IOVERVIEW

Korea relies on over 97 per cent of its primary energy sources from overseas acquisition, and fossil fuels, such as petroleum, gas and coal account for 85 per cent of these sources. Therefore, there are policy needs in the short term to take measures against fluctuations in the supply and demand for energy based on global factors, and in the long term to take measures against the depletion of fossil fuels. The 2011 Fukushima nuclear power plant accident in Japan has served as a warning to carefully consider the use of nuclear energy policy and the new energy environment, and the effects of climate change, has increased the use and interest in new and renewable energy.

Under the current environment and policy needs, Korea has designated the Energy Act and Framework Act on Low Carbon and Green Growth (the Framework Act) as its basic laws. These energy laws were prepared with the intention of achieving certain policy goals such as having a steady supply of energy, eco-friendliness, market principles and energy security, and these goals are being implemented in line with the changes to the energy market and environment through the enactment and amendment of individual laws.

The Korean government is strengthening the competitiveness of the renewable energy industry to the level of advanced countries with the aim of completing energy conversion with its own technology and fostering various new energy businesses including those related to energy efficiency, dismantling nuclear power and electric power brokerage. The government is focusing on the development of technologies to upgrade the systems of solar power, which is the most promising of the renewable energy sources. The government also enhances the competitiveness of the components required for wind-power generation. In the field of energy efficiency, the government has introduced the lowest efficiency standards for electric motors, chillers and air compressors, and is building up a national infrastructure for the Smart Grid. In addition, the government is endeavouring to further create new energy business fields, such as the full-scale dismantling of nuclear power plants and the opening of a small-scale renewable energy power brokerage market.

IIREGULATION

iThe regulators

Regulators

The Ministry of Trade, Industry and Energy (MOTIE) is in charge of all regulations regarding individual energy resources (e.g., electricity, petroleum and gas). In particular, the MOTIE carries out duties regarding entry regulations for individual energy resources with respect to licences, reporting and registration. Among the individual energy resources, with respect to electricity, the Electricity Regulatory Commission is an affiliated organisation within the MOTIE that was formed to, inter alia, decide on granting approval and licences for electric utility businesses, electric business acquisitions and other matters.

The Korea Power Exchange (KPX) is in charge of duties regarding establishing or managing the electricity market, and duties regarding transactions involving electricity, etc.

Further, the Prime Minister’s Office is in charge of matters related to the Framework Act, which is a basic law regarding the macroscopic energy policy, and the Energy Commission, which is an affiliated organisation within the MOTIE, was formed to, inter alia, deliberate over matters regarding important energy policies and plans. The Ministry of Environment and the Ministry of Foreign Affairs are also involved in energy-related policies such as establishing emissions-trading systems, clean energy and climate change, as well as joining international treaties.

Main sources of law and regulation

The Framework Act, which was enacted in January 2010, is a general law regarding energy policies. In the past the Energy Act was the general law regarding energy policies, but after the enactment of the Framework Act, several of its provisions were transferred to the Framework Act. The Framework Act establishes or promotes comprehensive government energy policies and national strategies, including solutions to climate change and energy issues, expansion of growth and development, strengthening the competitiveness of companies, efficient use of land and creation of a pleasant environment (Article 3(1)).

The Energy Act still regulates matters such as the establishment of regional energy plans and emergency energy plans and the establishment and operation of the Energy Commission.

Individual energy resources and the related businesses are regulated pursuant to the following laws:

  1. Electricity: the Electric Utility Act (EUA) regulates matters such as the production, distribution and sale of electricity and the Electrical Construction Business Act was enacted to ensure the safety of businesses that engage in electricity-related construction.
  2. Petroleum and gas: the Petroleum and Petroleum Substitute Fuel Business Act (PBA) and the Urban Gas Business Act (UGBA) regulate the adequate distribution of petroleum and gas to consumers, and the High-Pressure Gas Safety Control Act was enacted to introduce safer measures to prevent the possibility of gas exploding.
  3. Nuclear energy: the Nuclear Energy Promotion Act regulates the research, development, production and use of nuclear energy; the Nuclear Safety Act regulates the safety of nuclear energy; and the Nuclear Damage Compensation Act regulates matters regarding damage compensation arising in relation to nuclear energy.
  4. New and renewable energy: the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy (the New and Renewable Energy Act) acts as the basic law regarding the development of technology for new and renewable energy as well as the use and dissemination of new and renewable energy.

iiRegulated activities

Electricity

Under the EUA, electric utility businesses are categorised into five types of business, the definitions of which are as follows:

  1. Electricity generation business: a business, the main purpose of which is to generate and supply electricity to operators of the electricity sales business via the electric utility market.2
  2. Electric transmission business: a business, the main purpose of which is to set up and operate electric installations necessary to transmit electricity produced at power stations to operators of the electricity distribution business.3
  3. Electric distribution business: a business, the main purpose of which is to establish and operate electricity installations necessary to distribute electricity transmitted from power stations to consumers of electricity.4
  4. Electric sales business: a business, the main purpose of which is to deliver electricity to consumers.5
  5. District electric business: a business, the main purpose of which is to generate electricity with electric generating units of up to 35,000kW to meet the demand of a specific supply district, and to supply the produced electricity to consumers of electricity in that specific supply district, not via any electric utility market.6

The Korea Electric Power Corporation (KEPCO) had a monopoly on the production and supply of electricity in Korea until the late 1990s, and was entirely responsible for generation, transmission, distribution and sales. Currently, KEPCO is still responsible for transmission, distribution and sales of electricity, KEPCO’s subsidiaries and various private companies are competing in the electricity generation business.

