Japan Launches Electricity and Gas Deregulation Six Years After Big Earthquake

Total electricity deregulation started in Japan on April 2016 and gas deregulation started on April 2017. This deregulation makes many companies from various industries have new business opportunities. In this blog, I write about 1) how the deregulation started, 2) the expectation of deregulation, and 3) current situation after the deregulation.

The History of Deregulation

Japan has started deregulating its electricity and gas market since 1995 in order to supply cheaper electricity cost for customers, and lead innovation. However, every time the government tried to deregulate the market, it cannot make big step because huge oligopoly companies, such as Tokyo Electric Power Company (TEPCO), had huge political power and resisted to change the market. As a result, the deregulation completed only from large-scale users to middle-scale users, not for small-scale users, which means the government could not get the result it expected.

Turning Point – Tohoku Earthquake

Before Tohoku earthquake and tsunami in 2011, it seemed impossible to deregulate all segment (from large-scale users to small-scale users) in the electric and gas industry. But, Tohoku earthquake changed things dramatically. After this accident, people in Japan suffered from high electricity bill because all nuclear power stations was shut down and Japan increased reliance on oil and LNG (Liquefied Natural Gas) imports, which cost higher than using nuclear power stations. The electricity bill in Japan rose approximately 20% from 2011 to 2016, and people was finally impatient of oligopoly power companies and started demanding a change to power companies and government. (1)

The Expectation of Deregulation

Electricity deregulation in 2016 was the biggest deregulation in the Japanese history and this deregulation plus gas deregulation in 2017 would create new opportunity for the current players and new comers, and which would bring up Japanese economy for two reasons. First, consumers may enjoy lower utility bills. Obviously, this deregulation is huge challenge for current oligopoly players since they used to get certain margin as vertically-integrated oligopoly firms. So, newcomers are expected to join this market and the competition is expected to enhance efficiency of electricity generation. Second, consumers would get value from value-added new services. Companies like gas and mobile telecom firms, would provide package service, such as package of electricity and gas plan, and electricity and Internet plan, which are common in United Kingdom. In addition, nontraditional firms would enter the market and provide new innovative services that could produce or increase business opportunities domestically and possibly internationally.

The Interim Report

It has been a year since total electricity deregulation happened and it is hard to say that deregulation is working well. Japanese government had learned lessons from United Kingdom, several states of United States, and other European countries, and is setting the 10% switch rate as achieving goal, but according to Ministry of Economy, Trade and Industry, the switch rate was only 5.4% during first year though consumers recognize the fully electricity deregulation. (2) There are two reasons consumers did not switch suppliers. First reason is consumers concern about safety, so they are reluctant to switch to newcomers or nontraditional firms. Second, consumers do not save much by changing suppliers. New electricity plan from competitors is not attractive enough to convince cautious Japanese consumers to switch suppliers. Good news is fully gas deregulation started from April 2017, and giant power companies start advertising about their package plan, so consumers’ recognition is likely to increase. The Japan Research Institute, Japanese think tank, forecasts the electricity switch rate in the end of the 2017 will be 10%. If the rate will not increase around 10%, we could see some new incentive plan from government toward competitors.

Tatsuro Chino

MBA Candidate 2017