Japan city gas growth faces hurdles despite reforms

The liberalisation of Japan's city gas market has not been as successful as its electricity market reforms, writes Reina Maeda

Japan's city gas sector faces challenges in expanding further this year despite the market undergoing the final stage of its liberalisation in April 2022.

The city gas sector - piped natural gas sold to the residential, commercial and industrial sectors - was gradually deregulated over 1995-2017. The final phase of the reform will end the dominant pipeline operations of three gas suppliers - Tokyo Gas, Osaka Gas and Toho Gas - which must create new independent piped gas subsidiaries from 1 April 2022. But the liberalisation has not had the same success of the country's similar electricity market reforms of 2016. Around 4mn city gas accounts had switched to new retailers as of 31 March 2021, but this was only 17pc of total users, data from Japan's trade and industry ministry Meti show.

Japan has 26 registered city gas suppliers, including distributors, utilities, refiners and LNG importers. But investing in a new market entrant does not guarantee profits and may not be a feasible business, market participants say. It is hard to provide competitive prices to customers owing to high wholesale prices, they say. And many of the country's suppliers are increasingly looking to invest in decarbonisation projects, slowing the gas grid expansion, an industry expert says.

Gas grids cover only around 6pc of Japan's land area in mainly urban areas, Meti says. People living in rural areas use cylinder LPG or electricity. The share of city gas in Japan's energy mix is much smaller than electricity's, although the number of city gas users has been slowly increasing. Domestic city gas sales rose by 4.8pc on the year to 28.4bn m³ in January-September, Meti data show. The use of LPG as a city gas component, to raise the calorific value, rose by 18pc to 908,800t. But the expansion of the market and the resulting loss in LPG consumption in the residential sector outweighs any gain from additional use as a city gas blendstock.