According to Article 7 of the EUA, any person who intends to operate an electric utility business must obtain a licence, based on the business type, from the Minister of the MOTIE (the Minister); the Minister’s approval is required when the person intends to modify important matters relating to the licence, such as the business district or specific supply district, supply voltage and, in the case of electricity generation businesses and district electric businesses, the place of electric installations, equipment capacity and the type of motive power.7 To obtain a licence, the following documents must be submitted to the Minister:8

  1. an application for a licence;
  2. a business plan;
  3. the articles of incorporation, a profit and loss statement and balance sheet (the articles of incorporation are only required in the case of an entity that is being established); and
  4. the shareholder’s registry (unless the applicant’s power capacity is 3,000kW or less; if the applicant is a new entity whose financial capability cannot be assessed, the largest shareholder of the entity will be constructively deemed as the applicant).

The Minister will grant electricity utility licence after an application has undergone deliberation by the Electricity Regulatory Commission. The criteria for issuing the licence as provided by Article 7(5) of the EUA are:

  1. to have the financial and technological capability necessary to operate the electric utility business in the optimal manner;
  2. to be able to carry out the electric utility business as planned;
  3. all or a part of two or more business zones for operators of the electric distribution business or specific supply districts for operators of the district electric business must not overlap;
  4. in the case of district electric businesses, to meet at least 50 per cent of the electricity demand of a specific supply district and not to constitute any obstacle to the supply of electricity by another operator to consumers residing in the neighbouring area because of that business;
  5. power plants and power generation fuel must not be concentrated in certain areas to disrupt the power system; and
  6. to conform with the standards set by the Enforcement Decree of the EUA on the basis of public necessity.

An operator of the electric utility business must set up the electric installations necessary to operate the electric utility and start up the business within the preparation period determined by the Minister.9

The EUA requires the Minister to take into consideration the economic efficiency of the electric installations and their impact on the environment and public safety when establishing a basic plan for electric supply.10

Petroleum

Article 2 of the PBA defines the term ‘petroleum’ as ‘crude oil, natural gas (including liquefied natural gas)’ and ‘petroleum products’ as ‘gasoline, kerosene, diesel, fuel oil, lubricating oil, hydrocarbon oil and petroleum gas (including liquefied petroleum gas)’11 and categorises petroleum businesses into three types of business: petroleum refinery businesses,12 petroleum export and import businesses13 and petroleum sales businesses.14

Anyone who intends to operate a petroleum refinery business must register his or her business with the Minister by submitting an application for registration and a business plan to the Korea Petroleum Quality and Distribution Authority, which was established pursuant to Article 25-2 of the PBA.15 In connection with petroleum refinery businesses, anyone who intends to operate a business for manufacturing asphalt, base oil and lubricant must report the business to the Minister.16

Also, anyone who intends to operate a petroleum export and import business must register his or her business with the Minister 30 days prior to the expected date of the initial customs clearance, by submitting an application for registration, a business plan and import agent agreement to the Korea Petroleum Quality and Distribution Authority.17 Such a registration, however, is not required for a person who is already registered as an operator of a petroleum refinery business, and for the import and export of certain petroleum products such as asphalt, lubricant and base oil.18 To qualify for the registration of a petroleum export and import business, an applicant must be equipped with a storage facility capable of storing the greater of the quantity of 15 days’ worth of planned domestic petroleum sales or 2,500kL.19 The previous storage capacity requirement of the greater of the quantity of 30 days’ worth of planned domestic petroleum sales or 5,000kL has been relaxed to the current requirement since December 2016 to induce price cuts by lowering entry barriers to the petroleum export and import business and thus promoting price competition among petroleum products both domestic and foreign.

Petroleum sales businesses are classified into (1) general agents and solvent agents; (2) gas stations; (3) solvent vendors; (4) manufacture and sales businesses of petroleum by-products; (5) secondary fuel oil vendors; and (6) general vendors, aviation fuel sales business and special vendors. While (1) to (5) need to be registered with the head of the local government,20 petroleum sales businesses that fall under (6) need to be reported to the head of the local government.21

To facilitate integrated controls and regulations of liquefied petroleum gas businesses, the PBA excludes liquefied petroleum export and import business from petroleum export and import business.22 To further protect consumers of petroleum products, the PBA prohibits the sale of petroleum and petroleum alternative fuels whose volumes have been improperly increased by artificial heating, and punishes violations.23 In addition, the PBA adds the Customs Office as an agency from which the Minister of the MOTIE may request tax information for efficient supervision and monitoring of conducts that may disrupt sound distribution of petroleum products in the market or violate prohibition against manufacturing of fake petroleum products.24

Urban gas

The UGBA defines the term ‘urban gas’ as natural gas (including liquefied gas), petroleum gas, by-products from naphtha cracking and biogas,25 and synthetic natural gas (SNG).26 Under the UGBA, urban gas businesses are categorised into five types of businesses: gas wholesale business, general urban gas business, urban gas recharging business, by-products from naphtha cracking and biogas manufacturing business, and SNG manufacturing business.27

Besides the above, recently, there has been very active development of shale gas. To allow private businesses to flexibly take appropriate measures and seek new business opportunities in response to the changes in the international energy market, such as the expansion of the Northeast Asia LNG purchase market, a reporting system was implemented for businesses that carry natural gas in and out,28 and the sale of natural gas abroad for self-consumption by a direct importer (which imported the natural gas) is permitted.29

