Ensuring Electricity Security

in Japan’s Electricity Market Reform Project

Yuki SADAMITSU Director of Industrial Research JETRO, London

Special advisor to METI

June 12, 2014 IEA ELECTRICITY SECURITY ADVISORY PANEL (ESAP)

FIRST HIGH LEVEL PLENARY MEETING

Table of contents

1. Planned actions on Japan’s electricity market reform

2. Ensuring electricity security in Japan’s EMR project

1

PLANNED ACTIONS ON JAPAN’S ELECTRICITY MARKET REFORM

<1>

2

Problem revealed by 3.11

• Negative aspects of regional monopoly system with 10 big and vertically integrated EPCOs were revealed in the Great Earthquake 3years ago:

1. Lack of system to transmit electricity beyond regions 2. Little competition and strong price control 3. Limit in handling the change in energy mix including the increase in renewables

Hokkaido [2012] 5.52 GW

Tohoku [2012] 13.72 GW

Kansai [2012] 26.82 GW

Hokuriku [2012] 5.26 GW

Kyushu [2012] 15.21 GW

Chugoku [2012] 10.85 GW

Shikoku [2012] 5.26 GW

5.57GW 16.66GW

5.57GW 2.4GW

5.57GW 0.3GW

0.6GW

12.62GW

1.2GW

DC Tie line

BTB

DC Tie line Chubu

[2012] 24.78 GW Tokyo

[2012] 50.78 GW 1.4GW

Frequency in West: 60Hz

FC

* DC – direct current, FC – frequency conversion

Frequency in East: 50Hz

3

小売全面 自由化

（参入自由化）

Nov. 13, 2013

1st reform

Roadmap for Electricity Market Reform in Japan

Cab

inet D

ecisio

n o

n th

e P

olicy

on

Electricity Syste

m R

eform

Apr. 2, 2013

Cabinet Decision

Abolishment

of retail tariff

Legal unbundling of

transmission

/distribution sector

（※At around 2015:Transition to new regulatory organizations）

【1st Step】 2015

【2nd Step】 2016

【3rd Step】 2018-2020

2nd reform

3

rd reform

The

1st B

ill

4

(1st bill) 2013

Establishment of the

Organization for Cross-

regional Coordination of

Transmission Operators (OCCTO)

Full retail

competition Period of transitional arrangement for retail tariff

(2nd bill) 2014

(3rd bill) 2015

• 2 April 2013, Cabinet decided the “Policy on Electricity System Reform” to realize three objectives in Japan’s market with a three-step approach.

• 3 objectives: (1) Securing a stable supply of electricity (2) Suppressing electricity rates to the maximum extent possible (3) Expanding choices for consumers and business opportunities

The

2n

d Bill : u

nd

er d

iscussio

n

1st step: Establish the OCCTO

• Establish the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) by about 2015

5

5.57GW 16.66GW

5.57GW 2.4GW

5.57GW

0.3GW

0.6GW

12.62GW

1.2GW

DC Tie line

BTB

DC Tie line 1.4GW

Frequency in West: 60Hz

FC

* DC – direct current, FC – frequency conversion, TDSO – Transmission and Distribution System Operator

Frequency in East: 50Hz

JEPX OCCTO

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

TDSO

Generation

Retail

Kyushu

Chugoku

Shikoku

Hokuriku

Chubu

Tokyo (TEPCO)

Tohoku

Hokkaido

Kansai

(Power Exchange) (Coordination of TDSOs )

6

Liberalized Sector (50kW～2,000kW）

Regulated Sector （～50kW）

Large factory Large building

Building

Medium factory Small Factory

Residential Customer Small shop

Market Volume ; 7.5 trillion (=$ 75bn, €55bn) Number of contracts

Residential Customers : 76.8m Small shops and offices: 7.4m

2nd step: Full Retail Competition

• Expand retail competition to the residential sector around 2016, opening a new market

