The Energy Regulation and Markets Review: South Korea
Korea relies on overseas acquisition for more than 97 per cent of its primary energy sources, and fossil fuels (such as petroleum, gas and coal) account for 85 per cent of these sources. Therefore, there are policy needs to take measures both in the short term against fluctuations in the supply and demand for energy based on global factors, and in the long term against the depletion of fossil fuels. The 2011 Fukushima nuclear power plant accident in Japan has served as a warning that careful consideration should be given to the use of nuclear energy and the new energy environment, and the effects of climate change, and has increased the use and interest in new and renewable energy.
Under the current environment and policy needs, the Korean government aims to convert to safe and clean energy through system innovations in all areas of the energy industry encompassing energy consumption, supply and transmission. The government will also switch to a low-consumption and high-efficiency energy structure by gradually reducing the share of coal and nuclear energy and increasing the share of renewable energy. The government will change the centralised energy distribution system centred on large-scale power plants to a small-scale system by fostering hydrogen and renewable energy industries, while encouraging the new service industries utilising energy big data.
i The 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. The Electricity Regulatory Commission is an affiliated organisation within the MOTIE that was formed, inter alia, to 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 (1) establishing or managing the electricity market, and (2) transactions involving electricity, among others.
Further, the Prime Minister's Office is in charge of matters relating 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 that was formed, inter alia, to deliberate on 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, and joining international treaties.
Main sources of law and regulation
The Framework Act 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 in January 2010, 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:
- 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.
- 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.
- Nuclear: 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.
- New and renewable sources: 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, and the use and dissemination of new and renewable energy.
- Hydrogen: The Hydrogen Economy Promotion and Hydrogen Safety Management Act, enacted on 4 February 2020 and coming into effect on 5 February 2021, regulates matters relating to hydrogen safety and hydrogen industry development.
ii Regulated activities
Under the EUA, electric utility businesses are categorised into five types, the definitions of which are as follows:
- 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
- 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
- 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
- Electric sales business: a business, the main purpose of which is to deliver electricity to consumers.5
- District electric business: a business, the main purpose of which is to generate electricity with 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. KEPCO is still responsible for transmission, distribution and sales of electricity, and 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 relevant business type, from the Minister of the MOTIE (the Minister);7 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 location of electricity installations, equipment capacity and the type of motive power.8 To obtain a licence, the following documents must be submitted to the Minister:9
- an application for a licence;
- a business plan;
- 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
- 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 an 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:
- to have the financial and technological capability necessary to operate the electric utility business in the optimal manner;
- to be able to carry out the electric utility business as planned;
- 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;
- 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;
- power plants and power generation fuel must not be concentrated in certain areas to disrupt the power system; and
- to conform with the standards set by the Enforcement Decree of the EUA on the basis of public necessity.
An operator of an electric utility business must set up the electricity installations necessary to operate the electric utility and start up the business within the preparation period determined by the Minister.10
The EUA requires the Minister to take into consideration the economic efficiency of the electricity installations and their effects on the environment and public safety when establishing a basic plan for electricity supply.11
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)'12 and categorises petroleum businesses into three types: petroleum refinery businesses,13 petroleum export and import businesses14 and petroleum sales businesses.15
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.16 In connection with petroleum refinery businesses, anyone who intends to operate a business for manufacturing asphalt, or lubricating or base oil must report the business to the Minister.17
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.18 Registration is not required, however, for a person who is already registered as an operator of a petroleum refinery business, or for the import and export of certain petroleum products, such as asphalt, lubricating and base oil.19 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.20 The previous storage capacity requirement (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.