According to the UGBA, the definition of each urban-gas business is as follows:

  1. Gas wholesale business: a business by which urban gas is supplied by a person, other than an operator of general urban gas businesses or by-products from naphtha cracking and biogas manufacturing businesses, to general urban gas business operators, urban gas recharging business operators or large users.30
  2. General urban gas business: a business that supplies urban gas supplied by gas wholesale business operators, or petroleum gas, by-products from naphtha cracking or biogas produced by the general urban gas business operator itself, to users through pipelines according to the general demand.31
  3. Urban gas recharging business: a business that supplies urban gas supplied by gas wholesale business operators, or by-products from naphtha cracking or biogas produced by the urban gas recharging business operator itself, by recharging the gas in a container, storage tank or tank fixed to a vehicle.32
  4. By-products from naphtha cracking and biogas manufacturing business: a business that manufactures by-products from naphtha cracking and biogas itself for self-consumption or supplies to gas wholesale dealers or general urban gas businesses (except for a business that manufactures naphtha by-products with manufacturing permit as required under Article 4 of the High Pressure Gas Safety Control Act and supplies by-product gas through dedicated piping directly to such facilities designated under the MOTIE Ordinance).33
  5. SNG manufacturing business: a business that manufactures SNG itself for self-consumption, supplies to gas wholesale dealers or supplies to a party that holds the majority of the shares of the applicable SNG manufacturing business for the parties’ self-consumption.34
  6. Natural gas export and import business: a business exporting or importing natural gas.35
  7. Business that carries natural gas in and out: a business pursuant to Article 154 of the Customs Act that carries natural gas in or out from the storage facility in the bonded area.36

Under the UGBA, a person who intends to operate a gas wholesale business must obtain a licence from the Minister of the MOTIE 37 and a person who intends to operate general urban gas business must obtain a licence from the head of the local government.38 A licence for the gas wholesale business and general urban gas business will only be granted if applications meet the following requirements:39 (1) the relevant urban gas business is of an economic scale appropriate for the public interest and general demand; (2) the relevant applicant has financial resources and technical capability necessary to properly conduct such an urban gas business; and (3) the relevant applicant has the capability of establishing and maintaining appropriate supply facilities for the stable supply of urban gas. A person who intends to operate an urban gas recharging business and by-products from naphtha cracking and biogas manufacturing business must obtain a licence from the head of the local government for each place of business.40 A person who intends to operate an SNG manufacturing business must obtain a licence from the Minister for each place of business.41

Anyone who intends to operate a natural gas export and import business must register his or her business with the Minister 30 days prior to the expected date of the initial customs clearance, by submitting an application for registration and a business plan (including current status or construction plan of the storage facility of natural gas and a supply plan for the five years following the year of the import of natural gas).42 If a natural gas export and import business operator who is an urban gas business operator intends to conclude a natural gas import, export or transportation agreement, he or she must obtain approval from the Minister after meeting the urban gas requirements in relation to demand and supply, and appropriateness of price.43 Anyone who intends to operate a business that carries natural gas in and out must report the business to the Minister.44

On the other hand, the UGBA includes provisions to improve regulations on natural gas export and import business operators, and to strengthen safety requirements. In addition, to flexibly respond to natural gas supply and demand situations at home and abroad, the UGBA exempts natural gas import agreements that meet certain criteria from the requirement to obtain pre-approval from the Minister. With respect to these natural gas import agreements, the importers are required to report to the Minister only after concluding the agreements.45 The UGBA strengthens safety requirements by stipulating that, in cases where liquefied petroleum gas facilities are changed into urban gas facilities, urban gas operators and gas users must implement certain safety measures such as demolition of liquefied petroleum gas containers and ancillary equipment. The UGBA imposes penalties for violations of the safety requirements, and even gas users who fail to comply with the safety requirements will be subject to penalties.46 The UGBA also requires that safety measures for gas plumbing and gas use facilities be implemented in the case of an extension or alteration to a building where urban gas pipelines are installed.47 The UGBA also newly introduces penalty provisions against those parties that cause damage, or inflict harm to the functionality of, urban gas pipelines.48

New and renewable energy

The New and Renewable Energy Act authorises the Minister of the MOTIE to establish a basic plan to promote use, dissemination and technological development of new and renewable energy every five years after consultation with the head of the relevant central administrative agency and deliberation by the New and Renewable Energy Policy Council.49 Also, to achieve the goals set out in the basic plan, plans for implementation must be established and carried out for each type of new and renewable energy every year.50

The New and Renewable Energy Act provides that tradable renewable energy certificates (REC) will be issued to new and renewable energy suppliers. On the other hand, in cases where new and renewable energy suppliers receive support from the MOTIE in an amount equal to the balance between the trading price of the electric power supplied by new and renewable energy sources and the standard price announced by the MOTIE, RECs will be issued to the state. The MOTIE may trade the certificates issued to the state in the market to keep the balance of demand and supply and to stabilise prices.51 In addition, the New and Renewable Energy Act abolishes the renewable energy installation specialist system and the renewable energy building certification system, which have been found to be ineffective, and integrates the renewable energy facility certification system into the Korean Industrial Standards certification system under the Industrial Standardisation Act.52

