Abstract
Environmental regulations may erode competition owing to additional costs of compliance. To investigate the impact of such regulations in the Japanese electricity market, we analyze the effects of the environmental quality threshold set for public sector procurement. Using data on electricity procurement auctions from 2005 to 2012, we employ an endogenous switching regression model. We show that the environmental quality threshold lowers the participation of new power suppliers in auctions but does not increase their winning bids as long as competition is maintained. In fact, compliance with the quality threshold has made new power suppliers competitive in green auctions. By contrast, electricity utilities have suffered increased compliance costs since the Great East Japan Earthquake in 2011 owing to the shutdown of nuclear power plants and increased reliance on fossil fuels.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
A load factor here is defined as the ratio between the projected amount of consumption (average usage) and the contract demand (maximum usage), and is calculated as \(\frac{\hbox {Projected amount of consumption}\,\left( {\hbox {kWh}/\hbox {year}} \right) }{\hbox {Contract demand}\, \left( {\hbox {kW}} \right) \times 24 \left( {\hbox {hours}} \right) \times 365 \left( {\hbox {days}} \right) }\). A load factor shows the anticipated consistency of electricity usage.
Currently, the Japan Atomic Power Company and J-POWER are the only wholesale electricity companies.
As of April 30, 2015, 654 companies were registered as PPSs, of which 71 have past records of sales (Teikoku Databank 2015). Approximately one third of PPSs are in Tokyo and the remainder is spread across Japan.
Deregulation in Okinawa region was limited to customers using 20,000 kW or more of extra-high voltage power in 1999, which was reduced to 2000 kW thereafter.
The data do not include the Long Island Power Authority, small regulated utilities, or those municipalities or other entities that are supplied power through long-term contracts with the New York Power Authority (New York State Public Service Commission 2013).
For example, the fees were 2.03 yen/kilowatt hour (kWh) for extra-high voltage service and 4.15 yen/kWh for high voltage service in 2012 (Ministry of Economy, Trade and Industry 2012).
If an entrant fails to balance supply and demand every 30 mins, an incumbent steps in to fix the imbalance. For example, if a shortage exceeds 3 %, an entrant must pay 51.73 yen/kWh in summer and 45.73 yen/kWh in other seasons. On the contrary, if supply exceeds demand by more than 3 %, the excess electricity is obtained by an incumbent for free. Penalties are relatively low if an imbalance is within \(\pm 3\,\%\): an entrant pays 15.02 yen/kWh for shortages and can sell excess electricity at 10.48 yen/kWh. These fees are for the Tokyo Electric Power Company in 2012, and fees vary among incumbents.
A comparison of the two population means of the original and our datasets shows statistically significant differences for Green and Extrahigh at the 5 % level, but the differences are very small (0.025–0.073 and 0.023–0.067, respectively). No statistically significant differences are detected for any other variable. Therefore, it is unlikely that these exclusions significantly bias our dataset.
To derive E(y|x), we need the following fact about the normal distribution: if \(z\sim Normal\left( {0,1} \right) \), then, for any constant c, \(E\left( {z| z >c} \right) =\frac{\phi \left( c \right) }{1-{\Phi }\left( c \right) }\).
Okinawa, one of the ten regions, is excluded from our analysis because electricity procurement auctions have not been introduced in the region.
The standard error is 361.486. The coefficient is statistically significant at the 5 % level.
References
Agency for Natural Resources and Energy. (2006). Report by the subcommittee to evaluate system reform. Retrieved from http://www.enecho.meti.go.jp/committee/council/electric_power_industry_subcommittee/010_pdf/010_001.pdf.
Agency for Natural Resources and Energy. (2013). Deregulation of retail electricity market. Retrieved from http://www.enecho.meti.go.jp/category/electricity_and_gas/electric/pdf/seido1206.pdf.
Agency for Natural Resources and Energy. (2014). The white paper on energyusage. Retrieved from http://www.enecho.meti.go.jp/about/whitepaper/2014html/.
Besley, T., & Burgess, R. (2004). Can labour market regulation hinder economic performance? Evidence from India. The Quarterly Journal of Economics, 119(1), 91–134.
Cabinet Office. (2007). State of wholesale electricity market in Japan. Retrieved from http://www8.cao.go.jp/kisei-kaikaku/minutes/wg/2007/0425/item_070425_07.pdf.
Cameron, A. C., & Trivedi, P. K. (2009). Microeconometrics using Stata. College Station: A Stata Press Publication.
Creti, A., Pouyet, J., & Sanin, M. E. (2013). The nome law: Implications for the French electricity market. Journal of Regulatory Economics, 43(2), 196–213.
De Silva, D. G., Dunne, T., & Kosmopoulou, G. (2003). An empirical analysis of entrant and incumbent bidding in road construction auctions. The Journal of Industrial Economics, 51(3), 295–316.
