1. Risks related to the impact of the revision of the Electricity Business Act on erex Group
erex Group conducts its business in accordance with the Electricity Business Act. With regard to the Electricity Business Act, future trends in the detailed system design of the electric power system, the launch of new markets such as the capacity market, and other factors may have an impact on the state of competition, etc. In addition, revisions to the Basic Energy Plan may result in significant changes in the composition of power sources, which may affect the financial position, business performance, and cash flow of erex Group.
2. Risks related to the impact of revisions to laws and regulations on erex Group
The power plants operated by erex Group are engaged in the power generation business using power generation facilities certified under the “Act on Special Measures concerning the Procurement of Renewable Energy Electric Power by Electric Power Companies” (FIT system, Feed-in Tariff for Renewable Energy). Under the current system, once the purchase price is applied, it will not be changed within the procurement period specified by the above law. Depending on the review of the feed-in tariff system for renewable energy by the Ministry of Economy, Trade and Industry and the Agency for Natural Resources and Energy, the financial position, business performance, and cash flow of erex Group may be affected in some way. In addition, changes in laws and regulations related to erex Group’s business may affect erex Group’s financial position, business performance, and cash flow.
3. Risks related to the climate change issue
erex Group is working to expand renewable energy power sources that are CO2-free, mainly biomass power generation, as well as to develop biomass fuels, etc. In Japan, in light of the government’s “Declaration of Carbon Neutrality by 2050” and “CO2 Reduction Target of 46% by 2030 (as compared to FY2013)”, if new legal regulations are introduced to respond to climate change issues in the future, there is a possibility that erex Group’s business plans and operations will be significantly changed or restricted depending on the content of such regulations. This may have an impact on the financial position, business performance, and cash flow of erex Group.
4. Risks associated with intensifying competition
The electric power retail business conducted by erex Group can be started only after an application is filed under the Electricity Business Act and the business is registered by the Minister of Economy, Trade and Industry. Due to the low entry barriers, the number of new entrants into the business has been increasing rapidly in recent years. The rapid increase in the number of new entrants may lead to higher power procurement prices and lower power sales prices, which may affect the financial position, business performance, and cash flow of erex Group.
5. Risks of price fluctuations on JEPX (Japan Electric Power Exchange)
The electric power wholesale business conducted by erex Group is mainly engaged in the sale of electric power to JEPX. At the same time, erex Group procures electric power from JEPX. Trading prices on JEPX fluctuate depending on a variety of factors, including crude oil prices, seasonal and time of day electric power demand trends, the operating status of solar power generation, and the operating status of power plants, including nuclear power plants. Significant fluctuations in trading prices on JEPX may affect the financial position, business performance, and cash flow of erex Group.
6. Risks related to supply and demand balance adjustment
In supplying electric power through the transmission network of a general power transmission and distribution company, power retail companies, including erex Group, are obligated to match the planned and actual power generation volume and the assumed and actual demand volume every 30 minutes (planned balancing system) in accordance with the terms and conditions of the transmission service stipulated by the general power transmission and distribution company, etc. The difference between the volume of supply and demand planned in advance and the actual volume of supply and demand is settled with the general transmission and distribution company as an imbalance (charge). erex Group uses a supply and demand management system to optimize the balance of supply and demand on an hourly basis. However, in the event that erex Group is unable to achieve the balancing at the same time, the large amount of imbalance charges to be settled may affect erex Group’s financial position, business performance, and cash flow.
7. Risks to erex Group’s earnings from power suppliers
erex Group also purchases electric power from former general electric utility companies and other companies that own power generation facilities. Many of the power plants from which erex Group purchases electric power are fossil fuel-fired, and many of the power plants from which erex Group purchases electric power with fuel adjustment clauses are fossil fuel-fired. In cases where fuel adjustment clauses are attached, the purchase price of electric power from the power plant from which erex Group procures electric power may fluctuate due to changes in the price of imported fossil fuels. In such cases, the financial position, operating results, and cash flow of erex Group may be affected. erex Group’s financial position, business performance, and cash flow may also be affected in the event of contract cancellation, non-renewal of contracts, changes in contract terms, etc., from the power companies, etc., from which erex Group procures electric power, and in the event of a decline in the volume of electric power generated due to problems at the power plants from which erex Group procures electric power.
