IEEJ：June ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (641)June 15, 2023

Dramatically Changing State-Market Relationship (3)- Wavering Energy Market Liberalization Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
In the third serial story on the changing state-market relationship, I would like to take up
issues regarding relations between energy market liberalization or the utilization of market principles,and state control or intervention.
Until the 1970s, governments had played major roles in the energy market, implementingvarious regulations, controls and interventions in the energy industry and market. The reasons for suchgovernment measures vary by country but can be roughly summarized into the following two.
The first reason is the view that it is impossible or inappropriate to leave energy-related
issues to market forces alone because energy is of special importance. Energy has been considered
indispensable for human life and an important strategic good that supports economic and industrial
activities and influences national management. When the destabilization of the market for suchimportant energy becomes a serious issue, the government responsible for human life stabilization andnational management should not refrain from taking any action against the issue. It has been seen as
natural for the government to impose direct and indirect regulations on the energy market or
stakeholders involved in energy supply and demand such as the energy industry, and to implement
inductive policies to stabilize the market and secure stable energy supply in response to andpreparation for market destabilization such as an oil crisis in the 1970s. Energy externalities that thegovernment should address include not only energy security and stable energy supply but also energyrelated environmental issues, such as air pollution and other public hazards in the past and climatechange in the present. Priority has been given to policies for promoting the transition to cleaner energythat market forces alone cannot facilitate sufficiently.
The second reason is related to economies of scale and natural monopolies. As economies
of scale work in energy infrastructure development frequently, natural monopolies have the potential
to gain an advantage for efficient investment and infrastructure development. It has been seen as
important and necessary for the government to conduct both market control and consumer protection
by imposing direct regulations on relevant industries, companies and markets to avoid the adverse
effects of market monopolies while exploiting such peculiar advantages.
Even in the energy market put under strong state control for the abovementioned reasons,liberalization and competition promotion trends became conspicuous in the 1980s. While crude oil
prices decreased on the calming-down of the oil crisis chaos in the 1970s, the growing influence ofneoliberal economics enhanced the thought that competition should be introduced even in the energy
market to promote liberalization and deregulation. These trends originated in the United States and theUnited Kingdom and spread to other European countries and Japan, and even to developing countries.
In many cases, liberalization and competition promotion began first in the oil market and spread to the1IEEJ：June ©IEEJ 2023
electricity and gas markets known as network-type industries. In Japan, oil market liberalization began
to gain momentum in the second half of the 1980s and came to completion in the early 2000s.
Electricity and gas market liberalization was phased in over the 1990s and 2000s. As energy policies
were comprehensively reviewed in response to the Great East Japan Earthquake and the Fukushima
nuclear power plant accident in 2011, Japan implemented the fundamental liberalization of electricity
and gas markets. The liberalization trends took advantage of market principles to thoroughly promote
efficiency, rationalization and cost reduction.
Recently, however, the relationship between the state or policies and the energy market has
shown extremely great changes again. Those changes are related to carbon neutrality and otherdecarbonization initiatives. Few people believe that carbon neutrality through a fundamental transition
from the present energy supply/demand and infrastructure system for fossil fuels can be achieved
through market forces alone. It is globally recognized that the government should implement strong
policies to change the market system comprehensively.
Another driver of the extremely great changes is the revival of energy security initiatives.
Energy price spikes since the second half of 2021 and the Ukraine crisis that added fuel to the pricespikes and destabilized the energy market have exerted great influence on the world. In October 2021,
developed countries including European nations and Japan began to introduce energy subsidies inresponse to energy price spikes. The United States then strengthened the call for oil-producing
countries to increase production and released strategic oil reserves to suppress gasoline prices. As theUkraine crisis escalated, the Western bloc imposed sanctions on Russian energy, introducing caps on
Russian crude oil and European gas prices. The European Union has strongly promoted theREPowerEU plan to phase out dependence on Russia while promoting decarbonization. European andother major countries have adopted powerful policies to enhance energy security and secure a stableenergy supply. The paradigm that energy is especially important and should not be left to market forcesalone has been revived. Moves to nationalize energy companies have been seen in Europe as well.
In another remarkable development regarding the energy market, interest in nuclear energy
has grown for the simultaneous achievement of energy security enhancement and decarbonization. InFrance, the United Kingdom and other European countries, plans to construct new nuclear power
plants have been announced, indicating pragmatic efforts to achieve both energy security anddecarbonization. In the United Kingdom, the decision to introduce the Regulated Asset Base Modelclose to the overall cost coverage formula for new nuclear power plant construction has attracted
interest. This indicates that the U.K. government has seemingly recognized that regulation rather thanliberalization is required for constructing new nuclear power plans. Here is a major change in the statemarket relationship regarding energy.
What is more important is that the world’s division and growing geopolitical risks, as wellas the relevant trend of giving priority to economic security, support the state-market relationshipregarding energy. In an important typical case, the concentration of critical mineral supply sources in
China has become a matter of great strategic concern in addition to the tightening supply-demandbalance and price hikes for critical minerals at a time when the demand for such minerals is expected
to substantially increase due to the future promotion of energy transition. Such a situation has resulted
in a trend in which the government depicts a desirable picture and implements strong policies to guideits nation in the desirable direction, instead of leaving energy choices to the free market. Priority isgiven to de-risking, if not decoupling, rather than relying on free trade and the international divisionof labor. A typical initiative in this regard is related to industrial policies. As shown by the U.S.
Inflation Reduction Act, government initiatives to promote clean energy investment (and greenhouse2IEEJ：June ©IEEJ 2023
gas emission reduction), and economic growth and industrial development are being promoted aroundthe world. The abovementioned trend differs far from the energy market liberalization and theutilization of market forces promoted since the 1980s and should be viewed as a major development
exerting great influence on the future energy situation.

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