In short
📊 Japan's electricity is divided into "four values"
It is separated into four categories: electricity amount (kWh), regulation power (ΔkW), supply capacity (kW), and environmental value, and a system has been built to trade in different markets.
⚡ From 2028 onwards, the introduction of "co-optimization" will significantly change practices
The transition from the current "price bidding" method to the "three-part offer" method is expected to fundamentally change the revenue structure of power generation companies.
🏗️ Capacity markets and LTDA are the key to long-term investment
Capacity markets that trade supply capacity for four years ahead and long-term decarbonized power auctions (LTDA) that guarantee fixed income for 20 years are positioned as important institutions to increase the predictability of power investments.
🔄 The impact on each licensee is diverse
Retailers and power generation companies (stable power supply, renewable energy, and storage batteries) will be affected by market changes in different ways, and it is expected that this will also spread to the contract structure of corporate PPAs.
Introduction
Japan's electricity market has been undergoing gradual institutional reforms since the full liberalization of electricity retailing in 2016. The transition from the vertical integration model based on the aggregate cost method to the market transaction model based on the separation of functions of power generation, transmission and distribution, and retail can be said to be not only liberalization, but also a process of redefining the "value" of electricity itself.
Currently, in Japan, the value related to electricity is divided into four categories: electricity volume (kWh), regulation power (ΔkW), supply capacity (kW), and environmental value, and each is traded under different market mechanisms. This complex market structure is a result of institutional design aimed at balancing supply reliability with economic efficiency, and is expected to continue to evolve in the future.
Particularly noteworthy is the introduction of "co-optimization," which is being considered for the first half of the 2030s. This is a new market design that integrates the wholesale electricity market and the supply-demand adjustment market to simultaneously optimize the amount of electricity (kWh) and the regulation power (ΔkW), which is expected to have a significant impact on the profit structure of power generators and the procurement strategies of retailers.
In this article, we will summarize the basic structure of Japan's four major electricity markets and consider the impact of institutional reforms in the first half of the 2030s on the renewable energy procurement strategies of licensees and companies from both legal practice and business perspectives.
Chapter 1: Why is electricity traded in four values?
1.1 Basic Philosophy of Market Separation: Combining Supply Reliability and Economic Efficiency
Before electricity liberalization, Japan adopted a "vertically integrated model" in which major power companies were responsible for everything from power generation to retail. In this model, in order to ensure the reliability of power supply (a state in which electricity can be used stably at any time), a system was adopted to collect the construction and maintenance costs of power generation facilities and fuel costs using the "lump sum cost method".
However, with the full liberalization of electricity retailing in 2016, the power generation and retail businesses were opened up as competitive markets, and the transmission and distribution business was separated as a neutral public infrastructure. With this structural change, the question of "who" and "under what economic incentives" to ensure supply reliability has emerged.
The answer to this problem is Japan's institutional design approach, which is to separate the value related to electricity by function and build a market mechanism for each. Specifically, the following four values are classified.
- Electricity (kWh): The actual amount of electricity consumed
- Adjustment force (ΔkW): The ability to adjust the lift and lower to maintain the balance between supply and demand
- Supply capacity (kW): The capacity to supply during future peak demand (installed capacity)
- Environmental value: Value as a non-fossil power source such as renewable energy
Each value has a different timeframe and purpose, and therefore requires a different market design.
1.2 Overall view of the four values and corresponding markets
Here's an overview of the markets corresponding to each value:
| Types of values | Corresponding Markets | Timeline of the transaction | Primary Objectives |
|---|---|---|---|
| Electricity (kWh) | Wholesale electricity market (spot market, etc.) | The day before and on the day | Efficient procurement of electricity |
| Adjustment Force (ΔkW) | Supply and demand adjust the market | The day before and on the day | Maintaining a balance between supply and demand |
| Supply Capacity (kW) | Capacity Market & LTDA | 4 years ~ 20 years ahead | Ensuring supply reliability and promoting long-term investment |
| Environmental Value | Non-Fossil Value Trading Market/Market for Fulfilling Obligations under the Advanced Act | Fiscal Year | Achieving decarbonization goals |
This market separation has enabled a variety of business models, such as storage batteries that do not generate electricity but can provide regulatory power, and renewable energy power sources that sell only environmental value separately.
