Powerful Japanese Energy Monopolies

26.05.14 Publication:

Here in Europe, events in Ukraine have reminded me of two important things, beyond the obvious points about geopolitics, Russia and great-power competition. Those things are both about energy. One is how difficult it is for countries to change the form and structure of their energy supplies, infrastructure and costs quickly. The other is the way in which powerful energy companies frequently block any real changes, or make them even harder to achieve. And what is true for Europe is also true for Japan.

The problems are real ones. They became clear to me when I was doing some research on Europe’s energy dependency on Russia and found an article in my former publication, The Economist, saying that “The European Union is belatedly grasping the riskiness of its dependence on Russian gas”. This dated from 2007, however, and now six years later the same articles are being written amid a new crisis over gas supplies from Russia, and very little has changed.

It is easy to predict that the same will happen in Japan, looking at the current debate and at the slow pace of change. Every year since 3/11, or even more frequently, there seems to have been some kind of government review of the energy market. Admittedly, that is only three years, but still they have been three years with a big sense of crisis. But what has changed?

There may soon be two nuclear power stations reactivated. And, yes, Japanese companies have been very active in obtaining contracts for the supply of liquefied natural gas from North America, whenever exports of LNG have been given permits. But the basic situation, the one that matters most to industry and to households, remains the same: that in Japan electricity prices are the second highest among all the 34 rich, industrialised countries in the OECD, with industry paying prices more than 40% higher than the average for the OECD.

This situation has many causes. One which is largely a myth is the fact that Japan has no domestic energy resources of its own. It is a myth because the same is also true of many countries whose electricity costs are far lower. Transport distance from suppliers does make a difference, but not enough to explain such high costs. So, since 3/11 and Fukushima Dai-Ichi, does the nuclear shut-down, of course, which has raised costs by denying Japan this source of supply for which marginal costs are low. Yet although it would certainly make economic and financial sense to restart many more reactors, the basic situation of high electricity costs also existed in Japan before 3/11.

No, the basic explanation is one familiar to readers of Nikkei Business: lack of competition. Private monopolies are always at least as inefficient as publicly owned monopolies. In this light, it was rather unfair earlier in this article to say that little has changed in the Japanese electricity market, given that the Diet passed laws last autumn to begin the process of deregulation and to introduce competition.

Yet will anything really happen? That is the question, one that is being fought over in the Diet and in public opinion right now. The Liberal Democratic Party was brave to introduce its legislation last year, and brave to promise deregulation and radical reforms. But, knowing what we do of the influence that energy companies are able to exert in other countries, including in Europe over the past six years, it is reasonable to doubt whether much will really change.

Perhaps this is too pessimistic. The pressure from business for lower energy prices is strong. The need is there to create a new structure of energy supply and to enable a new infrastructure to develop over the next two decades or more. Productivity growth, driven even by technological innovation, is going to find it very hard to overcome the burden of high energy costs given that the Japanese population is ageing so rapidly, so direct measures are needed to cut electricity prices.

This is all true. But the difficulty with energy is that there is generally an implicit alliance between the existing monopoly or dominant suppliers, and today’s big, well-established customers. Those big, well-established customers are willing to accept high prices as long as they are stable and supplies are guaranteed. The victims are smaller customers and the new firms who would like to grow and become established.

Moreover, if the Abe government was unwilling to challenge Japanese farmers in order to make progress on the Trans-Pacific Partnership talks with the United States during President Obama’s visit, why should it be expected to challenge the energy producers? The safest thing to expect is that very little will change in electricity supply.