JAPAN Law and Practice Contributed by: Yutaro Fujimoto, Yurika Masakane, Hirokazu Tanaka and Yutaro Kato, Nagashima Ohno & Tsunematsu
OTC trading This is usually employed for trading a small amount of electricity that does not satisfy the thresholds for spot or intraday trading. New Electricity Markets In addition to the above, several new electricity mar- kets have opened with the aim of meeting the needs of new entrants after full liberalisation of the retail sector. The base-load market began in July 2019 as a wholesale market of electricity generated by a nuclear power plant, a traditional large-scale hydro- power plant, a coal-fired power plant or a geothermal power plant (also known as “base-load electricity”) to electricity retailers. The major utilities and J-Power are required to offer base-load electricity to the base- load market at no more than the amount calculated by a prescribed formula, to secure retailers’ access to base-load electricity for a price that is not unduly higher than their intra-group price. The capacity market held its first auction in July 2020. While electricity companies trade in kWh in the whole- sale JEPX market, the capacity market auctions the future value of generation capacity in kW. The capac- ity market is expected to improve power producers’ predictability to recover certain fixed costs in the gen- eration business in which such fixed costs have been difficult to recover from the wholesale JEPX Market (ie, “stranded costs”). If a generator places a success- ful bid at a capacity market auction it may receive a certain amount of fixed income from OCCTO for four years after the auction, which is funded by a capacity surcharge that OCCTO levies from retailers. Power futures markets In September 2019, a futures market was commenced by Tokyo Commodity Exchange, Inc (TOCOM) which allows buyers to hedge the volatility risk of the JEPX spot market trading price. The European Energy Exchange (EEX) also launched a Japanese futures mar- ket in May 2020. After the sharp price spike in 2020, the trading volume of Japan power futures is grow- ing sharply and steadily. The futures markets provide hedging on the physical power market, price indexing of domestic electricity in Japanese yen, and clearing counterparty credit risk. In order to further promote the power futures markets, METI has discussed, through
its working group on stimulation of power futures in Japan, taking various other measures such as strength- ening the linkage between physical and futures mar- kets, expanding market participants such as financial institutions, disseminating know-how and establishing best practices for power futures trading and improving surveillance to ensure transparent and fair trading. Balancing market In 2021 a balancing market (also referred to as a “real- time market”) was established. This market enables the TSOs to procure control reserves by auction, which will help them make supply-demand adjustments and maintain frequency control in their region in a more economically efficient manner. This also allows gen- erators and demand response aggregators to make profits by making use of their balancing functions. Control reserves sold in the balancing market are classified into five types by response time and dura- tion. The balancing market initially started handling a type of control reserve in the low-speed range. Then, gradually, other types of control reserves were added to this market and in April 2024, the balancing market finally began handling all five types of control reserves. The balancing market was previously operated by the TSOs, but since April 2024, has been operated by the Electric Power Reserve Exchange (EPRX), a general incorporated association established by the TSOs. Since the balancing market has several critical issues, such as a shortage of seller bids and high-price bids, the price cap for bids has been revised to be lower and there have been discussions regarding whether the balancing market should be integrated into the JEPX spot market (see 1.7 Announcements Regard- ing New Policies ). Non-fossil fuel energy certificates trading market As a measure to achieve the non-fossil energy source target, the non-fossil fuel energy certificates trading market was established in May 2018. In this market, each non-fossil fuel energy certificate (“NFC”) repre- sents an amount of non-fossil fuel energy and has a corresponding CO₂ emissions reduction value under the Act on Promotion of Global Warming Counter- measures (Act No 117 of 1998, as amended). At the time of writing, NFCs are traded in two markets: the
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