Renewable energy sees its chance in Japan's electricity market

TOKYO — Two years ago, Japan’s second-largest city launched a small-scale environmental experiment, encouraging residents to install solar panels on their roofs and buy pricey equipment to track how much energy they use.

Yokohama officials’ goal was simple: to save power and cut the city’s carbon emissions.

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 A massive 8.9-magnitude earthquake and several powerful aftershocks struck the eastern coast of Japan March 11, 2011, triggering tsunamis that devastated the coastline north of Tokyo.

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Japan’s generated energy, by source

But since the nuclear disaster that transformed the way Japan thinks about both energy and the companies that supply it, Yokohama’s “smart city project” has taken on potentially larger significance. What began as a modest environmental plan now stands as a controversial blueprint for a system in which the country’s monopolistic utilities would lose their absolute control of the grid.

In Yokohama, the households with both solar panels and meters act as micro-size power companies, generating electricity, using what they want and in some cases selling the surplus back to the Tokyo Electric Power Co. (Tepco). That model contrasts sharply with the one that has served Japan for decades, as 10 privately owned utility companies established regional fiefdoms, largely reliant on coastal nuclear plants and allowing little room for renewable-energy projects that would cut into profits.

Though nuclear and renewable energy are not mutually exclusive, many investors and industry analysts here blame the frailty of Japan’s renewable-energy sector on the long dominance of the utility companies and their cohorts, including the heavy machinery giants that build nuclear plants and a pro-nuclear bureaucracy in Tokyo.

An emerging bloc of clean-energy supporters is now seeking a place in the country’s $200 billion electricity market, calling for a loosening of the rules that hold them back in the current system. Japan partially deregulated its energy industry 16 years ago, but the changes were insignificant; the 10 major utility firms still control 98 percent of the market, with exclusive rights to supply households and responsibility for both generating and transmitting power. They also control the grid itself, which upstarts can access only by paying a 15- to 25-percent tax on all electricity they distribute.

“So in reality there is still a monopoly at each stage,” said Hiroaki Ikebe, president and CEO of Ennet, an 11-year-old power company. “In order for new companies to compete, the government should have more significantly handicapped these 10 utilities.”

But for Japanese authorities, wholesale changes to the power industry pose at least as many problems as they might solve. Influential business lobbies favor the status quo, because their firms supply the utilities. More important, the government has a particular incentive to help Tepco, the biggest of the 10 utilities and the operator of the crippled Fukushima Daiichi nuclear power plant. With tens of thousands of people displaced by radiation leaks from the facility, Tepco now owes $50 billion in compensation damages. It also owes trillions of yen to financial institutions that are clamoring to be reimbursed. Tepco’s best chance of meeting those obligations depends on its ability to keep operating unchallenged by competitors.