Japan Passes Energy Sector Reform in Wake of Fukushima

By Roger Yu Du:

The Fukushima nuclear crisis certainly had profound implications for Japan. In November 2013, Japan’s lower house and upper house successively passed legislation to start electricity sector reform in 2015. Nuclear energy, which used to account for 30 percent of Japan’s electric power, was discarded after the earthquake and Fukushima incident, leading to energy price hikes (see graph below). The new bill, designed to break up monopolies, curb electricity prices and facilitate the development of renewable energy through a series of liberal reforms, is the child of the Fukushima nuclear crisis.

Japanese CPI annual percent change
Source

The reform plan consists of three stages. The bill in question provides the legal background for the first stage of reform – the creation of a national grid company in 2015. This entity, after merging different regional grids, will be authorized to instruct power companies to supply electricity to each other when needed to overcome supply shortages. This reform emphasizes electricity transfer among regions, making sure that power shortages during the Fukushima incident would not happen again.

The second and third stages of reform seek to liberalize the sale of electricity to households and strip the major power firms of power transmission and distribution functions. The new bill’s supplementary provision included a plan to enact bills in 2014 and 2015 to stipulate these steps of reform.

The logic of the reforms is straightforward. The 10 regional electricity companies have monopolized Japan’s regional electricity markets for over half a century: they have total control of power generation, transmission and retail in their own regions. Users cannot choose their electricity supplier from other regions. Now, 98 percent of Japan’s electricity supply comes from those big corporations. Unfortunately, they all face soaring costs for imported fuel, which lead to electricity prices that are twice as high as those in the U.S. By allowing households to choose electricity providers and ensuring renewable energy’s access to the national grid, Japan’s electricity sector is expected to see higher supply with more competition.

“Consumers will have a wider choice over the purchase of electricity from operators and in terms of fees. It will also lead to a reduction in electricity payments,” said Toshimitsu Motegi, minister of the economy, trade and industry.

In any political scenario, the greater the perceived impact, the fiercer the opposition you will face. Japan’s regional electricity companies and the opposition parties tried hard to kill the legislation. In June 2013, Abe’s cabinet submitted a bill to the Diet, deliberation on which was postponed for an unrelated political reason. Similar stories have unfolded multiple times since 1990s, when Japan’s leaders tried to revamp the electricity sector. Luckily, this time, due to the Fukushima crisis, the power companies lost public support. Therefore, the first stage of reform, a unified national grid that guarantees power supply during emergencies, was passed this time without further delays.

However, whether this series of reforms can achieve lower electricity prices for households and corporations remains to be tested. What is certain is that old monopolies will face challenges from new energy providers and pressure to improve their services and prices. Renewable energy providers will have a bigger stake in Japan’s electricity market. On the other hand, we are not yet sure whether the opposition forces will fight to the death to stall the next steps of the reform or not.

This piece is cross-posted from OilPrice.com with permission.