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The renewable energy market in South Korea is at last on a firm
path to solid growth. The capacity additions of solar PV reached a
record high last year with 4.1 gigawatts coming online - equivalent
to 28% of total solar PV capacity. The country's largest solar PV
plant with 100 megawatts PV plant and 312MWh battery storage
capacity was built on the abandoned salt field in Younggwang area,
which will generate electricity enough to cover more than the
entire region. The 60 megawatts demonstration offshore wind project
off the Southwest coast also came online in November 2020, the
first commercial-scale offshore wind project after nearly 10 years
of back and forth in resolving local residents opposition and
obtaining permits. With the renewables market finally gaining
momentum, the key question remains whether the forthcoming solar PV
and wind projects will continue to generate attractive returns to
project developers and financiers alike.
IHS Markit simulated the wholesale market via a plant-level
hourly dispatch model to provide the power price outlook. The power
price, or system marginal price (SMP) in South Korea's cost-based
pool market, is an instrumental set of data needed in determining
the long-term contract price of solar PV and wind projects. The
outcome from our model revealed that three factors remain key input
variables in driving the future power price: fuel price, energy
transition progress and load profile dynamics. All these input
variables represent a combination of regulatory and market factors
ranging from a carbon price to changes in coal and nuclear power,
which will drive the power price up or down.
First, the fuel price, especially the imported LNG price, will
continue to guide the future power price, as gas-fired power
generators are the main price-setters in South Korea's power
market. Moving forward, a different set of LNG benchmark prices
such as the US Henry Hub and Asian spot LNG will set the delivered
LNG price because LNG importers diversify their portfolio to hedge
oil price risks. The changes in the domestic wholesale gas tariff
of the country's monopoly gas supplier, Korea Gas Corporation
(KOGAS), are also expected to put downward pressure on the SMP.
However, its impact is likely to be minor.
Second, the country's energy transition in the next two decades
will also significantly impact the SMP. The changes in the energy
mix triggered by decommissioning of coal and nuclear power will
push up the power price in the long run, although its impact will
be partly offset by a surge in renewables. The rise in carbon
prices is also expected to drive up the SMP, as they will be added
to the short-run marginal cost of all the thermal generators in the
merit dispatch starting in 2021.
Lastly, the load profile of electricity consumers in the future
will also influence the direction of the power price. While the
country's overall electricity consumption is expected to be
relatively flat, rising volatility in peak demand caused by
increasing extreme weather events such as heatwaves or a long cold
winter could always shake the short-term power price.
Incorporating all of the above factors, IHS Markit's inaugural
South Korea long-term power price outlook will help provide an
insight into investing in future renewable projects in the
country.
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Jun 30
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