The trading markets in Japan, particularly the electricity sector, have undergone significant transformations since the establishment of the Japan Electric Power Exchange (JEPX) in 2003. This document elaborates on the various facets of these trading markets, focusing on the wholesale electricity market and other specialized markets that support the country’s energy infrastructure and goals.
Wholesale Electricity Market: The Japan Electric Power Exchange (JEPX)
Establishment and Purpose JEPX was initiated in November 2003 and began operations in April 2005, aimed at stimulating electricity transactions in Japan. The primary purpose of the exchange is to facilitate efficient trading by providing improved instruments for buying and selling electricity while promoting index price formation to help stakeholders assess investment risks. Initially classified as a voluntary and privately operated market, JEPX transitioned into a designated wholesale electricity market under the Electricity Business Act in April 2016.
Market Participants Key participants in this market include electricity generation utilities and retailers involved in wholesale power transactions. Additionally, special trading members—such as electricity transmission and distribution utilities accepting electricity under the feed-in tariff scheme—also play a role in the exchange. Moreover, since March 2017, demand response aggregators, who manage negawatt trading contracts, have been allowed to participate in the market. As of August 1, 2023, JEPX boasts 285 trading members, indicating the growth and diversification of market participants.
Market Structure JEPX facilitates various types of electricity transactions:
- Spot Market: This market allows trading in 30-minute increments for next-day delivery. The spot market is critical, accounting for approximately 40% of all electricity sold in Japan. A blind single-price auction system is employed, meaning participants cannot see each other’s bids. The system price is determined by the intersection of sell and buy bid curves, with transactions executed at this price.
- Forward Market: In this market, electricity is traded for delivery over specified future periods, with products tailored to specific times and durations.
- Intra-day Market: This market addresses unexpected mismatches between supply and demand, allowing adjustments at least one hour before delivery.
- Bulletin Board Trading Market: JEPX mediates trades for prospective buyers and sellers, facilitating connections between various market players.
Despite its initial growth, the trading volume on the spot market declined in fiscal 2022 due to reduced supply capacity resulting from an earthquake near Fukushima Prefecture in March of that year. Between fiscal 2016 and 2021, however, trading volumes increased steadily.
Price Dynamics The annual average system price for electricity fluctuated significantly from 2015 to 2022. Initially, it remained stable between 7 and 10 yen per kilowatt-hour (kWh) but surged to 11.21 yen/kWh in fiscal 2020 and reached 20.41 yen/kWh in fiscal 2022 due to supply constraints and soaring fuel prices. By August 2023, the price had dropped to 11.49 yen/kWh, influenced by declining fuel costs. However, the Ministry of Economy, Trade, and Industry (METI) cautioned that prices could rise again, given the volatility in global fuel prices.
In light of the increasing electricity prices, some companies have started utilizing demand response strategies to manage their consumption more effectively. The Agency for Natural Resources and Energy has recognized the need to promote demand response in collaboration with private sector partners to navigate the anticipated supply shortages throughout fiscal 2023.
2. Other Specialized Markets
Apart from the wholesale electricity market, Japan hosts several other markets designed to enhance stability, sustainability, and environmental accountability in electricity supply:
a. Baseload Power Market The baseload power market was established in July 2019 to facilitate competition among new market entrants struggling to secure contracts for electricity from baseload sources such as coal, hydro, nuclear, and geothermal. Given the dominance of bilateral contracts held by larger utilities, the baseload market allows new entrants to access electricity at a predetermined price, which is fixed annually.
In response to rising fuel prices exacerbated by geopolitical tensions, discussions have arisen regarding adjustments to the pricing system. In the fiscal 2023 auction, a new structure was introduced, allowing for both fixed-price and two-year products where fuel cost balances would be settled later.
b. Capacity Market Launched in 2020, the capacity market aims to enhance investment predictability for power generation companies amid increasing competition and shifts toward renewable energy sources. This market includes several auction types designed to secure power generation capacity in advance, thus ensuring supply continuity.
The capacity market categorizes power sources into stable, variable (such as wind and solar), and on-demand sources, including demand response initiatives. As of 2023, new auction mechanisms have been introduced to facilitate battery storage capacity bidding, which may serve as both stable and on-demand resources.
c. Balancing Market The balancing market was established in April 2021 to streamline the management of supply and demand fluctuations. This market enhances the efficiency of electricity transmission and distribution utilities by enabling cross-regional procurement of balancing capacity. Various balancing products, including primary and tertiary balancing capacities, are traded to ensure system reliability and prevent overloads or shortages.
d. Non-Fossil Value Trading Market Concerns over the lack of distinction between fossil and non-fossil power generation in the wholesale market led to the establishment of the non-fossil value trading market in May 2018. This market enables the certification and trading of non-fossil energy attributes, initially restricted to electricity retailers. However, consumer participation has increased, with trading for renewable energy certificates initiated in November 2021.
The non-fossil market features a pricing structure aimed at balancing the needs of consumers and the environmental value of electricity derived from renewables. Despite initial challenges with high pricing and limited availability, METI is actively exploring ways to improve market efficiency and increase participation.
3. Emerging Trends and Future Directions
Electricity Futures Market In addition to the various existing markets, Japan has begun trading in electricity futures to help mitigate price fluctuation risks. The European Energy Exchange (EEX) initiated trading in Japanese electricity futures in May 2020, followed by the Tokyo Commodities Exchange (TOCOM) in April 2022. Although trading volume remains modest compared to JEPX, ongoing improvements and strategies are being explored to enhance market efficiency and attract more participants.
New Market Development Considerations METI is currently investigating the potential integration of the spot and balancing markets. The objective is to create a more efficient market that simultaneously procures energy (kWh) and balancing capacity (ΔkW), addressing the limitations posed by the current separate market structures. This ambitious proposal is expected to lead to significant changes in the trading landscape, with a target launch date of around 2028.
Conclusion
The evolution of Japan’s trading markets, particularly in the electricity sector, reflects the country’s commitment to fostering a competitive, efficient, and sustainable energy landscape. As the market continues to adapt to emerging challenges such as fluctuating fuel prices, supply constraints, and increasing reliance on renewable sources, ongoing collaboration between government agencies, market participants, and consumers will be critical. The development of new market structures, alongside existing frameworks, aims to enhance operational efficiency, stabilize pricing, and promote the use of non-fossil energy, ultimately supporting Japan’s long-term energy goals and sustainability initiatives.
