Japan Electricity Deregulation: Birth of Municipally Owned Electric Utilities

The upcoming retail electricity deregulation in Japan next April will create a way for Japanese municipal governments to produce and supply locally generated renewable electricity. The Fukushima nuclear disaster in 2011 was a harsh wake-up call that quickly became a strong source of motivation for many local governments to take energy matters into their own hands in order to provide safe and clean electricity to their own citizens.

Nakanojo, a town in Gunma prefecture, established the nation’s first locally owned utility with the motto of “Locally Produced, Locally Consumed Renewable Energy.” The town is geotropically located in the middle of Japan and is famous for flowers and hot springs surrounded by deep-green mountains.

“When a former mayor of Nakanojo visited the tsunami disaster areas in northeastern Japan, he decided to make his town nuclear-power-free, and upon his return, he created a new department to develop renewable energy plants,” Masao Yamamoto, Naknojo renewable energy department, said. Yamamoto was transferred from the wastewater division to head the newly created department.

Back then, everyone in the town had little choice but to purchase electricity from Tokyo Electric Power Co. (TEPCO), which is the nation’s largest investor-owned electric utility (IOU) and is an owner of the Fukushima Daiichi Nuclear Power Station and 16 other nuclear reactors.

By utilizing the nation’s feed-in tariff (FIT) program, which was launched in July 2012, the town funded and developed two 2-MW solar photovoltaic (PV) systems with the FIT rate of ¥40/kWh per 20 years. The town also leased town-owned land to a private company in order to build a 1 MW PV project. By the end of 2013, a town with a population of only 18,000 had 3 large-scaled PV plants, producing 7,000 MWh of electricity annually.

With the 5 MW of PV capacity under its belt, in August 2013, the town formed Nakanojo Electric Power to sell power. The company was established and registered as a power producer and supplier (PPS) to take advantage of the partially deregulated electricity market in Japan. PPSs represent new power retailers that supply electricity to large customers who contract for a block of 50 kW or more of high-voltage electricity.

Although the town owns 60% of the power company and the remaining 40% is owned by VPower, a private company, the company is operated independently and is not part of the town’s operations. The company buys electricity from the town-owned PV systems and re-sells electricity to 30 public facilities, including schools and community centers, at a lower rate than TEPCO.

“Our customers all together used to pay about ¥100 million a year to TEPCO; with us, they can save ¥10 million a year, about 10%,” Yamamoto said.

Yamamoto has has retired from the town, and now works as a director at Nakanojo Electric Power.

“Since PV doesn’t produce electricity at nights or on cloudy days, we currently end up purchasing electricity from other suppliers in the wholesale market and selling excess solar electricity to other suppliers,” he said. “To balance the energy mix, we are in the process of developing a 140 kW, small-scaled hydro power plant.”

In fact, Gunma prefecture owns and operates 31 hydro power plants in the prefecture, with a total capacity of over 221 MW. Out of 31 hydro power plants, 8 (representing 40 MW in capacity) are located within Nakanojo town.

“If we get access to all those plants, our town’s energy self-sufficiency rate will go up to 135%,” Yamamoto said. “We have tried to negotiate, but unfortunately the prefecture is locked in with supply contracts with TEPCO, and we won’t be able to get electricity from those generators located in our own town.”

By scaling up, Yamagata prefecture recently announced it will create the nation’s first publicly funded power company at the prefecture level. Yamagata prefecture is located west of Miyagi prefecture, which suffered the greatest losses from the devastating tsunami, and north of Fukushima prefecture, which encountered the nuclear power plant disaster. Due to its close proximity to disaster-stricken areas, homeowners and businesses suffered from lack of electricity for a long period of time.

Similar to the Nakanojo mayor, Mieko Yoshimura, the governor of Yamagata prefecture, declared the prefecture to be nuclear-power independent and energy self-sustainable, providing a reliable source of power without disruptions.

By the end of this September, the prefecture will establish Yamagata Power Company with several private entities.

“The new company will be focusing on retail sales of electricity,” Hiroaki Sato, local energy development specialist, Prefecture Environmental Energy Division, said. “We will procure electricity from local, renewable energy generators. We don’t intend to own power generations.”

Its business model is similar to Community Choice Aggregation (CCA), in which Yamagata Power Company will be aggregating regional energy demand, as well as negotiating and securing alternative energy supply contracts on a community-wide basis. It will deliver electricity via the grid owned by Tohoku Power Electric Co., the regional IOU. The prefecture is planning to procure energy from local renewable generators, such as PV, wind, small hydropower and biomass.

“We will start selling electricity from next April,” Sato said. “Like Nakanojo, we are planning to sell electricity first to prefecture-owned facilities, and depending on our supply capacity, we will gradually expand our customer base. We are currently negotiating [power supply] with local renewable generators. Our goal is to provide reliable and secure electricity supply. [With PV and wind being strong candidates for the power supply], how to secure base-load power will be our next big task.”

By 2030, the prefecture is planning to deploy 1 GW worth of renewable energy locally, which is equivalent to one nuclear power plant. Wind power is expected to account for about a half of the renewable generation, followed by PV with 30.5%.

As of Aug, 12, 734 organizations are registered as PPSs with the Ministry of Economy, Trade and Industry (METI), a huge jump from the little-over 200 organizations registered in April of 2014. The increased number was partially due to the launch of the FIT program, which enabled many organizations, including municipal governments, to own renewable energy systems.

Between July 2011 and April 2015, over 20 GW of renewable generators was installed under the FIT program, and over 87 GW has been currently reserved. (See Figure 1.)

By next April, the nation’s electricity market will be fully deregulated by opening up the remaining retail electricity market, which includes residential and small business customers. With the great number of new market players and large renewable capacity, the nation is preparing to finally break up the long-standing monopoly of the regional electric power companies.

Lead image: 2 MW PV system owned and operated by Nakanojo town. Credit: Nakanojo Electric Power.

Inset 1: 2 MW PV system operated by Nakanojo town. Credit: Nakanojo town.

Inset 2: Yamagata prefecture operated 1 MW PV system. Credit: Yamagata prefecture.

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