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Tuesday, April 17, 2012
RETAIL POWER SUPPLIERS
Retail power slow to make inroads despite nuclear crisis
Regional utilities have long dominated the power market, but companies and local governments are starting to get interested in new retailers offering much cheaper rates.
This rise is especially true since the Fukushima No. 1 crisis erupted last year and its operator, Tokyo Electric Power Co., decided to hike fees by 17 percent for large-lot users from April 1 to cover the rising cost of burning fossil fuels to offset its complete loss of nuclear power.
Often referred to as "power producers and suppliers," or PPS, in Japan, these new electricity retailers have been spawned by deregulation, but their supply potential is limited and their prices have actually started to soar amid the newfound demand. The domination of the conventional regional power utilities meanwhile remains intact.
Here are some questions and answers about the roles the new suppliers are playing and what is happening in the retail power market.
Who are these "power producers and suppliers" and how did they get started?
The new power retailers are businesses that supply electricity to customers, mainly corporate, who contract for a block of 50 kilowatts or more of high-voltage electricity. They use the power line networks of the major existing utilities to distribute electricity.
According to the Natural Resources and Energy Agency, 53 companies were registered as PPS retailers as of the end of March. They include Ennet Corp., the largest retailer, as well as trading house Marubeni Corp., electronics giant Panasonic Corp. and financial conglomerate Orix Corp.
The new retailers were allowed to join the market in 2000 as a result of partial deregulation. The country's electricity market has long been controlled by 10 giant players holding dominion over their own regions. The absolute lack of both competition and the need for business efficiency goaded the government into taking baby steps toward deregulation.
Both the amount and market share of the new PPS retailers have been limited, although the government has continued little by little to deregulate the sector. Of the 53 retailers, only 27 firms actually sell electricity. And the amount they supply accounts for a mere 3.5 percent of the nation's overall supply.
Why has their market share remained so small?
A major reason is their limited supply. It mainly comes from excess electricity generated by other companies' factories or by their own small-scale generators.
Building an industrial-size generator poses a huge business risk, including land procurement, environmental assessments and other costly factors.
Moreover, it isn't easy to procure electricity at the Japan Electric Power Exchange, an electricity wholesale market launched in 2005 where trading volume remains thin.
Conventional power companies such as Tepco and Kansai Electric Power Co., which have large-scale generators, aren't selling much electricity on the exchange these days as they don't even have enough for themselves now that all but one of their reactors have been shut down.
So, even though the new retailers have attracted interest in recent months, they are not able to meet the needs of all potential clients.
"The number of inquiries after the quake (and nuclear crisis) grew by two to three times, and it increased further after Tepco announced the hike for large-lot users," said Hidenori Kunioka, a senior official at Summit Energy Corp., one of the new retailers.
"But we can't sign contracts with all of them because we don't have enough supply," he said.
Among other disadvantages facing the new retailers is that they have to pay the conventional power firms when they use their grids. They also have to pay penalties to the old guard if they fail to balance demand and supply on the grid every 30 minutes.
Are there any examples of businesses that successfully cut costs by buying from retail suppliers?
Yes. The Tachikawa Municipal Government in west Tokyo cut its electricity bills by 26.4 percent in fiscal 2010 by switching the supplier for its energy-hogging bicycle racetrack from Tepco to Summit. The city ended up spending ¥46.2 million to light and heat the track for the year, down from ¥62.8 million when they were buying electricity from Tepco.
This encouraged Tachikawa to buy more retail electricity in fiscal 2011. For the 10 months starting last April, the power bill for 53 facilities in Tachikawa, including schools and libraries, came to ¥151 million, down from ¥192 million under Tepco.
"More than 100 local governments, even in Okinawa and Fukuoka, have asked us about it or came to inspect Tachikawa since last June," said Atsushi Fukunabe, an official in charge of buying power from retail suppliers.
Numerous other local governments, including Setagaya Ward in Tokyo, have jumped on board.
Are all municipalities doing as well as Tachikawa?
Not necessarily. Tachikawa has done exceptionally well. This is because local governments can't get all the electricity they need at lower prices because news of Tachikawa's success triggered a spike in demand from retailers, stressing the newcomers' already low supply capabilities.
For example, Yokohama couldn't attract any bids from retailers during tenders for new contracts for about 120 facilities. The city says the retailers sat out because the public tender process is lengthy — they usually take more than a month to come to fruition — while private companies often buy power at higher prices than local governments and are quicker to sign contracts.
Likewise, Ibaraki Prefecture and several municipalities reportedly failed to attract any bids for power contracts when they held out tenders in February.
Some local governments have opted to continue buying from Tepco and other major firms because their rates are sometimes lower than those of the new retailers. In fact, Tepco said its rates can remain unchanged until customers' current contracts expire, while rates from retailers are rising on the back of their popularity.
Are there any new developments taking place in electricity deregulation?
To increase the supply offered by the PPS retailers, the government has reportedly started to think about requiring conventional power firms to supply electricity to the wholesale market.
Also, a new market to trade smaller-lot power amounts will reportedly be launched this summer.
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