Risks of Higher Power Procurement Prices, Supply-Demand Mismatches and External Factors

「The capacity contribution payment of ¥583 million to be borne by the company during the current consolidated fiscal year has been recorded as cost of sales. The company's capacity contribution payment for the fiscal year ending March 2027 is expected to increase from the current consolidated fiscal year to ¥1,035 million.」

「The capacity contribution payment of ¥298 million to be borne by the company during the current interim consolidated accounting period has been recorded as cost of sales. Total capacity contribution payments for the current fiscal year are expected to amount to ¥516 million, a decrease of ¥963 million from the previous consolidated fiscal year」

「In addition to the market-linked, fixed-rate and mixed market-linked/fixed-rate plans offered since the previous consolidated fiscal year, the company newly began offering the High-Voltage Hybrid Plan, which switches between market-linked and fixed-rate plans depending on the period. By combining these four rate plans, the company has established a foundation for securing stable profits while meeting customer needs and minimizing the risk that fluctuations in JEPX trading prices will affect business earnings. Meanwhile, the capacity market, newly launched this fiscal year, is intended to ensure a stable future electricity supply by having retail electricity providers bear part of the fixed costs required to construct and operate power plants, referred to as capacity contribution payments. The capacity contribution payment of ¥1,479 million borne by the company in the fiscal year ending March 2025 was recorded as cost of sales and became a factor reducing profit.」

「Accordingly, from the current consolidated fiscal year, the company established a framework to address the risk of fluctuations in JEPX market prices without using futures transactions by appropriately combining and offering customers three rate plans: market-linked, fixed-rate, and mixed market-linked/fixed-rate plans. This enabled the company to recognize profit or loss without being affected by valuation gains or losses on futures transactions.」

「The monthly average system price on the Japan Electric Power Exchange (JEPX) from April to December 2023 was ¥10.97/kWh, remaining at a low level compared with the monthly average of ¥22.23/kWh for the same period of the previous year, from April to December 2022. As JEPX prices remained low, procurement costs on JEPX were contained, enabling the company to secure stable profits.」

「Electricity market prices remained low and stable, averaging below ¥10/kWh per month. The monthly average system prices on the Japan Electric Power Exchange (JEPX) in April, May and June 2023 were ¥8.56/kWh, ¥8.65/kWh and ¥8.48/kWh, respectively. In addition, through the previous consolidated fiscal year, the company had used electricity futures transactions to fix the price of a certain proportion of its procured electricity. However, as customer contracts shifted further toward market-linked plans and electricity procured through constant backup was allocated to fixed-rate plans, it was no longer necessary to fix the price of procured electricity through electricity futures transactions. Accordingly, during the cumulative first quarter of the fiscal year, the company was not exposed to price fluctuations related to electricity futures transactions and was able to secure a certain level of profit.」

「Although the surge in JEPX prices from June pushed up the unit selling price and drove substantial revenue growth, electricity futures transactions for contracts expiring from April 2022 onward, for which valuation gains had been recognized at the end of the previous fiscal year, also reduced segment profit during the cumulative third quarter of the fiscal year, resulting in a segment loss.」

「Against this backdrop, the surge in JEPX prices from June pushed up the unit selling price and drove substantial revenue growth. However, electricity futures transactions for contracts expiring from April 2022 onward, for which valuation gains had been recognized at the end of the previous fiscal year, also reduced segment profit during the cumulative second quarter of the fiscal year. As a result, segment profit turned into a loss. Segment revenue was ¥11,599 million, up 89.5% year on year, and the segment loss (ordinary loss) was ¥412 million, compared with segment profit (ordinary profit) of ¥719 million in the same period of the previous year.」

