A decade ago, in the wake of the Great East Japan Earthquake and the Fukushima Daiichi Nuclear Power Plant accident, Japan moved forward on electric power system reforms. These efforts to liberalize and bolster the country’s electricity market were guided by three objectives: security, by ensuring a stable electricity supply; affordability, by keeping electricity costs as low as possible; and competition, by expanding choices for customer and business opportunities for market participants.
While the reforms substantially modernized and fortified the market, the underlying conditions surrounding Japan’s energy sector have changed markedly in the years since. Today, Japan’s power market is at a pivotal stage, with accelerating decarbonization efforts, fuel price volatility, geopolitical risks, and rising interest rates, materials costs, and electricity demand over the next decade. Together, these pressures are making it difficult to meet the basic tenets of the earlier reforms — a reliable electricity supply, affordable prices, and progress toward decarbonization.
Against this backdrop, the Japanese government has been debating what functions and societal roles the power industry should fulfill moving forward and has looked at overseas markets for ideas. Commissioned by Japan’s Ministry of Economy, Trade and Industry (METI), Oliver Wyman conducted a study on overseas power market designs, regulatory frameworks, and industry structures — focusing on selected markets in Europe and the United States.
In our country-level market analyses and case studies, we took an in-depth look at how European market designs and institutional frameworks affect competition across the power value chain, investment behaviors, and shifts in business models. We also analyzed European utilities through the lenses of horizontal and vertical coordination.
Japan’s energy future depends on resilience and diversity
Japan faces a uniquely thorny challenge when it comes to energy: It has negligible fossil fuel reserves. As a result, Japan must rely on imported fuels, making it vulnerable to geopolitical disruptions and other macroeconomic shocks in oil and gas markets. Unlike European countries, Japan, as an island nation, has limited access to alternatives like pipeline gas or sharing supplies with other countries in the region.
Because of these realities, Japan has consistently faced challenges in fulfilling its commitment to maintaining a stable electricity supply and affordable prices, due largely to volatility in the global energy market.
Given its limited domestic resources and geographical constraints, Japan has sought to create a diversified power generation portfolio that includes thermal power, renewables, and nuclear power as a means of ensuring security of power supply. This mix, which is increasingly reliant on renewables, also supports the nation’s efforts to decarbonize its economy.
Emerging growth drivers are further reshaping Japan’s energy market
Moving forward, the Japanese government anticipates a rise in the country’s energy demand, driven by changes in industrial infrastructure, including the growth of data centers and the expansion of semiconductor manufacturing. This reverses past trends and intensifies pressure on Japan’s energy supply.
Not surprisingly, the fundamental goals of Japan’s latest energy policy continue to emphasize energy security and the need to maintain a stable electricity supply amid fuel procurement constraints. The second goal is, once again, affordability and a push to achieve stable electricity price levels, despite elevated global prices for fuel, inflation, and a falling yen.
The third goal is decarbonization and moving the nation toward carbon neutrality by 2050. Progress in decarbonizing will also help reduce Japan dependence on expensive imported oil and liquefied natural gas (LNG).
Three lessons from European energy markets for Japan
But what did Japan learn from Europe? Across the energy value chain, Europe’s energy market structures have been primarily influenced by liberalization, decarbonization policies, and macroeconomic factors, such as fuel prices, financing, and technology. In these markets, liberalization and renewable energy support initially encouraged new entrants and horizontal competition, which was later followed by consolidation due to competitive pressures and financial challenges.
Meanwhile, unbundling regulations and government initiatives have shaped the structure of regulated transmission sectors.
Lesson 1: Energy security depends on resilient market structures
Europe’s experience suggests that security of supply is shaped not only by generation capacity, but also by the governance and investability of transmission. As a regulated, capital intensive sector, energy transmission is strongly influenced by policy and regulation, including unbundling, and delivery depends on access to capital.
Many markets pursued vertical separation (neutralization) alongside horizontal integration/wider area transmission system operator (TSO) coordination. Strict unbundling improved transparency and access to funding, including for external investors, and reduced conflicts of interest.
As renewables scale, resilience increasingly depends on neutral operation, system wide planning, and the ability to mobilize capital to deliver grid investment at pace. In the generation and retail segments, liberalization initially brought a wave of new entrants and increased fragmentation.
