Japan’s Electricity Market Reform and Beyond

July 7, 2015

Takuya Yamazaki Director, Electricity Market Division

Director for Electricity Market Reform Agency for Natural Resources and Energy (ANRE)

OVERVIEW OF JAPAN’S ELECTRICITY MARKET

＜１＞

1

Electricity Market Overview

Okinawa

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

5.57 GW 16.66 GW

5.57 GW 2.4

GW

0.3GW

0.6GW

12.62GW

1.2GW

DC Tie line

BTB

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

5.57 GW

DC Tie line

10 Vertically Integrated Electricity Power Companies (EPCOs) 2 types of frequency, 50Hz and 60Hz

2

Partially Liberalized But Still Very Low Competition

3

While Japan’s electricity market has been partially liberalized since 2000, still big 10 EPCOs dominates the market. 10 big EPCOs: 848.5TWh / 209GW = JPY 18.2 trillion ($ 151.7bn, € 134.8bn) (2013)

Share of non- big EPCOs for over 50kW retail market = 4.2%

Only 1.3% is transacted at Japan Electric Power Exchange (JEPX)

Total market volume: 982.4TWh/289GW

Problems Revealed by 3.11

The Great East Japan Earthquake on March 11 2011 revealed negative aspects of regional monopoly system with 10 big and vertically integrated EPCOs. 1. Lack of system which transmits electricity beyond regions

2. Little competition and strong price control

3. Little flexibility in changing the existing energy mix; hard to

increase the ratio of renewable energy

4

Electricity Price Goes Up After 3.11

5

20.37 21.26

22.33

24.33 25.51

13.65

14.59

15.73

17.53

18.86

12

14

16

18

20

22

24

26

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

電灯 電力

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Fiscal year

Increased 25.2%

Increased 38.2％

(Yen/kWh)

[Source] Created based on the “Electricity Demand Report” (Federation of Electric Power Companies in Japan) and the materials concerning the power companies’ final settlement reports, etc.

For Households

For Industry

CO2 Emissions Also Goes Up After 3.11

6

Non-CO2 emissions from energy production CO2 emissions from energy production

CO2 emissions by general electricity utilities

1,270 1,397

1,304 1,354 1,390 1,408

0

200

400

600

800

1000

1200

1400

(Million ton-CO2)

FY1990 FY2005 FY2010 FY2011 FY2012 FY2013

+65 +112 +110

ELECTRICITY MARKET REFORM ROADMAP

＜２＞

7

1st step: Establish the OCCTO Established the Organization for Cross-regional Coordination of Transmission

Operators (OCCTO) in Apr. 2015 OCCTO’s main functions include:

1. Review the EPCOs’ supply-demand and grid plans for changes in the plans (e.g. tie line construction) if needed.

2. Order EPCOs to increase power generation and interchange if supply gets tight.

8

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

FC

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

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 )

60Hz 50Hz

9

2nd step: Full Retail Competition • Expand retail competition to the residential sector in 2016 • Maintain regulation on retail tariff for under 50kW users to incumbent 10 big EPCOs at

least until 2020

Will be liberalized

3rd step: Unbundle Transmission/Distribution Sector

10

• Unbundle the big EPCOs’ transmission/distribution (T/D) sector by “legal unbundling” in 2020 to enhance neutrality and transparency of T/D sector.

• EPCO can choose either a holding company or an affiliated company format

10

Holding company format Affiliated company format

Generation company

Retail company

Transmission/Distribution company

(System operation)

(Transmission/distribution facilities)

Holding company

Competitive Competitive Regulated

Transmission/Distribution company

Competitive Competitive

Regulated

Generation company Retail company

(System operation)

(Transmission/distribution facilities)

• Regional monopoly • Regulation on network tariff • Responsibility for maintaining frequency & providing

LR service • Code of conduct for securing neutrality

（※Within 2015:Transition to new regulatory authority）

1st reform

Legal unbundling of T/D sector

【1st Step】 Apr. 2015

【2nd Step】 Apr. 2016

【3rd Step】 Apr. 2020

2nd reform

3

rd reform

Establishment of OCCTO (The Organization for

Cross-regional Coordination of

Transmission Operators)

Full retail competition

Period of transitional arrangement for retail tariff

(The government reviews competitive situations)

Abolishment of retail tariff

11

Japan’s Electricity Market Reform: Roadmap

New regulatory authority

12

Positive Signs of More Competition

Non-EPCO companies s announce to enter the power retail market after 2016 • Gas company : electricity + gas, • Telecom company : telecom + electricity, etc.

Big EPCOs announce to start preparing for offering power retail business in other

EPCOs’ regions.

