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Shaking up the power industry

October 21, 2014

New power industry alliances


The comprehensive alliance struck recently between Tokyo Electric Power Co. and Chubu Electric Power Co. in their thermal power generation business raises expectations of a further shakeup in the power industry — likely involving companies from other sectors — ahead of the full liberalization of the retail sale of electricity in 2016.

While Tepco and Chubu Electric have their own reasons for the accord, it should be a welcome development if the tieup results in cutting electricity costs for consumers.

According to the basic agreement announced Oct. 7, the two companies will create a jointly owned firm that will integrate their liquefied natural gas (LNG) procurement to reduce fuel purchasing cost. The two firms combined buy roughly 40 million tons of LNG annually — or nearly half Japan’s total imports of 88 million tons — and they hope the expanded volume will boost their power to negotiate procurement pricing with producing countries.

Through the new firm, Tepco and Chubu Electric will also seek to replace aging thermal power plants with more fuel-efficient plants as well as to increase output from coal-fired plants, which generate power at less than half the fuel costs of LNG-fueled plants. As a first example, the new firm reportedly plans to work with Electric Power Development Co., popularly known as J-Power, to build and run a latest-generation coal-fired power plant at Tepco’s Yokosuka thermal power plant in Kanagawa Prefecture.

Tepco, which faces the massive cost of compensation for people affected by the March 2011 triple meltdowns at its Fukushima No.1 nuclear power plant, sees the alliance with Chubu Electric as a key pillar of its financial reconstruction. Tepco needs to improve its earnings to cover the trillions of yen in compensation, which it has been paying by borrowing from a government-backed fund. Since its nuclear power plants remain shut down in the wake of the 2011 disaster — just like other utilities — it is also imperative for Tepco to lower the cost of procuring LNG to run thermal power plants.

Chubu Electric is relatively unscathed from the shutdown of nuclear power plants, which accounted for only 15 percent of its power generation before 2011. Still, it faces the prospect of greater competition on its home turf in central Japan as a decades-old regional monopoly by major power firms is about to be fully dismantled. In 2016, the remaining restrictions on electricity sales to households will be lifted, making it possible for any power-generating entity to service customers anywhere across Japan. The alliance with Tepco will give Chubu Electric access to a power-generation source and a foothold for sales in the lucrative Tepco-serviced areas.

Moves are afoot by the major power firms to tap into demand in regions previously dominated by the others — often involving companies from other sectors such as gas, oil and general trading firms. Before reaching the accord with Chubu Electric, Tepco also explored other firms including Kansai Electric Power Co., Tokyo Gas Co., Osaka Gas Co. and JX Nippon Oil & Energy Corp. as potential partners. It is reported that Osaka Gas may later join the Tepco-Chubu Electric alliance. There is also the possibility that the firms that did not reach agreement with Tepco may explore their own alliance.

There are uncertainties as to how the Tepco-Chubu Electric alliance will evolve. Tepco is said to have urged Chubu Electric to place all of its main thermal power plants under the umbrella of the new jointly funded firm, but they eventually agreed only on the replacement of aging plants and construction of new facilities. They say integrating the operation of their thermal power plants will remain on the agenda of future discussions, and the scope of the alliance will substantially differ if they agree on such arrangements.

Given the uncertainties over reactivating its Kashiwazaki-Kariwa nuclear power plant in Niigata Prefecture, which it counts on in its financial reconstruction plan, Tepco will likely need to make greater efforts to restructure its business. Other regional utilities and companies from different sectors are also eyeing the market thus far dominated by Tepco.

But from a consumer viewpoint, active realignment of the power industry, which has for decades been effectively dominated by the regional monopolies, should be a welcome development if it leads to lower electricity bills.

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