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Structural reform of Japanese electric power industry: Separation between generation and transmission & distribution

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  • Goto, Mika
  • Inoue, Tomohiro
  • Sueyoshi, Toshiyuki

Abstract

This study examines the cost structure of Japanese electric power industry to investigate whether a structural reform on the industry really enhances a cost-saving benefit to consumers. A composite cost function model, using a panel data set, is used for this study. The data set consists of nine electric power companies from 1990 to 2008. Based upon the estimation results, this study examines whether economies of scale and vertical economies exist in the industry. Then, this study conducts a cost subadditivity test that is a necessary condition of natural monopoly. The empirical results indicate that the electric power firms exhibit the status of economies of scale in their transmissions and distributions and the operation as a whole. However, they do not exhibit economies of scale in their generations. Thus, the transmission operation, by integration, in a large area can improve its economic efficiency. Furthermore, the industry should introduce more competition in both generation and wholesale power markets where more firms can participate in their power trades. This study also empirically confirms that vertical economies have existed in the industry. Moreover, this study confirms that all the estimates in the cost subadditivity test satisfy the necessary condition of natural monopoly, where each estimate indicates cost saving in cost subadditivity. The test does not guarantee a sufficient condition of natural monopoly. However, it clearly indicates that the functional separation between generation and transmission will increase total production cost in the industry. The complete separation may result in a net loss of economic efficiency if a competition benefit does not exceed an expected economic loss. Consequently, this study suggests that the industrial structure of future Japanese electric power industry should be evaluated from not only an expected benefit by introducing competition but also an unbundling cost that occurs with a loss of vertical integration.

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  • Goto, Mika & Inoue, Tomohiro & Sueyoshi, Toshiyuki, 2013. "Structural reform of Japanese electric power industry: Separation between generation and transmission & distribution," Energy Policy, Elsevier, vol. 56(C), pages 186-200.
    • Handle: RePEc:eee:enepol:v:56:y:2013:i:c:p:186-200
    DOI: 10.1016/j.enpol.2012.12.029
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    4. Toshiyuki Sueyoshi & Mika Goto, 2020. "Performance Assessment of Japanese Electric Power Industry: DEA Measurement with Future Impreciseness," Energies, MDPI, vol. 13(2), pages 1-24, January.
    5. Yongli Wang & Shanshan Song & Mingchen Gao & Jingyan Wang & Jinrong Zhu & Zhongfu Tan, 2020. "Accounting for the Life Cycle Cost of Power Grid Projects by Employing a System Dynamics Technique: A Power Reform Perspective," Sustainability, MDPI, vol. 12(8), pages 1-28, April.
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    7. Sudhir Mahadeo Bobde & Makoto Tanaka, 2020. "Structural Reforms and Technical Efficiency in the Indian Electricity Distribution Sector," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(02), pages 1-36, March.
    8. Toshiyuki Sueyoshi & Mika Goto, 2019. "DEA Non-Radial Approach for Resource Allocation and Energy Usage to Enhance Corporate Sustainability in Japanese Manufacturing Industries," Energies, MDPI, vol. 12(9), pages 1-22, May.
    9. Oh, Dong-hyun & Lee, Yong-Gil, 2016. "Productivity decomposition and economies of scale of Korean fossil-fuel power generation companies: 2001–2012," Energy, Elsevier, vol. 100(C), pages 1-9.
    10. Li, Hong-Zhou & Kopsakangas-Savolainen, Maria & Xiao, Xing-Zhi & Lau, Sim-Yee, 2017. "Have regulatory reforms improved the efficiency levels of the Japanese electricity distribution sector? A cost metafrontier-based analysis," Energy Policy, Elsevier, vol. 108(C), pages 606-616.
    11. Toshiyuki Sueyoshi & Youngbok Ryu & Mika Goto, 2020. "Operational Performance of Electric Power Firms: Comparison between Japan and South Korea by Non-Radial Measures," Energies, MDPI, vol. 13(15), pages 1-23, August.

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