The regulatory framework for new and renewable energy in the Republic of Korea (South Korea) primarily consists in the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy (the Renewable Energy Act). The regulatory framework for renewable energy is intertwined with energy policies established by the Framework Act on Low Carbon, Green Growth (the Carbon Act), the emission trading scheme and the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits (the GHG Allocation Act), which became effective in 2015. The primary government authority responsible for renewable energy-related matters is the Ministry of Trade, Industry and Energy (MOTIE).
The South Korean government establishes long-term basic energy plans (the Basic Energy Plan) to promote, among other things, the development, use and diffusion of new and renewable energy. The Basic Energy Plan is published every five years and lays out the country's basic energy policy for the next 10 years.
Since 2012, the government has implemented the Renewable Portfolio Standard (RPS) scheme pursuant to the Renewable Energy Act. The RPS imposes obligations on 22 large power generation companies to generate a certain minimum percentage of gross power generation from renewable energy sources. Failure to meet the obligatory generation quota may result in an administrative fine in the amount equivalent to 1.5 times the average trading price of Renewable Energy Certificates (RECs).
The current renewable generation quota obligations are set out as follows. However, President Moon Jae-in's administration is in the process of revising the ratio and it is expected that ratios will be adjusted to a higher level.
Table 1: annual supply rates
II THE YEAR IN REVIEW
In June 2018, REC weighting was adjusted to address concerns over concentrated investments in bioenergy compared to other forms of renewable energy. Notably, REC weighting for bioenergy such as wood pellets, chips and bio solid refuse fuel has been significantly lowered or, depending on the type of incineration, partially abolished. In contrast, REC weighting for offshore wind farms has been raised to the range 2–3.5 units. In October 2019, the regulations under the Renewable Energy Act were amended so that non-reusable waste such as vinyl and plastic is excluded from the renewable energy types and consequently is no longer eligible for RECs.
The Third Basic Plan for Energy (for the years 2019–2040) was announced by the Moon administration in June 2019, whereby the government reaffirmed its energy initiative to phase out nuclear energy and sought to increase the proportion of renewable energy in the total energy supply to 30–35 per cent by 2040, from 7.6 per cent in 2017. Furthermore, in accordance with the Third Basic Plan for Energy, the government is contemplating (1) reducing total energy consumption by 18.6 per cent to 171.8 million tonnes of oil equivalent by 2040, (2) improving energy efficiency by 38 per cent by regulating energy demand by sector, (3) forging agreements with energy-intensive businesses to encourage them to reduce energy consumption, (4) introducing a new fuel efficiency standard for medium-sized to large cars by 2022, and (5) rationalising the energy pricing model by adopting green pricing or implementing corporate power purchase agreements (PPA), among other things. While the government is striving to tackle the problem of fine and ultra-fine dust and to reduce GHGs, its Third Basic Plan has been criticised by some commentators as being unrealistic and lacking detailed measures.
III THE POLICY AND REGULATORY FRAMEWORK
i The policy background
South Korea introduced the RPS in 2012, converting from the previous feed-in tariff (FIT) regime. Additionally, the government required companies with generation capability of 500MW or more to generate at least 6 per cent of gross power from renewable energy sources. Currently, 22 large power companies in South Korea are subject to this obligation. However, current policies have been criticised for being disadvantageous to renewable energy companies because the RPS ratios are too low. As new and renewable energy sources are lacking in South Korea, some commentators believe that achieving the ratio targets would be practically very difficult. Further, non-governmental organisations (NGOs) and renewable power companies also believe that profitability from renewable energy generation and the predictability of the business are uncertain because the REC price is relatively low and the volatility of the business is quite high. Therefore, some critics are not supportive of pursuing renewable energy business in the country.
For these reasons, the government has implemented its Renewable Energy 3020 Implementation Plan and MOTIE is in the process of raising the RPS ratio and adjusting RECs in accordance with the government's policy to expand the renewable energy business.
ii The regulatory framework
Main sources of law and regulation and regulators' powers and scope of authority
The main sources of law and regulation in South Korea are the Renewable Energy Act, the Carbon Act and the GHG Allocation Act.
Pursuant to the Renewable Energy Act, new energy is described as hydrogen energy, fuel cells, energy from liquefied coal and heavy residual oil, and renewable energy, including solar energy, wind power, water power, marine energy, geothermal energy, bio energy and waste-to-energy.