• Maintain regulated tariffs to 10 big EPCOs until around 2018-2020

Share of total power: 63%

Share of total power: 37%

3rd step: Unbundle the T/D sector

• Unbundle the transmission/distribution sectors of big EPCOs by ITO-style (legal unbundling) at around 2018-2020

送配電設備

Generation

company Retail company

Transmission/

Distribution company

(System operation) (Transmission/

distribution facilities)

Holding company

• Regional monopoly • Network tariff • Responsibility for maintaining frequency

& providing LR service • Code of conduct

Competitive Competitive Regulated

7

ENSURING ELECTRICITY SECURITY IN JAPAN’S EMR PROJECT

<2>

8

Japan’s supply and demand balance

10 big EPCOs’ capacity – Submitted supply plans based

Estimated peak demand

168GW Thermal 147GW

Renewable 3GW+ α

+8GW

Nuclear ??

184GW+α

Thermal 139GW

Supply

Renewable 3GW

177GW

Nuclear 0GW

2016 2014 (Summer) 2010

Thermal 127GW

Renewable 0.3GW

Nuclear 35GW

Hydro 35GW

Hydro 35GW

Hydro 34GW

198GW

*: in comparison of demand in 2014 summer

Reserve capacity

8GW

Reserve margin

5%

Reserve capacity*

16GW + α

Reserve margin* 10% + α

Full retail competition

• Supply and demand balance has been very tight especially in summer since Fukushima accident.

• Estimated capacity in 2016 when full retail competition starts: • Even without counting nuclear restarts and additional renewables, almost 10% of

reserve margin will be expected • 18 nuclear plants (18GW) have already applied to the safety inspection

(Note) All numbers are rounded off.

RES integration in Japan

• Although RES is increasing after introducing Feed-in Tariff scheme in 2012, the share of RES excluding hydro is under 2%.

• However, there already exist some challenges on grids especially for tie lines.

Composition of annual electricity generated in Japan Combined total capacity of renewable energy

generating facilities

940.8TWh

Source: ANRE,METI 10

Ensuring electricity security in Japan’s EMR project

• While expecting sufficient capacity in 2016 when full retail competition starts, the Government decided to include measures to secure long-term electricity supply: 1. Promote cross-regional electricity supply by OCCTO <2015>

2. Ensure adequate capacity investment

a. Obligation for all retailers to secure adequate capacity <2016>

b. Auction for the long-run generation capacity by OCCTO <2016>

c. Further discussion on capacity mechanism (capacity market etc.)

- Ensure procurement of enough quantity in the electricity market

- Prepare for the possible shortage of long-run capacity as a safety net for the electricity market

- Enhance the incentive to establish and maintain generation plant

11

Promote cross-regional electricity supply by OCCTO <2015>

• Main functions of OCCTO to be established in 2015: 1. Aggregate and analyze the EPCO’s supply-demand plans and grid plans, and

order to change EPCO’s plans such as tie lines construction Eg. Frequency conversion b/w Tokyo and Chubu : 1.2GW 2.1GW ? ? DC tie line b/w Hokkaido and Tohoku: 0.6GW 0.9GW ? ?

2. Order EPCOs to reinforce generations and power interchanges under a tight supply-demand situation

Hokkaido [2012] 5.52 GW

Tohoku [2012] 13.72 GW

Kansai [2012] 26.82 GW

Hokuriku [2012] 5.26 GW

Kyushu [2012] 15.21 GW

Chugoku [2012] 10.85 GW

Shikoku [2012] 5.26 GW

5.57GW 16.66GW

5.57GW 2.4GW

5.57GW 0.3GW

0.6GW

12.62GW

1.2GW

DC Tie line

BTB

DC Tie line Chubu

[2012] 24.78 GW Tokyo

[2012] 50.78 GW 1.4GW

Frequency in West: 60Hz

FC

* DC – direct current, FC – frequency conversion

Frequency in East: 50Hz

12

Obligation for all retailers to secure adequate capacity <2016>

Actual supply

Actual demand

Retailer A Retailer B Retailer X

The gap (shortage)

Actual supply

Actual demand

The gap (surplus)

・・・

・・・

Actual supply

Actual demand

The gap (shortage)

TDSO

Compensate the shortage Buy the

surplus

Compensate the shortage

Retailer A

Purchase plan for supply

The demand Increases to ‘110’, when accident happens.

