Energy Retail Liberalization Can't Wait! A Radical Shift!? The Energy Business

Following the full liberalization of the electricity retail market in 2016 and the gas retail market in 2017, the energy industry is undergoing a major structural transformation. Together with DEMS (Dentsu Energy Market Strategy), an internal cross-functional team within the Dentsu Group that has been researching energy retail liberalization since 2007, we explored the new business environment brought about by electricity retail liberalization.

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A Quick Recap

What is Energy Liberalization?

Electricity liberalization began with power generation in 1995, followed by the gradual opening of retail markets for large and medium-sized consumers after 2000. Then, in June 2014, the revised Electricity Business Act, centered on full retail liberalization, was enacted, leading to the complete opening of the electricity market in 2016. The newly opened segment is "low-voltage" electricity, serving households and small factories/stores with contracted power below 50 kW. This represents approximately 84 million accounts, with a market size of 7.5 trillion yen.

This will completely end the monopoly on electricity sales by major power companies that has lasted for over 60 years since the war. Currently, power generation, transmission/distribution, and retail are almost entirely monopolized by 10 power companies and their affiliates. Liberalization will reorganize this into three sectors: "power generators," "transmission/distribution operators," and "retail electricity suppliers." Parallel to electricity, full liberalization of city gas retail, including for households, will be implemented in 2017. The affected users, primarily households, exceed 25 million nationwide, representing a market worth 2.4 trillion yen. The full liberalization of retail markets for both electricity and gas is expected to intensify customer acquisition competition. It is also anticipated to lead to the expansion of comprehensive energy businesses, including bundled sales of electricity and gas, and collaboration between operators across regions.

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Expert Perspective

Professor Takao Kashiwagi, Tokyo Institute of Technology, Speaks
Three Perspectives on Creating New Energy Businesses

Prime Minister Shinzo Abe used the word "reform" over 30 times in his policy speech on February 12 this year.
After tackling agriculture and healthcare, the final remaining reform theme is "energy." While the law liberalizing the electricity market starting in 2016 has passed, what impact will this have on the future power source mix? I believe players aiming for new entry in this field must have a concrete and clear understanding; otherwise, they cannot create new business models for energy liberalization.

❶ From "Total Cost" to "Demand Control"
Japan's high-quality electricity supply was achieved through a network of large-scale power generation based on the total cost system (*1), ensuring stable power delivery. With electricity liberalization, only generation facilities based on market principles can be established. Therefore, it will become crucial for the supply side to control the demand side.
In other words, it's about how effectively demand control (demand suppression) can be implemented. Alternatively, if consumers save energy through negawatts (*2), they should be paid accordingly. It's similar to airline overbooking, where reservations exceed the number of seats available, anticipating no-shows and cancellations. Overbooking allows airlines to operate many flights near capacity, increasing revenue compared to flying with empty seats. A new business model for electricity, similar to this mechanism, is likely to emerge.

❷ Even without generating power, you can buy and sell electricity in the market
For example, suppose a non-utility entity, like a steel company, owns a large centralized power plant generating 1 million kilowatts for its own use. If this steel company reduces its electricity consumption by 30%, it can sell the equivalent of 300,000 kilowatts as baseload power (＊3) on the electricity market. This typically fetches around 13 yen per kilowatt-hour.
Conversely, businesses unable to build large-scale generation facilities can purchase this electricity from the market. This also gives rise to a new business model: aggregators (*4) that sell electricity pooled from various sources.

❸ New Energy Cash Flow Emerging in Your Home
Liberalization enabling anyone to trade electricity creates cash flow on the demand side. This opens the possibility of recouping investments in CEMS (＊5). A real-time electricity market could usher in an era of electricity day traders, similar to stock traders.
For example, residents of smart homes (*6) who install power generation systems like Ene-Farm can effectively manage self-generation and self-consumption. During peak demand periods, they can conserve energy while running their generation systems at full capacity to sell surplus electricity.
This means they can expect double income from negawatts and cogeneration (*7). The energy system is about to undergo a radical transformation. Keeping this in mind, it will be crucial to simultaneously advance the development of new, value-added business models alongside the electricity trading system.

Key Terms to Know

Glossary

＊１ Total Cost Method... A system where usage fees are determined proportionally to the total operating costs of the business.
＊２ Negawatts... The concept that electricity saved by users is treated as equivalent to generated power, allowing this surplus to be traded. The reduction in demand is termed "negawatts" (negative watts) in contrast to conventional power generation.
*3 Base-load power source... Stable, low-cost generation covering fundamental demand outside peak periods. Its antonym is peak power source, and efficiency improvements in this area are sought.
*4 Aggregator: Literally meaning " one who gathers " (a business entity), in the electricity industry refers to a business that aggregates negawatts. The business makes prior agreements with electricity users, paying them to conserve power during tight supply periods in exchange for selling the surplus electricity to power companies via the market.
＊5 CEMS (Community Energy Management System)... A system for integrated management of electricity demand and supply within a community.
＊６ Smartization... Equipping information systems and various devices with advanced information processing capabilities or management/control capabilities.
＊7 Cogeneration... A combined heat and power system that simultaneously generates electricity and heat, utilizing both.

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What are consumers like?

What are the 5 target types revealed by the survey?
Based on a proprietary survey of 5,000 households in 9 power company service areas ~

Attitudes and values toward energy vary significantly depending on life stages, such as raising children. The survey revealed the existence of five distinct clusters.

*Survey conducted online in December 2014 with 5,000 men and women aged 20-69 across 9 power company service areas

These findings also reveal

• 47% recognize the term "electricity liberalization," but only 7% understand its details. The fact that consumers can freely choose their electricity supplier is not yet widely known, and the specifics are largely unknown. However, the intention to consider switching is high at 74%, and many express interest in purchasing if specific suppliers or products become clear.
• The industries of interest as potential electricity suppliers are: regional power companies (57%), followed by regional gas companies (29%), and mobile phone carriers (27%). Various other industries are also attracting interest as new potential electricity suppliers.

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Electricity Deregulation: How It Works Overseas

Major Western countries like the UK, Germany, Australia, and the US have already liberalized their electricity markets.
Multiple companies have entered the market, offering a variety of rate plans and services. During seasons when electricity bills tend to be high, companies actively promote switching campaigns with gifts and discounts. Therefore, websites that compare the services of different power companies are indispensable. In addition to low prices and services, consumers can also choose green power sources such as wind and solar power, even if they are slightly more expensive. Thinking about and choosing energy is also thinking about and choosing the future of society.