To ensure the adequate quality of new and renewable energy fuels, the New and Renewable Energy Act authorises the Minister of the MOTIE to announce quality standards for new and renewable energy fuels, and requires that new and renewable energy suppliers must pass a quality inspection for new and renewable energy fuels by a designated quality inspection agency.53 The New and Renewable Energy Act also introduces renewable fuel standards that require petroleum refinery operators and petroleum exporters to mix more than a certain percentage of new and renewable energy fuel in fuel for transport. Violations of these requirements may be punished by civil fines.54 Moreover, the New and Renewable Energy Act requires a new and renewable energy facility certification holder to take out an insurance policy against damage to be suffered by a third party.55 Under the New and Renewable Energy Act, new and renewable energy suppliers may join a mutual aid association for the purpose of developing new and renewable energy technology and facilitating new and renewable energy business operations.56

iiiOwnership and market access restrictions

Article 96 of the EUA provides that a foreign-capital invested company under the Foreign Investment Promotion Act may not obtain a licence for an electricity generation business under Article 7(1) of the EUA (this restriction is limited to the operation of atomic power stations) or approval for a plan for the manufacture and supply of fuel for atomic power generation under Article 28 of the EUA. There is no other restriction on foreign-capital invested companies with respect to the operation of electric utility businesses. The PBA and UGBA do not contain any provisions limiting foreign-capital invested companies’ operation of the relevant businesses.

ivTransfers of control and assignments

With respect to an electric utility business, if a person intends to acquire all or part of an electric utility business from its operator or to divide or merge an electric utility company or to acquire more than a certain percentage of shares in an electric utility company (except for those with power capacity less than 20,000kW) to ensure management control, it must obtain approval from the Minister.57 There are no particular restrictions on the acquisition, division or merger of petroleum businesses and urban gas businesses.

IIITRANSMISSION/TRANSPORTATION and DISTRIBUTION SERVICES

iVertical integration and unbundling

Electric power

In Korea, KEPCO, which was established pursuant to the Act on the Korea Electric Power Corporation, initially had a monopoly on the production and supply of electricity as the Korean government decided that, to protect the public interest, it would be appropriate for a public corporation to conduct the business of generating and distributing electricity. The supply of electric power, however, became unstable from the late 1980s because of a rapid increase in the demand for electricity, so the Korean government enacted the Act on the Promotion of the Reorganisation of Electric Power Industry in 2000 and privatised the electricity generation business by dividing KEPCO’s electricity generation business into six subsidiaries. As of January 2019, the number of private companies participating in the electricity market is 2,894.

Urban gas

The UGBA has various provisions that regulate the proper management of the supply and consumption of urban gas, which is public property. A general urban gas business operator and gas wholesale business operator must prepare and submit to the head of the local government a gas supply plan for five years.

iiTransmission/transportation and distribution access

Electric power

According to the EUA, only members of the KPX are entitled to carry out electric utility transactions at the electric utility market58 and, other than a consumer who uses 30,000kVA or more, no consumer may purchase electricity directly from the electric utility market.59 Accordingly, electricity produced by electricity generation business operators must be supplied to electricity consumers by operators of electric transmission, distribution and sales businesses. The EUA further provides that no operator of the electricity generation business and electric sales business or no electric vehicle charging network operator may refuse to supply electricity without just cause as prescribed by the Enforcement Decree of the EUA60 and the operator of an electric utility business must maintain the quality of service that it provides.61 Moreover, operators of electric transmission businesses, electric distribution businesses and district electric businesses must be equipped with and maintain and manage installations meeting the standards determined and publicly notified by the Minister so as to smoothly transmit or distribute electricity regardless of changes in the supply and demand of electricity.62

Petroleum

The PBA has various provisions that regulate the management of the quality of petroleum products and prevent the distribution of pseudo-petroleum products.63

In the event that a petroleum refinery business operator, petroleum export and import business operator or a registered petroleum sales business operator intends to sell or deliver certain petroleum products (e.g., petrol for vehicles, kerosene, light oil, petroleum by-products), the operator must have the petroleum products inspected by a quality inspection institution appointed by the Minister.64 Any operator will be prohibited from selling or delivering petroleum products that have failed the quality inspection.65 According to Article 29(1) of the PBA, no one may engage in manufacturing, importing, storing, transporting or keeping pseudo-petroleum products.

Meanwhile, to promote the expansion of the exporting of petroleum products, Article 29(2)(v-2) of the PBA stipulates that the blending of petroleum products at the general bonded area for the purpose of export only, as well as storing and transporting such mixtures, will not be viewed as the manufacturing of fake petroleum products.66

Urban gas

No gas wholesale business operators shall refuse to supply natural gas, or have the supply thereof interrupted, to general urban gas business operators, urban gas charging business operators or bulk buyers without justifiable cause.67

Each urban gas business operator must have the urban gas that it supplies inspected by an urban gas quality inspection institution to confirm that the gas fulfils the required quality standards.68

iiiRates

Electric power

An operator of an electric sales business must prepare terms and conditions concerning electric utility charges and other conditions of supply (i.e., supply districts, type of supply and supply voltage and frequency), and obtain approval from the Minister.69 Further, an operator of the electric sales business must specify the details of the utility charges based on items in electric utility bills charged to consumers of electricity.70 An operator of the electric transmission business or electric distribution business must set charges for the use of electric installations and other matters concerning the conditions of their use.71

Petroleum

A petroleum refinery business operator, petroleum export and import business operator and petroleum sales business operator must report their sale prices of petroleum products to the Minister.72

