Japan’s Electricity Reforms Spark Increased Derivatives and Trading Talent Demand
Category: Insights

Japan’s Electricity Reforms Spark Increased Derivatives and Trading Talent Demand

Ongoing reforms in Japan’s electricity market are offering new opportunities for traders. New rules to encourage the growth of battery energy storage systems (BESS) and tackle the intermittency of renewable energy represent one of the latest signals for participants to sophisticate their price risk management further. As a testament, the European Energy Exchange (EEX), a leading marketplace in Japan, is planning to offer new products to trade this year. But to be successful, employers will need to take a long-term view to adopt an adequate recruitment strategy and build derivatives, sales and trading teams from scratch. 

BESS amendments 

In May 2022, the Japanese government amended the Electricity Business Act to categorize stand-alone BESS businesses and allow them to apply for power grid connections. The new terms will come into force on 1st April 2023.  

The amendment also comes after the Japanese government offered JPY13bn for a subsidy program for BESS construction projects from February to March 2022, according to reports. This led to a growing number of private companies investing in battery storage projects, including large-scale plants. Falling costs of BESS are also anticipated to trigger a significant expansion of battery storage projects with more new entrants taking position in Japan.  

While the new terms are coming into force this year, it may take one to two years for market participants to be ready for the implementation and operation (both technical and commercial) of these new BESS. 


Essentially, the aim of increased BESS capacity is to make grids more reliant as the country gradually increases the share of renewables to hit net zero targets. Japan has set a target for nuclear power generation to provide 20% to 22% of electricity and renewables 36% to 38% in the fiscal year 2030. At present, fossil fuels represent around 88% of Japan’s total power generation. LNG and coal are the most used fuels (more or less on an equal proportion), followed by oil, nuclear and renewables.  

The decision to amend BESS terms comes after the introduction in April 2022 of feed-in premiums (FIPs) to replace feed-in tariffs (FITs) which consisted in a fixed, subsidized price set by the government for renewable projects, as previously explored by HC Insider here.

Limited liquidity has resulted in high price volatility in Japan spot electricity market especially in times of peak heating demand in the winter.

The introduction of FIPs marks a shift to market-based prices. Under the FIP scheme, the premium received by generators is typically calculated as a margin added to the wholesale market price, or in the Japan Electricity Power Exchange spot prices. This means that the FIP-based revenue fluctuates in tandem with the market price movement. 


The FIPs are expected to bring more renewable developers and those who support them into the wholesale markets.  

These policy changes are having a huge impact on demand for Japanese energy talent across a wide range of market participants, according to Douglas Ferguson, Portfolio Director at HC Group in Singapore. “Oil majors and national oil companies have invested heavily in offshore wind projects resulting in a need for originators who can structure medium to long-term Power Purchase Agreements. Trading houses, US investment banks and European utilities are also strategically expanding in Tokyo by adding derivatives traders and analysts with a view to capturing short-term volatility,” Ferguson adds.  

But new BESS and FIPs rules are also designed to help reverse a trend of low liquidity that has plagued Japan’s power market in recent years (despite opening to retail suppliers in 2016).  

Limited liquidity has resulted in high price volatility in Japan spot electricity market especially in times of peak heating demand in the winter. This has become even more acute since the start of the Russia-Ukraine war. The current global energy crunch and rising gas prices and tight LNG supplies have put Japan’s grid and fuel stocks to the test, further encouraging the development of renewables.  Many Japanese companies in both the power generation and retail sectors have also been struggling to maintain healthy balance sheets and be active on wholesale trading markets. 

Risk management 

The availability of new BESS infrastructure is also meant to maximise the use of renewable supply, make the grid more stable and provide more visibility to traders into supply and demand fundamentals. Increased investment into renewable energy infrastructure offers significant arbitrage opportunities against other fuels like LNG, coal and oil. 

Importantly, the country is dependent on imports to meet more than 96% of its current energy consumption needs. Therefore, increasing the share of renewables would not only allow Japan to reduce its exposure to external prices. It would also enable the growth and formation of its own market and prices based on its domestic supply fundamentals.    

But this will take time. As liquidity improves, the risk of volatility stresses the need to bolster risk management capabilities, both for existing participants and for renewable energy producers. 

In this context, and following the introduction of FIP schemes last year, the EEX plans to launch a new daily futures contract during the first half of 2023 which is expected to transform the liquidity of its Japanese power futures product offerings especially in the short end of the curve, Bob Takai, Executive Advisor at the EEX told HC Insider.  

“Whilst it will still take time to develop, the combination of policy change and new product offerings will boost liquidity and encourage more new market entrants,” he adds.    

This will continue to draw on increased talent needs too. “There is a huge opportunity for banks and trading houses to provide renewable energy companies hedging solutions to manage their risk which will require significant investment in risk management system and talent,” Takai said. 

Positioning for the long term 

The development of Japan’s electricity market holds many promises for the years ahead. However, the market remains incredibly tight on talent, more than in any other electricity trading market globally. “Whilst liberalisation creates once-in-a-generation commercial opportunities, there is also a lot of risk and uncertainty,” Ferguson warns. “International companies have to be willing to embrace creative hiring strategies in order to expand.” 

Patience and a long-term view are crucial. These characteristics do not always go hand-in-hand with trading businesses. “Having said that, companies that invest in building trading and origination teams now will be best positioned for success over the next five to ten years and beyond,” he concludes. 

For queries related to HC Group’s insight into Japan’s energy market, please contact: 

Douglas Ferguson, Portfolio Director at HC Group in Singapore 

Mikari Kuga, Associate at HC Group in Singapore