Japan’s power sector is under pressure to reform pricing rules of the country’s power capacity market auction, given unexpectedly high prices in the recent first auction.
The contract price for the first auction, which was for power generation capacity available in the April 2024-March 2025 fiscal year, settled at ¥14,137/kW ($134.45/kW) for 167.69GW. This was around 50pc more than the ¥9,425/kW of the net cost of new entry (net Cone) and just below the ceiling price of ¥14,137.50/kW.
The auction result has surprised small-scale power retailers, as the contract price reflected higher reciprocal billing made by a few power generators. The first auction was carried out in a single price auction system, which allowed all winners to issue the same contract price.
The current auction rule allows power generators, bidding for a power capacity started up before March 2011, to bid at relatively high prices assuming that maintenance costs are included in the bid. This will cover the deduction for the pre-March 2011 capacities from the deal price, about 42pc for 2024-25 and gradually reduced to zero by 2030-31. The rule will reduce the burden on small-scale power firms during transition.
Japan’s registered power retailers are obligated to pay winning power generators based on the contract price during 2024-25, through Japanese power agency the Organisation for Cross-regional Co-ordination of Transmission Operator (Occto).
Most bids that are close to the contract price were made by the reciprocal bidding to collect the deduction in the deal price, which boosted the contract price for all winners, the electricity and gas market surveillance commission under the Ministry of Economy, Trade and Industry (Meti) said. Bidding at prices above the net Cone accounted for 11.7pc of total bids, while bids at zero yen were 78.5pc.
The commission also disclosed that 9,290MW, or 5.5pc of total contract capacity, including 5,960MW for oil-fired capacities, 2,840MW for LNG-fired capacities and 480MW for others, were bid at prices higher than ¥14,000/kW.
Small-scale power firm Ennet has criticised the contract price to be an unacceptable level, estimating that its cost burden would rise to ¥25bn based on the 2024-25 price.
The commission has prompted Meti and the Occto to rethink the current rules for the transitional measures and reciprocal billing ahead of the next year’s power capacity market auction, such as the validity of a single price auction for reciprocal bidding. It also suggested that the authorities should review how to calculate maintenance costs.
The mechanism aims to encourage investment in power generation plants by securing capacity and funding in advance, given an increase in unstable renewable power sources. It is unclear which power capacity has won the auction. But bids included 41,260MW coal-fired, 70,940MW LNG-fired, 13,420MW oil-fired, 7,040MW unclear, 290MW renewable, 13,310MW hydropower, 21,380MW pump-storage power capacity, Occto said.
Author: Motoko Hasegawa