Five years on, the Fukushima Daiichi nuclear power disaster is driving a restructuring of Japan’s $150 billion electricity sector. 

In April, the retail market opened to competition, representing a momentous shift for an industry where 10 regional power monopolies have long wielded outsized political influence to guard their interests. Over the years, Japan’s 80 million retail customers have endured some of the world's highest energy prices.

Retail liberalization is the second phase of the Ministry of Economy, Trade and Industry’s (METI) plan to introduce competition throughout the electricity sector, following the creation of a market regulator in 2015.  Decoupling of generation and transmission holdings will come by 2020. 

Proponents hope that an open power market will lower prices and drive improvements to system reliability and stability. Both fell short in the wake of the 2011 reactor meltdowns that left the Tokyo area’s 20 million electricity customers short on power even as abundant supply existed elsewhere in the country. Tokyo is home to Tokyo Electric Power Company (TEPCO), Fukushima’s owner and Japan’s largest utility with 30 percent of end-user demand.

But challenges abound. “There are a couple of big risks to the success of these market reforms and retail competition,” said Charles Fahy, a power markets expert with PA Consulting Group in Wellington, New Zealand. “One is the lack of wholesale market liquidity and the other is the problem of transmission interconnections.”

Indeed, there are minimal bridges between the transmission networks, stifling aspirations for a truly national power market. Further complicating matters, the country’s electric grid operates on two frequencies: Japan’s west operates on 60 Hz, while the east, including Tokyo, is 50 Hz. The lack of interconnections was largely responsible for emergency conservation measures that forced TEPCO’s commercial power users to cut consumption by 15 percent to 20 percent despite excess capacity in the west.

The interconnection challenges, if not rectified, will limit the country’s ability to absorb intermittent renewable power -- and to reap its benefits. 

“The Ministry’s policy goals following Fukushima were to secure stable supply, reduce electricity rates and enable choice for consumers and businesses, including encouragement of renewables,” said Fahy. 

After Fukushima, public backlash against nuclear power forced the country’s 50 nuclear power plants to shut down. Natural-gas generation, fueled by expensive LNG imports, grew from 30 percent to more than 40 percent of national electricity supply.

Looking to diversify its power base and cut emissions, the government introduced generous renewable feed-in tariffs.

“There was a huge uptake in PV, particularly ground-mounted installations over 10 kilowatts and residential,” said Fahy. “But the uptake was unbalanced. There wasn’t enough new wind, geothermal and biomass.”

The utilities became concerned with how to integrate the new intermittent resources. “Too much renewable power will cause system imbalances and issues with frequency control.”

Utilities covered the cost of the feed-in tariffs by raising retail rates an average 25 percent from 2012 to 2015. Subsequently, regulators looked to control costs. METI has since lowered thesolarincentives, though at 24 cents per kilowatt-hour for 20 years they still look generous. Today renewables account for 4 percent to 5 percent of electricity supply, not counting hydro, which generates 10 percent of Japan’s power.

Looking forward, questions remain around the nascent energy market’s ability to incentivize a more diverse and clean grid. The wholesale market is undeniably weak. Less than 2 percent of generation is traded on the Japan Electric Power Exchange (JEPX) despite the fact that the wholesale market has been in operation since 2005. That means there’s little power available for the day-ahead and spot purchases that grease mature markets such as PJM Interconnection in the U.S. 

The Organization for Cross-Regional Coordination of Transmission Operators (OCCTO), the market regulator that came into being last year, has been charged with beefing up interconnections, which would give remote resources better access to big urban markets. 

“At the moment, the OCCTO is not operating as an independent system operator,” said Fahy. “System operations and dispatch responsibility falls to the legacy utilities who continue to control operation of their electric networks. It’s more of a governance and coordination body. There’s a bit of concern that it does not have enough authority to ensure that the interconnections that are needed are built.”

The old line utilities stand to maintain a significant de-facto presence despite deregulation. While generation and transmission assets will be decoupled by 2020, rules allow common ownership to continue through holding companies. In April, TEPCO restructured itself into a holding company with three operating units in retail, generation, and transmission and distribution.

In fact, there are few carrots to lure Japan’s legacy utilities to support efficiency or demand-side management measures that might erode revenues. The industry has explored decoupling, which is “going on around the fringes,” said PA’s Fahy. “There is government funding for grid edge technologies and virtual power plants, but it’s at an early stage.”

TEPCO, in particular, has good reason to protect its revenue stream. Since April, 300 or so retailers have appeared in the $72 billion retail market, stealing as many as 1 million customers from legacy providers. Sixty percent of retail switching has taken place in TEPCO’s footprint.

The electricity giant is countering with plans to expand the generation interests it already operates in other parts of Asia. Closer to home, it’s looking to offer retail power in other parts of Japan (though that may prove to be a zero-sum game) and to participate in natural-gas markets as that sector also opens to competition.

A potential bright spot for TEPCO lies in its plans to install 27 million smart meters by 2020. That would potentially leverage the information it collects to offer energy management solutions in the future. The utility is also developing distribution network control systems that would ease the future integration of renewables.

For its own part, the government has ambitions for a cleaner and more diverse grid by 2030. Natural gas will fall to 30 percent of the generation mix from 45 percent in the wake of Fukushima, while the country will re-certify its nuclear fleet. So far, three nuclear plants are back in operation. Renewables will account for up to a quarter of total generation, hydro included, up from about 14 percent today.

Will Japan’s reforms be enough to reach its clean energy goals? 

“In the long run, if interconnection issues aren’t eased, and access to wholesale markets isn’t enabled, it isn’t going to be successful in the eyes of consumers,” said Fahy.