MOTIE is the primary governmental authority responsible for energy-related matters. Although the Energy Committee also plays a significant part in establishing energy-related policies in South Korea, MOTIE is the main agency responsible for establishing and implementing energy policies and plans. Ordinarily, MOTIE will review and set a new Basic Energy Plan every five years, which lays out the nation's basic energy policy for the next 10 years. These energy policies and plans are reviewed by the Energy Committee and then by a cabinet council consisting of ministers of each ministry. NGOs do not play a formal role in establishing government policies for renewable energy. However, many activists from NGOs have been working and coordinating with the government recently.
Different institutions regulate different areas of law in South Korea, as MOTIE delegates various duties to other agencies. For example, Korea Electric Power Corporation (KEPCO) manages REC matters, the New and Renewable Energy Centre is responsible for reviewing and issuing RECs to eligible companies, and local governments have the authority to issue licences for installation of renewable power plants located in their jurisdiction.
Renewable Energy Certificates
Under the Renewable Energy Act, an REC is defined as a 'certificate authenticating the fact of supply by using new or renewable energy facilities'. An REC is based on each megawatt hour (MWh) of electricity generated from a renewable energy resource. RECs are issued by the New and Renewable Energy Centre and are tradable in South Korea. RECs are typically sold to one of the 22 large power generation companies that are obligated to generate certain percentage of their generation output from renewable energy sources.
The renewable energy is monitored by KEPCO, which verifies the amount of renewable energy generated. If a company produces renewable energy, in addition to RECs, the company can also get a certified emission reduction credit for greenhouse gas emissions by registering with the United Nations as a clean development mechanism project.
The renewable energy is integrated into KEPCO's electricity grid network because the electricity generated from the renewable source can be sold only through Korea Power Exchange (KPX). In this regard, the South Korean renewable energy producers earn revenue by selling electricity to KEPCO through KPX plus additional income by trading RECs with the 22 large power generation companies.
As at May 2020, renewable energy companies generated revenue of approximately 78,000 Korean won per 1Mwh, and 44,000 won per 1 unit of REC. Subject to fulfilment of certain requirements, these entities may also obtain GHG emission rights by generating renewable energy.
Regulatory approval and authorisation
To engage in renewable energy business in South Korea, the developer must secure ownership or lease right of the land on which the power plant will be located and obtain necessary licences from the local government where the land is located. And for large-scale power generation projects (over 100,000kW), an environmental impact assessment must be carried out and approved by the Ministry of Environment.
The time frame for obtaining approval for the development of a utility-scale renewable energy project often depends on the type of renewable source. For example, for onshore wind, the approval process normally takes about four years from filing the application with the government, whereas for solar power, the approval may be granted within a year. In the case of a large-scale project, it may take longer than usual to obtain the approval since it requires an environmental impact assessment.
Special protocols for intermittent energy sources and environmental concerns
In South Korea, there are special protocols for intermittent energy sources such as wind and solar. When an energy storage system (ESS) is linked to supplement the intermittent energy, additional REC weighting is given in the range 4–5 units depending on the type of renewable source. The highest weighting (5 units) is given to solar power facilities linked with an ESS.
The government also seeks to secure commercialisation of ESSs and source technologies to reduce ESS prices by 50 per cent of the current price by 2020. The government also plans to develop technologies that enable early commercialisation of non-lithium storage methods, such as redox flow batteries and sodium sulphur batteries, and operation of mid to large-scale energy storage systems of 50MW to 100MW.
Although wind and hydropower are considered renewable energy, the construction of related power plants face difficulties as many environmental organisations and local residents oppose these plants because of potential environmental harm resulting from their construction and operation. In this regard, more investment is made in solar energy because of the comparatively fewer potential environmental problems associated with installation of solar panels in smaller-scale solar projects on parking lots, factories, residential roofs and farmland.
In the case of solar power, small and medium-sized projects seem more promising in South Korea. This is primarily because there is limited land space on which large power projects can be built. In recent years, aquatic solar power generation plants have been installed in dams and reservoirs to solve land site problems.
The majority of regions consist of mountainous terrain, and most areas of flat land suitable for solar power projects have been already developed. Accordingly, it is difficult for developers to procure land suitable for solar power projects (i.e., vast areas of flat land with appropriate amounts of solar irradiance). However, once suitable land is procured, financial institutions in South Korea have been seen to be willing to invest in such projects as stable income is expected over the long term.
IV RENEWABLE ENERGY PROJECT DEVELOPMENT
i Project finance transaction structures
Project financing transactions in South Korea
In renewable energy projects, the project operator typically acquires ownership or lease of the project site, ownership of the renewable energy generation and transmission facilities (including transmission facilities up to the point of interconnection with KEPCO's grid network), and ownership of the electricity sales proceeds and REC sales proceeds. The real property and tangible assets relating to sites and facilities are provided as collateral to the financial institutions that provide the financing. Intangible assets such as electricity sales proceeds, REC sales proceeds and insurance proceeds are also typically provided as collateral assignments to the lenders.
