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Energy Industry Overview

11, 01. 2004

Current State

Sales Volume of Electrical Power Falling Yearly Due to Liberalization and Long-term Stagnation of the Japanese Economy

Futtsu thermal power station of Tokyo Electric Power Co., Chiba Pref.
Futtsu thermal power station of Tokyo Electric Power Co., Chiba Pref.
 

 For many years, the Japanese power industry consisted of regional monopolies by ten major electric utility companies such as Tokyo Electric Power Company, Incorporated (TEPCO) and The Kansai Electric Power Co., Inc. However, by March 2000, deregulation that had begun in 1995 advanced as far as to include liberalization of the retail sale of electricity to large-volume purchasers, who account for about 30 percent of total demand. The scope of liberalization is scheduled to continue expanding in stages. Liberalization of retail sales to households will begin in 2007.

Behind such deregulation is a political intent to lower Japanese power rates, which are much higher than international levels, and bring them down to American and European levels by liberalizing the market and introducing market competition. Diamond Power Corporation, wholly owned by Mitsubishi Corporation; ENNET Corporation, a joint investment by NTT Facilities, Inc., Tokyo Gas Co., Ltd., and Osaka Gas Co., Ltd.; and Nippon Steel Corporation, a steelmaker, have already entered the power retailing market as independent power producers (IPP).

Takasegawa dam of Tokyo Electric Power Co., with the North Alps looked up
Takasegawa dam of Tokyo Electric Power Co., with the North Alps looked up

Meanwhile, electric utility companies, which must meet such competition head on, are facing a continuing decline in the amount of electricity sold each year. Reasons include the effects of stepped up deregulation, the long-term slump of the Japanese economy, and the spread of energy conservation measures. Such utilities are suffering in terms of business performance.
   With factors such as lowered rates and a cool summer and warm winter that made matters worse, TEPCO's consolidated operating revenue for FY2003 was 4 trillion 853.8 billion yen, down 1.3 percent from the previous year. Operating profit was 489 billion yen, a 6.2 percent year-on-year decline, while net income fell 9.5 percent on a year-on-year basis to 149.5 billion yen. Declines were seen in all three areas.

Deregulation Also Placing the Gas Industry into the Rough Seas of Competition

  The Japanese gas industry's major players are city gas suppliers. Japan's four major city gas utilities, Tokyo Gas, Osaka Gas, Toho Gas Co., Ltd., and Saibu Gas Co., Ltd., together account for a share of roughly 80 percent of total gas sales in Japan. Recently, however, players from outside the industry are beginning to launch gas retail sales to large-volume customers, an area that has been liberalized.

These new players include major electric power companies that use massive amounts of liquid natural gas (LNG) as fuel for power generation, as well as oil companies and steel manufacturers. For example, Nippon Steel delivers gas to Mitsubishi Chemical Corporation, and Teikoku Oil Co., Ltd. supplies gas to Matsushita Electric Industrial Co., Ltd.
   Gas utilities, however, are not sitting idly by. Gas utilities possess a massive LNG infrastructure since LNG is the raw material for producing city gas. Major gas utilities like Tokyo Gas and Osaka Gas have therefore, in turn, entered the LNG-based power generation field by leveraging this strength.

History

Liberalization of the Electrical Power Moving at an Accelerated Pace in the Past 10 Years

10 existing electric utility companies monopolized the retail sales of electricity for many years through the Electric Utility Law. However, deregulation and liberalization of the power industry has been advancing rapidly for the past 10 years.
   The December 1995 revision of the Electric Utility Law dropped the ban on market entry by a non-electric utility company, allowing IPPs to wholesale electricity to the 10 utilities. Many non-electric power companies, including Nippon Steel, Osaka Gas and TonenGeneral Sekiyu K.K., tendered bids in wholesale bidding implemented by six electric utility companies.
The revised Electric Utility Law that went into effect in March 2000 liberalized retail sales of electricity to large-volume customers. The liberalization of the retail sale of electrical power was further accelerated when the target of retail sales was further expanded in March 2003 to include volume customers who consume 2,000 kilowatts or more and receive their electrical power through power cables of more than 20,000 volts. Specifically speaking, this points to power retail sales to large factories, department stores, major shopping centers, hotels, and high-rise buildings. In FY2004, mid-scale plants and supermarkets became the target of liberalized power sales.

