JAPAN’S ENERGY OUTLOOK

AND NEW CHALLENGES (IEA ESAP SESSION 1)

June 2016

Takehiko Matsuo Secretary General,

Electricity and Gas Market Surveillance Commission, Japan

METI

Roadmap for Energy Market Reform

Electricity

Gas

2017 2016 2020 2018 2015 2022 2019 2021

Apr. Establishment

of OCCTO

OCCTO’s main functions (The Organization for Cross-regional Coordination of Transmission Operators) - prescribing utilities to increase power generation and interchange when needed. - reviewing utilities’ power supply and demand plans. - constructing transmission lines between regions in response to an increase in demand.

Sep. Establishment

of EGC

Apr. Full Liberalization of

Electricity Retail Market

Transitional Period of Regulated Retail Tariff

Apr. Legal

Unbundling

Apr. Legal

Unbundling

Apr. Full Liberalization of

Gas Retail Market 2

Electricity retail market has been fully liberalized from this April and legal unbundling is scheduled in 2020.

OCCTO and EGC was established to advance the energy system reform.

Transitional Period of Regulated Retail Tariff

About EGC

3

Role Mission

•The Commission is aimed to urge sound competition in the electricity and gas market.

•Besides strictly monitoring transactions in the market, EGC makes policy recommendations on necessary rule-makings to the Minister.

METI

Electricity /Gas Market

①Monitoring/Inspection Consumer protection ex. Demanding extremely high cancellation fee Exercising the market power ex. Setting extremely low retail price to block

new entrants Neutrality of transmission operators ex. Leaking the information of other

generators/retailers obtained through the transmission operation to the generation/retail sections in the company/group

②Policy Recommendation Rule-makings from the viewpoint of

competition as well as consumer protection

EGC

36.5%

4.8% 6.6%

42.3%

8.6% 1.2%

Source：ANRE

Total 1006.4TWh (248.87GW)

Hokkaido Company 37.3TWh (8.26GW)

Hokuriku 40.3GWh (9.18GW)

Kansai 163.3GWh (40.77GW)

Chugoku 68.7TWh

(15.72GW)

Shikoku 38.1TWh (8.45GW)

Kyusyu 96.6TWh

(23.24GW)

Okinawa 8.7TWh

(2.23GW)

25.0%

29.3%

7.5%

28.6%

8.5% 1.1%

31.4%

7.6% 43.6%

15.2%

2.1%

38.9%

20.2% 3.0%

22.9%

12.6%

2.3%

20.1%

20.7%

4.8%

43.2%

10.3%

0.8%

58.0% 17.6%

14.0%

3.3% 6.2%

0.9%

26.4%

18.9%

7.1%

38.7%

5.9% 3.0%

77.4%

21.0%

0.4%

1.2%

9.9%

44.8% 10.9%

28.2%

5.5%

0.6%

(Hydro) (RE)

25.7%

47.8%

3.7%

13.4%

8.7%

0.7%

38.6%

2.8%

37.8%

20.0%

0.8%

Generation by energy source by company（2010）

4 4

LNG Oil etc.

Nuclear

Hydro

Renewables

Coal

Tokyo 317.4GWh (78.10GW)

Tohoku 96.5TWh

(21.91GW)

Chubu 139.6GWh

(36GW)

31.0%

46.1%

10.6% 9.0%

3.2%

16.5%

66.3%

9.2%

5.8% 2.2%

24.7%

62.6%

1.6% 8.4%

2.7%

50.6%

0.6%

28.8%

14.8%

5.2%

64.8%

8.5%

24.5%

1.5%

24.9%

47.1%

15.2% 10.6%

2.1%

55.2% 22.9%

11.8%

6.7% 3.5%

31.8%

38.1%

15.7%

6.9%

7.5%

65.1%

18.6%

12.8%

3.5%

44.9% 31.3%

6.8% 12.9%

4.1%

Generation by energy source by company（2014）

LNG

Oil etc.