In project finance, the main documents include loan agreements; security documents in respect of the real property, mortgage and equity; pledge agreements with respect to accounts and insurance proceeds; security assignment agreement; and documents regarding disposal of power plants, assignment of licence and approval in the event of default, and credit support provided by majority shareholders. The typical tenor of the term debt is usually from 10 to 15 years.
In South Korea, it is common for the contractor that manufactures or installs renewable energy equipment to provide an efficiency guarantee to the lenders. Financing for renewable projects is mainly provided by commercial banks, although it is becoming more common for private equity funds to participate in these types of financing.
The other unique feature of renewable project financing in South Korea is that the electricity generated from the renewable energy must be traded in and through KPX. This adds complexity when structuring the project finance, especially in terms of structuring the collateral package, since KPX is a governmental agency.
Environmental attributes market and trends
In South Korea, the market for environmental attributes such as RECs has not been active because of various risks and systemic problems. One of the systemic problems is that the regulations relating to renewables (including REC weighting and the mandatory supply ratio under the RPS programme) are not so straightforward and change from time to time at the government's discretion, making the legal landscape less predictable. For example, when it was determined that the original RPS level was unattainable, the mandatory supply ratio was significantly lowered from the initial target of 3.5 per cent to 3 per cent (for 2015) and from 4 per cent to 3.5 per cent (for 2016). To implement a structured RPS system, the government must set up a system that is clear and enforce it in a consistent manner.
Further, there was no significant government programme to help facilitate investment in renewable energy projects. Aside from government subsidies of up to 50 per cent of installation costs for renewable energy equipment (such as solar power), there were no government policies that purported to support low-income and marginalised communities, individuals or rural residences. And up until now, the current government did not rigorously enforce relevant rules and regulations. This may account for the slow development in the renewable energy market. For example, if the government determines that mandatory supply ratios are not being met, the government simply adjusts these ratios without imposing penalties for violations. Until 2016, even when the 21 large energy companies subject to the RPS failed to meet the new and renewable energy ratio requirements, the government delayed imposing any fines. However, this delay was a policy decision, taking into consideration aggravation of the power generation companies' management, rises in electricity prices and the limitations of the renewable energy resources.
Nonetheless, it is expected that the new government will strongly push for the expansion of new and renewable energy. And if the relevant power supply companies do not meet the mandatory ratios, it is anticipated that the government will impose sanctions. The budgets are now allocated by the government for development of agricultural infrastructure, solar and wind power generation projects, development of core technologies for new and renewable energy, energy efficiency projects and trading of emissions.
Further, beginning with the Renewable Energy Act, the government has implemented a low-interest financing support system for businesses that invest in energy-saving facilities and reduce greenhouse gas emissions to streamline energy use and promote greenhouse gas reduction efforts. In addition, South Korea has developed a system to provide small-scale renewable energy funding at no cost, and low-interest loans. However, no system exists to fund large-scale renewable energy facilities at present.
When renewables equipment is installed in houses, buildings, local government buildings and social welfare facilities, funding may be provided to businesses that rent out the solar power facilities to the buildings and houses. Further, financial support is provided for the manufacturers of renewable energy equipment and facilities or the companies that install and operate new and renewable energy facilities. The government also supports the Energy Saving Company (ESCO), which is a company equipped with required facilities, capital and technology and registered with MOTIE pursuant to Article 25 of the Energy Use Rationalisation Act and Article 30 of the Enforcement Decree of the same Act, and which provides loans at lower interest rates than the market rates.
Since 2012, the government has implemented a guarantee system for cooperation agreements for renewables. Under these initiatives, the government uses funds contributed by large corporations, including KEPCO, Samsung Electronics and Hyundai Motors (approximately 103 billion won), to provide loans to renewable energy companies. These loans are guaranteed by the government-owned technology guarantee fund and credit guarantee fund. No government-sponsored green or similar funds have been introduced to facilitate renewable energy projects.
In South Korea, the government has taken the Recommendations of the Task Force on Climate-related Financial Disclosures2 seriously, while financial institutions, such as bankers' associations, commercial banks, insurance companies, brokerage firms and fund management companies have created green finance councils to create and operate financial products and provide loans for new and renewable energy. These initiatives support ESCO projects, guarantees, funds and insurance. These green financial products are just one type of financial support system available, in addition to those described above.
