Navigating electricity market deregulation in Asia-Pacific: Strategic procurement in Japan's evolving landscape

If your company operates in Japan and spends more than 100 million Yen annually on electricity, you're likely overpaying by 10–20% – that's millions of dollars annually for major manufacturers. Here's why, and what to do about it.

In this second instalment of our series exploring electricity market deregulation across key Asian markets, we examine Japan's unique electricity landscape. If you're interested in the series, please read our first blog on China’s electricity market deregulation.

Japan's electricity market looks competitive on paper, but ten regional utilities still control ~80% of demand. Smart buyers are finding ways around this. Growing wholesale markets (JEPX now trades ~30% of national consumption) and expanding Power Purchase Agreement (PPA) options are creating meaningful opportunities for cost reduction and decarbonization for large industrial buyers.

However, success requires careful risk management. Japan´s heavy dependence on fossil fuels (~69% of generation), grid constraints, and increasing renewable curtailment create volatility that caught many buyers off-guard during 2021–22.

The solution lies in balanced procurement strategies that combine longer-term contracts and PPAs with selective market exposure. Companies must also prepare for major regulatory changes coming in 2028 that will transform how electricity is bought and sold.

Companies should start now: assess your current market exposure, evaluate your retailer counterparties for financial strength and hedging capabilities, and explore PPA feasibility for your largest sites. Those who proactively explore and apply hybrid hedging approaches and strengthen procurement frameworks now will be best positioned to capture savings while avoiding the pitfalls that have hurt other buyers in this evolving market.

Japan´s market paradox: Open but still concentrated

Despite achieving full retail liberalization in 2016, Japan's electricity market presents a fascinating paradox that procurement managers must navigate carefully. Ten regional Electric Power Companies (EPCOs) – the traditional utility monopolies – still control approximately 80% of the market. Meanwhile, more than 700 new retailers compete vigorously for the remaining 20%.

Using our Five-Stage Framework for evaluating electricity markets (as detailed in our previous blog in the series), Japan sits at Category 4: Mature Deregulated Market. Yet as this paradox illustrates, even mature deregulation doesn't guarantee the competitive outcomes that buyers might expect from such classification.

Why traditional utilities still dominate

This concentration exists because of deep structural and cultural factors that distinguish Japan from other deregulated markets. Unlike China's state-directed reform approach that we explored in our previous analysis, Japan's market-led deregulation has evolved within the context of the country's unique business culture, which values long-term relationships and risk aversion.

These cultural preferences, combined with the EPCOs' control of both generation and grid assets, create formidable barriers to competition that pure market forces have struggled to overcome.

Source: JEPIC

The 2021–22 crisis: A wake-up call

The energy crisis in 2021–22 showed just how vulnerable the market can be. When wholesale electricity prices spiked globally, approximately 20% of new entrant retailers filed for bankruptcy. They couldn’t weather the storm without generation assets or sophisticated hedging strategies.

This mass failure temporarily reduced new entrants' market share from 20% to 17% and reinforced many buyers' preference for the stability that the established EPCOs offer. The market has since recovered, with new entrants regaining ground and even expanding their foothold, but the crisis left lasting lessons about the importance of counterparty risk assessment and the dangers of over-reliance on spot market procurement.

Source: Modified from Day Ahead Market | Trading Market Data | Trading Information | JEPX

What's coming in 2028: Game-changing regulations

The biggest development facing large energy buyers isn't in today's market structure but in the fundamental reforms planned for 2028.

The Ministry of Economy, Trade and Industry (METI) has proposed a framework that would require all electricity retailers to secure 50% of their projected demand three years in advance, rising to 70% one year ahead of delivery. This isn't merely a guideline – retailers who don´t comply could lose their retail license. This fundamentally alters how electricity is procured and priced in Japan.

Why these changes matter

This forward procurement mandate responds to ongoing concerns about market stability and generator revenue predictability. Currently, Japan's power procurement landscape is dominated by short-term spot market transactions, creating the price volatility that devastated many retailers during the recent crisis.

By forcing retailers to lock in supply well in advance, METI aims to create more stable price signals that can support long-term generation investment, particularly in renewable energy projects that require predictable revenue streams.

New market infrastructure

To support this requirement, METI is establishing the "Mid-Long Term Market" (中長期取引市場), a comprehensive marketplace that includes futures, forwards, over-the-counter transactions, broker-mediated trades, and PPAs. This new market infrastructure aims to establish Japan's first comprehensive long-term electricity price index, potentially revolutionizing how power is priced and traded across multiple time horizons.

METI's "Simultaneous Market" initiative, also planned for 2028, will integrate energy and balancing markets more efficiently. This new market structure will see kilowatt-hours (kWh) and delta-kilowatts (ΔkW, representing capacity flexibility) agreed simultaneously on both day-ahead and hour-ahead bases, superseding current separate markets entirely. The expected benefits include reduced price spikes and improved market liquidity, while better accounting for grid constraints and regional demand variations across Japan's fragmented electrical system.

