Renewable energy sees its chance in Japan’s electricity market

October 1, 2011

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.

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.

“If you truly deregulate, you gain economies of scale and all these new entrants,” said Andrew DeWit, an energy policy expert at Tokyo’s Rikkyo University. “But what happens to Tepco’s ability to pay these compensation costs?”

With about 70 percent of Japanese now opposed to nuclear power, once-obscure questions about energy policy have become part of everyday language. Facing energy shortages because of its idled nuclear plants, Japan this summer encouraged people to cut their consumption by 15 percent. Television monitors in subway cars and shopping malls gave real-time data about regional energy usage.

And for the first time, prominent Japanese have pushed for an increase in renewable energy. (Renewable sources — mostly hydropower — currently account for 9 percent of Japan’s energy.) Last month, the cellphone entrepreneur Masayoshi Son, Japan’s richest man, proposed a $26 billion “supergrid” that could efficiently transmit renewable energy across the country. The infrastructure could help Japan become 60 percent reliant on clean energy by 2030, he said.

“The next battle in Japan is for grid connections,” said Tetsunari Iida, executive director of the Institute for Sustainable Energy Policies. “The monopolies have tried to constrain access to the grid.”

Japan’s central government has so far stopped well short of proposing changes to the grid, but in August it passed a bill designed to encourage the growth of renewable energy. The feed-in tariff bill, which takes effect next July, requires utility companies to purchase a certain amount of energy from renewable-energy providers at a yet-undecided price. Industry analysts have called it a promising first step.

The Yokohama model represents a more drastic option, turning the utility companies into bystanders rather than buyers. But the project remains in its pilot stage, far too small to pose a threat. By 2014, Yokohama officials say, 9,000 homes in the city will have solar panels, up from 5,000 now. Those panels will be capable of generating 27 megawatts — 1/40th of the capacity of a typical nuclear reactor.

And even here, Yokohoma is at the mercy of Tepco. The city is still negotiating with the utility about rental fees for use of an electrical storage facility. It is also struggling to obtain detailed historical data on usage, providing context for an assessment of energy savings. In the past, city official Naoshi Nagura said, Yokohama received no data about annual energy consumption and never bothered to ask for any.

“So far, Tepco has been, to an extent, cooperative,” Nagura said. “But if the whole thing comes together, with each household setting up solar panels, it will infringe on Tepco’s profits and cause problems for them.

“I wouldn’t say Yokohama is directly promoting deregulation,” he added. “But the current situation is pretty one-sided. We want to have a multilateral relationship in terms of energy use. Ultimately the goal is to create a community where our city can use electricity in the most efficient way and not have any waste.”

Special correspondent Ayako Mie contributed to this report.

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