Urban gas

A general urban gas business can have a party that is requesting a change in the contract regarding the supply of urban gas or supply of gas pay for all or a portion of the installation costs of the gas supply equipment or facilities (Article 19-2). Also, where it is difficult to supply urban gas for any of the reasons stipulated under Article 19, the national and local government can pay for all or a portion of the installation costs (Article 19-3). Gas wholesale business operators must obtain the approval of the Minister of the MOTIE in determining the rate. When a determined rate is changed, the same approval is required (Article 20(1)).

ivSecurity and technology restrictions

Electric power

Where an operator of an electric utility business intends to perform the works for setting up or altering electric installations for the electric utility, he or she must obtain approval for the plan for the works from the Minister,73 and undergo periodic inspections conducted by the Minister.74

New and renewable energy

If the Minister of the MOTIE deems it necessary for the promotion of the use and supply of new and renewable energy or to increase the vitality of the new and renewable energy business, it may make it mandatory for a party that holds over 500,000kW of generating units (excluding equipment for new and renewable energy), the Korea Water Resources Corporation and the Korea District Heating Corporation to use new and renewable energy with respect to a determined generation quantity per year within the scope of 10 per cent of the total power production amount for supply energy.75 Where the Minister of the MOTIE deems that the above party with the obligation to supply did not fulfil its obligation by not using sufficient new and renewable energy in supplying its energy, the Minister may impose an administrative fine.76

IVENERGY MARKETS

iDevelopment of energy markets

Electricity

As previously described, transactions regarding electricity take place at the KPX pursuant to the EUA, which was established as an independent legal entity on 2 April 2001. Specifically, transactions occur between the over 1400 electricity generation business operators and a sales business operator 24 hours a day and 365 days a year, based on prices that change every hour.

Gas

Gas is divided into the wholesale sector and retail sector. The Korea Gas Corporation is in charge of business in the wholesale sector, and regional urban gas companies are in charge of business in the retail sector. Specifically, through the main line operated by the wholesaler operator (i.e., the Korea Gas Corporation), gas is supplied to the general urban gas companies, and urban gas companies supply consumers through the pipes that are operated regionally. Because of the public nature of the gas business, the central government oversees and supervises each of the duties of the wholesaler operator and local governments oversee and supervise each of the duties of retail operators.

iiEnergy market rules and regulation

Electricity

Electricity is regulated by the EUA. Electricity transactions must be made through the KPX and users of electricity cannot directly purchase electricity from the power market (EUA, Article 31). Electricity transactions are regulated by the Power Market Operating Regulations as determined by the KPX, pursuant to Article 43 of the EUA, and Article 53 of the EUA authorises the Electricity Regulatory Commission to adjudicate on disputes concerning the Regulations.

KEPCO has been monopolising the electric power brokerage business. However, pursuant to the amended EUA (Article 43-2 of the EUA and Article 1-3 of the Enforcement Decree of the EUA), small-scale electric power brokers may sell renewable energy under 1,000kW or electricity generated and stored in energy storage systems (ESS) and electric vehicles. Small-scale electric power brokers may enter into the market more easily now as they can commence their business after registration. They are not required to obtain approval as existing electricity businesses are. Such deregulation of market entry is expected to lead to the effective management of small-scale power resources and to improve the stability of the power sector.

Gas

Gas is regulated pursuant to the UGBA. Prior to the 2014 amendment of the UGBA, the direct importing of natural gas by private companies was allowed solely for private consumption. Aside from direct importing by private companies for a limited purpose, the importing and wholesale of natural gas was exclusively conducted by the Korea Gas Corporation (KOGAS). However, the 2014 amendment of the UGBA enabled private companies to resell natural gas they had directly imported. Direct imports of natural gas are expected to reach 4.65 million tons in 2017, accounting for 12 per cent of domestic natural gas demand. This amount is expected to more than double in 2031.

iiiContracts for sale of energy

Electricity

The price on the electricity market is determined based on the electricity demand price predicted by the KPX a day in advance and the supply bid price of the electricity generation business operators. The electricity charge (the sales price of businesses that sell electricity), however, is approved by the government pursuant to laws such as the EUA, as opposed to supply and demand, because of its public nature. After a large-scale power outage in Korea on 15 September 2011, electricity costs were increased a total of four times until November 2013. The main reason for the increase was the need to align costs with actual usage. In particular, in November 2013 electricity costs increased by an average of 5.4 per cent and, included in this, the industrial electricity cost increased by 6.4 per cent. Since that time, there has been no further increase or decrease in electricity rates. According to the Second Basic Energy Plan confirmed in January 2014, besides classifying electricity rates based on use (e.g., industrial, general and housing), as was done in the past, seasonal or time differential pricing has also been introduced.

In 2017, KEPCO has resolved to amend its Implementation Rules of General Terms and Conditions of Supply to expand new and renewable energy and ESS by modifying renewable energy discount standards, introducing new incentive to install new and renewable energy and ESS together, and extending new and renewable energy and ESS discount periods.

Gas

The transacting price in the wholesale sector is determined based on the contracts executed between the KOGAS and urban gas companies. Since the KOGAS imports all of its gas, it is directly or indirectly regulated by the government regarding the import volume and conditions. With respect to the issue of whether to strengthen or relax regulations on importing gas, there are differences in views between the government (which favours relaxation) and the National Assembly (which favours strengthening). In the retail sector, approval of the charge is required from local governments.

