Japan’s experience highlights complexities of energy reform

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One of the reasons I find energy market reform and unbundling (MRU) so interesting is the scale and complexity.

These processes take years to complete. First, governments must make the initial decision to reform, which then begins a long period of transformation. Utility business processes, system installations and culture are all impacted. Often significant government asset sales will result.

The challenge for governments and utilities is maintaining focus throughout this prolonged period of change. They must remain committed to creating and maintaining a market design and operating model that enables competition and efficiency to benefit customers in the long term.

As widespread as reform is – more than 30 countries are beginning or progressing the restructuring of their energy markets – each process is as complex, and as unique, as the government, market and culture of the country it is taking place in.

Yes, the experiences of previously reformed markets can give clues as to what might happen, but these lessons learned should be viewed as a guidebook rather than a how-to manual. There is no one blueprint for effective market reform and unbundling.

For governments, utilities and potential new entrants, capitalizing on the potential opportunities of each market requires constant vigilance to breaking developments in the reform process and a deep understanding of how the different approaches to reform can impact the development of new energy markets and their ability to meet the aims of reform.

“There is no one blueprint for effective market reform and unbundling. Capitalizing on potential opportunities requires constant vigilance throughout the often long term of the reform process.”

Of all the investment opportunities presented by reforming energy markets, those on offer in Japan are the most significant in the world right now. The size and scope of the Japanese reforms are huge, impacting every aspect of the value chain. Already the opening of the Japanese market is attracting huge interest – we’ve seen close to 500 new generation companies register in the last few months, and several new non-conventional players register for electricity retailing. One move worth noting is the decision by some of Japan’s incumbent utilities to form joint ventures in preparation for unbundling.

Decisions by new players to enter markets are always intriguing, particularly where markets have been dominated by statutory monopolies and where business processes between market players are yet to be fully developed. In Japan, it will be interesting to see which geographies and customer segments are targeted by new retail players. As successful retail market entry often depends on medium to large customer profitability, the Government may soon be pressured to provide access to metering and customer information so that new entrants can develop the datasets required for outbound marketing activity.

With only a few years until go-live, there is little time to waste for those planning entry into Japan. For incumbents, the to-do list is long. Cultural change, structural separation and developing individual identities as separate companies are key. Businesses will also have to design and master new processes to deal with customer churn and “arms-length” communications with new retailers.

In an environment where market rules are being developed and refined, the pressure of retailer customer segmentation and defensive plays will weigh heavily. Whether brand loyalty and the scale enjoyed by the incumbents can withstand the threat of nimble new entrants will be the test that these companies set themselves and judge their future success against.

As we have seen in many countries before, and will see again in Japan, market reform and unbundling is an evolutionary, rather than revolutionary process. Governments and utilities adopt mechanisms, test and then modify or even abandon those that prove not fit for purpose, take too long to achieve or impose unreasonable costs on incumbents and new entrants.

This is understandable given the sheer size and scope of market reform. The complexities are almost endless – hundreds of decisions, both big and small, must be made in preparation for unbundling and operating in a competitive market.

Matthew Rennie is EY’s Global Energy Reform & Unbundling Leader. He is based in Brisbane, Australia.

For more information, please visit: ey.com/powerandutilities  

 

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