Energy deregulation threatens to break up Japanese monopolies

This article is published by the FT as part of a collaboration with Nikkei that started in 2013 to provide added insight to our readerships.

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Four years have passed since the earthquake and tsunami ravaged much of northeast Japan and started meltdowns at a nuclear power station in Fukushima prefecture. About 7,000 workers still struggle through a clean-up operation that has no end in sight.

The disaster in March 2011 at the Fukushima Daiichi power plant — which had been operated by Tokyo Electric Power (Tepco) — and the way it was handled have put many Japanese off nuclear power.

Plans to restart nuclear reactors have also hit a snag. In February, at least 40 files were carried into the offices of the Nuclear Regulation Authority (NRA). These held details of proposed engineering work at the number one reactor at Kyushu Electric Power’s Sendai nuclear power plant in Kagoshima prefecture, southern Japan. This must be complete before the plant can be brought back into service.

In September, the plant’s one and two reactors were the first to pass tougher post-Fukushima safety checks. But the plans for engineering work, later submitted to the NRA, were found to be wanting. The utility hurriedly revised them and, although the amended plan for the number one reactor has been resubmitted, both reactors could be offline until the summer or even later.

“Reactors acknowledged by the NRA to meet the new safety regulations will be allowed to restart,” Prime Minister Shinzo Abe said. But while Japan’s 48 reactors once supplied 30 per cent of the nation’s power, they now provide none.

This has led to a number of problems. Electricity rates for industrial users have risen 30 per cent, and household bills by 20 per cent. Japan’s trade balance in 2011 turned into an outright deficit for the first time in 31 years and has deteriorated since.

Both situations were caused by increases in the amounts of oil and natural gas that Japan imports.

Electricity costs in Japan are relatively high compared with the US and most of Europe. Even though crude oil prices began falling last summer, Japan’s electricity rates could go higher.

That, says Sadayuki Sakakibara, chairman of the Japan Business Federation, a powerful business lobby, may act as a drag on economic growth. It could also work against Mr Abe’s plan to stoke competition in the private sector.

At any rate, both the government and utilities are motivated to restart nuclear power stations quickly. However, they have yet to say how long the country — which is in an area prone to seismic activity — will continue to use atomic power.

And right now, SoftBank Telecom’s salespeople are asking business customers: “Why not buy electricity from us?” The telco buys electricity through group companies and sells it to large corporate users, taking advantage of the part of the electricity retail market that has already been liberalised.

Japan’s 48 reactors once supplied 30 per cent of the nation’s power. They now provide none

Japan will fully liberalise its electricity market in 2016. Gas utilities are due to be fully deregulated in 2017. These moves are expected to end regional monopolies and open a Y10tn ($82.8bn) market.

“Liberalisation brings business opportunities,” notes Hiroshi Ozaki, president of Osaka Gas. So far, more than 500 businesses have registered with the Ministry of Economy, Trade and Industry (METI) to enter the electricity retailing business.

There are potential upsides. Competition usually brings lower prices and better service, which benefit consumers. For businesses, meanwhile, banding together may make them less vulnerable and might make it possible for Japan’s energy businesses to break into Asian and other markets where electricity demand is soaring.

Yet it is hard to envisage what Japan’s power market will look like in five years’ time because no one really knows what role nuclear will play. Each of Japan’s nuclear power stations has been operated as a single business managed by a private company. It is necessary to redefine who should keep them operating and how, now that the competitive environment is about to change.

METI says it has three goals: the clean-up of Fukushima Daiichi and the rehabilitation of Tepco; the repositioning of nuclear power; and reform of the electricity market.

These goals are interrelated and potentially conflicting. Yet Japan’s resurgence rests on solving all of them.