The different classifications of petroleum sales businesses are (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 businesses classified under points (1) to (5) need to be registered with the head of the local government,21 petroleum sales businesses that fall under point (6) need to be reported to the head of the local government.22
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.23 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.24 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 the manufacturing of fake petroleum products.25
The UGBA defines the term 'urban gas' as natural gas (including liquefied gas), petroleum gas, by-products from naphtha cracking and biogas,26 and synthetic natural gas (SNG).27 Under the UGBA, there are five categories of urban gas businesses: gas wholesale, general urban gas, urban gas recharging, by-products from naphtha cracking and biogas manufacturing, and SNG manufacturing.28
Besides the above, 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,29 and the sale of natural gas abroad for self-consumption by a direct importer (which imported the natural gas) is permitted.30
According to the UGBA, the definition of each category of urban gas business is as follows:
- 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.31
- 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.32
- 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.33
- 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 a 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 facilities as designated under the MOTIE Ordinance).34
- 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.35
- Natural gas export and import business: a business exporting or importing natural gas.36
- 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.37
- Natural gas business for ships: a business that supplies natural gas for ship fuel.38
Under the UGBA, a person who intends to operate a gas wholesale business must obtain a licence from the Minister of the MOTIE39 and a person who intends to operate general urban gas business must obtain a licence from the head of the local government.40 A licence for a gas wholesale business or general urban gas business will only be granted if the application meets the following requirements:41 (1) the urban gas business is of an economic scale appropriate for the public interest and general demand; (2) the applicant has the financial resources and technical capability necessary to properly conduct such an urban gas business; and (3) the 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 or a business manufacturing by-products from naphtha cracking and biogas must obtain a licence from the head of the local government for each place of business.42 A person who intends to operate an SNG manufacturing business must obtain a licence from the Minister for each place of business.43
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 a 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 first import of natural gas).44 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.45 Anyone who intends to operate a business that carries natural gas in and out must report the business to the Minister.46
Nevertheless, the UGBA includes provisions to improve regulations on natural gas import and export business operators, and to strengthen safety requirements. In addition, to respond flexibly 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 approval in advance 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.47 The UGBA strengthens safety requirements by stipulating that, if 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.48 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.49 The UGBA also sets forth penalty provisions against those parties that cause damage, or inflict harm on the functionality of, urban gas pipelines.50
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.51 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.52
The New and Renewable Energy Act provides that tradable renewable energy certificates (RECs) will be issued to new and renewable energy suppliers. However, if 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 on the market to maintain the balance of demand and supply and to stabilise prices.53 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.54
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.55 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 fuel from new and renewable sources in fuel for transport. Violations of these requirements may be punished by civil fines.56 Moreover, the New and Renewable Energy Act requires a new and renewable energy facility certification holder to take out an insurance policy against damage that may be suffered by a third party.57 Under the 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.58
As of 5 February 2022, in principle, anyone who intends to manufacture hydrogen products is required to obtain permission from the local government,59 and those who intend to manufacture hydrogen products in foreign countries to export to Korea should register with the MOTIE.60
iii Ownership 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 the UGBA do not contain any provisions limiting foreign-capital invested companies' operation of the relevant businesses.
iv Transfers of control and assignments
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 of less than 20,000kW) to ensure management control, it must obtain approval from the Minister of the MOTIE.61 There are no particular restrictions on the acquisition, division or merger of petroleum businesses and urban gas businesses.
Transmission/transportation and distribution services
i Vertical integration and unbundling
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 government enacted the Act on the Promotion of the Reorganisation of the Electric Power Industry in 2000 and privatised the electricity generation business by dividing KEPCO's electricity generation business into six subsidiaries. As of December 2019, the number of private companies participating in the electricity market is 3,574.
