South Korea: On the brink of coal-to-gas displacement?
South Korea is the world's fourth-largest coal-importing country. Despite multiple years of strong, nearly double-digit import growth, imports into South Korea have grown by an average of just 1% per year since first exceeding 100 million metric tons in 2011. Weak power demand growth and delays in commissioning new coal plants have contributed to the slowdown in import growth in recent years. Meanwhile, an abundance of LNG and new government policies could further threaten South Korea's coal consumption.
- The inauguration of President Moon Jae-in this May brings additional anticoal sentiment to South Korea's energy policy. Moon's government is pushing for a significant shift away from plans published by the Ministry of Trade, Industry and Energy under the former administration, with the president calling for an immediate halt to all coal plants under construction and the suspension of all future coal plant builds.
- Power spreads in South Korea continue to favor coal over gas, but the spread has significantly narrowed for some generators. Most of South Korea's gas-fired power generators buy their gas from Korea Gas Corporation (KOGAS)-which holds a monopoly on the domestic gas market-at a price that is substantially higher than the cost of generation from coal. Some private utilities, however, are able to import LNG at a significant discount to the KOGAS price, which has tightened the competition between these gas plants and South Korea's least efficient coal plants.
- Nevertheless, coal is expected to out-compete gas in the short term. Even with an upcoming rise in coal taxes, power spreads will continue to favor coal for the bulk of South Korea's generators. At current prices, coal taxes would need to more than double to significantly influence coal-gas competition. Greater access to cheaper LNG imports, stronger tax rises, and additional anti-coal policies, however, are likely to increase coal-to-gas switching in the longer term.
Sareena Patel is an Associate Director, Global Steam Coal at IHS Markit.
Posted 2 October 2017
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