​Royal Dutch Shell quietly enters Japan's $125 billion electricity market

Royal Dutch Shell CEO Ben van Beurden. Image: Shell

One of the largest energy companies is quietly testing the waters of what is perhaps the world’s richest electricity market yet to be tapped by foreign investors.

Royal Dutch Shell Plc has set up a small desk to trade electricity in Japan, where it is in an “experimental” phase of learning to buy and sell power and identify industrial customers.

The second-largest energy firm by market capitalization sees opportunities to balance the grid when there are supply-demand mismatches driven by intermittent wind and solar power.

“We think there will be more volatility in the power system going forward,” Mark Gainsborough, the company’s executive vice president of new energies, told reporters at the company’s Singapore office Wednesday. “There will be more optimization potential sitting in the middle of the value chain.”

Shell’s foray into Japan’s electricity market -- where sales topped 14 trillion yen ($125 billion) last year -- marks the first major foreign company to say it’s entering a market that fully deregulated in 2016, after being dominated for decades by regional monopolies. And it raises the prospect more could follow. RWE AG, one of Europe’s biggest power traders, has said the liberalized market may allow traders to take on risk Japanese firms want to hedge.

Opportunities for traders to help balance the grid will expand as more industrial and commercial users begin generating power on their own premises, according to Gainsborough. Japan, which derived roughly 15 percent of its electricity from renewable sources including hydroelectric dams in the year ended March, is already facing situations where clean power generators must curtail output because supply exceeds demand.

Spot trading on the Japan Electric Power Exchange has surged as reforms required the utilities to sell power. Nearly 30 percent of the country’s electricity was purchased through the exchange in November, up from just 1.5 percent before the reforms.

Japan isn’t Shell’s first foray into power trading. The company operates in Europe and recently set up a power trading and marketing operation in Brazil. It’s also the second-biggest power trader in the U.S., in terms of terawatt-hours sold, Gainsborough said.

“We already have quite a material presence in that market, and one of the things we’re looking to do is extend that capability into new markets,” he said. “We’ll take a look at other markets, particularly as markets deregulate.”

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