Ennet. (2012). Overview and challenges of PPS. Retrieved from www.pref.osaka.lg.jp/attach/15930/00093425/7_siryou1.pdf.
Estache, A., & Iimi, A. (2010). Bidder asymmetry in infrastructure procurement: Are there any fringe bidders? Review of Industrial Organization, 36(2), 163–187.
Hattori, T. (2010). Determinants of the number of bidders in the competitive procurement of electricity supply contracts in the Japanese public sector. Energy Economics, 32(6), 1299–1305.
Heyes, A. (2009). Is environmental regulation bad for competition? A survey. Journal of Regulatory Economics, 36(1), 1–28.
Hosoe, N., & Takagi, S. (2012). Retail power market competition with endogenous entry decision-an auction data analysis. Journal of the Japanese and International Economies, 26(3), 351–368.
Jaffe, A. B., Peterson, S. R., & Portney, P. R. (1995). Environmental regulation and the competitiveness of U.S. manufacturing: What does the evidence tell us? Journal of Economic Literature, 33, 132–163.
Japan Electric Association Newspaper Division. (2010). Japanese electricauction data book. Tokyo: Japan Electric Association.
Japan Electric Power Exchange. (2014). Trading information archives. Retrieved from http://www.jepx.org/english/market/index.html.
Joskow, P., & Tirole, J. (2006). Retail electricity competition. The RAND Journal of Economics, 37(4), 799–815.
Klemperer, P. (2004). Auctions: Theory and practice. Princeton: Princeton University Press.
Krishna, V. (2009). Auction theory (2nd ed.). San Diego: Academic Press.
Lanoie, P., Patry, M., & Lajeunesse, R. (2008). Environmental regulation andproductivity: Testing the Porter hypothesis. Journal of Productivity Analysis, 30(2), 121–128.
Lokshin, M., & Sajaia, Z. (2004). Maximum-likelihood estimation of endogenous switching regression models. The State Journal, 4(3), 282–289.
Maddala, G. S. (1986). Limited-dependent and qualitative variables in econometrics. Cambridge: Cambridge University Press.
Maskin, E., & Riley, J. (2000). Asymmetric auctions. The Review of Economic Studies, 67(3), 413–438.
Ministry of Economy, Trade and Industry. (2012). Report of the expert committeeon the electricity power systems reform. Retrieved from http://www.meti.go.jp/committee/sougouenergy/sougou/denryoku_system_kaikaku/pdf/004_s01_02a.pdf.
Ministry of the Environment. (2013). Actual and adjusted \(\text{ CO }_{2}\) emissionfactors of electricity suppliers in 2013. Retrieved from https://www.env.go.jp/press/17512.html.
Ministry of the Environment. (2015). Tender notice sample form. Retrieved from https://www.env.go.jp/policy/ga/H27hinagata.pdf.
Myerson, R. B. (1981). Optimal auction design. Mathematics of Operations Research, 6(1), 58–73.
Nawata, K. (1994). Estimation of the sample-selection biases models by the maximum likelihood estimator and Heckman’s two-step estimator. Economics Letters, 45(1), 33–40.
New York State Public Service Commission. (2013). Eectric & natural gas retailaccess migration archives. Retrieved from www3.dps.ny.gov/W/PSCWeb.nsf/All/441D4686DF065C5585257687006F396D?OpenDocument.
Porter, M. E. (1991). America’s green strategy. Scientific American, 264(4), 33–35.
Porter, M. E., & Vander Linde, C. (1995). Toward a new conception of the environment-conpetitiveness relationship. The Journal of Economic Perspectives, 9(4), 97–118.
Porter, R. H., & Zona, J. D. (1999). Ohio school milk markets: An analysis of bidding. The RAND Journal of Economics, 30(2), 263–288.
Statistics Japan (2014). Consumer price index. Retrieved from http://www.stat.go.jp/data/cpi/1.htm.
Stock, J. H., & Watson, M. W. (2007). Introduction to econometrics. Boston: Pearson Education Inc.
Teikoku Databank. (2015). The second survey of PPS. Retrieved from https://www.tdb.co.jp/report/watching/press/pdf/p150504.pdf.
Trade Statistics of Japan. (2014). Foreign trade statistics. Retrieved from http://www.customs.go.jp/toukei/srch/index.htm.
Von Dehr, Fehr N. H. M., & Hansen, P. V. (2010). Electricity retailing in Norway. The Energy Journal, 31(1), 25–45.
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data (2nd ed.). Cambridge: The MIT Press.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Okajima, S., Okajima, H. Impact of environmental regulation and the 2011 earthquake on the Japanese electricity industry. J Regul Econ 49, 223–249 (2016). https://doi.org/10.1007/s11149-016-9294-6
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11149-016-9294-6