• Power demand in August fell to its lowest since 2003
  • Market reforms may increase competition in utility sector

The decline in Japan’s power use to the weakest in 12 years underlines the risk to earnings at the nation’s biggest utilities and raises expectations of increased competition and consolidation fueled by government reforms.

Power consumption dropped to 74.6 terawatt-hours in August, the lowest for that month since 2003, according to data released by the Federation of Electric Power Companies of Japan on Wednesday. Demand from manufacturers, which makes up more than a third of the nation’s total consumption, fell for the 15th straight month, as output from machinery and metals products lagged, according to data compiled by Bloomberg Intelligence.

Falling energy consumption and lower sales volumes "could induce the power utilities to accelerate some of their earnings diversification and boost now-nascent businesses,” Joseph Jacobelli, an analyst at Bloomberg Intelligence, said by e-mail. “Longer-term consolidation is certainly possible as we’ve seen in other highly-competitive power markets abroad.”

Measures to diversify may include more aggressively seeking strategic alliances, expanding other business segments and going abroad to pursue better growth opportunities, according to Jacobelli.

Declining power use, throttled by a stagnant economy that uses less electricity year-after-year, is likely to erode earnings for power companies. Tokyo Electric Power Co., Japan’s largest utility, will probably see revenue decline 9.4 percent this fiscal year, according to the average of five estimates compiled by Bloomberg. Sales at Chubu Electric Power Co., the nation’s third-largest utility, will fall 8.1 percent, according to the average of 11 estimates.

Joint Ventures

Japan’s power utilities are already working together to boost profits. Tokyo Electric forged a venture with Chubu Electric to buy and sell natural gas, with the idea that the combined bargaining power will allow fuel purchases at a cheaper price. Seeking to lower costs, the two utilities also plan to merge thermal power operations as soon as 2017.

Utilities “will also try to raise revenue from expanding into other energy related sectors, like retailing gas, as well as non-energy sectors,” Ali Izadi-Najafabadi, a Tokyo-based analyst with Bloomberg New Energy Finance, said by e-mail. “The larger ones will naturally try to go abroad.”

Kansai Electric Power Co., the nation’s second-largest utility, is interested in developing power projects in the Middle East and the Americas, the company said in its 2014 annual report. The company currently has a stake in six power projects outside of Japan with a total capacity of 1.2 gigawatts.

“We might see more moves like the Tokyo Electric and Chubu alliance,” Polina Diyachkina, an analyst at Macquarie Group Ltd., said by phone. “That is one of the first steps in terms of potential mergers between different companies. We are moving toward more consolidation but the companies want to see how deregulation shapes up first.”

Japan’s government has begun implementing reforms that will allow new players into the market and break regional monopolies. By April, residential power customers in Japan will be able to choose their provider for the first time, allowing new companies to produce and market electricity to households. Utilities will be required by 2020 to separate their transmission, distribution and retail businesses.

Sales Declines

“New industry participants should mean further volume falls for power utilities,” BI’s Jacobelli said.

In other parts of the world where the power market is less regulated, growth through consolidation has increased. North American electricity deals surged 82 percent to $49 billion in 2014, according to data compiled by the consulting firm PricewaterhouseCoopers LLP. Germany, a market similar in size to Japan, has four power companies that dominate power production, distribution and sales, according to Tom O’Sullivan, founder of Mathyos, a Tokyo-based energy consultant.

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