Opportunity knocks in Japan’s lucrative energy market

Opportunity knocks in Japan’s lucrative energy market

Why Japan’s the perfect candidate for retailers exploring international expansion opportunities by Ruediger Neubauer

Japan has the 3rd largest economy in the world, is the 4th largest consumer of electricity, and has long been recognized as a leader in energy technology. Yet its energy market remains relatively nascent, offering untapped potential for retailers globally looking to expand.

A decade of change

Significant reforms, kickstarted by the 2011 earthquake and subsequent Fukushima nuclear accident, have led to major deregulation in the energy market. This has been coupled with:

  • new technologies and business models to drive efficiency in the market
  • major investments to accelerate renewable generation
  • Japan’s feed-in tariff coming to an end in 2020

Combined these have created huge opportunities for energy innovators, and led to 600 players entering the market in the past 3 years. This has included local and international retailers, from small start-ups to those with established customer bases.

Drivers of competitive energy retail

Japan energy self-efficiency ratio is low compared to other OECD countries, at 9.6%. It lacks its own natural resources such as oil and liquefied natural gas, and requires additional measures to secure a stable energy supply. This however creates opportunity for others, with a low energy self-efficiency ratio leading to dependence on other countries for resources.

Japan is also highly dependent on fossil fuels. In 2017 these accounted for 87.4% of its energy supply, up from 81% in 2011. This sharp increase was driven by increased utilization of thermal power generation, to make up for shortages caused by the shutdown of nuclear power plants following the 2011 earthquake. These have made Japan more susceptible to the ripples of global energy markets, and deepened difficulties in securing energy in a stable manner.

Combined these factors have driven major price increases over the past decade. Between 2011 and 2017 electric rates increased by 16% for residential customers, and 21% for industrial and commercial customers.

Reform and regulation

To respond to this Japan’s government has put in place reforms to create a new comprehensive energy market in Japan. This has been focused on removing barriers in the vertically integrated market, through:

  1. Driving Growth in Japan by nurturing dynamic innovation, including combinations of different services and development of revolutionary industrial technology 
  2. Enhancing benefits for customers, including an expansion of energy choices, keeping energy prices to a minimum, ensuring a stable supply of energy, and securing overall safety.

There has been improvements in the market since opening in April 2016:

  1. The Tokyo Commodity Exchange (TOCOM) began trading Japan electricity future contracts in September 2019.
  2. EEX launched futures electricity trading for Japan in May 2020
  3. Greater liquidity in the electricity wholesale markets due to additional whole electricity trading partners started business units in Japan.

On the near horizon, all Japan renewable power will stop receiving payment through the Feed-in Tariff (FIT). This provides a great opportunity for retailers to provide green products as renewable power sources are no longer dedicated to regulated tariffed payments.

The market structure now mirrors other major deregulated markets in the world, such as the US, UK and Australia. Many products offered in Japan today are close to products seen in these countries.

Consumers have also shown huge appetite for change. The total switching rate is 15.6.5% – equating to around 13.81 million account switches. This means the market is now worth an estimated $136 billion dollars. The market opportunity remains large. A retailer who captures only 0.6% of the market will have achieved over 500,000 customers.

One of the key entry models for international retailers looking to break into the market has been partnership models. Japanese energy suppliers know there is much they can learn from their foreign equivalents. They have been therefore been joining forces with retailers in the USA and further afield, combining their local understanding of the market with the nous more established retailers have gained through years of experience in deregulated markets.

There have been winners and losers from the rush to break into this market. But those who have gone in with the right partners have been able to capitalize on the abundance of opportunities present, and established themselves as first growing players.

__________________________________________________________________________________

Ruediger Neubauer is CSO for Znalytics, a cloud-native billing provider for retailers in the USA and Japan.