VRENEWABLE ENERGY AND CONSERVATION

iDevelopment of renewable energy

The Act on Promotion of Alternative Energy was enacted in the 1980s, and the government later established its comprehensive support policy, the Basic Plan for Technical Development for Alternative Energy (1988–2001). Also, to achieve its efficient promotion, the government established the Alternative Energy Business Department within the Korea Energy Management Corporation as the organisation in charge of the development of new and renewable energy.

In the 1990s, to prepare for the Climate Change Convention, the comprehensive technology development plan for energy and the environment, the Energy Technology Development 10-Year Plan (1997–2006), was established to establish a system to promote technological development of not only new and renewable energy, but also to help saving energy, and develop clean energy and resource technology.

As 2000 approached, there was a new understanding of the importance of new and renewable energy and, to strengthen policies regarding technical development and its increased use, the Act on Promotion of Alternative Energy was amended to become the Act on Promotion of Development, Use and Diffusion of Alternative Energy. This Act served to form the basis for business promotion regarding feed-in tariffs (FITs) for new and renewable energy general output, an obligation for public institutions to use new and renewable energy and new and renewable energy equipment certification procedures, etc., which made it possible to create an early market for new and renewable energy.

The Basic Plan for Development and Use of New and Renewable Energy (2003–2012) was established and implemented for the further promotion of new and renewable energy development and dissemination, and the relevant law was again amended in 2004. Korea applied FITs from 2002, but in 2012 they were replaced by the Renewable Portfolio Standard (RPS), which obligates certain operators of energy businesses to supply certain amount of new and renewable energy.

As of 2017, renewable energy accounted for 5.45 per cent of Korea’s electricity generation, which is lower than other major countries. In December 2017, the government set the goal of increasing the proportion of renewable energy to 20 per cent by growing the capacity of renewable energy facilities to 63.8GW by 2030. In order to achieve this goal, the government plans to promote:

  1. city-type private solar power for one household per 15 households by 2030;
  2. small-scale projects under 100kW through introducing the Korean FiT, which combines the advantages of existing RPS and FiT;
  3. projects in rural areas utilising subprime farmland; and
  4. large-scale project development with policy support.

The sources of renewable energy in Korea, as of 2017, are waste (57 per cent), bio (22 per cent), and solar (9 per cent). In order to reduce the proportion of non-renewable wastes, the government will improve the licencing system for energy businesses by mandating environmental impact assessments. The government will also exclude non-renewable wastes from the scope of renewable energy and ensure that more than 95 per cent of new power plants will supply clean energy such as solar power and wind power.

The government plans to leverage renewable energy as an opportunity to foster new energy businesses. For that purpose, the government will:

  1. set up an R&D roadmap to reduce the price of solar and wind power, to catch up with new technology and to acquire a competitive edge in next-generation technology;
  2. pursue strategic pilot projects to demonstrate new technologies, to verify business models and to promote pre-emptive deregulation;
  3. create renewable energy innovation growth clusters; and
  4. establish a comprehensive support system for promoting overseas market entry.

Furthermore, in order to foster new energy industries based on small-scale distributed power such as solar power and wind power, the government also plans to establish an intelligent power grid and ‘internet of things’ (IoT) infrastructure and strengthen certification standards. In doing so, the government is expected to induce the creation of new service industries based on the advanced power infrastructure and IoT technology, and to foster the new services industries through smart-city business models.

iiEnergy efficiency and conservation

In 1995, the government established the use of demand management investment plans for energy suppliers pursuant to Article 12 of the Energy Use Rationalisation Act (Article 9 in the current version of the Act) and these plans have been in use since 1996 by companies such as KEPCO, the KOGAS and the Korea District Heating Corporation. Meanwhile, because of the restructuring and privatisation of the electricity industry, and based on the amendments to the EUA, the government established the groundwork formation plan for the electricity industry in December 2000, which, with the government funds for this groundwork, separately promotes demand-side management businesses.

Under the electricity demand management policy, which was established to achieve a stable supply and demand of electricity and efficient electricity use, the representative businesses are divided into load-management businesses, which reduce the maximum electricity demand, and energy-efficiency businesses, which reduce electricity consumption through high-efficiency devices. In terms of gas and heating, for the management of a stable supply and demand, there is an emphasis on the dissemination of gas-cooling and cogeneration facilities and efforts are being made to achieve greater energy efficiency compared with individual heating systems through regional heating and cooling businesses.

According to the Sixth Electricity Supply and Demand Basic Plan, which was announced by the MOTIE in February 2013, the government has strengthened measures to manage demand by companies, such as the demand adjustment programme of advance notice (where financial incentives are offered to customers who reduce their demands at peak times by observing contract terms and conditions during the KEPCO-announced summer and winter peak periods) and load reduction by adjusting vacation or maintenance schedules, as well as using smart meters to manage the electricity-saving system and intelligent demand. Subsequently, in July 2015, the MOTIE released the Seventh Electricity Supply and Demand Basic Plan and announced that it would actively consider the temperature fluctuation and demand trends in developed countries for precise power-demand forecasting. For efficient supply and demand management, the MOTIE is adopting innovative technological solutions, including the negawatt market, ESS and energy management systems (EMS). Through these policy improvements, the MOTIE will be able to provide electricity without resorting to mandatory power-saving for industries or limiting air-conditioning temperatures, except in exceptional cases. The MOTIE announced at the plenary session of the National Assembly in July 2016 that it would release the Eighth Electricity Supply and Demand Basic Plan in July 2017. In the Eighth Electricity Supply and Demand Basic Plan released in December 2017, the government stated that it will gradually reduce its nuclear power plants and coal-power generation facilities; expand eco-friendly energy focusing on new and renewable energy; operate facilities that reduce coal-power generation and increase LNG-power generation, taking into consideration environmental costs; and increase the LNG facility capacity and generation capacity to achieve a stable power supply and environmental improvement. The MOTIE will announce the Ninth Electricity Supply and Demand Basic Plan this year with the aim of reducing fine dust by promoting the conversion of coal fuels to LNG.

