Electricity liberalisation in Japan lift producers’ profits

Nov. 27, 2000 (IndustrySuppliers.com)à‚–Japan’s deregulation of the electricity market seems to have had the desired effect. Nine out of ten electricity producers have reported record pre-tax profits in their half-year results from April to September.

The reason stated for the excellent performance of these companies is that they have been allowed to diversify into new business areas following the deregulation. The biggest advantage so far for these companies is that competition has not yet grown to be a serious threat, else they would have been forced to bring down prices in their fight for more customers.

The electricity deregulation plan in Japan was implemented in stages, giving enough room for the companies to stabilise after each change. Initially, when the concept took shape in 1995, the government allowed the large independent power producers to sell their excess generation capacity to regional power companies.

In the next step, these big power producers were allowed to sell directly to large users, defined as using 2,000kWh or more at 2,000 volts or higher. This year electricity traders gained entry into the Japanese market for the first time. They are permitted to buy power from any company they choose and sell it to the large users.

Since it is a new concept, the market took some time responding to it. One of the responders to the new system was the car company Toyota. It conducted a tender for a power contract for a new shopping and leisure complex. Though many companies sent in their quotes, the deal was ultimately finalised with Toyota’s main supplier, Chubu Electric Power. Another case where nothing much came out of a competitive tender was when IPPs pulled out as they were not sure enough to guarantee supply. In an attempt to show that the system works, the Ministry of International Trade and Industry awarded the contract for its own buildings to Diamond Power, a new power subsidiary of Mitsubishi Corporation.

Earlier almost all its contracts were given to Tokyo Electric Power (Tepco). The Ministry contract has helped Diamond Power in its growth as it has attracted several other new customers. The market is expected become more dynamic once the new financial year starts, as many contracts will then have to be renewed. Foreign entrants into the market will hot up competition. US based Enron has already arrived with an offer of rebates of up to 10 percent for companies signing contracts of 3-5 years with it. Since it has no power productions units in Japan as yet, it is expected to initially source power from the open market.

Its subsidiary E power is said to be on the look out for building or acquiring power stations in Japan. All the potential foreign investors like Vivendi, Texaco and Royal Dutch Shell have the same problem. They have expressed their interest in entering the Japanese market but it will take time before they have their own sources of power. The ten local power producers are meanwhile gearing up to face the competition from the new players.

They have drawn up strategies to reduce capital expenditure and lower electricity prices. Their share prices are already higher than they were in March. They are emulating the power companies in US and Europe and building up alternate sources of income by moving into sectors like telecommunications. These are plans for the long term. But for the present it does not seem that these companies have much to worry about.

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