Innovation of the Electric Power Industry in Japan’s post-Fukushima Era

February 27, 2012 Kazuhiko Toyama CEO Industrial Growth Platform, Inc. Member of Japan Association of Corporate Executives (Doyukai), Vice chairman of Study Group on Reform of Electric Power Systems �

3.11 Earthquake

Fukushima Tsunami

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Tsunami, and destruction of power plants

3.11 Aftermath Fundamental questions emerged

✔  Can we say … current power systems/infrastructures are designed/operated trustworthy enough ??

✔  Can we say … power companies (typified by TEPCO) have been properly governed/operated ??

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3.11 Aftermath

“Vertically integrated systems and regional monopolies are indispensable for stable supply of electricity.”

“Remember that increase of market competitiveness will risk electricity universality as a lifeline.”

“Smart meters may not pay, for people keep using air-conditioning. It’s hot and humid here.”

Sure ??

Doubt about power companies’ mantra

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- 4 -

40

30

20

Sep-1 Aug-1 July-1

70

60

50

(×103 MW)

3.11 Aftermath

Peak 2011

Ave. ▲18.9% power-save !

Astonishing power-save driven by users

Peak 2010

Heads-up alert Rolling blackout Usage restriction

:

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Current Market Structure

Wholesale suppliers PPS Private

generation

9 regional electric power companies

w/ exclusive rights

Other customers EHV and HV (over 50kw/6000V )

Private generation

Wheeling service

PPS

Transmission

Generation

Consumption

Distribution & Retail

96.4% 3.6%

Oligopoly by 9 giant power companies

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- 6 -

Current Market Structure

Revenue (billion USD)

# of Consumer

(000’)

①Hokkaido 6.6 3,960

②Tohoku 18.8 7,690

③Tokyo 60.1 28,600

④Chubu 26.1 10,450

⑤Hokuriku 5.8 2,080

⑥Kansai 29.3 13,430

⑦Chugoku 12.2 5,200

⑧Shikoku 6.2 2,830

⑨Kyushu 16.7 8,440

TTL 181.7 82,680

①

③

⑥

②

⑤

④

⑨

⑦

⑧

As of FY2010 , 1USD=80JPY

9 Utilities by Service Area

Regional monopoly by each xxPCO

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Opportunity for Rational Discussions

  Optimal system structure on a national scale •  Beyond monopolies and vertical integration •  Interchange of electricity across regional borders

  Innovative initiatives to optimize supply-demand •  Power usage/cost Info. disclosure for new entries •  Broader choices for users to democratize the market

Examples of primary issues

Long-overdue “Sealed” discussions Power companies has been that powerful,

economically & politically

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Opportunity for Rational Discussions Doyukai aims to take the initiative

TEPCO Governance

Market System

Key Agendas

Japan Association of Corporate Executives

“Doyukai”

Japan Business Federation

“KeiDanren”

Japanese Trade Union Confederation

“Rengo”

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Doyukai Propositions : Nov.18,2011 Basic principles in reforming the market

  Stable, low-cost power supply is a key, but now we know current system is not the one for the future.

  Observed changes of consumers’ mindset and behavior will strongly boost innovations in power market

  Competitive pricing mechanism, and demand control by peak-cut will reduce total cost of electricity through optimization of electricity usage and waste elimination

  Competitiveness will also promote technology innovation and new product/service introduction to make the market start growing again

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Doyukai Propositions : Nov.18,2011 Short-term actions to get things rolling

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  Expedite implementation of smart meters •  Provide users with information on electricity consumption/price

to give incentives for power-saving efforts •  Standardize specifications of interface, communication or data

formats, without excessive focus on Japanesque features •  Establish power exchange market to enable restraint of excess

generation and reduction of total electricity usage

  Visualize and share cost structures for current system •  Ensure transparency to maintain public governance •  Offer data for feasibility calculations for new entries •  Secure fairness of competition