Over time, competitive pressure and macro shocks drove exits and horizontal consolidation, with markets converging toward a mix of a few large-scale players and multiple specialist or niche players. This consolidation helped improve overall power-system stability by strengthening financial resilience and operational capabilities.
Lesson 2: Affordability requires more than market competition
The experience of European countries also shows that affordability does not automatically follow from liberalization and competition. Outcomes depend on how market design manages wholesale price volatility and how feed-in tariffs and other policies are funded.
Retail liberalization enabled entry and competition, but high-volatility periods exposed weak hedging and thin capital buffers, which led to exits and failures. This raises the importance of customer-continuity measures and prudential requirements. Policymakers often face trade-offs between smoothing price increases and preserving market functioning, as with feed-in tariffs.
Lesson 3: Decarbonization changes the basis of competition
Europe’s experience suggests that the push toward decarbonization changes not only the energy mix but also the capabilities required of market participants and the basis of competition. Early feed-in-tariff schemes improved revenue visibility and accelerated developer and independent power producer entry.
As renewables grow, integration challenges and costs — grid connections, variability, and flexibility/balancing — become more prominent, shifting advantages from building assets to operating reliably within grid constraints and market rules. Scale, the ability to finance, portfolio management, and system integration capabilities become more important in the face of evolving support schemes, including auctions and long-term contracts for different approaches. In some markets, this coincided with the dominance of a few large portfolio players alongside many specialist/niche participants.
No energy security without transition at scale
Rising geopolitical risk and heightened market volatility have exposed a key vulnerability in energy security: Countries heavily reliant on fossil fuels are disproportionately affected by supply disruptions and abrupt price swings. As a result, strengthening resilience against external shocks requires the entire energy system to advance the energy transition to low-carbon or no-carbon alternatives at greater scale.
At the same time, an energy transition cannot be achieved overnight. Two challenges must be addressed in parallel. First, because non fossil resources are capital intensive, the transition puts affordability under pressure. As decarbonization progresses, system costs shift from fuel expenditures to capital investment. Given the scale and long payback periods, higher financing costs and unclear allocation of costs and risks can undermine affordability, reduce social acceptance, slow investment, and ultimately make it harder to strengthen security of supply.
Second, there is an inherent “timing mismatch” in achieving both capacity adequacy and decarbonization. Renewable energy, nuclear power, and grid development often involve long lead times. A rapid transition is therefore unrealistic, and a lengthy transition period is unavoidable. During this period, it is necessary to continue long-term transition investment, while also securing practical near-term supply capacity and flexibility. This is now increasingly viewed in Europe as the balancing layer between weather-exposed renewables and baseload generation.
Batteries and other flexible resources can make baseload assets more responsive, helping accelerate a reliable transition while supporting operations that can withstand shocks, such as tightening supply conditions.
Taken together, the energy transition is difficult to accomplish through business and market dynamics alone. A supportive governmental framework is essential — one that ensures policy coherence and provides sufficient predictability to enable investment and sustain momentum through the transition.
How public-private cooperation can solve Japan’s energy trilemma
Solving the energy trilemma — that is, the balancing of energy security, energy equity through affordable pricing, and environmental sustainability — cannot be achieved by regulators or businesses acting alone. Progress depends on regulators and industry working together to make system socially acceptable, commercially investable, and feasible over the long run.
At the same time, Japan’s starting conditions — its energy mix, supply-demand outlook, geography, and geopolitical exposure — differ from Europe’s. Thus, these international lessons can only serve as reference points, not templates. Japan will need a tailored approach that preserves energy pragmatism, remains open to course corrections as conditions change, and permits bold, timely adjustments when trade-offs become unbalanced in pursuit of a fit-for-purpose model.
Ultimately, outcomes are shaped not only by design but by execution. Delivering a fit for purpose model will require coordinated, sustained cross stakeholder implementation — with regulators, utilities, new entrants, investors, and end users all aligning on practical timelines, roles, and accountability.
Looking ahead, it is also worth reiterating that there can be no true energy security without an energy transition at scale. In the face of future global risks, Japan’s power industry players and regulators need to work together to strike the right balance between adapting to changing global situations and driving the necessary investments and infrastructures to advance the energy transition.