iiiTechnological developments

The fourth industrial revolution is revolutionising the energy sector among others, and the energy 4.0 era is emerging that fuses energy and related fields and promotes the digitisation of energy. Faced with this new development, the government will establish and implement plans to build an ICT-based energy infrastructure that effectively links distributed energy supply, flexible and intelligent consumer demand responses, and distributed grid. The second Smart Grid Basic Plan announced in July 2018 aims to foster the new Smart Grid industry by pursuing new projects to promote new services, establishing service experience facilities and expanding infrastructure and facilities. The government has decided to invest 400 billion won in the new projects.

In January 2019, the government announced the Roadmap for Promoting the Hydrogen Economy to assess the domestic and overseas hydrogen industry; to increase or expand the production capacity of hydrogen cars, hydrogen fuelling stations and fuel cells; and to build up an economical and stable hydrogen production and supply system, aiming to become a global hydrogen economy leader. The government is planning to expand the number of hydrogen fuelling stations, which are the core infrastructure necessary for the spread of hydrogen cars, from the current 14 to 310 in 2022 and 1,200 in 2040. In order to achieve this goal, the government is considering subsidies to support the installation and operation of hydrogen fuelling stations until hydrogen fuelling stations are economically viable. On 11 March 2019, the Hydrogen Energy Network (Hnet), a special purpose corporation in which 13 hydrogen-related companies including KOGAS and Hyundai Motor Company participate, was established with the goal of setting up and operating 100 hydrogen fuelling stations by 2022.

In the market, industries relating to smart factories or power plants, smart home appliances, eco-friendly energy towns, and zero-energy buildings are expected to grow. In particular, investment is expected to increase in connection with the construction of smart-grid and ‘internet of things’-dedicated infrastructure.

In addition, the new government’s policy initiative to promote green cars will expand the supply of green cars by building electric vehicle charging infrastructure, reducing the green car toll by 50 per cent and completing highway charging facilities. The policy initiative is expected to increase investment in green cars.

VITHE YEAR IN REVIEW

Key concepts in 2018 are the fourth industrial revolution, climate change, hydrogen economy and environment.

The government has revised the existing electricity supply-and-demand basic plan, which was established mainly for supply-and-demand stability and economic efficiency, by substantially enhancing environmental stability and safety. In order to cope with fine-dust pollution due to thermal power generation, the government has set up a coal-power generation reduction plan to abolish old coal power plants by 2022 and to convert coal fuels to LNG.

Furthermore, in order to gradually phase out nuclear power, the government has decided to abandon the construction project of six new nuclear power plants and to cancel the life extension of 10 old nuclear power plants. In order to avoid problems in energy supply and demand due to the phase-out of nuclear power, the government is supplementing measures to improve energy efficiency and manage demand.

With respect to climate change issues, Korea signed a universal climate deal, the Paris Agreement, adopted at the Paris climate conference (COP21) in December 2015 to replace the 1997 Kyoto Protocol on climate change. The National Assembly ratified the Paris Agreement in November 2016. Pursuant to the Paris Agreement, the government is obligated to cut greenhouse gas emissions by 37 per cent compared to its emissions forecast by 2030. In addition, in order to meet another goal of the Paris Agreement to limit the global average temperature to 1.5°C, the government should establish a carbon emission reduction target and a long-term low carbon development strategy by 2020. In that regard, the government held a cabinet meeting on 6 December 2017 and confirmed the First Basic Plan for Response to Climate Change, and the Basic Roadmap for 2030 National Greenhouse Gas Reduction, a detailed plan to achieve the 2030 greenhouse gas reduction target (37 per cent reduction in 2030 emission estimates) proposed by Korea in the Paris Agreement. In July 2018, the Korean government announced a revised Roadmap that reflected the energy conversion policy of the government. The target of the revised Roadmap is to reduce greenhouse gas emissions by 277 million tons in 2030, which constitutes a reduction of 58 million more tons compared to the previous Roadmap, by enhancing energy efficiency, strengthening the management of energy demand and fostering low-carbon industries.

In the process of implementing the Paris Agreement, there may be conflicts between existing market participants and government regulators. In order to mitigate such conflicts and to create new markets by establishing new energy regulations, the Moon Jae-in government aims to reduce greenhouse gas emissions by creating a wood industry complex through the expansion of forest investment, and invigorating forest carbon management and trading.

The new energy industry, which is strongly driven by the government, is expected to become the catalyst for the fourth industrial revolution. In particular, the emergence of ESS, renewable energy, and ICT-convergence technologies are triggering a fundamental shift in traditional energy systems. On the other hand, there are concerns that the government may restrict the creative initiatives of market participants by limiting or micromanaging the roles of public and private enterprises in the new energy industry.

