By Nick Stockton

Japan is a weird place. But not for any of the reasons you’re thinking. I’m talking in terms of energy, because among industrialized, consumer-ized, electronically-driven nations, Japan probably has the world’s worst portfolio of homegrown energy resources—it’s the second largest net importer of fossil fuels. But it gets weirder. This month, the island nation rewrote its energy rules to give consumers the power to choose which energy source it wants.

Before Fukushima, Japan got 30 percent of its power from nuclear energy. That would be significant even in a country with abundant natural resources. In lieu of coaxing a gas-filled meteor to fall into its lap, the Japanese government is hoping to use market forces to generate innovation in the energy sector. See, if electricity buyers get to buy from the lowest bidder, then those bidders will have to compete for ever-lower prices. Which doesn’t just mean lower prices for consumers: It could result in a boom for renewables…

…But Japan needs innovation to make up for the electrical capacity it lost when it switched off its nuclear power plants. Otherwise, the country keeps buying fossil fuels (mostly natural gas) from abroad. In a perfectly deregulated market, anybody can build a power plant, the transmission lines are free for all, and consumers can pick and choose who they want to buy from. That means stiff competition between energy providers to develop cheaper energy sources.

Obviously, that’s a boon for Japan. For a long time in the country, only 10 state-sanctioned monopolies were allowed to build power generating plants. Recently, however, the nation started allowing anybody (with the money and permits) build a power plant.

This works out great for small towns, which can build suitably sized solar, hydroelectric, or wind plants and set up their own municipal utility company. When the renewables can’t keep the lights on, they can buy from the old established utilities.

But there’s a huge wrinkle in Japan’s energy deregulation that could make it difficult for independent energy providers to build new energy projects at a larger scale. “The old regional monopolies that traditionally owned the power plants still get to set rates on the transmission lines,” says Steve Cicala, an energy economist from the University of Chicago. “That will hurt any incentive for people looking to build new renewable energy capacity.”

Think of it this way: Once they are built, renewables generate energy basically for free. As long as the wind is blowing, the sun is shining, and the rivers are flowing, renewables are cheaper than any other form of electricity. And with open transmission lines, those renewables can sell anywhere. “If you don’t have demand where the wind is blowing, you have to sell it through the transmission lines,” says Cicala. If putting your cleanly-produced electrons through those lines has a significant enough cost, then energy from a cheaper competitor using dirty fossil fuels might look more attractive to the frugal and now-empowered customer base. A not-so-free market after all…

Continue reading at WIRED…

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Areas of Focus: Energy Markets
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Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Electric Power
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Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...
Renewable Energy
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Renewable Energy
Lower technology costs and supportive public policies are driving an increase in renewable energy in markets around the world. EPIC research is assessing the costs, benefits, and efficiency of policies...