reforming japan’s power industry · reforming japan’s power industry koichiro ito stanford...

Reforming Japan’s Power Industry

Koichiro Ito

Stanford Institute for Economic Policy Research, Stanford University

February 27, 2012

Outline

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Introduction

Research question: How do consumers respond to nonlinear price schedules?

In the US, 34% of GHG emissions come from electricity (EPA 2007)

Electricity pricesIn the US, 34% of GHG emissions come from electricity (EPA 2007)Electricity pricesIn the US, 34% of GHG emissions come from electricity (EPA 2007)



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Outline of the talk

1) Brief introduction of Japan’s electricity industry

2) Key issues for reforming Japan’s electricity industry

3) Smart grid and dynamic pricing experiments in Japan

Four key points to understand Japan’s electricity industry

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1) Regulated regional monopoly

2) Vertical integration

3) Partial deregulation since 1990’s

4) Adequate & stable supply until 3/11 and few demand response policies

1) Regulated regional monopoly - 10 regional electric utilities

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Partial deregulation in 1990’s

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But each region is still almost entirely covered by a regulated monopolist

Source: msnbc.com

http://www.chem.ucla.edu/C125/Week1-1.html


2) Vertical integration - the electricity industry is not yet “unbundled”

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Generation

Transmission

Distribution

RetailingSource: http://www.chem.ucla.edu/C125/Week1-1.html

Vertical integration




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Before 1990’s: Vertical integration in most countries

Generation

Transmission

Distribution






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After 1990’s : Transmission and distribution were unbundled in many counties

Generation

Transmission

Distribution






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In Japan, transmission and distribution were not yet unbundled

Generation

Transmission

Distribution






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In Japan, transmission and distribution were not yet unbundled

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Regional monopolists own and operate the four parts almost entirely

Generation

Transmission

Distribution





3) Partial deregulation since 1990‘s

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Three main phases of deregulation (1995, 2000, and 2003)


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Main policy objective: lower electricity price


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Outcome:


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Outcome:

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Partial deregulation in generation (1995) and retailing (2000)


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Outcome:

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Failed to unbundle transmission and distribution (2003) for a few reasons


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Outcome:

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- Opposition from power companies


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Outcome:

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- Lack of political leadership


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Outcome:

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- Lack of political leadership

- Critiques for the California electricity crisis

4) Adequate & stable supply and few demand response policies

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Japan US UK Germany France Korea16 292 75.7 19.3 61.6 17.2

Japan USIndustrial ��

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Adequate and stable supply until 3/11



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Annual average hours of blackouts per customer in 2007:



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Source: Japanese Agency for Natural Resource and Energy (2011)



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Higher electricity prices: cents per kWh (source: EIA 2008)



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Higher electricity prices: cents per kWh (source: EIA 2008) Introduction






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Regional utilities build their capacity to meet any levels of max demand



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Customers have enjoyed the stable supply in exchange for the high price



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Customers have enjoyed the stable supply in exchange for the high price

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Few “demand response” policies to shift peak demand to off-peak



Residential ��

Outline

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Outline of the talk




a) How to unbundle transmission and distribution?

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Generation

Transmission

Distribution

Retailing

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Unbundling is necessary to open the electricity market for new entrants

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After unbundling, who should 1) own and 2) operate the system?

b) How to restructure the regional electric utilities?

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Inter-regional transactions are low (5.2% in 2008) despite the deregulation


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Regional utilities have not invested much on the inter-regional transmission


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This under-investment was a reason for the limited "exibility in transmission right after 3/11, which caused rolling blackouts in Tokyo


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This under-investment was a reason for the limited "exibility in transmission right after 3/11, which caused rolling blackouts in Tokyo

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The central problem is, the wholesale and retail markets are still far from competitive despite the deregulation since 1990’s

c) How to make the wholesale and retail markets more competitive?

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Is the wholesale market competitive now?


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Regional utility companies still generate over 70% of total power in Japan


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The deregulation (1995) allowed IPP (independent power producer) to enter


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However, their share is still very small


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Also, most transactions are bilateral long-run contracts with regional utilities


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Transactions in the wholesale market (JEPX) is less than 1% of total volume


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Is the retail market competitive now?


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63% of the retail markets are now deregulated


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The deregulation (2000) allowed PPS (Power producer and Supplier) to enter


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The deregulation (2000) allowed PPS (Power producer and Supplier) to enter

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However, their share of the market is about 2%

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acity

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(Peak./me$consump/on/max$capacity)$in$Kyushu$electric$u/lity$service$areas$in$Jan$and$Feb$2012$

d) How to take advantage of “smart grid” technology?

