Editor's Picks

JapanFriday, April 1

Japan's Electricity Deregulation Gets Underway

Consumers in Japan can now choose their electricity supplier. They have long been buying electricity from major power companies in regions where they live.

Full deregulation of the electricity retail market started on Friday. The move ends more than 6 decades of a monopoly held by the major utilities.

Other businesses will now be allowed to supply electricity to households. Over 260 companies have registered to enter the market.

In Japan, officials began deregulating electricity sales in 1995 starting with the power-generation business. Since 2000, they began gradually liberalizing electricity retail for big users such as factories.

And now, retailers can provide electricity to households and small businesses, opening up the market further.

Many countries and regions around the world have deregulated their electricity retail markets. They include Germany, Britain, some US states, and parts of Asia. So there are plenty of lessons for Japan.

Full deregulation of the electricity market is a highlight of Prime Minister Shinzo Abe's growth strategy. He's been pushing reform to create new business opportunities and encourage competition and innovation in the industry.

The electricity market for small users is worth about $70 billion. It serves more than 85 million households and small businesses. Gas companies, convenience-store chains and many other businesses are eying those rich pickings. I went to find out more.

In this home appliance store in Tokyo, telecom firms are offering the latest models of smartphones, and electricity price plans. The companies are venturing into power retailing. They are advertising cheaper utility bills for their phone and tablet users.

"Price and services matter. I'll switch, if there are better deals," says one shopper.

"I want to choose a company with decent safety standards. I don't know much about offers from new retailers so I'm currently collecting information," says another.

So now, consumers can pick from a growing range of providers. More choice sounds good.

But what are the risks of accepting new entries to the market? There are two. One is prices. More competition usually means lower electricity bills.

But an expert warns that may not be the case in the long run. Consumers could be hit with higher bills after competition settles down and retailers experience a shakeout.

"The number of the players will decrease and several players dominate the market," says Shinichiro Takiguchi, senior manager at the Japan Research Institute. "In that situation, the price of the electric power will go up again."

That has sometimes been the experience elsewhere. In Germany, some firms lured people with cheap deals without making it clear costs would soar in the second year.

After California embraced deregulation, it was hit by blackouts. Consumers accused a utility of deliberately creating an electricity shortage to raise rates.

Japan's energy users have enjoyed remarkably stable supply. So another challenge is keeping it that way. For decades, the same companies have generated and retailed power so demand and supply usually matched.

An expert notes that demand from retailers could overwhelm the suppliers, especially during Japan's hot, humid summers and cold winters.

"It depends on the gap of the demand supply. Electric power companies might not be able to provide enough electricity because they don't have enough preparation for the energy supply," Takiguchi says.

So consumers and retailers will need to keep an eye on how that can be avoided. What kind of change might we see in the industry?

Major power utilities have faced almost no competition. Now the market is open to all, including foreign businesses. Analysts say US and European energy firms may be eyeing the new opportunities.

It's also a chance for Japanese companies to expand. If they can survive the competitive environment at home, some firms may find more opportunities overseas.

The outlook for Japan's economy remains cloudy amid global economic uncertainties and sluggish domestic consumer spending. Deregulation and its impact is a vital test of the government's pledge to drive growth.