Nuclear Hydro

Renewables

Source：ANRE 5 5

Coal

Total 910.1TWh (252GW)

Kansai 143TWh (43.32GW)

Hokuriku 3.3TWh (9.24GW)

Hokkaido 3.3TWh (8.55GW)

Tohoku 92.7TWh (22.38GW)

Tokyo 277.1TWh (80,7GW)

Chubu 141.1TWh (37.8GW)

Shikoku 30.5TWh (8.57GW)

Okinawa 8.6TWh (2.56GW)

Kyusyu 85.3TWh (23.06GW)

Chugoku 65.9TWh (15.75GW)

56.7% 7.9%

18.7%

11.5%

4.9%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

太陽光 風力

バイオマス 地熱

中小水力

Surplus power buyback program FIT ＲＰＳ

(MＷ)

Annual average growth rate 5%

Annual average

growth rate 9%

Annual average

growth rate 33％

Geo thermal

Solar power

Wind power

Small and medium hydropower

Expansion of renewable energy facilities

Biomass

※１

note1. except large-scale hydro power Source: ANRE calculation based on several statistics such as JPEA ,NEDO etc. 6

1,065 TWh (Total generated energy)

2030

Electric power 980.8 TWh

2030 2013 (Actual result)

Economic growth

1.7%/year

Electric power 966.6 TWh

Renewable energy 22 to 24%

Nuclear power 20 to 22%

LNG 27%

Coal 26%

Petroleum 3%

Hydroelectric 8.8 to 9.2%

Solar power 7.0%

Wind power 1.7%

Biomass 3.7 to 4.6%

Geothermal 1.0 to 1.1%

Base load ratio: 56%

* Values are approximate.

2013

966.6 TWh

LNG 40%

Coal 31%

Petroleum 13%

Renewable energy 12%

7 7

Electricity Supply and Demand Outlook for 2030 Generation by energy source Power demand

Thorough energy efficiency and conservation 196.1 billion kWh

(17% lower than before the implementation of the energy conservation measures)

Source: ANRE calculation based on several statistics such as JPEA ,NEDO etc.

8

Three challenges to further introduction of REs

Challenge②： interregional

transmission lines

• How can new inter-regional lines, which is necessary for REs’ further instruction, be smoothly constructed? How can utilization of existing lines be expanded?

Challenge①： fixed cost of conventional power plants

• As more renewable electricity, whose variable cost is almost zero, come into the market, how can the fixed cost of conventional power plants, which are essential for ancillary service, be secured?

8

Challenge③： transmission tariff system

• While electricity demand is not expected to grow, how should transmission tariff system be reformed, in order to make the grid-related investment, required by newly introduced renewables, efficient and appropriate?

Overview of transmission tariff system in Japan

• 物理的送電権はｘｘであるのに対し、金融的送電権はｘｘ • Japan adopts the full pricing system. • Transmission tariffs consist of capacity charge(kW) and energy charge

(kWh), and are charged 100% to loads on the premise that electricity flows from upper to lower grid.

Calculation of full pricing/ First connection charge

Allocation of generation-tariff/

Load-tariff Allocation by

voltage Transmission tariff planning

by service categories

Current system In Japan

Overview

9

• Full pricing system • Shallow1)

• Transmission tariff is 100% charged to loads

• Based on the premise that electricity flows from upper to lower

• Combination of capacity and energy charges, but…

Transformation cost

Transmission cost

Distribution cost

General Administration

cost

ＮＷ Overall

cost

Load Tariff

Generation Tariff

Except the First

Connection charge

note1. Grid users pay for the infrastructure connecting its installation to the transmission grid (line/cable and other necessary equipment)

Composition rate of full cost

Fixed cost 80%

Energy charge (kWh) 73%

Variable cost 20%

Capacity charge (kW) 27%

…

LV ・Distribution cost for LV

HV and LV ・Transformation cost for distribution ・Distribution cost for HV

SHV(220-500kV), HV(154-220kV), and LV(6.6-154kV) ・Ancillary service cost ・Transmission cost etc.

53 % of the total cost is collected through energy charge, while being fixed cost

Composition rate of transmission

charge

Challenge①：Charge to generators

• 物理的送電権はｘｘであるのに対し、金融的送電権はｘｘ • Charging 100% to load would diminish generators' incentive to construct and operate grid system more efficiently.

Efficient development and maintenance of grid Efficient use of grid • Depending on the locations of RE, the cost of grid might be extremely high.

• However, generators don’t need to consider the additional cost for the grid because load pays 100% of the cost.

• It is necessary to consider the maximum flow from the generation facilities when transmission facilities are developed.

• If the generation capacity is the same, the necessary cost is also the same regardless of the utilization rate of the facilities.

