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In many international electricity markets, wholesale power procurement is an established practice. Market participants face price volatility, regulatory changes and intermittent renewable energy integration—challenges that Japan is beginning to experience. As the market matures and liquidity rises, energy derivatives like futures and option contracts become increasingly important for hedging risk and ensuring stable cash flows for utilities, retailers and large consumers in Japan.
New trading venues and instruments
After market liberalisation, Japan’s wholesale electricity markets initially saw slow growth due to limited liquidity and cautious industry adoption. Regulatory reforms, new trading platforms and new market entrants (especially after the introduction of the feed-in premium in 2022) increased market participation. This resulted in an increase in market trading activity at the wholesale spot exchange JEPX—a market for immediate physical delivery—to 40% of total electricity generation today*1.
Additionally, the market for medium- and long-term delivery horizons expanded significantly in recent years, particularly with the introduction of financial futures contracts—exchange-traded contracts that set a fixed price for future delivery and are typically financially settled.
After the Tokyo Commodity Exchange (TOCOM) launched electricity futures for the Japanese market in 2019, the European Energy Exchange (EEX) followed in May 2020, the US-based Chicago Mercantile Exchange (CME) in 2021 and the Intercontinental Exchange (ICE) in 2025. These exchanges offer futures contracts for both base and peak load electricity deliveries in the Tokyo and Kansai regions. Since futures trading commenced in 2019, trading activity for Japanese futures at these exchanges has picked up significantly. In particular, the growth at EEX has been remarkable, with volumes surging from 18.3 TWh in 2023 to 72.9 TWh in 2024, giving EEX over 90% market share in 2024*2 (see Figure 1).
Figure 1 : Japanese Power Futures Growth at EEX
On top of new marketplaces, various new instruments have been introduced. A recent innovation is the ‘JJ-Link’ platform, launched by JEPX and TOCOM, allowing the conversion of financial futures contracts into physical deliveries in the spot market. Furthermore, EEX Japan has been expanding its range of derivative products with the introduction of Power Monthly Options for the Tokyo and Kansai regions in February 2025. These average price options are settled against the average JEPX spot prices during the respective delivery month. Additionally, EEX just introduced order book trading for the Japanese power derivatives market in April 2025, aiming to improve transparency and liquidity.
Therefore, Japan’s power market infrastructure is a growing ecosystem of interacting platforms: a growing spot market, multiple futures exchanges and new market instruments—all of which were practically non-existent a few years prior.
Risk management via futures
By providing longer trading horizons and reduced transaction costs due to a higher number of competitive orders (narrower bid-ask spreads), this new wholesale market ecosystem allows participants to access risk management strategies that were previously unavailable or underutilised. One main application of futures contracts is to secure prices for long-term future deliveries to mitigate market risk. While retailers and large consumers can hedge against rising procurement costs, this allows power producers to stabilise revenue with guaranteed prices for future delivery periods. The latter use case is visualised in Figure 2.
Figure 2 : Simplified example of hedging power deliveries with futures
Example: A power producer hedges a power delivery at market price at time t by selling a futures contract at the current market price of ¥12,000/MW. In this scenario, the market price declines to ¥10,000/MW at the delivery time t. Prior to delivery, the producer will close the futures position at the (dropped) market price of ¥10,000/MW and deliver the power at the same market price of ¥10,000/MW. The producer earns ¥2,000/MW (¥12,000/MW - ¥10,000/MW) from the futures transactions and ¥10,000/MW from the power delivery, thus effectively securing the price of power delivery at ¥12,000/MW.
At the same time, shorter-term hedging tools are becoming available, such as futures for daily or weekly deliveries. These allow retailers and generators to adjust positions in the short run to reflect unexpected weather shifts or grid constraints—both very relevant scenarios in the Japanese market.
With Japan’s futures market being segmented into East (Tokyo region) and West (Kansai region) price zones, regional spread trading via opposing futures positions is emerging as a tool for managing price differentials. This helps market participants hedge against regional price discrepancies caused by transmission congestion. The same can be applied to fuel-linked hedging by using power futures together with LNG futures. As Japan’s electricity prices are closely tied to LNG import costs, market participants can hedge fuel risks and protect against sudden fuel price changes.
Additionally, structured hedging products provide additional approaches for risk management. For instance, with the recently introduced EEX options, retailers can limit exposure to price increases beyond a certain threshold for the uncertain portion of their overall exposure at a relatively low cost.
Implications for market participants
Thus, market participants should not regard the wholesale market as a secondary option for residual volumes. Active participation is essential for both hedging and optimisation purposes. When establishing or upgrading trading processes for the development of the required capabilities, the following aspects should be anticipated and considered:
- Further increasing liquidity
While the development of liquidity is unique to each market, one common observation from international markets is that liquidity tends to generate further liquidity. The increasing liquidity in the Japanese market attracts a rising number of local as well as foreign trading participants (e.g. approximately 50% of the currently 100 exchange members at EEX Japan are foreign companies*3). Therefore, further market entries and increases in trading activity should be anticipated. - High volatility and low price periods
Despite calmer market conditions in 2024 compared to previous years, rapid price changes are typical in liquid markets. Additionally, as Japan adds solar and wind, there will be periods of surplus generation (e.g. sunny spring afternoons) that could drive prices to very low levels. While negative prices are not permitted, periods of low prices and high volatility will occur more often. - New retail offerings
Greater wholesale volatility will eventually impact margins if not managed and passed through to retail prices. Market participants should innovate their offerings to create dynamic pricing plans as well as strengthen operational flexibility by participating in wholesale markets.
- IT backbone and automation
As spot and derivative markets gain liquidity and volatility, automated trading and algorithmic solutions are becoming essential for efficient strategy execution and risk management. Higher trading volumes, tighter bid-ask spreads and shorter arbitrage windows require speed and data-driven decision-making that are difficult to match for manual traders. This trend is most distinct in spot markets, but derivative markets could also see an increasing number of automated transactions. Modern cloud-native ETRM*4 systems as well as flexible position management will be required by all market participants. - Risk management and governance
As trading activity grows, effective risk management is essential for success. Hedging should be a core practice, with dedicated trading desks managing forward market positions. Comprehensive risk governance will become increasingly important as market liquidity rises. Best practices in risk management for energy trading organisations and lessons from overseas markets will be discussed in the next article of this column.
*1 Source: Japan Electric Power Exchange (JEPX) Overview [20240404 #Commodities#Tips]
*2 Source: EEX日本電力先物市場について
*3 Source: EEX Power Derivatives Market Update Q1 2025
*4 ETRM: Energy Trading Risk Management (system) – a software that supports the trade lifecycle of energy trading transaction from deal capture to settlement and helps managing associated risks.
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