Open for competition: Electricity in Japan

Retail, cell service, banking — the thoughtful consumer generally assumes they have choices when picking services in a modern economy. And for many industries, healthy competition is crucial to ensuring that customers get to choose from the best services possible.

So why do essential utilities like electricity often get a pass from the typical rules of business competition?

For many countries, the answer lies in infrastructure: There is often just one electricity grid, one set of wires flowing to each household. Duplicating such infrastructure for the sake of competition would be foolhardy — not to mention incredibly expensive.

In all but the youngest cities and towns, the groundwork for these basic utilities was laid almost a century ago, often by or with the oversight of the government. In the past, the group that controlled the physical infrastructure received payment for their use in the form of bills from customers, leaving the consumer with little or no option to shop around.

Sparked in part by a growing demand for choices in infrastructure service industries, the electricity market is evolving with the times. And for Japanese households, consumer choice is being actively promoted by the government.

Overcoming division through disruption

Japan’s electricity grid — physically separated from the rest of the world by an ocean — has been split down the middle since its very inception. Tokyo, in the east, purchased its very first AC generators from German electrics producer AEG in the 1800s, while Osaka, in the west, acquired their first equipment from General Electric soon afterwards.

Ever since, Eastern Japan has run at 50Hz and Western Japan at 60Hz, completely isolated save for just a few frequency converters bridging the two grids. Until recently, a small number of providers enjoyed regional monopolies over the electricity infrastructure of each area.

The problematic nature of this fragmented system became painfully apparent following the 2011 Great East Japan Earthquake and nuclear disaster in Fukushima, as officials battled to reroute excess electricity from the west to make up for the sudden shortage caused by nuclear shutdowns in the east. Debates surrounding this electrical incompatibility had been swirling for decades, but the 2011 disaster jolted the government into action, setting Japan’s energy industry on the path to the biggest liberalization since Germany in the 1990s.

While Japan had already dabbled in opening up the market to certain sectors, it wasn’t until 2015 that the government decided that concrete action was necessary to truly allow newcomers to break into the established regional monopolies and sell to general consumers. Laws were revised to force utilities to sell their electricity at wholesale prices and give other companies access to their infrastructure.

By liberalizing the market, the government is hoping to boost compatibility between regions while also introducing new competition to challenge regional monopolies, driving innovation, efficiency and lower prices for Japanese households. The revision not only allows power companies to compete with one another outside of their own territories, but also opens the market up for industry newcomers to sell electricity alongside their own services.

Empowering customers: Rakuten Denki

Despite these substantial steps from government, after four years of liberalized electricity, just 22.6% of customers have switched away from the major providers as of July 2020. Many don’t see the point of switching services — even if prices are lower — and consider the switching process too complex and troublesome to be worth the effort.

That’s a challenge Rakuten Denki is tackling head on. Since 2018, it has been providing electricity services to household customers, offering an alternative take on utility budgeting.

Rakuten Denki has a laser focus on simplicity, a common theme among Rakuten Group services. Applications are entirely online — no faxing or posting necessary — and users can register, pay and even earn Rakuten’s famous loyalty points on their bill, all through their existing Rakuten ID.

Fees have also been simplified: Rakuten Denki has done away with the ubiquitous “basic fee” that has long mystified customers of other Japanese electricity providers, instead only charging for the exact kilowatt hours each household uses.

So far, the service has been a hit, earning the top spot among alternative electricity providers in surveys measuring customer satisfaction in the industry. Respondents to an NTT survey cited the reasonable rates, strong loyalty program and comprehensible pricing plans as chief reasons for their high level of satisfaction.

In many ways, Rakuten Denki’s strategy mirrors that of another Rakuten service made possible by regulatory reform. Allocated spectrum by the government in 2018, Rakuten Mobile took up the challenge of becoming Japan’s fourth major carrier to help break the industry’s pricing stalemate and pass back savings to Japanese consumers. It has been disrupting and revolutionizing the industry ever since.

Customers are giving both services top marks for competitive prices and simple service plans.