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 or a gas wholesale business operator must prepare a gas supply plan for five years and submit it to the head of the local government.
ii Transmission/transportation and distribution access
According to the EUA, only members of the KPX are entitled to carry out electric utility transactions on the electric utility market62 and, other than a consumer who uses 30,000kVA or more, no consumer may purchase electricity directly from the electric utility market.63 Accordingly, electricity produced by electricity generation business operators must be supplied to electricity consumers by operators of electricity transmission, distribution and sales businesses. The EUA further provides that neither any operator of an electricity generation business or electricity sales business nor any electric vehicle charging network operator may refuse to supply electricity without just cause as prescribed by the Enforcement Decree of the EUA64 and the operator of an electric utility business must maintain the quality of service that it provides.65 Moreover, operators of electricity transmission businesses, electricity distribution businesses and district electricity 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.66
The PBA has various provisions that regulate management of the quality of petroleum products and prevent the distribution of pseudo-petroleum products.67
If a petroleum refinery business operator, petroleum import and export 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.68 Any operator will be prohibited from selling or delivering petroleum products that have failed the quality inspection.69 According to Article 29(1) of the PBA, no one may engage in manufacturing, importing, storing, transporting or keeping pseudo-petroleum products.
Further, to promote the expansion of exports petroleum products, Article29(2)(v-2) of the PBA stipulates that the blending of petroleum products at the general bonded area for the purpose of export only, and the storing or transporting such mixtures, will not be viewed as the manufacturing of fake petroleum products.70
In principle, 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.71
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 meets the required quality standards.72
An operator of an electricity 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.73 Further, an operator of an electricity sales business must specify the details of the utility charges based on items in utility bills charged to consumers of electricity.74 An operator of an electricity transmission business or electricity distribution business must set charges for the use of electricity installations and other matters concerning the conditions of their use.75
Petroleum refinery business operators, petroleum import and export business operators and petroleum sales business operators must report their sale prices of petroleum products to the Minister.76
A general urban gas business can require that a party who is requesting a change in its 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 (UGBA, Article 19-2). Further, when it is difficult to supply urban gas for any of the reasons stipulated under Article 19 of the UGBA, 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 (UGBA, Article 20(1)).
iv Security and technology restrictions
If an operator of an electric utility business intends to carry out the necessary work for setting up or altering electricity installations for the electric utility, he or she must obtain approval for the plan for the work from the Minister of the MOTIE77 and undergo periodic inspections conducted by the Minister.78
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 new and renewable energy business, it may be a mandatory requirement for a party that holds more than 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 amount of power production for supply energy.79 If the Minister deems that such a 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.80
Renewable energy and conservation
i Development 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 efficiency in its 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, a comprehensive technology development plan for energy and the environment, the Energy Technology Development 10-Year Plan (1997–2006), was drawn up to establish a system to promote technological development of not only new and renewable energy but also to help with conserving energy and developing 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 renamed 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 general new and renewable energy output, an obligation for public institutions to use new and renewable energy, and new and renewable energy equipment certification procedures, among other things, 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 the development and dissemination of new and renewable energy, 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), under which certain operators of energy businesses are obliged to supply a 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. To achieve this goal, the government plans to promote:
- city-type private solar power for one in 15 households by 2030;
- small-scale projects under 100kW through introducing the Korean FIT, which combines the advantages of the existing RPS and FITs;
- projects in rural areas utilising subprime farmland; and
- 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). To reduce the proportion of non-renewable wastes, the government is to improve the licensing 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 and wind power.
The government plans to leverage renewable energy as an opportunity to foster new energy businesses. For that purpose, the government will:
- set up a research and development (R&D) road map 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;
- pursue strategic pilot projects to demonstrate new technologies, to verify business models and to promote pre-emptive deregulation;
- create renewable energy innovation growth clusters; and
- establish a comprehensive support system for promoting overseas market entry.
Furthermore, to foster new energy industries based on small-scale distributed power such as solar and wind power, the government also plans to establish an intelligent power grid and internet of things (IoT) infrastructure and to 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.
In April 2019, the government announced ways to strengthen the competitiveness of the renewable energy industry, focusing on (1) converting a price-oriented market structure into a quality-oriented structure through high-quality solar modules, (2) fostering renewable energy products and related service markets in which information and communication technology (ICT) and related industries are converged, (3) maintaining momentum to expand investments in renewable energy through stable expansion of the domestic market, and (4) promoting the establishment of a privately led R&D road map. The government has also included the foregoing goals in its Third Basic Energy Plan and will pursue policy actions to establish a minimum energy performance system for solar modules, the renewable energy R&D road map and strategies to promote renewable energy overseas expansion. The government's aim is to generate 20 per cent of the total amount of power from renewable energy sources.
ii Energy 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). 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 stability in the 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, to maintain stability in 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.
