Japan revises power capacity auction rules

Japan's trade and industry ministry (Meti) is set to revise the country's power capacity auction system to ease the burden on power retailers. The reform was in response to last year's first auction results settled at extremely high prices.

One of the main changes for the single-price auction would be reform of pricing rules, a working group under Meti said on 26 April in its draft interim report to review the country's power base-load and capacity markets. The proposed new rules will prohibit the reciprocal bidding to collect any deductions set for relatively old power plants.

The original auction system allows power generators, bidding for a power capacity started up before March 2011, to bid at relatively high prices assuming that maintenance costs are included in the bid. This was deemed to cover the deduction for the pre-March 2011 capacities from the deal price, which was about 42pc for the previous auction and expected to be gradually reduced to zero.

The pricing rule was initially thought to reduce the burden on power retailers during transition. But the contract price for the first auction, which was for power generation capacity available in the April 2024-March 2025 fiscal year, settled at ¥14,137/kW ($130.60/kW), around 50pc more than the ¥9,425/kW of the net cost of new entry. This surprised power retailers, as the contract price reflected higher reciprocal bidding made by a few generators in the single price auction, which allows all winners to issue the same deal price.

The proposed new rules still adopt the deduction from a contract price for the pre-March 2011 capacities to support power retailers, but not allowing any reciprocal bidding. Power generators with lower bid prices, below a contract price by a certain ratio, would also receive less money. The deduction rates for the 2025-26 capacities are proposed at 7.5pc for old plants and 18pc for lower bids, with the ratio expected to gradually fall to 1.5pc and 3.6pc respectively in 2029-30.

The renewed auction system also aims to accelerate the phase-out of the country's inefficient coal-fired power plants while securing enough power capacity. The new rule sets a 20pc deduction from a contract price for coal-fired power plants that use less advanced technology than ultra-supercritical technology, or around 42pc thermal efficiency, with a utilisation ratio above 50pc.

Japan plans to hold the second power capacity market auction, which is targeted for capacity available in 2025-26, through the Organisation for Cross-regional Co-ordination of Transmission Operator (Occto) in September-October, reflecting the revised rules. The next auction could seek 98pc of targeted capacity volumes this year, and the remaining 2pc during 2024-25 to adjust balances.

Japan has introduced the power capacity auction mechanism to promote investment in power generation plants, by securing capacity and funding in advance especially amid an increase in unstable renewable power sources. The Occto has to collect from the country's registered power retailers and pay winning companies during corresponding period.

By Motoko Hasegawa