Non-EPCO Companies start making new investments in power generation • KOBELCO: 1.4GW (2019-2020), Saibu Gas: 1.6GW (2020), Ohgishima Power:

0.4GW (2016), etc. EPCOs promote partnership

• Tokyo EPCO and Chubu EPCO contracted to form comprehensive partnership to jointly procure fuel, operate related businesses (upstream investment, transportation and trading), construct and replace thermal power plants, etc.

ROAD AHEAD ＜3＞

13

Challenge

14

How can we secure stable supply and achieve desirable low-carbon energy mix

while facilitating competition?

Japan’s Generation Mix Target (Preliminary)

15

Coal

Nuclear 28.6% Nuclear

20-22%

Coal 25%

Coal 31.0%

Coal 26%

LNG 29.3%

LNG 46.1%

LNG 27%

Oil 7.5% Oil 10.6%

Oil 3%

Renewables 9.6%

Renewables 12.2% Renewables

22-24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010FY 2014FY 2030FY

停止中の原子力発電所 運転中の原子力発電所

建設中の原子力発電所

１ ２ ３ ４ ５ ６ ７ １ ２ ３

１ ３ ２

３ ５

１ ２ ３ ４

１ ２ ３ ４ ５ ６

１ ２ ３ １

１ ２ ３ ４

１ ２ ３

１ ２

１ ２

１ ３

１ ２ ３

１ ２ ３ ４

４

２

１

１

：Under review by NRA ：Decommissioning by operator

４ １ ２

Tokyo Electric Power Co.- Kashiwazaki Kariwa

Hokuriku Electric Power Co.- Shika

The Japan Atomic Power Co.-Tsuruga

The Kansai Electric Power Co.-Mihama

The Kansai Electric Power Co.-Ohi

The Kansai Electric Power Co.-Takahama

The Chugoku Electric Power Co.- Shimane

Fukui

Kyushu Electric Power Co.-Genkai

Kyushu Electric Power Co.-Sendai

Shikoku Electric Power Co.-Ikata

Output scale ＜500ＭＷ ＜1000ＭＷ ≧1000ＭＷ

Chubu Electric Power Co.-Hamaoka

The Japan Atomic Co.-Tokai Daini

Tokyo Electric Power Co.-Fukushima Daini

Tokyo Electric Power Co.-Fukushima Daiichi

Tohoku Electric Power Co.-Onagawa

Tokyo Electric Power Co.-Higashidori

Tohoku Electric Power Co.-Higashidori

Electric Power Development Co.-Ohma

Hokkaido Electric Power Co.-Tomari

In operation

Under suspension

Under construction

Nuclear Electric Power Plants in Japan (As of June 23rd, 2015) • 25 units in 15 NRPs are under NRA’S assessment and inspections for resuming operation: NRA has decided to decommission 5

units in 3NRPs. • These 25 units account for 25GW out of total nuclear capacity of 46GW.

RES integration

FIT(only for surplus residential PV) FIT

ＲＰＳ

GＷ

0

5

10

15

20

25

30

35

40

45

2003FY 2004FY 2005FY 2006FY 2007FY 2008FY 2009FY 2010FY 2011FY 2012FY 2013FY 2014FY

Biomass Geothemal Hydraulic Wind PV

Average annual growth rate 5%

9%

32%

33%

About 39GW

Authorized (up to the

end of 2014FY)

Already installed before 2014FY

PV (residential)

3.79GW 3.1GW

PV (non-residential)

78.84GW 15.01GW

Wind 2.29GW 0.33GW

Hydraulic 0.66GW 0.09GW

Geothermal 0.07GW 0.01GW

Biomass 2.03GW 0.22GW

Total 87.68GW 18.76GW

17

Generated Renewable Energy

Policy Under Consideration

How can we secure stable supply and achieve desirable low-carbon generation mix while facilitating competition?

Challenges

Maintain nuclear power generation in competitive environments. Promote cross-regional electricity supply. Set up a scheme to recover investments in grid reinforcement for RES integration.

Policy Plan

Strengthen OCCTO’s influence over 9 TSOs to promote risk/cost sharing and coordination for more cross-regional transmission and grid reinforcement.

Prepare the scheme for neutralizing risks of nuclear investments Review FIT system. Introduce “Capacity Mechanism”

Thank you!

