Five years ago, the world’s attention turned to Japan after a nearly 50-foot tsunami disabled the power supply and cooling systems for three Fukushima nuclear reactors. The disaster sparked an international conversation about the safety of nuclear energy, as well as long-lasting challenges for Japan’s energy sector and economy. But it also created an opportunity.
This month, Japan will deregulate its electricity market—both generation and retail—becoming one of the world’s largest deregulated electricity markets in history . If done right, the change could vastly modernize Japan’s energy sector and lower prices, boost its sagging economy, advance innovation globally and allow the country to become a worldwide model.
How did Japan get here? Ever since the U.S. deregulated its electricity market in the 1990’s, Japan has been trying to do the same in order to cut prices, improve efficiency and boost innovation and business opportunities at home and abroad. But each time it tried, the country made just baby steps, primarily because monopoly power companies like Tokyo Electric Power Company (TEPCO), the owner of the Fukushima plants, wielded strong political influence.
Before Fukushima, most government officials did not believe it was possible to fully deregulate the sector. But since the accident, Japan’s energy prices have skyrocketed to be among the highest in the world. Much of this surge is due to an increased reliance on fossil fuel imports— namely, oil and LNG—which now make up 85% of Japan’s energy mix, costing up to $40 billion per year.
These increased costs, combined with the shutting down of nuclear plants, have spelt trouble for Japan’s power monopolies. In total, the disaster cost at least $110 billion. In the years since then, Japan has gone from operating 35 nuclear reactors to just two. These reactors were expensive to build, and would have been cheap to run. So as these plants remain off the grid, companies like TEPCO keep losing money. The net income of Japan’s Electric Power Companies (EPCos) is still just over half of what it was prior to the disaster, after escaping the red two years ago. Meanwhile, the public, who have seen their electricity bills rise about 20% over the last five years, has lost faith in their monopoly power companies and are demanding a change.
Combined, these factors triggered deregulation. For Japan, this deregulation could bring much-needed competition to the market, allowing the power sector—which until now had little incentive to improve—to become more efficient, driving down costs. Already, new entrants from a wide variety of industries have lined up, and they’ve brought with them new business models that bundle costs like cell phone, internet and electricity.
As new players enter the market and companies are compelled to push for efficiency, this could encourage technological improvements in devices like smart meters, home and building energy management systems and efficient power generators. Innovation could also happen in the renewables sector as more renewable companies enter the market. These improved technologies can then be exported around the world.
Along with changing the technological landscape, Japan has the opportunity to lead the way in creating new, innovative policies to ensure lower prices for consumers and an improved economy—such as through a dynamic pricing system that charges a higher price during peak times. My colleagues and I have studied what happens when people are charged more during these peaks. We found that they reduced their electricity use by 14% to 17%.
Five years after one of the worst energy disasters in history, it’s time for the world’s attention to turn to Japan once again. This time, not because of its catastrophic events—but because of the vast opportunities ahead. If Japan deregulates its electricity market right, the country has the chance to not only boost its economy, but become a leading player in the international energy scene.
Note: To deregulate its electricity market right, Japan needs to address several key challenges. To learn more about those challenges, please read my piece in the newspaper Nikkei.