In Japan’s electricity market, many retailers shop for power as if buying dinner ingredients on the way home from work: they head to the store, basket in hand, hoping prices are kind. Most of the time everything is fine. But when the price of ‘eggs’ – or, in this case, LNG – soars, they have to either swallow the cost or exit the business. The government now wants electricity retailers to stock their ‘pantries’ instead.

The latest discussions inside the energy agency point to the potential creation of a new electricity market and a system under which retailers would be mandated to secure large parts of their customers’ projected power demand several years in advance. The aim is to smooth bills, bolster investment in power plants, and prevent the sort of panic-buying that has at times left Japan’s electricity shelves half-empty.

The reform targets two weaknesses that have become glaring since Japan’s power market was fully liberalised in 2016. First, too many of the 700+ retailers are small, asset-light sector newbies without the means or knowhow to structure long-term contracts, and who rely on the liquidity of the electricity spot market with all the volatility that this entails. Second, this short-termism leaves power generators with inadequate demand signals about future sales, dampening their incentive to invest in new capacity or secure long-term fuel supply.

This is where the so-called Mid- to Long-Term Electricity Market (MLEM) comes in. Japan’s energy planners hope that the mechanism will help to shift the retail industry from “just-in-time” procurement to mature and more stable purchasing, pointing to similar schemes overseas. But will stricter oversight of electricity retail – one of the directions endorsed by the 7th Basic Energy Plan – work in the Japanese context? Or, will it favor the larger industry players and potentially weaken price signals in a liberalized market?