8. Risks related to fuel import sources
PKS and wood pellets, which are biomass fuels used in the power plants operated by erex Group, are mainly produced in foreign countries. If embargoes are imposed in these countries due to changes in laws and regulations, political instability, or other reasons, or if exports become impossible due to natural disasters or other reasons, the financial position, business performance, and cash flow of erex Group may be affected.
9. Risks of price increase of biomass fuels
In the event that the prices of PKS and wood pellets, which are biomass fuels used in the power plants operated by erex Group, rise in the future due to industrial structural reforms, technological developments, changes in laws and regulations and taxation systems in producing countries, and increased demand, the cost of raw materials may increase, which may affect erex Group’s financial position, business performance, and cash flow.
10. Risks of exchange rate fluctuation
The power plants operated by erex Group are engaged in the power generation business using biomass fuels imported from overseas, and are therefore subject to the influence of foreign exchange rates. erex Group is also planning to expand its power generation and fuel businesses in Asia in the future, and rapid fluctuations in exchange rates may affect erex Group’s financial position, business performance, and cash flow.
11. Operational risks of the power plants operated by erex Group
erex Group strives for safe operations and stable operation of the facilities at the power plants operated by it. Maintenance and security work is carried out not only by erex Group’s employees but also in consultation with power generation equipment manufacturers and maintenance companies. However, in the event that erex Group is unable to operate the plant as planned due to unexpected equipment failure, etc., the financial position, business performance, and cash flow of erex Group may be affected.
12. Risk of output control of power plants owned by erex Group
For naturally fluctuating power sources such as solar power and wind power, whose output is affected by the climate, a revision of the system was made in January 2015 to expand the output curtailment rule, which requires acceptance of unlimited and uncompensated output control after the start of operation as a requirement for connection to the grid, for the purpose of maintaining the balance between supply and demand and of stabilizing the power supply. In principle, biomass power generation is subject to output control as a power source similar to thermal power generation, in accordance with the Guidelines for Electricity Transmission and Distribution Operations established by the Organization for Cross-Regional Coordination of Transmission Operators. If output control is implemented more than expected in the future, it may have an impact on the financial position, business performance, and cash flow of erex Group.
13. Risks related to large capital investments
In addition to power retail business as a power retail company, erex Group has made aggressive capital investments in order to provide inexpensive electric power to customers by constructing biomass power plants operated by erex Group and by securing base power sources. In addition, erex Group is promoting and planning to build more renewable energy power plants in Japan and overseas. erex Group decides on capital investments prudently, taking into account market trends, competitor trends, and other factors, while comprehensively taking into account business strategies and the profitability of the relevant investment. However, it is difficult to accurately predict economic and market trends, and in the event that demand does not grow as erex Group expects, erex Group may have to retire or recognize impairment loss on the facility used, which may affect erex Group’s financial position, operating results, and cash flow.
14. Risks of large amount of borrowings and of violating financial covenants
Among erex Group’s borrowings, loans based on loan agreements (syndicated loans) are subject to financial covenants. In the event of a breach of these covenants, erex Group will lose the benefit of time if the lender requests it, and will need funds to immediately repay the debt, which may affect erex Group’s financial position and cash flow.
15. Risks of new coronavirus infection
If the impact of the new coronavirus infection is prolonged both in Japan and overseas, it may have an impact on the electric power retail business due to a slump in overall electric power demand caused by stagnant economic activity, or it may interfere with fuel procurement, power plant operations, and other aspects of business operations, which may affect erex Group’s financial position, business performance, and cash flow.