies are playing an important role as entities to put forward such competition policies. In Japan, while the government has decided to establish a new regulatory body with a high degree of independence and expertise in 2015, details are still unknown.

However, assuming that such a competitive environment will be realized to a certain extent, is that possible for newcomers to exert their presence, offering benefits to consumers? Even after full liberalization, the pie for the whole retail market of 15 trillion yen, including the market for large users, will not expand; the population will decrease and the trend for energy saving is likely to continue in Japan. In such circumstances, even if newcomers devote themselves to price competition, it will be difficult for newcomers to beat major electric power companies possessing many of power sources.

So, are there any solutions for newcomers? The answer is in services. In addition to buying and selling electricity itself, players should also seek to distinguish themselves from their competitors by providing relevant value-adding services, and make such services a new source of income. It is well-known that the cell-phone business, which started from the voice telephone service, has now become a platform for Internet business, providing attractive services.

This will open the door to various possibilities, such as demand-response services based on various price menus corresponding to consumers’ consumption patterns and related energy management services, the management of storage batteries for electric vehicles and peak shift control using such data, and a comprehensive control service including home electric appliances (Smart Home). We can also think about selling electricity and gas in package deals, or reading meters simultaneously with a smart meter. In order to provide such comprehensive services, alliances beyond existing industries may also emerge.

In the conventional power system in Japan, a significant emphasis was placed on ensuring stable supplies, and electric power companies have focused their considerable resources on the realization of stable supplies under regional monopolies. In the future, stable but flexible supplies considering consumers’ options or market mechanisms will be required. To this end, it will be essential for creative companies to provide consumer-oriented services.