Ex)： Utilization rate of the facilities Thermal power plant：80% Wind power plant: 20%

Additional cost

Hokkaido Tohoku Total

2.7GW （4.7TWh/ year）

3.2GW （5.6TWh/ year）

5.9TkW （10.3TWh/ year）

Internal grid cost

1.47 billion Euro

0.5 billion Euro

1.99 billion Euro

Interconnection between regions/ Internal main transmission lines etc.

5.01 billion Euro

1.61 billion Euro

6.63 billion Euro

Total construction cost

6.48 billion Euro(11.1 cent/kWh)

2.14 billion Euro(2.95 cent/kWh)

8.61 billion Euro (6.63 cent/kWh)

10 Source:ANRE

Hokkaido

Tohoku

【Areas in the left side chart】

Tokyo

Challenge②：Charge to consumers • The fairness of the burdens of fixed cost and the risk of being unable

to recover fixed cost could become more serious problems in the future depending on the extent of expansion of RE.

• Since fixed cost is recovered by energy charge, the users of off-grid power system don’t pay sufficient fixed cost in transmission tariff.

【Preliminary calculation roof-top PV】 <Premise> ・Contracted capacity :50A,6,000kWh/year ・Utilization of facility:14%, self consumption:30%

Increasing off-grid power system • Increase in the number of consumers with off-grid power system accelerates free-rider problem regarding the payment of fixed cost.

• In Japan, this problem gets more serious because roof-top PV and micro-cogeneration are often installed together.

• 9GW of roof-top PV for residence and 5.3 million micro-cogeneration(around 10% of all households) are expected to be installed in 2030.

Problem of the fairness of the burdens

Capacity Charge (kW)

Energy Charge (kWh)

w Roof top PV w/o Roof top PV

Around 243 (fixed cost: around 161)

Around 338 (fixed cost: around 235)

Around 18 Around 18

1/3 of fixed cost(74euro) which originally should be paid decreases. *Toward 2030, this difference will be expanded.

unit: euro/year

Source:ANRE

0

1

2

3

4

5

0.0

1.0

2.0

3.0

93 95 97 99 01 03 05 07 09 11system price per kW

introduction amount(roof top)

introduction amount(all PV)

(GW

)

(Mill

ion

Euro

)

0

50,000

100,000

150,000

200,000

09 10 11 12 13 14 15

micro co-generation

(am

ount

)

11

Challenge③：Value of the grid

In the future Change of the electricity flow

High voltage (HV)

Low voltage(LV)

Special high Voltage(SVH)

• In the low voltage area, new services like VPPs including DR are emerging together with introduction of roof top PV and micro-cogeneration.

Source:ANRE

Possible flow in the future

Existing flow

Utilization of off-grid

power system

12

Reverse flow from the lower

gird system

• Smart meters will be fully deployed by early 2020s. – For high voltage users (ex. factories), smart

meters will be installed by 2016. – For low voltage users (ex. residences etc.), smart

meters will be installed by 2020 in Tokyo area and by 2024 in all the areas in Japan.

User (Energy saving)

user

aggregator

Generators (RE)

Retailers/TSO

• 物理的送電権はｘｘであるのに対し、金融的送電権はｘｘ • Given the increase in the number of off-grid generation users and the increase in reverse flow from lower to upper grid system in the future, how should we evaluate the value of the grid?

Measures to be considered

Challenges

• How should we evaluate the value of the grid in case reverse flow to the upper grid occurs due to the introduction of roof-top PV and micro co-generation?

• Generators might locate power plants without taking into account the transmission and distribution cost since the cost is 100% charged to loads.

• The utilization rate of network facilities might be low because they are constructed based on the maximum flow.

Measures to be considered

• Locational transmission tariff system (Demand side)

• New transmission tariff system considering the flow within the lower gird

Load

Generation

• Introduction of network charge to generators

• Locational transmission tariff system

Others

Further discussion is needed considering that electricity flow has been changing. Charges for ancillary service and transport service should be considered differently?

• Due to the imbalance between the ratio of fixed cost and ratio of capacity charge, heavy power users bear more burden.

• Acceleration of distributed power systems makes the problem more serious, further damaging the fairness of burdens.

Rebalance of fixed cost

・Transmission charge depending on the capacity (kW charging)

・Reviewing capacity charge

・Charging the fixed cost to the users of off-grid power system

13