TOKYO�Japan's recently deregulated power and gas sectors are beginning to feel the effects of stiff competition from newcomers. In the latest move, US energy giant Enron Corp. has set up a wholly-owned subsidiary in Tokyo to penetrate Japan's energy and financial sectors.
Enron's move comes as a number of foreign and domestic companies consider entering Japan's electricity market, which was partially liberalized in March when the supply monopoly by the nation's 10 regional electric utilities ended.
Since Mar. 21, Japan's 10 regional power firms have been competing with each other, and with nonpower companies, to supply electricity to large-lot customers, a market estimated to be worth an annual �3 trillion. The 8,000 high-volume industrial and commercial users represent roughly 27% of total Japanese power demand. The size of the market now open to competitors is about 292 billion kw-hr.
This is the second stage of a deregulation plan�aimed at reducing Japan's relatively high electricity prices�that began in 1995 when nonpower companies were allowed to sell electricity to the 10 utilities.
Enron executives say Enron Japan KK will focus on merchant activities such as finance, risk management, commodity market-making, and electronic commerce. Enron Japan will complement Enron's other interests in the industrial power sector, which it is pursuing through its E Power affiliate, established last August, the company said.
Japanese leasing company Orix Corp. said in January that it will buy a 20% stake in E Power for $30 million to tap into the retail power supply business. Recently, Enron Corp. Chairman Kenneth Lay said the company expects to start electricity trading in Japan within 3 months, assuming regulatory changes are implemented.
But Enron is not the only foreign company pursuing the Japanese power market. Other foreign firms eyeing Japan's power sector include Royal/Dutch Shell, Texaco Inc., and Vivendi SA.
Hurting incumbents
Domestic companies that have expressed an interest in the power sector include Mitsubishi Corp, Marubeni Corp., Sony Corp., Tonen Corp., and Nippon Telegraph & Telephone Corp. Additionally, the country's two biggest gas suppliers�Tokyo Gas Co. and Osaka Gas Co.�have also said they plan to enter the retail power business.
The impact these new players will have on the incumbent electric utilities could be dramatic. Japan's largest utility, Tokyo Electric Power Co., for example, says its revenue could decrease by as much as $75million/year if just one fifth of its industrial base chooses an alternative supplier.
But power companies are not taking the potential encroachment lying down. Rather, they are turning the tables on gas suppliers by diversifying into the natural gas business.
Japan's second largest utility, Kansai Electric Power Co. Inc., for example, is setting up an LNG sales firm with trader Iwatani International Corp. This will be the first time a Japanese power utility has operated a gas supply business, a direct response to intense market competition in the power sector.
The new company, eL ENERGY Co., will be capitalized at �150 million, 51% of which will be put up by Iwatani. Kansai Electric and Iwatani will build a large LNG storage and regasification center at Sakai, Osaka prefecture, in 2005 to distribute gas to surrounding areas, as well as a new storage terminal at Kansai Electric's LNG base in Himeji, Hyogo Prefecture. The company plans to sell natural gas within a 150-km radius of Himeji and aims to sell tens of thousands of tonnes of gas in 2005, accounting for about 10% of total gas demand in the area.
To construct an LNG storage and distribution complex in Sakai, Kansai Electric, Iwatani, Ube Industries Ltd., and Cosmo Oil Co. will jointly establish a new company. The venture will invest �100 billion or more initially to build three 140,000-kl. LNG tanks on Ube Industries premises. The site might be expanded in the future, however. Kansai Electric has three gas-fueled thermal power generation plants in the cities of Sakai and Osaka and entrusts regasification to Osaka Gas Co.'s Semboku plant in Sakai.
By building the three LNG tanks and using Osaka Gas's pipes to distribute natural gas to nearby factories, Kansai expects to reduce annual costs by billions of yen. Kansai Electric hopes these plans will help it post gas sales of �20-30 billion in 2010.
Tohoku Electric Power Co., a power supplier in northeast Japan, is also considering entering the nation's city gas supply business. As in the case of Kansai Electric Power, the move is based on business diversification efforts to cope with intensifying competition in Japan's deregulated power retail market, says the company.
Tohoku Electric Power plans to participate in a tender to be issued later this year by Yamagata prefecture in northeast Japan. The local government plans to sell off its existing city gas supply business to a local private company in fiscal year 2000 (April 2000-March 2001). The company has been studying the entry into the city gas business and would do so through buying existing gas ventures, the official said.