APPENDIX

Transition of Japan’s Generation Mix

21 Coal

27% 28% 29% 32% 32% 34% 35% 36% 37% 34% 34% 35% 31%

26% 29% 31% 30%

26% 26% 29% 29%

11%

2% 1% 0%

10% 10% 11% 12% 13%

14% 14% 15% 15% 17% 18% 21% 22%

24% 25%

26% 25%

25% 25% 25% 25%

25%

28% 30% 31%

22% 23% 23%

22% 22% 22% 23%

24% 25% 26% 26%

27% 27%

28% 26%

24% 26% 27% 28%

29% 29%

39%

42% 43% 46%

29% 26% 26% 21%

24% 19% 18% 14% 12% 12% 11% 8% 10% 11% 10% 11% 9% 13% 12%

7% 7%

14% 18% 15% 11%

12% 13% 11% 13% 9% 10% 10% 11% 11% 10% 10% 10% 10% 11% 11% 9% 10% 9% 9% 9% 10% 10% 10% 11% 12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Renewables

Oil

LNG

Coal

Nuclear

History of Electricity Market Reforms in Japan

No. Year enforced Overview

1 1995 • Opened the IPP (Independent Power Producer) market • Allowed specified-scaled and vertically integrated power generators

2 2000 • Introduced partial retail competition (over 2,000kW in 2000 [26%], over 500kW in 2004 [40%]) • Introduced regulation of third party access to grid lines

3 2005 • Expanded retail competition (over 50kW [62%]) • Established the wholesale power exchange (JEPX) and its supporting

body for transmission in wider areas • Improved regulation of third party access to grid lines, and

introduced accounting separation of transmission/distribution sector

4 2008 • Modified the rule of wheeling rates

No competition in the electricity market before 1995: 10 vertically integrated EPCOs dominated and controlled the market.

METI embarked on a series of reforms...

22

Thermal plant Nuclear power plant Wind farm,etc. Hydroelectric plant

Primary substation

Substation for distribution

Large factory Large building

Building Medium factory Small factory Household Shop

Meter Meter Meter Meter Meter

220-500kV

220-500kV

220-500kV

154-220kV 154-220kV

Consumers

Retailers

Generation companies

Contract with retailer to sell

electricity

Retail contract with consumers

Not necessary to have assets

66-154kV

6.6kV

100/200V

6.6kV

66kV Transmission

Distribution

Wheeling contract

Regional monopoly, tariff regulation

Transmission/ Distribution companies

Receive electricity from various power companies Super high voltage

substation

Future Design of Japan’s Electricity Market

23

JEPX

24

54% people want to switch their electricity retailer if retail power sales is fully deregulated.

And even among those who do not think about switching, only 1% say they like the current retailer.

Strongly positive 22.7%

Positive 31.7%

Neutral 27.1%

Negative 6.1%

Strongly negative

2.6%

N/A 9.8%

Do you want to switch your retailer?

Ask to people (36%) who answered as follows • Neutral • Negative • Strongly negative

Reasons why you are negative or neutral to switch you retailer?

No particular reason

45%

10% Don’t think the price goes down

9% Satisfied with the current retailer.

1%

3%

14%

18%

18%

34%

37%

22% Do not know which company is good.

23% Cannot think of switching the retailer.

18% Procedures may be troublesome.

I like the current retailer

3% The most powerful reason Less power reasons

54.4%

Source: Opinion research , Apr. 2014 , METI

People Want Reform

Other reasons

Improve liquidity in the wholesale market • Current rule (from March 2013):

• Self commitment by 10 big EPCOs to provide all capacity except for adequate reserve margin into JEPX

• Market monitoring by the regulator

• Further discussion including introduction of VPP scheme etc. will be needed depending on the result of market monitoring

Share of trading in JEPX to retail market sales (FY2014)

(13.51TWh)

(837.67TWh)

Trading in JEPX

Others

(1.10TWh)

(12.41TWh)

Breakdown of 8.1%

(0.19TWh)

(0.04TWh)

(0.86TWh)

Breakdown of trading in JEPX (FY2014)

Day-Ahead spot trading

Others

4 hour-Ahead spot trading

New Forward trading

Forward trading 1.6%

98.4% 91.9%

8.1%

78.8%

17.3%

4.0% Breakdown of 1.6%

Source: JEPX 25

0.5% 0.9%

1.3%

FY2011 FY2012 FY2013

Trend of share of trading in JEPX to retail market sales

4.74TWh

7.67TWh

11.17TWh

(+2.93TWh)

(+3.50TWh)

1.6%

13.51TWh

(+2.34TWh)

FY2014

Cross-regional competition • Avoid market separation and congestion of tie lines through OCCTO’s function for

reinforcing their capacities. Eg. Frequency conversion b/w Tokyo and Chubu : 1.2GW 2.1GW 3.0GW DC tie line b/w Hokkaido and Tohoku: 0.6GW 0.9GW ? ?

• Maintain the “postage stamp” cost allocation scheme for network fee, even after

introducing full retail competition.

