Japan electricity market reform sparks interest but poses challenges

Moves to free up Japan’s electricity market have met with an enthusiastic response, with 663 Power Producer and Supplier (PPS) applications as of May 2015. But Bloomberg New Energy Finance renewable energy analyst Takehiro Kawahara said many will face a tough time.

“Most new entrants are expected to face challenges because of their limited access to power generation, considering the inactive wholesale power market, and limited customer base compared to the vertically integrated utilities ,” he said.

Japan’s electricity market, which until now has been dominated by 10 vertically integrated, investor-owned utilities and only open to private providers with a capacity of 50 kW or more, is being completely liberalised as of 2016.

“Significant numbers of companies are interested in participating in the electricity retail market since the electricity market reform was launched ,” said Kawahara, a speaker at the Solarplaza Solar Asset Management Asia Conference this month in Tokyo . 

The prospect of challenges in finding bona fide power customers is already leading some prospective PPS companies, including PV module manufacturers, engineering, procurement and construction firms, and real estate developers, to come up with novel business models.

Real estate businesses such as Misawa Home and Daiwa House are looking to use their PPS status to promote zero-energy housing as a lure for homeowners, for example.

The companies will offer homes equipped with rooftop solar, energy storage and home energy management systems, aggregating electricity generated from commercial customers and residential PV above 10 kW.

PPS applicants looking to acquire existing solar assets may also face hurdles, Kawahara believes. “I think Japan's secondary market for solar assets is still very early stage ,” he said.

“While there will be opportunities for both PV asset owners and financiers, the competition to acquire 'good' PV assets—large, utility-scale, with a track record proving constant high performance in terms of power generation—is likely to be fierce .”

Furthermore, Kawahara points out that the majority of solar plants in Japan are below 2 MW in size, so conducting technical and operations and maintenance (O&M) due diligence on every project will be a significant task.

“Buyers must assess solar plant design and their O&M contracts to determine likely performance ,” he commented.

On the plus side, PV system prices are expected to drop rapidly if expected reductions to Japanese feed-in tariffs (FiTs) take place.

At present, relatively high FiTs allow average Japanese PV system prices to remain about 50% higher than equivalent systems in Germany or Australia.

A drop in system prices could also make PV more competitive with retail electricity prices, encouraging the adoption of solar for self-consumption.

Asset management and O&M roles within engineering, procurement and construction (EPC) firms and others are also set to benefit from a growing maturity of the Japanese market, according to Jorge de Miguel, country manager of Vector Cuatro Japan.

“These are services that have been gone somewhat unnoticed until now, but as the market matures they will gain in importance ,” he said.

“EPC companies will need to take more responsibility for O&M in the short term, and within the O&M market the quality and scope of services will have to improve due to competition between providers .”

For now, though, it remains to be seen whether Japanese power consumers can be tempted away from the cosy relationship they have with the dominant electricity suppliers.

“The monopolies have been providing stable supplies of electricity to residential customers for many years ,” Kawahara observed. “New entrants may find it difficult to convince the customers to switch .”

The analyst is forecasting fierce competition between the large electricity companies, Japan’s big gas utilities and some of the larger PPS players. Whatever happens in Japan’s hitherto staid energy market next year, it certainly will not be business as usual.

Find out all about opportunities and challenges in the Japanese solar market at the Solarplaza Solar Asset Management Asia event this month in Tokyo, on June 24 and 25.