VIICONCLUSIONS AND OUTLOOK

The Fukushima nuclear power plant accident in Japan on 11 March 2011 and the large-scale power outage on 15 September 2011 in Korea have had a significant effect on Korea’s energy policies and laws. Because of the Fukushima nuclear accident, the likelihood is high that nuclear energy, which accounted for about 12 per cent of the country’s energy mix, will be reduced in the future and replaced with new and renewable energy. The power outage was the combined result of factors such as the failure to predict electricity demand, the price of electricity, which fell short of the production cost, and structural deficiencies in the industry, and this is likely to cause policy-oriented changes to the electricity industry, such as an increase in electricity rates.

As Korea signed the Paris Agreement, it is bound by obligations to reduce greenhouse gas emissions. These obligations are expected to produce further promotion of the sectors that develop and implement new, clean and renewable energy sources.


Footnotes

1 Soong-Ki Yi, Kwang-Wook Lee and Changwoo Lee are partners at Yoon & Yang LLC.

2 Article 2(iii) of the EUA.

3 Article 2(v) of the EUA.

4 Article 2(vii) of the EUA.

5 Article 2(ix) of the EUA.

6 Article 2(xi) of the EUA; Article 1-2 of the Enforcement Decree of the EUA.

7 Article 7(1) of the EUA; Article 5(1) of the Enforcement Rule of the EUA.

8 Article 7(1) of the EUA; Article 4(1) of the Enforcement Rule of the EUA.

9 Article 9(1) of the EUA.

10 Article 3(2) of the EUA.

11 Article 2(i) and (ii) of the PBA.

12 Article 2(iv) of the PBA.

13 Article 2(v) of the PBA.

14 Article 2(vi) of the PBA.

15 Article 5(1) of the PBA; Article 4(1) of the Enforcement Rule of the PBA.

16 Article 5(2) of the PBA; Article 8(1) of the Enforcement Decree of the PBA.

17 Article 9(1) of the PBA; Article 8(1) of the Enforcement Rule of the PBA.

18 Article 9(1) of the PBA; Article 10(2) of the Enforcement Decree of the PBA.

19 Article 12(1) of the Enforcement Decree of the PBA.

20 Article 10(1) of the PBA; Article 12(1) to (6) of the Enforcement Rule of the PBA.

21 Article 10(2) of the PBA; Article 12(7) of the Enforcement Rule of the PBA.

22 Article 9(1) of the PBA.

23 Article 39(1)(iii) of the PBA.

24 Article 41-3 of the PBA.

25 Article 2(i) of the UGBA; Articles 1–2 of the Enforcement Decree of the UGBA.

26 Article 2(i) of the UGBA.

27 Article 2(i-2) of the UGBA.

28 Article 2(ix-2) and (ix-3); Article 10-2(3) of the UGBA.

29 Article 10-6 of the UGBA.

30 Article 2(iii) of the UGBA.

31 Article 2(iv) of the UGBA.

32 Article 2(iv-2) of the UGBA.

33 Article 2(iv-3) and Article 8-3 of the UGBA

34 Article 2(iv-4) of the UGBA.

35 Article 2(vii) of the UGBA.

36 Article 2(ix-2) of the UGBA.

37 Article 3(1) of the UGBA.

38 Article 3(2) of the UGBA.

39 Article 3(7) of the UGBA.

40 Article 3(3) of the UGBA and Article 3(4) of the UGBA.

41 Article 3(5) of the UGBA.

42 Article 10-2(1) of the UGBA; Article 10-6 of the Enforcement Rule of the UGBA.

43 Article 10-5(1) of the UGBA.

44 Article 10-2(3) of the UGBA.

45 Article 10-5(2) of the UGBA.

46 Article 28-2 and 54(6) of the UGBA.

47 Article 28-3 of the UGBA.

48 Article 48(4) and (8) of the UGBA.

49 Article 5(1) and (2) of the New and Renewable Energy Act.

50 Article 6(1) of the New and Renewable Energy Act.

51 Article 12-7 of the New and Renewable Energy Act.

52 Article 13 of the New and Renewable Energy Act.

53 Article 12-11, 12-12 of the New and Renewable Energy Act.

54 Articles 23-2, 23-3, 23-4, 23-5 and 23-6 of the New and Renewable Energy Act.

55 Article 13-2 of the New and Renewable Energy Act.

56 Article 30-2 of the New and Renewable Energy Act.

57 Article 10(1) of the EUA.

58 Article 44 of the EUA.

59 Article 32 of the EUA; Article 20 of the Enforcement Decree of the EUA.

60 Article 14 of the EUA.

61 Article 18(1) of the EUA.

62 Article 27 of the EUA.

63 Products manufactured by a method of mixing petroleum products with other petroleum products or petrochemicals; Article 2(x) of the PBA.

64 Article 25(1) of the PBA; Article 28(1) of the Enforcement Rule of the PBA.

65 Article 27 of the PBA.

66 Article 29(2)(v-2) of the PBA.

67 Article 19 of the UGBA.

68 Article 25-2(1) of the UGBA.

69 Article 16(1) of the EUA; Article 16(1) of the Enforcement Rule the EUA.

70 Article 17 of the EUA.

71 Article 15(1) of the EUA.

72 Article 38-2(1) of the PBA.

73 Article 61(1) of the EUA.

74 Article 65 of the EUA.

75 Article 12-5(1) and (2) of the New and Renewable Energy Act; Article 18-3 of the Enforcement Decree thereof.

76 Article 12-6(1) of the New and Renewable Energy Act.