While the long-term impacts of the March 2011 disaster at Fukushima are still being debated, Japan has started to take decisive steps to reform their energy markets. We believe the reform roadmap will bring about greater energy security, competition and investment opportunities for those operating both in Japan and in the wider regional energy markets.
Underlying issues emerge
In the days and months that followed the March 2011 earthquake and subsequent tsunami, much of Japan’s population suffered from rolling power blackouts.
With much of the finger pointing being directed at the Fukushima nuclear plant, Japan’s energy regulator – the Ministry of Economy, Trade and Industry (METI) – quickly recognized that many of the real problems within the system were actually the result of the country’s traditional regional monopoly system.
“What Fukushima made clear was that Japan was overly reliant on nine regional power companies and just two or three generation technologies which ultimately left the country in a very weak position following the accident,” noted Mr. Tanaka, former Director General of the IEA and a former Director General at METI.
A new approach to energy security
Based on these findings, Japan’s Cabinet approved the Policy on Electricity System Reform in April 2013 which set out a realistic step-by-step schedule focused on three main areas: the creation of cross-regional coordination between transmission operators; the encouragement of full retail competition; and the unbundling of the transmission and distribution sector.
“Many of the key issues are intertwined,” added Mr. Tanaka. “Changing the energy mix to include renewables will require more interconnected networks to balance out the variable base loads but this, in turn, will require greater competition to encourage independent power producers and the unbundling of the distribution network.”
Taking a regional view
While Mr. Tanaka firmly believes that METI’s energy reform program will achieve many of its objectives, he also stresses the need for Japan’s market to become more integrated regionally. In particular, he points to the success of Europe’s energy market integration.
“When Germany decided to phase out nuclear generation while dramatically increasing renewables, they were able to rely on their neighbors to fill any gaps or troughs that the domestic system experienced as a consequence,” said Mr. Tanaka. “To truly achieve energy security and greater competition, Japan must follow Europe’s example and start thinking about its collective regional energy security rather than just its domestic security.”
Greater competition and more regional cooperation will also encourage greater participation from foreign participants which, in turn, should add further strength to the market and reduce costs for consumers. The introduction of new generation capacity – particularly from renewable sources – will require significant technology, products, infrastructure and capabilities, all of which could be provided by foreign players.
“This kind of competition is most welcome in Japan and should help make our domestic market more competitive and secure,” added Mr. Tanaka. “I think that, while Japan’s energy market may not be growing as fast as China’s or India’s, there are still plenty of opportunities available in what is widely seen as a very stable environment.”
The nuclear question
Of course, the outcome of the ongoing debate surrounding the use of nuclear power in Japan’s energy mix will have a significant outcome on the country’s markets. Today, Japan imports approximately US$40 billion worth of gas and oil to fill the gap left when its nuclear generators were shut down. Returning some of the remaining assets into operation would go far to helping improve the country’s balance of energy trade.
Mr. Tanaka is optimistic that nuclear generation will eventually come back online. “We hope in the short term some of the reactors may start running and that will pave the way for other reactors to gradually come back online. But just how much of the original capacity will come back and how fast we can bring it back online is still a big unknown,” he added.