Reform of the Electricity Supply Industry in Japan

Abstract

Proposed reforms of Japan’s electricity supply industry are quite modest by international standards. In particular, while the retail market has been the focus of reform efforts, the wholesale market has been largely ignored. Most of the gains from reforming electricity supply in other countries have arisen, however, from exploiting technological changes that have allowed wholesale markets to become more competitive. The electricity market in Japan currently is very heavily regulated, with pricing, entry and planning conducted in a centralized fashion. Japanese electricity prices are very high by world standards and also do a poor job of signaling the resource costs of meeting the demands of consumers, or the value of supply to potential producers. Japan will be making increasingly larger sacrifices of potential gains if it forgoes opportunities to radically restructure its wholesale electricity market in a manner consistent with world best practice. Successful restructuring requires an understanding of the sources of monopoly power in the industry, and separation of competitive from natural monopoly elements. Partial reforms that relax controls on the retail market while leaving monopolies in generation and transmission in place may be more harmful than beneficial.