This document presents the examination of the capacity market discussed through written deliberation at the 106th System Review Task Force held by the Agency for Natural Resources and Energy, Ministry of Economy, Trade and Industry, showing the current status and future direction of the system.
The meeting was held in written deliberation format on July 22, 2025, examining operational improvements and system sophistication for the capacity market. The capacity market is a mechanism that pays compensation for future supply capacity (generation capacity) to secure the supply capacity necessary for stable electricity supply, with full-scale operation beginning in FY2020.
Current Status and Challenges of the Capacity Market
The materials analyze auction results and operational performance of the capacity market to date. While the initial auction (conducted in FY2020 for FY2024 actual supply-demand) saw contracted prices surge to 14,137 yen/kW, subsequent system improvements have achieved stable price formation in recent auctions. Meanwhile, new challenges have emerged, including insufficient adjustment capacity accompanying mass deployment of renewable energy and the need to promote planned retirement of aging thermal power plants.
Direction of System Improvements
The review materials present specific measures for further improving the capacity market. These include reviewing demand curve setting methods, relaxing participation requirements for demand response resources, and adapting to new technologies such as battery storage. Additionally, institutional design is being discussed to secure necessary supply capacity while promoting the phased phase-out of inefficient coal-fired power generation toward achieving carbon neutrality.
Strengthening Coordination with Other Markets
Strengthening coordination between the capacity market and the supply-demand adjustment market, electricity spot market, and others is also being examined. By clarifying the roles of each market and enabling complementary functions, the aim is to improve efficiency of the entire power system. In particular, establishing mechanisms that allow distributed resources such as battery storage and demand response to provide value across multiple markets has been positioned as an important challenge.
Future Outlook
Toward achieving carbon neutrality by 2050, the capacity market is positioned as an important system supporting both stable electricity supply and decarbonization. Institutional design will continue to be examined to secure necessary adjustment capacity and inertia while premising further expansion of renewable energy deployment and maintaining power system stability.
The article demonstrates that the capacity market functions as a fundamental system supporting stable supply of Japan's power system and continues to evolve to address new challenges during the energy transition period.