The Japan Times
Municipal governments lose energy supplies as new providers exit
The companies are finding themselves unable to withstand the recent sharp rise in fuel prices
More so-called new power providers, which entered the electricity retail market after it was liberalized in 2000, are withdrawing from or downsizing their business — unable to withstand the recent sharp rise in fuel prices.
Some municipalities that have contracts with such providers have seen their electricity supplies halted, so have had to look for other suppliers, and there have been cases in which even major utility companies like Chubu Electric Power Co. have refused to sign new contracts with high-energy-use clients.
Experts say the situation is taking a toll on local governments, operated using taxpayers’ money, and is unexpected, highlighting the need to reform the system again.
On March 14, the Nishio Municipal Government in Aichi Prefecture received an email from Hope Energy Inc., a new power provider in Fukuoka, saying that it would unilaterally stop supplying electricity to the municipality at the end of the following day.
Hope Energy had a contract with the Nishio authorities to supply power to a total of 97 facilities, including the main government building and the municipal hospital for another whole year.
“It was totally beyond our expectations,” said a Nishio government official regarding the timing of the notice.
The municipal government avoided a power outage thanks to the safety net system, in which major electricity transmission and distribution utilities become a provider of last resort when small providers terminate contracts with their customers for any reason — guaranteeing their power supply until they find a new provider.
But the price of energy under such an arrangement is 20% higher than the standard rate set by major utilities, and higher than the price that had been offered by new market entrants.
“If the situation remains as is, our budget is highly likely to run out in the middle of the fiscal year, which means we have to consider compiling a supplementary budget,” a Nishio municipal government official said.
The Nagoya Municipal Government has also had to rely on the last-resort service for four months, since December, to secure power for its main government building and other facilities, and has barely managed to make ends meet.
Japan’s electricity market, which had been monopolized by 10 regional utilities, has been liberalized in stages since 2000 to encourage new entrants. The shift began with allowing new entrants to provide electricity to large-scale plants and office buildings, then expanded to households in 2016.
Combined, new entrants occupied a 21.7% share of the market nationwide as of September, according to the Natural Resources and Energy Agency.
But power retailers have been hard hit by soaring prices in the wholesale electricity market where electricity is sold and purchased among providers.
Many of the companies that entered the liberalized utilities sector from other sectors, such as telecommunications and travel, do not have their own electric power generation facilities and depend on the market to procure electricity. They purchase electricity at a low price when prices are stable and have managed to grow their customer base by offering power at lower prices than major utilities.
Cases of municipalities signing contracts with such smaller power retailers through open tendering have increased because they offered lower prices.
However, business conditions for such providers have deteriorated as market prices rose due to the severe winter in fiscal 2020 and a sharp rise in prices of fuel, such as liquefied natural gas, following Russia’s invasion of Ukraine.
According to Tokyo-based credit research firm Teikoku Databank Ltd., 14 new power providers went bankrupt in fiscal 2021. More providers asked customers to accept price hikes or stopped their power supply, forcing many municipalities and companies to try to switch from new power providers to major utilities since the end of last year.
Even for major utilities with power generation facilities, it is not easy to expand supply. They are often unable to generate enough electricity to provide the power needed by new large-lot corporate clients, and have to buy extra energy in the market.
Chubu Electric Power Miraiz Co., a Nagoya-based sales subsidiary of Chubu Electric Power Co., has stopped signing new contracts except for a very small number of exceptions. Kansai Electric Power Co., Hokuriku Electric Power Co. and Kyushu Electric Power Co. have also stopped accepting new customers and are not sure when they will resume.
At the same time, the use of last-resort service, like in the case of the Nishio Municipal Government, is dealing a blow to the business operations of the major utility firms that receive such requests.
“They won’t be able to make a profit unless they set a price about twice as high as the standard price,” an official in the energy industry said. “The more major utilities supply, the more deficit they suffer.”
Toshihiro Matsumura, a professor of public economics at the University of Tokyo’s Institute of Social Science who served as a member of a government committee on electricity systems reform including liberalization of the retail market, said, “We didn’t assume at that time that fuel prices and electricity market prices would go up this high in such a short period of time.”
He pointed to the need for further reforms.
This section features topics and issues from the Chubu region covered by the Chunichi Shimbun. The original article was published April 15.