「Although electricity trading prices rose amid the global increase in fuel prices stemming from Russia's invasion of Ukraine and other factors, the increase eased somewhat from April onward. The monthly simple averages of the system price in the day-ahead spot market of the Japan Electric Power Exchange (JEPX) were ¥17.8/kWh in April and ¥16.9/kWh in May. However, due to the unseasonably hot weather in late June, the system price reached a high of ¥100/kWh in individual time slots, and the monthly simple average in the day-ahead spot market reached ¥21.3/kWh in June. As a result, although the company recorded realized and valuation gains on electricity futures margin transactions held for hedging purposes, it was unable to fully absorb the increase in costs.」

「Because electricity procurement corresponding to the scheduled supply volume had been fixed at predetermined prices in advance, procurement was largely unaffected by the surge in JEPX electricity trading prices this winter」

「In response to the surge in electricity prices on the Japan Electric Power Exchange (JEPX) from mid-December 2020 through late January 2021, the Company took appropriate measures, and the total contracted capacity of high-voltage customers remained stable. In addition, because part of the costs incurred in responding to the price surge was recovered from customers, both sales and profit exceeded those of the year-earlier quarter.」

「From mid-December 2020 through late January 2021, electricity trading prices on JEPX rose sharply. The spot-market system price averaged ¥6.28/kWh from 1 to 14 December 2020, rose to a daily average of ¥9.73/kWh on 15 December and continued climbing thereafter. The daily average system price reached ¥154.57/kWh on 13 January 2021, while the system price for individual 30-minute intervals reached a record high of ¥251.00/kWh on 15 January.」

「The procurement of liquefied natural gas (LNG), used as fuel for thermal power generation by Japanese power companies, became difficult, while a cold wave caused electricity demand to surge. As a result, from around mid-December 2020, prices on the Japan Electric Power Exchange (JEPX), which had previously remained at around ¥5–6/kWh, surged to as much as ¥80/kWh toward year-end. Consequently, sales increased, but profit fell below that of the year-earlier quarter.」

「Electricity procurement prices during the summer remained lower than usual, and as a result both sales and profit exceeded those of the year-earlier quarter.」

「Although electricity consumption declined slightly, partly because weather conditions were relatively mild compared with the previous fiscal year, the gross margin improved as a result of efforts to contain electricity procurement costs.」

「In the previous year, procurement prices surged and put pressure on profit because extremely hot weather increased electricity demand. During the nine months ended the third quarter, however, weather conditions were milder than in the previous year even during summer, electricity demand did not increase, and the Company promoted efforts to contain electricity procurement prices, resulting in relatively stable procurement prices.」

「In the previous year, procurement prices surged and put pressure on profit because extremely hot weather increased electricity demand. During the six months ended the second quarter, however, weather conditions were milder than in the previous year even during summer, and electricity demand did not increase, so procurement prices remained relatively stable.」

「As a result of revising its contract structure and taking other measures to level out profit fluctuations caused by seasonal factors, both sales and profit exceeded those of the previous consolidated fiscal year.」

「Although the increase in procurement prices caused by extremely hot weather subsided, profit fell below the year-earlier period due to a temporary increase in costs associated with the review of electricity contracts.」

「In the electricity trading business, the Company supplies electricity at retail to low-voltage customers as well as primarily high-voltage customers. As a result of efforts to increase the number of electricity supply-demand contracts and contracted electricity volume outside its main target areas, sales exceeded the year-earlier period. Meanwhile, higher electricity procurement prices due to extremely hot weather put pressure on profit.」

「Because electricity procurement prices rose unexpectedly from December 2017 through February 2018, the pace of growth in the number of contracts and contracted electricity volume slowed, and the earnings margin declined.」

「However, electricity procurement prices rose unexpectedly in December 2017, causing gross profit for the nine months ended the third quarter to fall below the planned level.」

「To comply with the Electricity Business Act and related laws and regulations, we will promptly gather information on regulatory amendments and other developments, maintain our terms and conditions, expand our business implementation framework and ensure appropriate operations. We will also work to establish and maintain a framework for information gathering, diversifying power procurement sources and risk management so that we can respond appropriately and promptly to events affecting electricity procurement prices, including weather, changes in fuel costs, the status of nuclear power plants and changes in electricity policy and laws and regulations.」