Understanding Japan's current market landscape

Japan's unique grid constraints

This market structure operates within the unique physical constraints. The country is split into two incompatible frequency zones – Eastern Japan, including TEPCO and Tohoku Electric territories, operates at 50 Hz, while Western Japan, including KEPCO and Chubu Electric, runs at 60 Hz. This division stems from late 19th-century decisions when different regions imported generation equipment from Germany and the United States, respectively, creating a structurally divided national grid with severely limited interconnection capacity.

Four frequency converter stations enable power exchange between the two systems, but their combined capacity totals just 1.2 gigawatts. This fundamentally limits arbitrage opportunities and cross-regional competition.

Source: Shulman Advisory

The wholesale market landscape

The Japan Electric Power Exchange (JEPX) has become the country's primary wholesale electricity marketplace, trading approximately 266 terawatt-hours through its spot markets in fiscal year 2024. This represents roughly 30% of Japan's total electricity consumption – substantial growth that shows increasing market activity, though still behind the more mature wholesale markets in Europe and North America, where participation often exceeds 50%.

The forward market landscape reveals important dynamics. JEPX, through the Tokyo Commodity Exchange (TOCOM), offers standardized futures contracts for both Eastern and Western regions, covering baseload and peak load products. European Energy Exchange (EEX), since entering the market in 2020, has emerged as a formidable competitor. By the first half of 2024, it accounted for 98.6% of all exchange-cleared Japanese power futures. EEX also offers a wider range of product periods (eight) compared with TOCOM’s two.

Despite the growth of exchange-traded futures, many Japanese companies continue to negotiate customized bilateral OTC contracts to suit their specific needs. These trades are typically submitted for clearing through EEX or TOCOM, allowing participants to combine the flexibility of OTC contracts with the risk management and liquidity benefits of exchange clearing.

The energy mix challenge

Heavy dependence on imported fuels

Japan's electricity generation profile creates unique challenges and opportunities for large buyers. Following the 2011 Fukushima disaster, the country underwent a dramatic transformation in its energy mix, with fossil fuels now comprising 68.7% of electricity generation – 32% from coal and 34% from natural gas.

This heavy reliance on imported fuels, which has made Japan one of the world's largest LNG importers, creates significant exposure to international commodity price volatility that flows directly through to electricity costs.

Source: Electricity Data Explorer | Ember

The Renewable energy opportunity and challenge

The renewable energy sector presents both great opportunities and operational challenges that directly impact procurement strategies. Japan ranks as the fourth-largest solar generator globally, with 87 gigawatts of installed capacity contributing to 9.5% of total generation.

However, the country faces a growing renewable curtailment challenge – instances where renewable generation must be reduced because the grid cannot handle the power. Curtailment has tripled from 0.57 TWh in fiscal year 2022 to 1.76 TWh in fiscal year 2023, affecting all regional grids except Tokyo.

Source: JEPIC

This curtailment challenge is particularly concerning given Japan's renewable penetration remains relatively modest compared to countries like Australia or regions like California, which manage higher renewable shares with lower curtailment rates.

The issue highlights serious grid flexibility constraints that create risks for buyers considering PPAs – your contracted renewable energy might not always be deliverable due to grid limitations, potentially forcing you to purchase replacement power at spot market prices.

What this means for buyers

Understanding these dynamics is crucial when evaluating procurement options, especially given Japan's climate ambitions of achieving carbon neutrality by 2050 and a 46% reduction in greenhouse gas emissions from 2013 levels by 2030. Market-linked contracts that seemed attractive during periods of low gas prices can quickly become expensive when international LNG markets tighten.

Similarly, renewable PPAs that appear to offer stable, sustainable electricity supplies must be evaluated in the context of regional curtailment risks and the complexity of wheeling arrangements – the process of physically moving contracted power across grids managed by different companies.

Your procurement options today

Large energy buyers in Japan now face an expanded menu of procurement options, each with distinct risk-return profiles that must be carefully evaluated within the context of your organization's risk tolerance, sustainability objectives, and operational requirements.

The traditional EPCO standard contracts offer stability and simplicity and are an attractive option for risk-averse organizations or those with smaller loads of less than 5 GWh per year that don't justify sophisticated procurement strategies.

New entrant retailers have emerged as increasingly viable alternatives, typically offering savings compared to EPCO menus. However, our detailed analysis of industrial contracts reveals that capturing these savings requires careful price and counterparty assessment. The retailers that survived the 2021–22 crisis typically shared certain characteristics:

• Ownership of generation assets covering at least 30% of their retail obligations
• Transparent hedging strategies
• Diverse customer bases with no single client representing more than 20% of their business
• Strong balance sheets with demonstrated access to credit facilities

Market-linked contracts represent the highest risk-reward option, potentially delivering savings of 10–20% during favourable market conditions but exposing buyers to price volatility. These contracts typically index pricing to the JEPX spot market, requiring sophisticated risk management capabilities to navigate successfully. More on that in future blogs.

