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Two years ago, South Korean President Moon Jae-In announced that
he would like to see his country rely less on coal and nuclear for
electricity generation and put forth a target of 20% renewable
generation by 2030, up from only 6% in 2018.
To meet the renewable target, 40 Gigawatts (GW) of solar and
wind projects would need to be installed by 2030. Will the
wholesale power prices reach a level that can incentivize new
investment in renewables but avoid creating a political backlash
against high retail prices?
To address concerns about a potential rise in electricity
prices, the government recently announced a new natural gas price
scheme, designed to reduce gas-fired generator's fuel costs. The
policy enables the state-owned Korea Gas Corporation
(KOGAS)—currently the monopoly reseller of imported LNG within
South Korea—to supply gas to generators priced on a per
contract basis rather than the current regulated price based on
KOGAS's total average import costs.
Moreover, over 13 GW of new nuclear and coal power plants are
expected to come online in the next five years (they had been under
construction before President Moon's term), adding downward
pressure on the system marginal price (SMP), the wholesale price in
the Korean Power Exchange. The decline in power demand caused by
COVID-19 can also have a moderating effect on power prices in the
months ahead as restriction policies remain in place.
Figure 1: South Korea: Power prices under downward
pressure
However, over the long-term there are other policy and market
factors which will can make the SMP fluctuate both ways.
Typically, gas-fired power plants are the marginal generators
determining the SMP in the Korean Power Exchange, with the cost of
imported LNG a key influencer. Therefore, expected fuel prices, the
gas tariff structure, capacity mix, and power demand are among the
key variables needed to understand the potential direction of South
Korea's power prices.
IHS Markit expects the SMP to decline through
2024. This is driven by additions of relatively cheap
baseload capacity (nuclear, coal, and new gas power plants) as well
as a decline in import LNG prices.
Renewable players may face significant challenges in
financing new projects over the next 2-3 years. Korean
Electric Power Corporation (KEPCO), the vertically integrated
national utility and single buyer of electricity, will benefit from
the lower SMP.
From 2024 to 2030, the SMP is likely to gradually
increase. The planned retirement of existing coal and
nuclear plants along with increasing gas prices and power
consumption are expected to drive up the SMP. However, this trend
will be partially offset by a growing number of gas-fired power
generators which able to access cheaper fuel either from KOGAS' new
individual tariff scheme, or by directly importing LNG from the
global market.
Today, the levelized cost of energy (LCOE) for solar and
offshore wind is about $100/MWh and $210/MWh, respectively.
Although they are expected to drop by about 30% by 2030, the profit
margin for new renewables project is likely to be squeezed because
of the drop in the SMP in the next few years along with the
plunging renewable energy credit prices.
Therefore, additional government support will be needed to meet
the 2030 renewable target. Authorities are starting to act. For
instance, the Ministry of Trade, Industry, and Energy (MOTIE) is a
drafting a plan to include carbon prices in the power dispatch
mechanism; the seasonal shutdown of coal-fired power plants could
also put upward pressure on the SMP, which would help
renewables.
IHS Markit experts are available for consultation on the
industries and subjects they specialize in. Meetings are virtual
and can be tailored to focus on your areas of inquiry. Book in a
consultation with Vince Heo.
Vince Heo is an Associate Director and research lead in
Asia gas and power at IHS Markit.
