Japan’s electric power system reforms are heading towards maximizing market mechanisms. They are trying to achieve economic efficiency by introducing a number of markets including Base Load market, Supply and Demand Adjustment market, Capacity market, Non-fossil Value Trading market, Indirect Auction. However, almost all stakeholders believe that these markets will not work.
Why do they?
Among them, capacity market is considered to be the biggest problem. On capacity market, it is assumed that the generation output (kW value) is traded four years before the actual transaction, and the electric energy (kWh value) is to be traded on the wholesale electric power market separately.
However, this system is analogous to dividing the apple into sour and sweet and putting them on auction for each taste. An apple farmer will be in trouble if the bidding is made on sourness, but the situation that the sweet taste could not be bid successfully. The lowest trading unit of an apple is one apple. It is unrealistic to trade one apple’s different tastes in different markets.
Power is also the same. Power generation is only possible when the power plant and fuel are united.
When auctions are conducted separately in the capacity market and the wholesale power market respectively, for example, the power contracted in the capacity market will not close in the wholesale power market. Naturally, situations like wasteful construction of power plants that do not operate never happen, but the capacity market could theoretically lead to such a situation.
In addition, there is an inverse correlation between the construction cost of the power plant and the fuel cost. The construction cost is higher as the cheaper power source of the fuel cost, and it is not competitive in the capacity market. For this reason, in the past, we aimed for a power supply configuration with high economic rationality as a whole, taking into consideration the facility utilization rate of each power plant sufficiently.
Unfortunately the capacity market neglects the correlation between such construction costs and fuel costs.
Originally, “market” is one that both the seller and the buyer agree and is formed spontaneously. It is because bureaucrats who are not practical think only by head to realize the system that the market which is not supposed to function like this is to be formed.
Recently large-scale coal-fired power projects have been stopped one after another. Kyushu Electric Power Co., Tokyo Gas, Idemitsu Kosan (January 2019), Chugoku Electric Power Co., JFE Steel (December 2018), Kansai Electric Power Co., TonenGeneral (March 2017 March) projects canceled announcement. About the background, media says, the wind against the coal fire power is raising, but that is not all.
It is highly likely that planning of power plants such as coal fired power, which is particularly expensive to construct, has been forced to stop as market design sent an erroneous message to the power plant construction market.