Recommendations for Power System Restructuring Toward Further Deployment of Renewables October 2020 Renewable Energy Institute Acknowledgements In preparing these Recommendations, we interviewed energy specialists at government agencies, the Electricity and Gas Market Surveillance Commission, energy companies, consultancies, universities, and independent research institutes and received from them many helpful suggestions. We would like here to express our gratitude to them. These Recommendations were written by Renewable Energy Institute (REI)’s Power System Restructuring Research Team. The primary authors are listed below (in Japanese alphabetical order). Hiroshi Takahashi, a senior research fellow at REI and professor at Tsuru University, led the research team and provided suggestions for the writing overall. Hiroshi Takahashi Senior Research Fellow / Professor, Tsuru University Keiji Kimura Senior Researcher (Chapter 3, Part 3) Mika Ohbayashi Director Mika Kudo Senior Researcher Seiichiro Kimura Senior Researcher Tatsuya Wakeyama Senior Research Fellow / Associate Professor, Kyushu University (Chapter 4, Part 1) This Recommendation is translated from "電力システム改革に対する提言：自然エネルギーのさらなる導入 拡大に向けて" released on 14 May 2020. In case of discrepancy between this English translation and the Japanese original, the Japanese text prevails. Disclaimer: Although the information given in this report is the best available to the authors at the time, Renewable Energy Institute cannot be held liable for its accuracy and correctness. About Renewable Energy Institute Renewable Energy Institute is a non-profit think tank which aims to build a sustainable, rich society based on renewable energy. It was established in August 2011, in the aftermath of the Fukushima Daiichi Nuclear Power Plant accident, by its founder Mr. Son Masayoshi, Chairman & CEO of SoftBank Corp., with his own resources. Table of Contents Introduction Nine years of electricity system reform ................................................................... 1 Completing the unbundling and strengthening the authority of the independent regulatory body ............................................................................................................. 3 Part 1 Types of generation–transmission separation and assessment of legal unbundling ..................................................................................................................... 3 Three types of unbundling ......................................................................................................... 3 Historical background of unbundling in Japan .......................................................................... 4 Assessment of legal unbundling and the superiority of the ownership unbundling .................. 5 Two types of legal unbundling in Japan .................................................................................... 6 Part 2 Conduct regulations under legal unbundling ............................................................. 7 Regulations related to personnel ............................................................................................... 7 Regulations related to preventing unfair transactions ............................................................... 9 Regulations related to compliance systems ............................................................................. 10 Part 3 Role of independent regulatory body and its enhancement of authority .............. 11 Authority and regulations of Europe’s independent regulatory bodies ....................................11 Status of Japan’s Electricity and Gas Market Surveillance Commission ................................ 12 Promoting competition in the retail sector and the market to realize decarbonized society ........................................................................................................................... 14 Part 1 For fair competition in the retail sector .................................................................... 14 Competition in the retail market .............................................................................................. 14 Problem of sales activities to retake customers and rate discounts by major power utilities .. 16 Distortions in the electricity market due to the “fairness” of nuclear decommissioning cost sharing ................................................................................................................................ 18 Part 2 Promotion of retail market reforms to realize a decarbonized society .................. 19 Realization of a decarbonized society and the retail market ................................................... 19 Power source disclosure status in Japan .................................................................................. 19 Power source disclosure system in Europe and the US ........................................................... 20 Challenges in purchasing renewables ...................................................................................... 23 Promoting competition and market system reform in the generation sector ........ 25 Part 1 Competition in the generation sector and the status of the day-ahead market .... 25 Competition in the generation sector ....................................................................................... 25 Day-ahead market and effects of gross bidding ...................................................................... 26 Structural measures to promote competition in the generation sector in Europe and the US .. 27 Part 2 The “Baseload market” and electricity futures market .......................................... 28 Current state of the “Baseload market” ................................................................................... 28 Current state of electricity futures market ............................................................................... 29 Market systems in Europe for promoting competition ............................................................ 29 Part 3 Concept of capacity market and decarbonization ................................................... 30 Diversity of capacity mechanisms ........................................................................................... 30 Discussion of Japan's capacity market design ......................................................................... 31 Inconsistency with decarbonization policy .............................................................................. 32 Capacity market designing example in Europe and the US .................................................... 33 Realizing fair and rational grid operations .............................................................. 35 Part 1 New initiatives for grid connection ............................................................................ 35 Lack of "available capacity" on transmission lines ................................................................. 35 Japanese version of “Connect and Manage” ........................................................................... 35 Cases of overseas grid integration of renewables .................................................................... 37 Part 2 Rational enhancement of transmission networks .................................................... 38 Importance of systematic transmission network design .......................................................... 38 Necessity of open discussions on identifying broad social benefits ........................................ 39 Cost burden for grid formation ................................................................................................ 40 Column: Approaches to setting charges for grid strengthening – Generation Side Basic Wheeling Charge, G-Charge .................................................................... 42 Part 3 Balancing supply and demand to accelerate high integration of renewables ....... 43 Supply and demand balancing mechanisms under electricity system reform ......................... 43 Japan’s balancing market and European market ...................................................................... 44 Supply and demand balancing market challenges ................................................................... 45 Conclusion ...................................................................................................................................... 48 List of Recommendations ................................................................................................................ 49 [List of Figures] Figure 1-1 Three types of unbundling ............................................................................................................... 4 Figure 1-2 Two types of legal unbundling ......................................................................................................... 6 Figure 2-1 Retail market share by sector and type of power retailers ............................................................. 15 Figure 2-2 Examples of electricity label in the UK ......................................................................................... 21 Figure 2-3 Examples of US electricity labels .................................................................................................. 22 Figure 3-1 Ratio of day-ahead market and intraday market transactions to total electricity sales ................... 26 Figure 3-2 Types of capacity mechanisms ......................................................................................................