Power Purchase Agreements (PPAs) – contracts which typically span between 10–25 years – have emerged as Japan's fastest-growing procurement mechanism, with over 30 agreements signed in November 2024 alone. These contracts offer the dual benefits of price stability and sustainability credentials, though they come with their own complexities.

Most Japanese PPAs require physical grid connections, with energy suppliers managing the intricate wheeling arrangements necessary to deliver power to end users. Japan's split supply framework, which uniquely allows multiple suppliers to serve a single meter, creates opportunities for sophisticated buyers to combine traditional utility supply with renewable PPAs and market-linked components in a balanced portfolio approach.

Strategic actions for 2025 and beyond

The window for positioning your organization to benefit from Japan's evolving electricity market while avoiding its pitfalls is narrowing as we approach the 2028 regulatory changes.

Start with a contract audit

Companies should begin immediately with a comprehensive audit of current contracts, identifying problematic terms such as:

• Absence of price ceilings on market-linked components
• Automatic renewal clauses without renegotiation windows
• Lack of provisions for integrating PPAs or other innovative supply arrangements.

Understanding your true all-in electricity costs, including network charges, capacity charges, and various surcharges that can represent 30–40% of your total bill, provides the baseline for evaluating savings opportunities. Many organizations discover they've been focusing solely on energy charges while overlooking opportunities to optimize network and capacity costs through load management or strategic contract structuring to avoid capacity charges.

Plan for 2028 changes

As you move into strategic planning for the medium term, modelling your exposure to the 2028 forward procurement requirements becomes critical. Organizations with predictable loads may benefit from locking in forward contracts now, before the mandate creates additional demand pressure. Conversely, those with variable or declining consumption might need to maintain flexibility to avoid over-procurement penalties under the new framework.

For sites with annual consumption exceeding 10 gigawatt-hours, evaluating PPA feasibility should be a priority. While the wheeling arrangements and grid connection requirements add complexity, the combination of price stability and sustainability benefits often justifies the effort for large consumers. Moreover, understanding how split supply comes into play for these organizations will be critical.

Early movers in the PPA market are securing better terms and prime renewable projects, while latecomers may face limited options and higher prices as corporate demand for renewable electricity accelerates.

Conclusion: Seizing opportunity while managing risk

Japan's electricity market offers genuine opportunities for cost reduction and decarbonization, but success requires sophisticated procurement strategies that balance opportunity with risk management.

The companies currently capturing 10–20% savings share common characteristics:

• Diversified procurement portfolios that don't over-rely on any single method
• Robust counterparty assessment processes that prevented exposure to failed retailers
• Active hedging strategies that protected against the 2021–22 price spikes
• Clear governance frameworks with defined risk mandates and decision authorities.

As the market evolves toward the 2028 regulatory changes, the gap between sophisticated and passive buyers will likely widen. Organizations that strengthen their procurement capabilities now – building the analytical tools, governance structures, and supplier relationships necessary for active management – will be best positioned to navigate the transition.

Those that maintain passive approaches, simply renewing EPCO contracts without exploring alternatives, risk being locked into uncompetitive positions as the forward procurement mandate reduces market flexibility.

The key insight from our analysis across Asian markets is that successful deregulation outcomes aren't automatic – they require active participation from buyers willing to engage with new market structures while carefully managing associated risks. Japan's market, with its unique combination of technical sophistication, cultural considerations, and structural constraints, exemplifies this principle.

The opportunity is real, but so are the challenges. By beginning the journey today with careful assessment, strategic planning, and measured implementation, large energy buyers can position themselves to thrive in Japan's evolving electricity landscape.

This is the second article in our series on Asian electricity markets. In our next instalment, we'll examine Power Purchase Agreements in India, where different regulatory approaches have created distinct opportunities and challenges for large energy buyers.

For those interested in exploring how these insights apply to your specific situation, contact us to discuss your energy procurement challenges.

This article was written with valuable input from Shulman Advisory, who provided their expert review and feedback.

Shulman Advisory is a leading consultancy helping foreign companies and stakeholders succeed in the Japanese energy market. With nearly 20 years of experience, Dan Shulman leads a bilingual team combining deep policy and regulatory expertise with hands-on operational knowledge to guide clients through Japan’s complex and evolving power market.

"Our services include market and regulatory research, entry strategy and support, energy procurement approaches, and tailored tools such as forecasting and site mapping.

It has been our pleasure to collaborate with our partners at E&C Consultants on this article. Recent years have seen growing demand for procurement optimization and wholesale price forecasting, and we are proud to have supported major energy users, from hyper-scale data centers to manufacturers, in meeting these challenges." 

Find out more about our partnership with Shulman Advisory in our news release.