In the renewable energy market, the private power purchase (PPP) market has not yet been developed in South Korea because electricity can be sold only through the electric power market in KPX. PPPs are in use, however, with related renewable energy sources, such as incineration of certain waste, and landfill projects, where the government encouraged investors by providing minimum revenue guarantees to promote the business.
ii Distributed and residential renewable energy
The government seeks to encourage small energy projects. More specifically, to enhance and expand new renewable energy sources, the government provides financial support for installation of household generators (3kW or less) and geothermal heat pumps, among other applications. Currently, the government subsidises 50 per cent of the cost of installing new renewable energy equipment in residences and buildings.
Although there is no system or government policy to support the establishment of a renewable energy company in South Korea, the government supports renewables facilities on a small scale by offering financial support for residences, buildings and regions to enhance production and usage of new renewable energy. MOTIE also facilitates leasing of solar energy equipment and related facilities under the Ordinance on the Support of New Renewable Energy Facilities.
Ownership structures of distributed (on-site) and residential energy facilities
In the case of a single-family house in South Korea, the owner of the house can install and own a distributed and residential energy facility. However, in the case of multi-unit dwellings such as apartments, the approval of the resident representative meeting must be obtained to install the distributed energy facility on the roof of the building or veranda (in the case of the multi-unit dwelling, the approval of each owner is required). In the case of Seoul, the local governments provide housing subsidies for small, home solar power facilities. As such, homeowners (co-housing owners or representatives in the case of apartments), local governments and installation companies are the key participants in the distributed energy market.
The local governments are expanding their investment in distributed renewable energy in the form of the One Less Nuclear Power Plant campaign, which is one of the major policies of the government. One of the major concerns for South Korea is the strong opposition of environmental groups and local residents to the acquisition of land for power plants and development of large utility-scale renewable projects. This is accounted for in part because South Korea is a small country, hence the land scarcity.
iii Non-project finance development
In some cases, the investment in new and renewable energy is made with an individual's or an entity's own capital (rather than using project financing provided by the financial institutions) for the owner developer (rather than the lenders) to secure the GHG emission rights or the RPS. In this case, renewable energy projects are only possible when the ownership or leasehold of the site is secured by that individual or entity.
V RENEWABLE ENERGY MANUFACTURING
In South Korea, the solar modules and panels business is relatively more developed than the wind power business. The wind power component industry is relatively less developed than the solar power industry because of the limitations regarding geographical conditions in South Korea. In connection with other renewable energy manufacturing, businesses such as photovoltaic parts manufacturing, wind power manufacturing, anaerobic digestion of organic waste, and transmission equipment businesses such as biogas refining, hydrogen production, fuel cell businesses and ESSs are well established in South Korea.
To promote and support development of renewable energy or energy-efficient technologies, the government's efforts include providing financial support, promoting technology development projects, standardising technologies and introducing technology certification systems. The government has also reduced tariffs on equipment for the production of renewables. Furthermore, if a company invests in facilities and equipment to produce new and renewable energy materials and related parts, an income or corporate tax reduction of 10 per cent of the investment amount is made available.
The government has also introduced multiple schemes relating to renewable energy, including (1) a renewable heat obligation policy (mandating a certain amount of thermal energy usage to be supplied by renewable energy); (2) a renewable fuel standard policy (mandating oil refiners, importers and exporters to blend a certain amount of renewables in transportation fuel); and (3) installing new or renewable energy equipment in workplaces with massive energy consumption. The government further plans to expand renewable energy by investing in research and development of relevant technologies and expanding financial support, among other measures.
The government is currently carrying out various technological improvements, including developing high-voltage direct current technology, enhancing technological independence, expanding dispersed-type power sources (in-house power generation for areas of business with massive energy consumption), disseminating new renewable energy and developing microgrid technologies, among other measures.
VI CONCLUSIONS AND OUTLOOK
The development of renewable energy projects in South Korea is largely driven by government initiatives, such as the RPS scheme, policies and related mandates. The government plans to make significant investments in new and renewable energy going forward. However, significant progress needs to be made to overcome handicaps such as the lack of incentives and scarcity of land.
However, as investments increase and as technologies become more efficient and smaller, we believe that renewable energy use will expand, albeit beginning with smaller installations and improvements. These elements may include solar panel roofs in public highway rest areas and on street lights, panel installations on roofs of public and private buildings, and installations on reservoirs, among others. Thus, the first immediate developments may be realised through less intrusive methods, while development of larger-scale projects will progress more slowly.
1 Tong Keun Seol and Dong Eun Kim are partners and Sangmin Kim and Jay Junyong Lee are associates at Lee & Ko.