Wholesale Trading of Electricity to Begin in FY2005 through the Japan Electric Power Exchange

'Solar Arc of SANYO', a large-scale photovoltaics equipment with 530,000kWh power generation capability a year, in Gifu Prefecture
"Solar Arc of SANYO", a large-scale photovoltaics equipment with 530,000kWh power generation capability a year, in Gifu Prefecture

 Retail power sales to households and small shops is scheduled to be liberalized in FY2007, leading the way to the complete liberalization of power retail sales.
   Meanwhile, the economic power interchange market, which was available only to power utilities to accommodate each other's power needs through surplus electricity, was opened to new entrants in April 2001. Furthermore, an electric power exchange market, in which new entrants will be able to purchase surplus power from major power utilities and IPPs, is scheduled to open in FY2005. The aim is to further reduce power costs by diversifying means of power procurement means for new entrants.
   As a result of such deregulation, the regional monopolies of the traditional 10 power utilities was dissolved, and a fierce price war is about to erupt in the power retail arena against new entrants, including foreign affiliates.

Four Major Gas Companies Dominate 80 Percent of the Gas Market

 As in the case of the power industry, a tide of liberalization is surging towards the gas industry as well. In the past, regional monopolies of city gas by roughly 240 city gas utilities in Japan existed. Tokyo Gas, Osaka Gas, Toho Gas and Saibu Gas, the four majors in the gas industry, accounted for 80 percent of market share while the remaining 20 percent was split between 230-plus gas utilities. This is a point in which the gas industry differs greatly from the power industry: there are many small and medium sized enterprises.
   Deregulation of the gas industry began in 1995 through liberalization of retail sales to large-volume customers that have annual contracts of 2 million cubic meters or more, such as large-scale plants and buildings. Direct retail sales to customers with contracts for more than 1 million cubic meters per year or more was liberalized in 1999. Liberalization that extended to customers with annual contracts of 500 thousand cubic meters or more was implemented in 2004, and further liberalization is scheduled to open retail sales to customers with annual contracts of 100 thousand cubic meters, such as small factories and buildings, in 2007.
   Although it is still unknown when complete liberalization that will include households and other small-volume users will be implemented, it is certain that such liberalization and deregulation will drive major changes in the management of power and gas utilities.

Three Key Points towards the Future

Point 1
Can the Energy Industry Reinforce its Management Structure in Order to Beat the Competition?

Hachijojima wind power station of Tokyo Electric Power Co.
Hachijojima wind power station of Tokyo Electric Power Co.

As deregulation and liberalization advances, the number of new-entry companies will increase in the gas and electricity markets. The nature of these markets is expected to change, and what is now a seller's market will turn into a buyer's market. The need for each utility company to reinforce its management structure will become strong in order for such companies to prevent large-volume, prime customers from switching to other companies. The monopolies will finally have no choice but to manage themselves in the fashion of a "regular" company.
   Differentiating a product like gas or electricity is no easy task, however, so the stability and lowness of rates will become decisive factors for the strengthening of utility company operations. Electric power and gas utility companies will probably need to make a major tightening of their capital investment spending and strive to lessen interest-bearing liabilities so that they can create a structure that will allow them to achieve good profits even if they lower rates in competition with rival companies.
   Meanwhile, the move to transform themselves into a "regular" company may have its side effects.There is a danger that problems may arise in the stable supply of gas and electricity if power and gas utilities, out of a consciousness to turn profits, become reluctant to make new facility investments, such as the construction of nuclear power plants or thermal power stations. This is especially true of electricity which cannot be stored in massive amounts or resort to emergency import measures. The possibility of frequent power outages during peak consumption hours will become greater.

Point 2
Can the Energy Industry Develop Entry into New Businesses?

If the profits of the power and gas utilities begin to fall in their main line of business, that is to say electricity and gas supply, it is inevitable that such utilities will accelerate their moves towards diversification in order to make up for lost profit.

Along with the liberalization of power retail sales, the restriction imposed on existing power and gas utilities which prohibited them from being involved in other businesses was also done away with There are now utility groups that are busy exploring entry into new fields of business. For example, the TEPCO Group is currently advancing a bold plan with the target of expanding sales to outside of the group by more than 500 billion yen (as compared with FY1999) by FY2005. Energy and the environment, information and communication, and housing and living are the three areas of focus.

Point 3
How Far will the Shakeout and Reorganization of SMEs Advance in the Gas Industry?

Unlike the electric power industry, the gas industry has more than 230 small and medium sized enterprises (SMEs) throughout the nation. The majority of them are small concerns with annual sales of between several hundreds of millions of yen and several billions of yen. Up to now, such gas utilities have been protected through government-led regional monopolies. However, there will probably be an increase in the number of SMEs that are shaken out or forced to reorganize once competition becomes severe through liberalization.

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