Liberalization of the Electric Power Sector in Japan

1. CIGRE SC-C5 Workshop in Brasilia Liberalization of the Electric Power Sector in Japan September 22, 2003 Jun-ichi Naito The Tokyo Electric Power Company,Inc.

2. Outline of Japanese Electricity Market １．Overview of Electric Power Industry ２．Background of Liberalization ３．Japanese Electricity Market Design ４．Challenges for Emerging Electricity Market

3. １． Overview of Electric Power Industry

4. 1. Overview of Electric Power Industry 2. Background of Liberali 3. Market Design 4. Challenges for Emerging Outline of Network System in Japan • Elongate-shape system without international connection(isolated system) Hokkaido 5 GW Tohoku 15GW Hokuriku 6GW Tokyo 64 GW Chugoku Kansai 12GW 33GW Chubu 28GW Shikoku6GW Kyushu 17GW (about 100 GW) 50 Hz (about 85 GW) 60 Hz

5. 1. Overview of Electric Power Industry 2. Background of Liberali 3. Market Design 4. Challenges for Emerging • Very few natural resources in Japan Energy Self-sufficiency Rate Source: IEA/Energy Balances of OECD Countries (excluding nuclear energy)

6. 1. Overview of Electric Power Industry 2. Background of Liberali 3. Market Design 4. Challenges for Emerging Electric Energy Output by Generation type • Too much dependence on Oil Best Mix Policy Generating Energy of TEPCO [TWh] 47 111 112 188 249 284 308 343 100% Nuclear 80% Oil 60% 40% LNG 20% Hydro 0% 1965 1973 1975 1985 1990 1995 2000 2005 Others IPP Hydro LNG/LPG Nuclear Oil Coal

7. 1. Overview of Electric Power Industry 2. Background of Liberali 3. Market Design 4. Challenges for Emerging Daily Load Curve • High level skill for dispatching control is required by steep load curve. Norway 7.7%/hr (17.6 GW) ＰＪＭ (59.3 GW) 4.2%/hr (43.4 GW) Demand (%) 14.8%/hr TEPCO (40.5 GW) 6.4%/hr California Time

8. 1. Overview of Electric Power Industry 2. Background of Liberali 3. Market Design 4. Challenges for Emerging (Minutes/year) (Times) 100 2.50 93 minutes 2.13 times 90 Duration of outages (on the left scale) 80 2.00 70 60 1.50 50 Frequency of outages (on the right scale) 40 1.00 16 minutes 0.25 times 30 9 minutes 0.24 times 5 minutes 0.19 times 3 minutes 0.10 times 20 0.50 10 0.00 0 ‘66 ’70 ‘75 ’80 ‘85 ’90 ‘95 ’00 ‘01 (FY) • High reliability Duration of Yearly Forced Outages per Customer Duration and Frequency of Yearly Forced Outages per TEPCO’s Customer 当社のお客さま１軒あたりの年間事故停電時間・回数 Frequency of outagesper household Duration of outagesper household Duration of Yearly Forced Outages per Customers in Major Countries (2000) (Minutes per household per year) USA UK France TEPCO Source: USA: “SAIDI” (System Average Interruption Duration Index) average value of five US electric power companies—Consolidated Edison, Florida Power & Light, NStar (former Boston Edison), Pacific Gas & Electric, and Southern California Edison. UK: “Ofgem Report on Distribution and Transmission Performance” France: “EDF Annual Report”

9. 1. Overview of Electric Power Industry 2. Background of Liberali 3. Market Design 4. Challenges for Emerging • Strictly environmental restrictions SOX Emission Intensity of Thermal P/S

10. ２．Background of Liberalization

11. 1. Overview of Electric 2. Background of Liberalization 3. Market Design 4. Challenges for Emerging Privatized Government-owned 1951 Generation & Transmission Co Regional Distribution Co. Vertically Integrated Co. Historical Restructuring • Regional electric utilities were privatized and vertically integrated 50 years ago. • Regional Supply Responsibility • Inter-regional Coordination • Independent of government

