Reflections on my recent business trip to Japan: Insights into a complex energy market

Having returned from my second business trip to Japan, I’ve been reflecting on the valuable insights gained from discussions with partners, clients, and prospects. Partnering with Dan Shulman and his team at Shulman Advisory has deepened our understanding of Japan’s unique energy landscape. Conversations during the trip revealed recurring and critical questions:

1. What contracting and risk management options are available for large businesses?
2. When should companies start exploring Power Purchase Agreements (PPAs)?
3. What types of PPAs are available, and how do they differ?

Japan’s energy market is deregulated, with over 700 suppliers serving diverse demand sectors. Yet, competition often feels limited. Only a fraction of these suppliers caters to large energy users, creating an ecosystem that more closely resembles an oligopoly than a fully competitive market.

Traditional Electric Power Companies (EPCOs) still dominate market share, while newer entrants face scaling challenges. This limited competition is compounded by the widespread adoption of JEPX-linked contracts. While attractive due to current low prices, these contracts expose customers to risks without safeguards like price ceilings – a lesson painfully remembered by many during the price spikes of 2021 and 2022.

Adding to this challenge, Japan’s futures markets (e.g., EEX, TOCOM) lack the liquidity needed to provide effective risk management options. Prices in these markets often fail to reflect recent dynamics, leaving businesses with fewer tools to hedge exposure.

Looking ahead, significant changes are on the horizon. From 2026, large EPCOs are expected to discontinue standard menus without market linkages. This shift means most contracts will be exposed to the JEPX monthly average prices, introducing new considerations for energy buyers.

Meanwhile, Japan is recalibrating its energy mix. Nuclear energy is being reestablished as a key component of stability, while government mandates to increase LNG imports highlight its dual focus on energy security and regional influence through investments in Asia’s gas infrastructure.

Japan has become one of the most active markets for PPAs, with over 30 agreements signed in November 2024 alone. These are predominantly physical PPAs, requiring direct grid connections and involving energy suppliers to facilitate the "wheeling" of energy to users. By law, energy suppliers must oversee these transactions, balancing residual supply requirements.

A distinctive feature of Japan’s market is its split supply framework, enabling multiple suppliers to serve a single meter. This creates opportunities for advanced risk management strategies, such as splitting demand between market-linked and fuel-linked contracts or hedging market-linked rates with a physical PPA.

Virtual PPAs (VPPAs) remain less common. While simpler in design – settling through Contracts for Difference (CFDs) against JEPX prices – companies often hesitate due to accounting complexities, such as the impact of VPPA settlements on Profit & Loss statements.

For companies considering a PPA, timing and preparation are essential. Here’s our approach:

1. Develop a Decarbonization Roadmap: Clearly define your sustainability goals and actionable steps to achieve them.
2. Engage Early with Developers: Request indicative pricing from established projects to gauge market competitiveness.
3. Explore Greenfield PPAs: These provide additionality benefits but require more time, effort, and carry greater pricing uncertainties.

Japan’s energy market is at a fascinating crossroads, balancing tradition with transformation. From innovative contracting options to a dynamic energy mix strategy, the opportunities for large energy users are significant. However, navigating this landscape requires a nuanced, informed approach tailored to each organization’s needs.

Thanks to our strategic partnership with Shulman Advisory, we are able to offer a unique approach to dealing with the global and local energy requirements from large organizations. Shulman's local expertise and our presence and understanding of complex energy markets around the world can provide companies with a new approach to tackle the exciting energy market of Japan.