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Peak time demand is reaching near the max capacity level this winter

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Need to shift peak time demand to off-peak

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Better to use market mechanisms rather than rationing

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Yen/kWh

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Among other things, smart grid and smart meter technology can be used to:

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1) Allow customers to have dynamic (time-varying) pricing

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2) Allow customers to access real-time price and usage information

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2) Allow customers to access real-time price and usage information

3) Make the most use of EV and plug-in hybrid vehicles as “storage”

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Outline

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Outline of the talk




Peak time demand is reaching near the maximum capacity level

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Reasons:

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Not only Fukushima but also other nuclear power plants were stopped

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Cold wether hit many areas in Japan this winter 15

80%$

82%$

84%$

86%$

88%$

90%$

92%$

94%$

96%$

98%$

100%$

1/23%

1/24%

1/25%

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1/27%

1/28%

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1/30%

1/31% 2/1

%2/2%

2/3%

2/4%

2/5%

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2/7%

2/8%

2/9%2/10%

2/11%

2/12%

2/13%

2/14%

2/15%

2/16%

2/17%

Peak./me$consum

p/on

/max$$cap

acity

$for$e

ach$da

y$

(Peak./me$consump/on/max$capacity)$in$Kyushu$electric$u/lity$service$areas$in$Jan$and$Feb$2012$

Generally, the cost of electricity is very high at the peak demand periods

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economic growth throughout the western United States shifted the supply/demandbalance and caused the market to tighten up suddenly. Although the investor-owned utilities had by 2000 received permission to buy a limited amount of powerunder long-term contracts, they were doing very little of it. They were still procur-ing about 90 percent of their “net short” position—the power that they were notproducing with their own generation and did not have under contracts thatpredated the restructuring—in the Power Exchange’s day-ahead or the systemoperator’s real-time market.

In addition, cost increases for thermal generating plants (in California, nearlyall of which are natural-gas fueled) raised production costs and, importantly, did somuch more for the marginal production units. Figure 3 shows the marginal costcurve from all thermal plant capacity in California. This omits production fromnuclear and hydroelectric production, which are inframarginal in nearly all hours,and renewable sources (wind, solar and geothermal), which have less reliableproduction patterns. Thermal plant production is nearly always the marginal powersource in California.

The lowest line is the marginal cost curve during July 1998, when gas priceswere low and the costs of pollution permits for emitting nitrogen oxide werenegligible. The next highest line shows costs during June 2000, when natural gasprices were almost double their 1998 levels. Not only has the curve shifted up, it hasrotated, with the costs of the most expensive units increasing more, because themost expensive units convert natural gas to electricity at about half the efficiencyrate of the least expensive generators. By August 2000, shown in the highest line,the problem was further exacerbated as the price of nitrogen oxide pollution

Figure 3California Thermal-Generation Supply Curve(various months)

The Trouble With Electricity Markets 199


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Example: the marginal cost curve of thermal plants in CA (Borenstein 2002)

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Expensive power plants have to be run at the peak time

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The social cost would be even larger (e.g. blackouts) if demand exceeds supply

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However, usually, electricity prices do not re"ect these costs:

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However, usually, electricity prices do not re"ect these costs:

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Most customers do NOT pay “time-varying” electricity prices16






Usually, these peak demand periods are limited hours per year

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Load duration curve (left) and wholesale price duration curve (right) in PJM

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Peak demand periods are limited hours per year

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Thus, wholesale electricity prices are very high only at limited hours per year

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Large economic gains just by shifting this peak demand to off-peak

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Dynamic (time-varying) pricing can be used to mitigate the problem

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Basic idea:

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Set high prices only for the peak demand hours for “emergency days”

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Lower off-peak prices

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Customers get larger incentives to shift their peak time consumption

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No technological barriers now with smart meters

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Several experiments in the US

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Frank Wolak (2011) -‐ Field experiment in D.C.

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Finds significant peak demand reduc?ons by dynamic pricing

Smart grid and dynamic pricing experiments in four locations in Japan

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Sponsored by the government and partnered with companies and academics

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Current main target: residential customers

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Different “treatments” in the four locations

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Customers are randomly assigned to different treatment groups

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Yokohama Large-scale (4000) Smart Homes H�Energy management system wh ich in tegra tes HEMS, BEMS, CEMS927000 kW: H�Use of heat and unused energy H�The largest scale 4000 Smart houses, 2000 EVs�

Toyota Plugin HEV cars (next Plius)

H� EV/PHEV deployment with V2H and V2G

H� Use of heat and unused energy as well as electricity

H� Demand response with more than 70 home

Kyushu Dynamic Pricing H�Energy management system which integrates demand-side managements (HEMS, BEMS) and main grid system. H�Real-time pricing management in 70 companies and 200 houses

Kyoto Osaka Nara High-tech HEMS H� ‘Smart tap’ which visualizes

energy consumption and controls home electronics energy usage.

H� ‘Electric power virtual coloring’ technology that actualizes t o t a l h o m e e n e r g y management system.

Example of the price schedule for residential customers

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Critical peak pricing (CPP) with variable peak prices

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Customers get “day-ahead” notice about the peak price for tomorrow

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Peak hours for summer (1pm to 5pm)

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High peak prices are announced when temperature exceeds a “cutoff” level

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Customers get noti#ed by phone, email, and through their information device 20

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Treatments to be examined in addition to dynamic pricing

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Information devices integrated with HEMS (Home Energy Management System)

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In-home display

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Smart phone with a smart energy application

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Automated demand response (ADR) technology

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Electric appliances with ADR in response to time-varying electricity prices

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Electric and plug-in hybrid vehicles

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Long-time lease for free for some customers

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EV and PHV can be potentially used as “storage”

Goals of the experiments:

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Examine what is possible with smart grid and smart meter technologies

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Create a platform for #rms to explore new business opportunities 21

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