In accordance with 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 (whereby 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. 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 the Eighth Electricity Supply and Demand Basic Plan at the plenary session of the National Assembly in July 2016. In this Plan, which was 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 improvements. With the proposal of the advisory committee for the Ninth Electricity Supply and Demand Basic Plan, which is due to be released in 2020, the following agenda topics are being discussed:
- a medium to long-term coal reduction road map to implement energy conversion plans and to improve the eco-friendly power mix;
- specific measures to further reduce greenhouse gas emissions;
- a response to output volatility to secure stable diffusion of renewable energy and location-system linkag;
- improvements in the power market system; and
- forecasts for future industry trends and electricity demand.
iii Technological developments
The fourth industrial revolution is revolutionising the energy sector, among others, and an 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 its Road Map 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. Further, the government announced:
- a road map for the standardisation of the hydrogen economy in April 2019;
- a supplementary budget for the supply of hydrogen fuelling stations and hydrogen cars in August 2019;
- a plan for the construction of hydrogen infrastructure and fuelling stations, a road map for the development of hydrogen technology, and development strategies for the future automobile industry in October 2019; and
- comprehensive measures for hydrogen safety management in December 2019.
In 2019, Korea had the leading share in the world's fuel cell market, at 40 per cent.
The government is also 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. To achieve this goal, the government is considering subsidies to support the installation and operation of hydrogen fuelling stations until they are economically viable. On 11 March 2019, the Hydrogen Energy Network (Hnet), a special purpose corporation in which 13 hydrogen-related companies participate (including KOGAS and Hyundai Motor Company), was established with the aim 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 IoT-dedicated infrastructure. The domestic smart grid market is expected to grow at an annual average of 28 per cent, from 0.4 trillion won in 2012 to 2.5 trillion won in 2020.
In addition, the 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.
i Development of energy markets
As has been 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, as of December 2019, transactions occur between the electricity generation business operators (of which there are more than 3,500) and a sales business operator all day, every day, based on prices that change every hour.
The gas industry is divided into a wholesale sector and a 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 Korea Gas Corporation, gas is supplied to the regional 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, 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.
ii Energy market rules and regulation
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 electricity power brokerage business. However, pursuant to the amended EUA (Article 43-2) and the Enforcement Decree of the EUA (Article 1-3), small-scale electricity power brokers may sell renewable energy (under 1,000kW) or electricity generated and stored in energy storage systems (ESS), and electric vehicles. Small-scale electricity 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. This 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 is regulated pursuant to the UGBA. Prior to the 2014 amendment of the UGBA, direct imports of natural gas by private companies were allowed solely for private consumption. Aside from direct imports 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. As of August 2019, direct imports of natural gas were 8.01 million tons, which is expected to increase to 11.21 million tons in 2022. This amount is expected to more than double by 2031.
iii Contracts for sale of energy
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 it is a public business. After a large-scale power outage in Korea on 15 September 2011, electricity costs were increased four times by November 2013. The main reason for the increase was the need to align costs with actual use. 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 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 incentives to instal new and renewable energy and ESS together, and extending new and renewable energy and ESS discount periods.
The transacting price in the wholesale sector is based on the contracts executed between the KOGAS and urban gas companies. Since the KOGAS imports all 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 gas imports, 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.
iv Market developments
As the government takes policy initiatives focusing on the renewable energy market rather than the traditional energy market, investments in solar and wind power are increasing.
The solar market is undergoing not only quantitative expansion but also qualitative improvement. In 2017, the market share for solar modules with energy efficiency of 18 per cent or higher was only about 35 per cent, but in 2019, the share was expanded to more than 80 per cent.
