**1. Introduction**

In Japan, power-related administrative reforms have been progressing since the 2011 earthquake. The liberalization of the electricity market is a major pillar of this policy. From the ministry of economy, trade and industry (METI) report [1], until now, the power market has been monopolized by regional corporations, and a single large power company has provided almost all of the power in a given region. The Tokyo Electric Power Company, which caused a nuclear accident, is one such company. The public reaction on the accident has led to a demand for a system that will allow consumers to select a preferred power company. In fact, the liberalization of electricity retail began in 2016, and it is expected to continue being liberalized going forward.

The Japanese governmen<sup>t</sup> is promoting the liberalization of electricity concurrently with the introduction of renewable energy; furthermore, it is trying to promote power trading through one market player, namely the Japan Electric Power Exchange (JEPX). In the spot market, all bids are matched every 30 min; thus, 48 products are traded every 30 min per day. The minimum volume that can be traded during a 30-min bid is 1 MW (equivalent to 500 kWh). The bid supply and demand are matched by using the price auction method. In the case of congestion of electricity, the exchange is split by a regional hub, and the transaction is carried out in each split market. When there is no intersection between the supply and demand caused by oversupply, the spot price is deemed to be zero (see JEPX website [2]).

However, as we explain in Section 3, the electricity market possesses some special properties (such as demand price-in-elasticity and merit order curve) that are different from the normal goods handled in economics. For this reason, electric power industries in regions such as Europe also supplement the electricity market through various mechanisms. The forward market (that is, the opening up of an electricity market before electric power is actually supplied) is one of the mechanisms for increasing the liquidity of electric power.

Of course, the forward market has already been opened by using JEPX. There are four types of forward products, including monthly 24-h products, weekly 24-h products, monthly daytime products, and weekly daytime products. Bid supply and demand is matched through continuous sessions.

The development of forward markets is also important from the perspective of renewable energy propagation. The growing popularity of renewable energy is, of course, a natural consequence of nuclear power plant accidents. Nuclear power has a lower environmental impact compared to thermal power, and it has been introduced for that purpose in Japan. Furthermore, the policy for cleaner renewable energy achieved national attention after the earthquake. However, renewable energy is produce through a variable energy system in which the amount of power generation is affected by various environmental factors such as sunshine hours, wind speed, and rainfall. Because weather information changes from moment to moment, the existence of markets with various timelines that correspond to such information is also essential for considering business operator's risk aversion.

Previous research has pointed out that increasing the liquidity of renewable energy is also an important factor in the penetration of renewable energy; thus, based on this aspect as well, the forwards market is an essential system. For example, researchers investigating wind power generation in Germany pointed out the importance of increasing the liquidity of electricity (Holttinen (2005) [3], Ummels et al. (2006)) [4]. Markets with several timelines raise the liquidity of electricity and it becomes easy to trade electricity produced by renewable energy.

However, increasing the amount of trading opportunities includes one other aspect: allowing market participants to dynamically perform speculative actions. Electric power is difficult to save, but if the liquidity of the market increases, and the electricity transaction becomes easier, it is natural that some market players make profits by using price differences. In this paper, we use a simple model based on JEPX to analyze the speculative behavior in the dynamic power market. Moreover, we show that the demand inelasticity is improved by the speculative trading. The inelasticity of demand in the electricity market is well known, and it is one of the causes of inefficiencies, such as price manipulation by suppliers. However, our findings show that speculative action may improve the inelasticity and increase market welfare. Our model is based on JEPX; however, the basic factor of the model is not specific to Japan. This model can be applied as a more general model in electricity markets.

The rest of the paper is organized as follows. Section 2 introduces related literature, and Section 3 explains the standard electricity market features. Section 4 then introduces the heterogeneous belief model, and it includes many of the electricity market features noted in Section 3. Section 5 presents the theoretical results and discusses some policy implications. Finally, Section 6 provides some concluding remarks.