1.3 Practical Complexities Posed by Market Separation
On the other hand, this market separation also creates practical complexity.
For example, when a renewable energy power generation company concludes a corporate PPA, it is necessary to consider the following.
- Electricity (kWh): How you will provide physical electricity (via a retail utility or self-consignment)
- Coordinating force (ΔkW): Who bears the coordination cost associated with fluctuations in the output of variable renewable energy
- Capacity Supply (kW): Capacity Market Participation Obligations and Capacity Contribution Burden Structure
- Environmental value: whether to include non-fossil certificates in PPA contracts or trade separately
The reason for this multifaceted consideration is that the commodity of electricity is not a single value, but is traded as a bundle of multiple values.
In the next chapter and beyond, we will explain the detailed mechanisms of each of the four markets and the impact of institutional reforms in the first half of the 2030s on practice.
💡 From here on, we will explain it in detail in a paid article
In Chapter 1, we hope you have understood the basic philosophy of the electricity market and the overall picture of the four values.
Chapters 2~4 from here explain in detail the following practical contents.
📊 Chapter 2: Specific pricing mechanisms for each market (e.g., merit orders, multi-price auctions, LTDA 90% refund rules, etc.)
⚡ Chapter 3: Fundamental changes in revenue structure due to the introduction of concurrent markets in the first half of the 2030s (e.g., three-part offer practices, uncertainty of fixed cost recovery, etc.)
🏢 Chapter 4: Impact analysis by business type and ripple effects on corporate PPA contracts (price negotiation points, risk distribution methods, etc.)
The complete version, which systematically summarizes practical knowledge directly related to corporate power procurement strategies and corporate PPA considerations, is available in note.
📝 Read the full version in note (detailed explanation of Chapter 2 ~ Chapter 4)
Chapter 2: Detailed mechanisms of the four markets
2.1 Wholesale Electricity Market (Spot Market): Electricity Volume (kWh) Trading
2.2 Supply-Demand Adjustment Market: Trading Adjustment Forces (ΔkW)
2.3 Capacity Market and Long-Term Decarbonized Power Auction (LTDA): Capacity (kW) Trading
2.4 Non-Fossil Value Trading Markets and Standards for Achieving Compliance Requirements: Environmental Value Transactions
👉 Learn more about the detailed pricing mechanisms, bidding rules, and practical implications for each market in the full NOTE article.
Chapter 3: Institutional Reform in 2028 - The Impact of Introducing the "Simultaneous Market"
3.1 What is "co-optimization"?
3.2 From Price Bidding to Cost Registration: Introducing Three-Part Offers
3.3 Changes in Revenue Structure: Transformation of Business Model of Power Generators
3.4 Adoption of Medium- to Long-Term Markets and Activation of Forward Trading
👉 A detailed impact analysis of the 2028 reforms and measures for each business can be found in the full version of the note article.
Chapter 4: Impact from the Perspective of Licensees and Spillover to Corporate PPAs
4.1 Impact on Retail Electricity Utilities
4.2 Impact on Power Generators (Stable Power Supply)
4.3 Impact on Renewable Energy Generators
4.4 Revenue Opportunities for Battery Storage Operators
4.5 Spillover effects on corporate PPAs
👉 The specific profit opportunities and risk analysis of each business operator and the practical impact on corporate PPA contracts are explained in the full version of the note.
summary
📝 For those who want to know more
📝 For those who want to know more
The full version of this article explains in more detail:
✅ Specific pricing mechanisms for each market
Spot Market Merit Orders, Details of the 5 Product Segments in the Supply and Demand Adjustment Market, Capacity Market and LTDA Bidding Rules and Market Revenue Refund Calculation Examples
✅ Changes in the revenue structure of power generation business due to the introduction of simultaneous markets in 2028
The practical impact of the three-part offer, changes in fixed cost recovery mechanisms, and the strategic response of operators
✅ Market Participation Strategies and Practical Responses by Business Type
Retailers' procurement cost management strategies and profit maximization strategies for stable power supplies, renewable energy, and storage batteries
✅ How to distribute market risk in corporate PPA contracts
Price Fluctuation Risk, Balancing Costs, and Non-Fossil Certificate Handling Practices in Physical and Virtual PPAs
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