Japan power derivatives electrify market as foreigners plug in

TOKYO, Nov 27 (Reuters) – Trading of a Japanese power market derivative offered by the European Energy Exchange (EEX) has surged in the six months since its launch as overseas traders and investors pile into the world’s fourth-biggest electricity market.

EEX Japan power swaps amounting to 111.5 million kilowatt hours (kWh) were traded in October, 10 times the volume in the first month of trading in May, Bob Takai, the head of the European exchange’s Japan office, told Reuters in an interview.

The surge in trading highlights growing overseas interest in the once-closed electricity sector in Japan after a series of reforms, prompted by the 2011 Fukushima nuclear disaster, led to the gradual opening up of the market.

Once a backwater in the energy sector, the Japan Electric Power Exchange (JEPX) has become the locus of action in a deregulated market, with volumes of the bourse’s spot power contract accounting for more than 40% of sales in June in the roughly $140 billion electricity market.

Before the market was almost fully liberalized in 2016, when the government allowed any supplier to sell electricity to households, trading on JEPX accounted for less than 2% of the market.

“JEPX has become a very liquid spot market,” Takai said. Liquid enough for EEX to launch power swaps based on the spot price on JEPX and cleared through the European bourse, which reduces counterparty risk, he added.

To attract more participants EEX is waiving its fee of 3 yen per megawatt hour for another six months from November, he said.

Foreigners account for about 70% of the traders in the EEX product and come from nine countries outside Japan.

These include trading arms of European energy companies ENGIE and Electricite de France, along with trading house Trafigura and brokerage Simpson Spence Young (SSY), while local participants include Mitsui and Tohoku Electric Power.

“It’s really the missing piece of the puzzle in terms of bringing the global power markets into Japan and providing liquidity,” said James Whistler, global head of energy derivatives at SSY, which accounted for nearly 50% of volumes in the EEX contract in October.

Overseas companies are also looking to invest in power generation such as offshore wind farms as well as the solar industry, which has seen massive growth in recent years after mandatory preferential tariffs were introduced.

Denmark’s Orsted, the world’s largest offshore wind farm developer, has teamed up with Tokyo Electric Power to bid for an offshore wind farm near Tokyo.

Germany’s biggest electricity producer, RWE, also recently set up a Japanese subsidiary to trade power and offer risk management products to local companies.

“The market’s set-up has now started to get more refined, more attractive and more interesting for foreign market players,” Peter Krembel, chief commercial officer trading at the energy trading unit RWE, told Reuters in a recent interview.

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