Japan's city gas sector has been facing challenges in expanding further. The city gas market was fully deregulated in 2017 and will undergo its final stage of liberalisation next year.
Japan's city gas sector has been gradually deregulated since 1995, and the full liberalisation of the retail gas market was completed in 2017. The final phase of the long-term system reform will end with the split of pipeline operations among three domestic gas retailers, namely Tokyo Gas, Osaka Gas and Toho Gas. The three retailers are required to create new independent pipeline-dedicated subsidiaries, and this will come into effect on 1 April 2022.
But the liberalisation of the country's city gas sector lags far behind that of the electricity market, which was deregulated in 2016. About 4mn accounts across the country were switched from typical gas retailers to new entrants as of 31 March this year, which is only 16.8pc of total city gas users in the country, according to data from Japan's trade and industry ministry Meti. Meti has since stopped disclosing this data as four years have passed since the full liberalisation of the sector. Tokyo and the Kansai region, the two biggest power consuming areas in Japan, saw an increase in users switching to new entrants. But no switches were observed in the northern Hokkaido and Tohoku regions and the western Chugoku and Shikoku regions, where few or no major pipelines are installed compared with other areas in the country.
City gas pipelines are installed in only 6pc of the country's land area, mainly in urban areas, said Meti. People in other regions, including rural and mountainous areas, use cylinder LPG as LPG does not require costly pipeline installations. There are also fully-electric homes which do not require gas for cooking. The share of city gas in Japan's energy mix is much smaller than the country's electricity market, though the number of city gas users has gradually been increasing in line with an expansion of pipeline networks.
The country's city gas sales rose by 4.8pc to 28.4bn m³ in January-September compared with the same period in 2020, according to the latest data from Meti. Requirements of both LNG and LPG, the main feedstocks of city gas, increased over the same period by 3.2pc to 19.3mn t and by 17.5pc to 908,773t, respectively, in line with an increase in city gas sales.
The city gas sector does not have a wholesale exchange in the energy market, such as the Japan electric power exchange (Jepx), which poses another challenge for liberalisation. New entrants must directly purchase city gas from existing gas retailers or city gas producers that are able to produce gas which blends LNG and LPG to meet Meti's standard specifications. There are 26 companies registered as city gas producers presently, including gas retailers, power utilities, refiners, and LNG importers. Investing in new city gas sector entrants does not ensure profits and is not feasible as a business, said market participants. It is difficult to provide a competitive price for customers on the back of the cost of purchasing city gas from such producers, participants added.
Tokyo Gas last month updated its business plan as part of its efforts to support the country's 2050 decarbonisation goal. The company will invest ¥2 trillion ($17.6bn) into growth areas including decarbonisation, and is currently researching the production of carbon-free synthetic methane as an alternative feedstock of LNG for city gas.
Gas distributors are accelerating purchases of "carbon-neutral" city gas, which offsets CO2 emissions using carbon credits obtained from supporting environmental programmes. Nine gas distributors have bought such city gas from the country's upstream firm Inpex so far, while two other gas distributors have purchased "carbon-neutral" LNG cargoes from Inpex. Most gas distributors are rushing to develop businesses related to decarbonisation right now and do not have the funds to invest in city gas itself, according to a market expert.