Doyukai Propositions : Nov.18,2011

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Long-term actions to move forward (1/2)

  Separate transmission from generation and operate in wider area, under stronger government supervisions •  Ensure fair access, while assuring cost transparency and security •  Expand area of services, e.g. west Japan and east Japan •  Establish ISO or other neutral organization as operating entities •  Introduce incentive mechanisms that reward management efforts

  Promote competition among generation and distribution & retail by encouraging new entrants •  In generation, diversify sources, maintain stability and cost •  In downstream, diversify services/plans and demand control •  Take measures to allow new entrants to compete w/ existing ones •  Induce innovation on power storage technologies

Doyukai Propositions : Nov.18,2011

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Long-term actions to move forward (2/2)

  Reassume total cost and clarify risk reality for nuclear power plants •  Analysis and verification of risks, disasters or terrorisms, not only

by provability but impact •  Utilize nuclear plant accident experience to reassume and

visualize total cost to including used fuel handling cost and decommissioning cost

  Create augmented interface and mechanism to let consumers make choice, as a key driver of reform •  Educate consumers to act on their own initiative to use products/

tech., e.g. smart meter and energy management system, w/ awareness that their change in mindset & behavior could lead to elimination of waste and actualization of innovation

•  Establish power exchange market to enable consumers to join

METI Release : Dec.27,2011 “Coincidental” similarities (1/2)

  Construct more competitive and open electricity market to realize cheaper and stable electricity supply, by studying specific measures on following points;

1.  Enhance the supply-demand adjustment function through the market mechanism and introduce relevant rates & services

2.  Establish a mechanism where consumers can choose the supplier and power sources

3.  Review regulations for power generation, also activate the wholesale electricity market to increase options for retails

4.  Review rules on network connection and power transmission to further utilize distributed energy technologies

5.  Establish a mechanism to ensure an appropriate reserve capacity and stable supply capacity in competitive environment

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METI Release : Dec.27,2011 “Coincidental” similarities (2/2) Cont’d

6.  Unleash barriers related to electricity supply beyond regional borders to activate competition in wholesale electricity exchange

7.  Establish a mechanism for network operation and supply-demand adjustment in a wider area and use the supply capacity efficiently

8.  Ensure neutrality of power transmission sector, introduce rules & mechanisms for fair competition (legal separation and ISO in sight)

9.  Compliance obligations for safety, investment on adequate infrastructure, universality, supply responsibility, etc.

10.  Consider the time schedule for the system design to realize stability and efficiency of the system

*“Major Issues for Discussion by the Task Force on the Reform of Electric Power Systems”

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Conclusion Key concepts for the future

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Efficiency and Stability through “smart” rule-based competitions

 Fair competition at generation, distribution & retail  Monitored/supervised wide-area transmission platform

Effectiveness and Innovation through user enhancement

 Wider user choices for supplier, product/service, etc.  Adequate rules/regulations to activate horizontally specialized

competition by diverse players

Conclusion An analogy : what happened in telecom

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’80s Reform Upstream

’90s ~ Revolution in Downstream

✔  Disintegration of mega-carrier, long distance and local access

✔  Promoted birth of new telecom carriers for wide-area

✔  Internet, as a new platform for personal empowerment

✔  Geometric diffusion of mobile product/applications

More efficient market but no major impact yet

(preliminary stage) Innovation

Where is Electric Power Industry now?

Conclusion : A Potential of Japan as An Innovation Leader of Power Industry

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Cost of fossil fuels (scarce natural resource),

Concerns regarding nuclear power,

Carbon emission issue

Generation (solar, wind..), Smart grid (grid control/EV/storage/

HEMS/smart meter/cloud), Energy-saving tech.

Currently vertical integration and regional monopoly….

What’s next ??

Reform the market system quickly to avoid another “Galapagos tragedy”

Real Innovation

Technology (Market/Social) Needs

System (Regulation, Institution)

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