12. 1. Overview of Electric 2. Background of Liberalization 3. Market Design 4. Challenges for Emerging Advisory body to govt. Economic Reform Introducing principle of competition 1996 - 600 70000 ] 65000 Global liberalization trend 550 60000 thousand kW 500 55000 GDP [trillion yen] 50000 450 Nordic Calif- ornia 45000 U.K. 400 Peak demand 40000 GDP Peak demand[ 35000 350 30000 PJM 300 25000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 [FY] Debate on Liberalization Higher electricity rate Recession after economic bubble

13. 1. Overview of Electric 2. Background of Liberalization 3. Market Design 4. Challenges for Emerging Full Retail Market? • Step-by-step expansion of eligible customers Expansion of Retail Market (50kW～) PX(Power Exchange) Neutral Organization Partial Retail Market (2000kW～) Liberalization Schedule in JAPAN Scale of Market Wholesale Market IPP (Independent Power Producer) bidding system Year 1996 2000 2005 ?

14. 1. Overview of Electric 2. Background of Liberalization 3. Market Design 4. Challenges for Emerging Eligible Customers 20kV & above (2000kW～) • Eligible customers will account for about 64% in 2005. 75 billion kWh (27%) Liberalized in 2000 6kV (500kW～) 40 billion kWh (15%) Liberalized in 2004 6kV (50～500kW) 60 billion kWh (22%) Liberalized in 2005 100,200V (～50kW) 100 billion kWh (36%) Begin discussion in 2007 * Electricity sales of TEPCO in the fiscal year 2001

15. 1. Overview of Electric 2. Background of Liberalization 3. Market Design 4. Challenges for Emerging Share of PPS(non-utility) • Share of Power Producer & Supplier is gradually increasing . Share of PPS GWh 2001 2002 2003 2000 Share of PPS = PPS Sales ÷ Consumption of Eligible Customer Source: METI web site

16. ３．Japanese Electricity Market Design

17. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging • TPA system is adopted. New entrant Power Producer & Supplier (PPS) PPS = Wholesaler + Supplier First Step of Partial Retail Competition(2000) Vertically Integrated Utility Generation PowerPlant IPP Wholesaler [Wholesale Contract] Transmission Line Transmission Distribution Distribution Line [Legal Supply Responsibility] Middle & Small Customers Large Customers Retail

18. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging P X Second Step of Retail Competition(2005) Vertically Integrated Utility Generation IPP PPS Wholesaler PowerPlant [Wholesale Contract] Transmission Line Transmission Distribution Distribution Line [Obligation to Serve] Large(HV) Customers Small(LV) Customers Middle(MV) Customers Retail • Retail competition will be expanded to the middle scale customers • Utilities would be practically vertically integrated • Power eXchange in TPA model would encourage wholesale transactions

19. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging <CONCEPT> • Private and voluntary (not compulsory pool) • Physical transaction rather than financial • Wholesale power exchange(Customers not take part in) Basic concept of PX Establish PX <AIM> • To facilitate power exchange between players • To form market price index • To supplement bilateral transaction

20. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging Design of Power Exchange Market PX transaction Settlement of Imbalance By Utilities Forward market・Continuous trading Day ahead market・Closed book auction with single price ・Congestion management with market splitting Operating day Year ahead Month ahead Week ahead Day ahead No Real Time Market Bilateral transaction

21. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging Impartiality and Transparency of T&D Legislation for・Information firewall ・Prohibition of cross subsidization ・Ban on discriminatory treatment Electric Utility remains vertically integrated Establishment of Neutral Organization New Scheme from 2005 Ex-post regulation by the Ministry

22. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging • Neutral organization is not ISO/RTO. • <Function> • Formation of Grid Code・Dispute resolution • Disclosing of power system information • Study on interconnection system reinforcements Neutral Organization Stake-holders Wholesaler PPS Utility Neutral member BOARD Academic Check Trustees Ministry of Economy, Trade & Industry Administrative Office Expert Committee Inter-regional Coordination Ex-post regulation Utility’s T&D PX

23. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging Postage stamp 2.4yen/kwh 0.3yen/kWh Transmission Tariff at Present Compensation for New Facilities Basic Rate Backup Services • Demand Charge (\/kW)+ Energy Charge (\/kWh) • Selective Menu(Standard or Time-of-Use) • Discounted Rate to reduce dominant flow • Ancillary Service • Load Following (within 3%) • Forced Outage • Scheduled Outage • Standard Construction Cost deducted by Utility’s burden Regional • Energy Charge(\/kWh) only • Postage Stamp based Zone System • Additional Rate for Frequency Converter • Actual Construction Cost Cross-Border

24. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging G L L G Cross Border(area) Tariff • Abolish “pancaking” <Conventional Scheme> <Proposed Scheme> • Transmission users pay thin CBT in addition to regional transmission charge • All customers pay uniform regional transmission charge including CBT. • Compensate CBT among regional utilities. Power Company A Power Company B Power Company C Power Company A Power Company B Power Company C Company C’s Transmission charge \3/kWh + \α(*) Company C’s Transmission charge \3/kWh \0.3/kWh\0.3/kWh User’s payment (income for utilities A and B) * Utility C compensates A and B’s transmission cost.

25. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging GU1 GA1 GA2 GB2 GU2 GB1 From other control area Electric Power System GAx LU1 LB1 LA1 LA2 LB2 LU2 Balancing Mechanism • Utility is responsible for balancing and ancillary services. • Imbalance charge is settled by the 30 minutes. Utility PPS A PPS B ΣGUi =ΣLUi * * ΣGAi =ΣLAi ΣGBi =ΣLBi + Ancillary Services

26. 1. Overview of Electric 2. Background of Liberal 3. Japanese Electricity Market Design 4. Challenges for Emerging Alleviated Imbalance Charge 【Conventional Scheme】 【Proposed Scheme】 Supply shortage Supply shortage ・EC (high penalty) ・DC+EC (Over 2h: high penalty) 10％ ・EC (Under 2h) Second imbalance level　・DC+EC (Proposed) Selectable ３％ ３％ ・EC First imbalance level　・EC ０％ ０％ ・EC ・EC ▲３％ ▲３％ ・EC (lower than EC under 3%) ・Free of compensation ▲10％ ・Free of compensation Supply surplus Supply surplus

27. ４．Challenges for Emerging Electricity Market

28. 1. Overview of Electric 2. Background of Liberal 3. Market Design 4. Challenges for Emerging Market △18.3% Fruits of Liberalization IPPbidding Retailcompetition Clarify Aims of Liberalization • To lower electricity rate for all end-users. • Not only to diverse business chances for newcomers. Average electricity rate of TEPCO Electricity rate has been decreasing on and on since opening market. 100 △3.1% △5.4% △4.2% △7.0% ‘96 ‘98 ‘00 ‘02

29. 1. Overview of Electric 2. Background of Liberal 3. Market Design 4. Challenges for Emerging Market • Transmission investment is necessary to avoid Blackout. • What incentive is necessary for transmission reinforcement? 140 Normalized Transmission Circuit Miles Japan Germany 130 PJM Japan 122.6 California 120 California 107.1 110 PJM 106.1 100 Germany 100.2 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Need for Transmission Investment

30. 1. Overview of Electric 2. Background of Liberal 3. Market Design 4. Challenges for Emerging Market Homework of Ministry by 2004 How to coordinate antimony in market design? Who shall pay back-end cost? Who is responsible for nuclear power promotion? Nuclear Power Promotion v.s. Liberalization Problems of Nuke under liberalization Necessity of nuclear generation • Energy security in poor natural resource country • Mitigate global warming due to CO2 emission • Risk of cost recovery • Risk of stranded cost • Risk of uncertain back-end project Trade-off

31. 1. Overview of Electric 2. Background of Liberal 3. Market Design 4. Challenges for Emerging Market - Japanese way of liberalization - Slow but Steady! Step by Step! Proposal for Emerging Market <Remember original GOAL!> • Inherent energy situation－Low energy self-sufficiency rate－Steep daily load curve－Long lead-time of facility construction • Specialty as market commodity－Real-time balance, Incapable of storage－Low elasticity of price Customer’s Satisfaction －Decrease electricity rate －Keep energy security & supply reliability • Learn from examples of failure－California crisis －Enron debacles <START> Opening electricity market

32. Thank you for your attention ! Junichi NAITO Tokyo Electric Power Company, Inc. naito.junichi@tepco.co.jp