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

26

Switching support system

• Establish an one-stop system for switching support until 2016. • New retailer X can obtain necessary customers’ information for the switching, which are

standardized, from TDSOs through the system. • New retailer X can complete a switching process including changing a wheeling contract b/w

retailer X and TDSOs through the system. • Time line: “automatically and instantly”

27

consumers

Retailer A

Switching Support System

TDSO A

TDSO C

TDSO Ｂ

start to supply

apply to switching

OCCTO

･ ･ ･

continuously linked

request for changing

wheeling contract

Retailer B

Retailer C

Retailer D

finalize to change

wheeling contract

request for consumer

information

provide for consumer

information

make up an estimate

･ ･

※ Information interchanged through this system will be standardized and provided for retailer instantly.

Ensuring electricity security in Japan’s EMR project

1. Regulation for T/D companies to secure frequencies and to maintain

investment on the grid

2. Obligation for all retailers to secure adequate capacity <2016> - Ensure procurement of enough quantity in the electricity market

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

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

4. Further discussion on capacity mechanism (capacity market etc.) - Enhance the incentive to establish and maintain generation plant

28

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.

29

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

30

1) Remote metering and opening/closing for efficient tasks

2) Utilizing data for declining energy and CO2 by customers

3) Controlling appliances in demand side for stabilizing girds

Total image and the effects of Smart Meter and the related system

Smart Meter and the effects

EPCO (transmission/distribution)

Smart Meter

需要家

Ａ Ｂ

Ｃ

Stop/Stop-release Change contract

Retailer Private company (third party)

HES MDMS

<Peak cut / Peak shift of demand>

<Visualization of power usage / Control of home electrical appliances>

EV PV

Storage Home electrical appliances

Customers

Power usage (30min.), etc. Request information

Power usage (30min.), etc.

EMS

(Note) EMS: Energy Management System MDMS: Meter Data Management System

HES: Head End System HEMS: Home Energy Management System

Reducing measurement cost and the future capital investment by launching Demand Response menus, visualization of the electricity use, control of appliances and so on

Creating future various services and businesses by utilizing ‘Big Data’ such as energy usage

Smart meter

31

The demand of each “Small and Medium-sized Enterprise” and “Low Voltage Consumer” is small. However, the number is large.

Based on the perspective of efficiency of Smart Meters as a supply and demand measure, a transition to Smart Meters for commercial-scale utility customers will be initiated first.

Smart Meters in high voltage sector (factories, etc.) are planed to complete installing in Japan until FY2016.

Smart Meters in low voltage sector (household, etc.) are planed to complete installing in Tokyo until the end of FY2020 and in Japan until the end of FY2024.

All EPCOs announced to exchange the current meters to smart meters promptly for consumers who want to install according to the introduction of HEMS, etc. or switch their retailers.

Hokkaido Tohoku Tokyo Chubu Kansai Hokuriku Chugoku Shikoku Kyushu Okinawa

High voltage Installation will be completed in 2016 Completed Completed 2016 2016 Completed 2016 2016 Completed 2016

Low voltage

Installation will be started in 2015 Started Started 2015 Started 2015 2016 Started 2016 2016

Installation will be completed in 2023 2023 2020 2022 2022 2023 2023 2023 2023 2024

Introduction schedule of Smart Meters

Introduction schedule

32

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 Total

Hokkaido 380 530 480 490 510 510 520 560 570 4,550

Tohoku 120 650 840 820 810 800 780 730 730 720 7,000

Tokyo 1,900 3,200 5,700 5,700 5,700 3,300 3,300 28,800

Chubu 10 1,020 1,460 1,440 1,420 1,390 1,390 1,420 1,390 10,940

Hokuriku 150 250 250 230 230 220 190 190 160 1,870

Kansai 1,600 1,700 1,700 1,700 1,500(Note) 1,300(Note) 1,300(Note) 1,200(Note) 1,100(Note) 15,600

Chugoku 240 560 610 610 610 610 610 610 610 5,070

Shikoku 30 150 310 310 310 310 310 310 310 300 2,650

Kyusyu 800 850 850 1,090 1,010(Note) 1,000(Note) 890(Note) 790(Note) 7,280

Okinawa 10 100 100 100 100 100 100 90 90 90 850

Total 3,660 7,500 12,250 12,260 12,020 9,640 9,530 6,080 5,870 3,240 90 84,610 (Note) Except the number in the table, some smart meters will be exchanged new smart meters because of reaching maturity of the verification

The estimated number of smart meters introduced as of the end of each fiscal year (Thousand)

33

EPCOs Plan to Introduce Smart Meters