The wind power industry has high scalability for expansion and development potential for manufacture and development of power components, towers and forgings, blades and materials for generators, maintenance, transportation, construction and training. The export share of the wind power industry is increasing.
In particular, the government is planning to build a large-scale renewable energy complex in the Saemangeum reclaimed area, constructing 3GW of power generation facilities in 2020 (comprising 0.7GW of land solar power, 2.1GW of floating solar power, 0.1GW of wind power and 0.1GW of fuel cell power) in stages.
The year in review
The key concepts in 2019 were hydrogen economy, climate change, renewable energy and stable energy supply.
In January 2019, the MOTIE released the Road Map for Promoting Hydrogen Economy, disclosing policy targets relating to hydrogen mobility, hydrogen energy (fuel cells) and hydrogen production, storage and transportation. The Hydrogen Economy Promotion and Hydrogen Safety Management Act (the world's first act relating specifically to the hydrogen economy) was enacted on 4 February 2020 and will take effect on 5 February 2021, except for the provisions regarding safety management and insurance obligations, which will come into effect on 5 February 2022.
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 obliged to cut greenhouse gas emissions by 37 per cent compared to its emissions forecast by 2030. In addition, to meet another goal of the Paris Agreement to limit the global average temperature increase 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 Road Map for 2030 National Greenhouse Gas Reduction, a detailed plan to achieve the aforementioned 2030 greenhouse gas reduction target proposed by Korea in the Paris Agreement. In July 2018, the government announced a revised Road Map that reflected its energy conversion policy. The target of the revised Road Map is to reduce greenhouse gas emissions by 277 million tons by 2030, which constitutes a reduction of 58 million more tons compared to the previous Road Map, by enhancing energy efficiency, strengthening the management of energy demand and fostering low-carbon industries.
In October 2019, the government established the Second Basic Plan to Respond to Climate Change to strengthen the response system for overall climate change and implement the 2030 National Greenhouse Gas Reduction Road Map. The aim of the Plan is to enhance the climate change response by means of the reduction of coal power plants and a transition to a low-carbon society, the establishment of an adaptation system for climate change, and the creation of a future market by fostering new technologies and new markets to respond to climate change.
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 27 February 2020, the MOTIE released the 2020 Action Plan to Develop, Utilise and Supply New and Renewable Energy Technologies, focusing on large-scale projects relating to renewable energy, such as offshore wind power and solar power, expansion of competitive bidding in the renewable energy certificate trading market, and mandatory prior notice to residents for the approval of power generation projects.
The Ninth Electricity Supply and Demand Basic Plan was originally planned to be released in 2019, but postponed until 2020. The government is planning to reduce coal power generation and build new LNG power plants. It is also expected to release the Fourteenth Long-Term Natural Gas Supply and Demand Plan in 2020.
Conclusions 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, it is highly likely 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 is a signatory to 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.
In addition, as the supply of renewable energy is rapidly expanding as a result of technological progress and cost reduction, renewable energy is expected to reach 17 per cent of the primary energy demand by 2040. The use of renewable energy is further expanding as global companies have joined the RE100 initiative. It is expected that the government will continue to pursue policies for the expansion of renewable energy, improvement of energy efficiency, and reduction of power generated by coal and nuclear energy.
1 Soongki Yi, Kwang-Wook Lee and Chang Woo Lee are partners at Yoon & Yang LLC.
2 Electric Utility Act [EUA], Article 2(iii).
3 EUA, Article 2(v).
4 id., at Article 2(vii).
5 id., at Article 2(ix).
6 id., at Article 2(xi); Enforcement Decree of the EUA, Article 1-2.
7 Under the amended EUA, which comes into effect on 5 August 2020, a licence will be issued by the MOTIE or the relevant local government based on the type and scale of the business.
8 EUA, Article 7(1); Enforcement Rule of the EUA, Article 5(1).
9 EUA, Article 7(1); Enforcement Rule of the EUA, Article 4(1).
10 EUA, Article 9(1).
11 id., at Article 3(2).
