Survey reveals electricity procurement trends of local governments

Survey reveals electricity procurement trends of local governments   Major utilities reclaiming former customers, a major trend in 2019

With the transformation of Japan’s electrical power system and liberalization of the electricity retail market, many “new power producers” have been established all over the country and market situation is changing. Electricity procurement by local governments plays an important role in this context due to their large contracts. FoE Japan serves as the secretariat for the Power Shift campaign, which together with the Asahi Shimbun newspaper, the Hitotsubashi University Natural Resources and Economics Project, and the Institute for Sustainable Energy Policies (ISEP) conducted a survey in June and July 2019 on the status of electricity procurement by local governments. Responses were received from 134 local governments.

Source: Asahi Shimbun, “Reality of the oligopoly revealed as majority of local governments go back to major power utilities,” October 29, 2019 (in Japanese).

What stands out from a close look at responses shows that Japan’s major utilities won the open bid in about half the contracts (47 prefectures and 20 major cities) to supply electricity for the main government buildings. The map shows in orange the local governments (36) that had at one point entered a power purchase contract with a new power producer but then returned to a major utility, and yellow shows those that stayed with a major utility all along (18). The total (36+18=54) reveals clearly that a significant number had contracted with a major utility. The major utilities own many large power generating facilities built decades ago and paid for by electricity consumers based on pricing determined through rate-of-return regulation of utilities. The result is that the big utilities are able to make extremely competitive bids at considerable discounts, which are difficult for new power producers to match.

The need to include environmental criteria in electricity procurement contract bids

Based on the “Act on Promotion of Contracts of the State and Other Entities, Which Show Consideration for Reduction of Emissions of Greenhouse Gases, etc.” (2007), local governments are required to make an effort to consider environmental performance when entering into electricity and other procurement contracts. The survey showed that still only a low percentage of prefectures (53%) and major cities (55%) is considering the environment in their procurement of electricity. The government’s basic policy under the Act refers specifically to electricity procurement and provides examples of a minimum threshold to qualify for bidding (electricity suppliers are scored mainly on their CO2 emission factor, and can only participate in bidding if they achieve a minimum score of 70 points). But this has not led to the promotion of contracts for renewable energy and/or local new power producers. In addition, the CO2 emission factor is not zero for electricity procured under the feed-in tariff (FIT) system (electricity procured from renewable energy facilities that received subsidies under the fixed-price purchase system, or feed-in tariff). New power producers are weighted heavily with FIT electricity procurement, so they end up with a high CO2 emission factor unless they take steps to offset like purchasing certificates with zero CO2 value. This puts them at a disadvantage in bidding, so this problem also needs to be addressed.

In open bids, the winner is determined only by price. From our perspective, the winning bid should be based on a comprehensive evaluation that covers other factors, including the ratio of renewable energy in a supplier’s power mix. Starting in fiscal 2019, the Tokyo Metropolitan Government introduced a comprehensive evaluation method for the open bid process for its main building (Building Number 1), and as a result signed a contract with a new power producer that provides 100% renewable energy. As another positive example, the city of Shizuoka has signed a contract with local new power producer, chosen by a bid process using a comprehensive evaluation.

Renewable energy has huge potential for local governments

On the positive side, more local governments (from prefectures to municipalities) are establishing their own new power producers. Yamagata Prefecture, Tokorozawa City (Saitama Prefecture) and others have already established their own new power producers, and in nearly every case they procure electricity for their main buildings from those producers through a negotiated or no-bid contract. The Local Autonomy Act stipulates that, in principle, open bidding is to be used to procure goods and services at lower prices for local governments. However, negotiated or no-bid contracts are permitted if bidding is not considered appropriate. In many cases, this is based on the rationale that in local government plans is it important to promote renewable energy and local power sources. Rationale for local governments to establish new power producers often includes promoting economic circulation at the local/regional level, local/regional stimulation or revitalization, and the utilization of local/regional renewable energy. But in many cases, even local governments that have established their own power producers are facing various challenges with the procurement of renewable energy and electricity generated locally.

Some local governments procure renewable energy to contribute to local communities

The following recommendations were compiled based on the survey. The Power Shift campaign plans to reach out to local governments to publicize exemplary cases and further encourage the procurement of renewable energy to contribute to local communities.

(1) The procurement of electricity by local governments should not be based on price alone, but rather, on a comprehensive or integrated perspective. Electricity procurement is intimately linked with other locally-important factors such as regional planning and economic conditions. Procurement decisions should also consider the environment, renewable energy, and new power producers in the region, etc. The option of local governments to establish their own new power producers is also an effective and promising approach.

(2) Local governments need to develop long-term visions for sustainable regional development and regional revitalization, and share those visions with local communities and overall society nationwide.

(3) It is important to identify and rectify the disparities (ownership of power supplies, customer information, etc.) between new power producers and the major utilities that are driving the noticeable trend of major utilities “taking back” contracts (reclaiming former customers) through general competitive bid processes.

(4) The basic policy under the “Act on Promotion of Contracts of the State and Other Entities, Which Show Consideration for Reduction of Emissions of Greenhouse Gases, etc.” should be amended to encourage the use of a comprehensive/integrated perspective to determine successful bidders, and this approach should be mandatory not only for the national government but also for prefectures and municipalities (cities, towns, villages, and special wards).

“Survey report on the status of local government power procurement in Japan: For environmental consideration and regional economic circulation”

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FoE Japan activities: Supporting Power Shift

Since the 2011 nuclear accident, many people have been wanting to be able to choose their electricity from renewable energy sources and avoid nuclear power. FoE Japan has played a key role in supporting the Power Shift campaign in cooperation with environmental groups, consumer groups and anti-nuclear groups, to call for consumer-led choice of electricity. Power Shift provides information about electricity suppliers in terms of their total power mix, procurement of renewable energy, and avoidance of nuclear and coal power, etc.

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