Japan needs to lift barriers to third-party access and enhance grid interconnection in order to drive home gas market liberalisation, the Paris-based International Energy Agency (IEA) said its Japan 2021 Energy Policy Review published last week. It also recommended that the role of natural gas in achieving greenhouse gas emissions reduction goals neededs to be clearly defined. 

In 2017, the government embarked on a comprehensive reform of the domestic city gas market, in parallel to the electricity market reform. The aim of the reform was enacted to enhance the security of supply, decrease prices, and expand consumer choice and business opportunities. 

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One of the components of the reform is the promotion of third-party access (TPA) to gas production infrastructure. Since April 2017, owners of 31 LNG terminals each with capacity of 200,000 m³ or more are prohibited from rejecting third-party use without justification. The regulation requires terminal owners to submit and publish their annual estimated available spare storage and regasification capacity, as well as the terms and conditions for TPA use, including access fees.  

The idea behind the new regime was to promote competition in the gas market by using idle storage and regasification capacity of the existing terminals. However, according to IEA, only one applicant has acquired access to LNG terminals to date; other applications were either refused as per the relevant rules or are waiting for the result.  

“The government should closely monitor the situation and adjust TPA conditions and the regulatory framework if necessary,” IEA said. 

Liberalisation in the retail gas market has been slower than in the retail electricity market, but it is picking up. By April 2018, one year after liberalisation, just 3.7% of residential consumers had switched their gas suppliers, according to IEA. By November 2019, this share had increased to 12% of all users. Nationwide, new entrants accounted for 14.3% of total retail sales volume in September 2019, up from 8.2% in April 2017. The market share is the highest among industrial consumers (18%) and reached 9% and 4% for households and commercial consumers, respectively. 

The limited number of new entrants can partly be explained by the nature of Japan’s wholesale market, IEA said. There is no well-defined wholesale market where retailers could procure LNG conveniently. Most entrants, therefore, need to import LNG by using LNG terminals under TPA conditions or purchase regasified natural gas from existing importers that are willing to enter into contracts with them. However, there is a limited number of importers in any given region, given that gas pipeline networks are not interconnected.  

“Better pipeline connectivity and a well-functioning TPA regime are therefore important for the development of a competitive wholesale market and, eventually, to introduce greater competition in the retail market,” IEA stated. 

IEA in its report also said that Japan needs to evaluate the operations of the Electricity and Gas Market Surveillance Commission and consider legislative changes to increase its independence as part of the next phase of market liberalisation.