12 Petroleum and Petroleum Substitute Fuel Business Act [PBA], Article 2, Paragraphs (i) and (ii).
13 PBA, Article 2(iv).
14 id., at Article 2(v).
15 id., at Article 2(vi).
16 id., at Article 5(1); Enforcement Rule of the PBA, Article 4(1).
17 PBA, Article 5(2); Enforcement Decree of the PBA, Article 8(1).
18 PBA, Article 9(1); Enforcement Rule of the PBA, Article 8(1).
19 PBA, Article 9(1); Enforcement Decree of the PBA, Article 10(2).
20 Enforcement Decree of the PBA, Article 12(1).
21 PBA, Article 10(1) of the; Enforcement Rule of the PBA, Article 12, Paragraphs (1) to (6).
22 PBA, Article 10(2); Enforcement Rule of the PBA, Article 12(7).
23 PBA, Article 9(1).
24 id., at Article 39(1)(iii).
25 id., at Article 41-3.
26 Urban Gas Business Act [UGBA], Article 2(i); Enforcement Decree of the UGBA, Articles 1 and 2.
27 UGBA, Article 2(i).
28 id., at Article 2(i-2).
29 id., at Article 2, Paragraphs (ix-2) and (ix-3) and Article 10-2(3).
30 id., at Article 10-6.
31 id., at Article 2(iii).
32 id., at Article 2(iv).
33 id., at Article 2(iv-2).
34 id., at Article 2(iv-3) and Article 8-3.
35 id., at Article 2(iv-4).
36 id., at Article 2(vii).
37 id., at Article 2(ix-2).
38 id., at Article 2(ix-5). This definition is introduced by the amendment to the UGBA made on 4 February 2020 and taking effect on 5 August 2020.
39 id., at Article 3(1).
40 id., at Article 3(2).
41 id., at Article 3(7).
42 id., at Article 3, Paragraphs (3) and (4).
43 id., at Article 3(5).
44 id., at Article 10-2(1); Enforcement Rule of the UGBA, Article 10-6.
45 UGBA, Article 10-5(1).
46 id., at Article 10-2(3).
47 id., at Article 10-5(2).
48 id., at Articles 28-2 and 54(6).
49 id., at Article 28-3.
50 id., at Article 48, Paragraphs (4) and (8).
51 New and Renewable Energy Act, Article 5, Paragraphs (1) and (2).
52 id., at Article 6(1).
53 id., at Article 12-7.
54 id., at Article 13.
55 id., at Articles 12-11, 12-12.
56 id., at Articles 23-2, 23-3, 23-4, 23-5 and 23-6.
57 id., at Article 13-2.
58 id., at Article 30-2.
59 Hydrogen Economy Promotion and Hydrogen Safety Management Act, Article 36(1).
60 id., at Article 38(1).
61 EUA, Article 10(1).
62 id., at Article 44.
63 id., at Article 32; Enforcement Decree of the EUA, Article 20.
64 EUA, Article 14.
65 id., at Article 18(1).
66 id., at Article 27.
67 Products manufactured by a method of mixing petroleum products with other petroleum products or petrochemicals; PBA, Article 2(x).
68 PBA, Article 25(1); Enforcement Rule of the PBA, Article 28(1).
69 PBA, Article 27.
70 id., at Article 29(2)(v-2).
71 UGBA, Article 19.
72 id., at Article 25-2(1).
73 EUA, Article 16(1); Enforcement Rule of the EUA, Article 16(1).
74 EUA, Article 17.
75 id., at Article 15(1).
76 PBA, Article 38-2(1).
77 EUA, Article 61(1).
78 id., at Article 65.
79 New and Renewable Energy Act, Article 12-5, Paragraphs (1) and (2); Enforcement Decree of the New and Renewable Energy Act, Article 18-3.
80 New and Renewable Energy Act, Article 12-6(1).