Actual demand

Reserve margin which retailer A should have secured for upward demand (additional supply necessary for fulfilling the obligation)

Forecast the demand

Actual supply

Some years or months ahead

At the actual supply and

demand

Forecast the demand as ‘100’

Purchase the supply same as forecasted demand (=‘100’)

• All retailers are legally obliged to ensure adequate capacity (incl. reserve margin) to match their demand.

• Government checks all retailers’ plans at both points of registering to enter the market and of submitting 10-year supply and demand plan each year

• TDSO will balance the gap b/w actual supply and actual demand in the imbalance mechanism.

13

Auction for the long-run capacity by OCCTO <2016>

• OCCTO will call for bids when supply power shortage is likely to occur because of insufficient investment.

• OCTTO will pay for their capacity (MW), through recovering from network fee. • The detailed design is under discussion.

OCCTO

Generation company A

Generation company B

Generation company C

Bid

Bid Bid

Decide the constructor by bids

Compensate part of the cost

All Consumers

Pay the cost as network fee

Construct the power plant and sell the electricity

Selling electricity

Call for bids for constructor of power plants

Revenue Retailers / Power exchange

14

15

Thank you!

REFERENCE

16

17

Oil

Renewable etc.

LNG

Coal

Nuclear

LNG mainly compensates for the decline of nuclear power.

25%

48%

Coal

Energy mix in Japan

• All of 50 units of nuclear power plants are in stoppage as of September 17, 2013. • 18 units (in blue square) are under review for restart by Nuclear Regulation Authority in accordance

with new safety regulation.

1 2 3 4 5 6 7

1 2

1 2

1 3 2

1 2 3 4

1 2 3 4

1 2

1 2 3 4

1 1 2 3

1 3 2

1 2

5 6

1 2 3 4

3 4 5

1 2 3

NPP in operation

NPP in Stoppage

Under review by Nuclear Regulation Authority(NRA)

Nuclear Power Plants Suspended

18

History of Market Reforms in Japan

No. Year enforced Overview

1 1995 • Open the IPP (Independent Power Producer) market • Allow specified-scaled and vertically integrated power

generators

2 2000 • Introduce partial retail competition • Accounting separation of transmission/distribution sector

3 2005 • Expand retail competition • Establish the wholesale power exchange (JEPX) and its

supporting body for transmission in wider areas

4 2008 • Modify the rule of wheeling rates

No competition in the electricity market before 1995: 10 vertically integrated GEUs (General Electricity Utilities) dominated and controlled the market.

METI embarked series of reforms...

19

Large demand area

Suitable area for wind farm

20

OCCTO’s role for RES integration

• OCCTO has a role to resolve the imbalance between RES well-endowed area and large demand area 1. One stop reception desk for network access 2. Order to reinforce the main transmission lines including tie line capacity 3. Cross-regional frequency adjustment by transferring high-frequency fluctuation

from an area, in which the TSO cannot afford to control it, to large demand area

Hokkaido [2012] 5.52 GW

Tohoku [2012] 13.72 GW

Kansai [2012] 26.82 GW

Hokuriku [2012] 5.26 GW

Kyushu [2012] 15.21 GW

Chugoku [2012] 10.85 GW

Shikoku [2012] 5.26 GW

5.57GW 16.66GW

5.57GW 2.4GW

5.57GW 0.3GW

0.6GW

12.62GW

1.2GW

DC Tie line

BTB

DC Tie line Chubu

[2012] 24.78 GW Tokyo

[2012] 50.78 GW 1.4GW

FC