Factfile: RPS Framework drives South Korean market

Sarosh Bana

The enabling policy framework and deft concessions and incentives implemented under the green growth agenda have energised Korea's industry in terms of renewables.

Note: this article first appeared in Renewable Energy Focus September/October 2012. Click here for a free signup.

Investments in new & renewable energy (NREs) technologies and plant expansion by private companies spiralled from KRW696bn ($616mn) in 2007 to KRW4.55 trillion ($4.03bn) by 2011. Of this, the photovoltaic (PV) industry accounted for over 80%, with wind accounting for 16.2%.

The number of companies and key players active in Korea's NRE sector has increased from 41 in 2004 to 212 in 2010, according to government agency Korea Energy Management Corporation (KEMCO) in its Overview of New and Renewable Energy in Korea 2012. This includes 91 PV firms, 46 bioenergy and 32 wind companies. KEMCO's director general Hyung-jin Kim says the workforce engaged in the NRE industries has climbed from 689 in 2004 to 17,348 in 2010, noting that 11,556 are employed in the PV and wind power industries alone.

A feed-in tariff mechanism was first introduced. While guaranteeing fixed rates for electricity from green energy sources it also imposed a cap on the amount of capacity that could be developed however. The FIT mechanism was replaced with a Renewable Portfolio Standard (RPS) and a Renewable Energy Credit trading mechanism, whereby revenue is determined by the market.

Under the RPS, which came into effect this year, income for power generated by renewable energy sources will be via a combination of the wholesale system marginal electricity price plus the sale of Renewable Energy Certificates (RECs) – certificates are currently selling at KRW40 (€ 0.026-0.035). Plant operators receive RECs for the output they generate over a 20-year period. Under the policy, onshore wind farm operators, for example, will get one REC/kWh while the level for offshore wind has been set at two RECs.

These RECS are then sold to companies that need to meet targets for a proportion of their energy to come from renewables. Under the country's energy policy, the 13 largest public and private utilities are obligated to increase the share of renewables in their generation portfolios to 10% by 2022. They can either build their own plant or buy RECs and enter supply agreements with NRE plant operators to comply with their obligations. Penalty payments are charged for any shortfalls.

Meantime, with the enactment in May of a long-delayed bill to start trading CO2 emissions in 2015, Korea became the third Asia Pacific country to tax polluters (after Australia and New Zealand). The cap-and-trade system limits industry emissions of CO2, while permitting companies to buy credits if they want to emit more, or to sell credits if they can cut emissions. The limits will apply to companies that discharge over 125,000 tonnes of CO2 annually.

The Ministry of Knowledge Economy (MKE) – which formulates and implements energy policy – says an exchange will be either designated or created to ensure stable trading of emissions credits. Credit prices will be determined by the market. While firms exceeding emission limits will have to pay a penalty three times the market value of the credits, fines will be limited to a maximum KRW100,000 ($88.5) per tonne of emission.

“The RPS penalty and the REC trading mechanism should be effective measures to urge power companies to meet their RPS targets, but policy revision can happen if the financial burden caused by RPS penalty is too heavy for the major power companies,” says Maggie Kuang, a research analyst at Bloomberg New Energy Finance (BNEF).

The 13 utilities targeted by the RPS programme accounted for 90% of Korea's annual power generation of 486TWh in 2011, with renewable energy accounting for 1.5% of their current generation. “Assuming Korea's GDP maintains an annual growth of 2.8% over the next decade, these 13 companies would need to generate 659TWh of electricity in 2022 to help the country meet its demand,” notes BNEF in a recent analysis on South Korea's market.

“Tax incentives have [also] been made available for renewable energy,” says Kuang. “The government is also considering introducing Renewable Heat Obligation (RHO) and Renewable Fuels Standard (RFS) to promote the use of renewables.” Meantime, for other technologies such as tidal, IGCC [integrated gasification combined cycle] and fuel cells, Seoul has been providing R&D funding to support technology innovation.

“Hopefully all these key programmes will help create enough renewable energy demand for Korean manufacturers to scale up their manufacturing capacities,” says Kuang. “Such a growth will offer reasonably priced renewable energy equipment which will improve project economics locally and thereby promote local project development.”

See our 3 part article on South Korea's renewable energy industry, starting here.

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Photovoltaics (PV)  •  Policy, investment and markets  •  Solar electricity  •  Wave and tidal energy  •  Wind power