The Renewable Energy Law Review: South Korea

Introduction

The regulatory framework for new and renewable energy in South Korea primarily consists of 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 Carbon Neutrality and Green Growth to Respond to the Climate Crisis (the Carbon Neutrality 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 authorities responsible for renewable energy-related matters are the Ministry of Trade, Industry and Energy (MOTIE) and the Ministry of Environment (MOE).

The South Korean government establishes long-term basic energy plans (the Basic Energy Plan) among other plans, such as the Basic Plan on Electricity Supply and Demand, to promote 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 23 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 in Table 1 below.

Table 1: Annual minimum percentage of renewable energy quota under the RPS scheme

Year201220132014201520162017201820192020202120222023202420252026
Ratio (%)22.5333.54567912.514.51720.525

The year in review

In 2021, South Korea finalised its 2050 Carbon Neutrality Scenario, a detailed plan for achieving carbon neutrality by 2050. In the same year, South Korea also submitted the intended nationally determined contribution to achieve a 40 per cent domestic reduction in greenhouse gas emissions by 2030. These plans primarily rely on reducing coal usage and replacing it with renewable energy.

South Korea introduced the world's first hydrogen law, the Hydrogen Economy Promotion and Safety Management Act (the Hydrogen Act), in 2020. The Hydrogen Act focuses on developing an ecosystem for the hydrogen economy and expands public access to alternative fuel. As of May 2022, to promote a hydrogen economy, South Korea created a Clean Hydrogen Portfolio Standard (CHPS), a mandatory renewable energy supply system using hydrogen under the Hydrogen Act by excluding hydrogen energy and fuel cells from the scope of the existing RPS scheme. Moreover, the amendment to the Hydrogen Act adopted a grade-based certification system for clean hydrogen and requires operators of hydrogen fuel supply facilities to include a minimum percentage of clean hydrogen in hydrogen that they sell or use.

A new administration launched this year, headed by President Yoon Suk-yeol, reaffirmed the importance of hydrogen in South Korea's renewable energy policy by including 'Fostering the World's No. 1 Hydrogen Industry' as one of the 110 National Tasks that it is planning to implement.

In January 2022, South Korea began implementing an environmental power system that reflects the cost of purchasing greenhouse gas emission rights from power generators in the power market. Since the opening of the greenhouse gas emission rights market in 2015, the cost of purchasing emission rights that power generators have spent to date for power production has been separately paid outside the power market. For this reason, even low-efficiency coal-fired power, which emits a lot of greenhouse gas, has an advantage in the power generation competition if the fuel introduction cost is low. However, if the environmental power supply system works effectively, it is highly likely that the power supply ranking of generators, which are burdened with the cost of greenhouse gas emission rights, will be pushed back. This is expected to present a disadvantage for coal-fired power, which has already been losing ground due to rising coal prices.

i The policy background

South Korea introduced the RPS in 2012, converting from the previous feed-in tariff regime. In the past, the RPS regime required companies with a generation capability of 500MW or more to generate up to 10 per cent of gross power from renewable energy sources in accordance with the annual quota. Currently, 23 large power companies in South Korea are subject to this obligation. The RPS quota had been maintained at 10 per cent since 2010 until it was raised to 25 per cent in April 2021 in response to criticism that the previous quotas were too low and not enough to incentivise renewable energy use.

In December 2020, the South Korean government announced the Fifth Basic Plan for Use, Supply and Technology Development of New and Renewable Energy (the Fifth New and Renewable Energy Basic Plan) as a sub-plan of the Fifth Basic Energy Plan for the years 2019 to 2034, as laid out in Table 2.

Table 2: New and renewable energy power generation percentage objective by 2034

 2019 status2034 objectiveIncrease amount
New and renewable energy5.6% (19.3GW)25.8% (84.4GW)20.2% (65.1GW)
Renewable energy5% (18.5GW)22.2% (80.8GW)17.2% (62.3GW)
New energy0.6% (0.8GW)3.6% (3.6GW)3% (2.8GW)

However, President Yoon's government is planning to re-evaluate the new and renewable energy targets and overhaul the Fifth New and Renewable Energy Basic Plan, particularly by reincorporating nuclear energy by cancelling the former government's nuclear phase-out plan.

ii The regulatory framework

Main sources

The main sources of law and regulation in South Korea are the Renewable Energy Act, the Carbon Neutrality Act and the GHG Allocation Act.

Pursuant to the Renewable Energy Act, new energy is described as hydrogen energy, fuel cells, and energy from liquefied coal and heavy residual oil. Renewable energy is described as solar energy, wind power, water power, marine energy, geothermal energy, bio energy and waste-to-energy.

MOTIE and the MOE are the primary governmental authorities responsible for energy-related matters. MOTIE is responsible for reviewing and setting 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. Non-governmental organisations (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. 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.

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 the installation of renewable power plants located in their jurisdiction.

Meanwhile, the MOE is the competent authority for the Carbon Neutrality Act. The Carbon Neutrality Committee, introduced last year, is responsible for reviewing the government's Carbon Neutrality Basic Plan, which contains greenhouse gas emissions reduction goals and other policies linked to the carbon neutrality initiative, including energy-related policies.

RECs

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 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 23 large power generation companies that are obligated to generate a certain percentage of their generation output from renewable energy sources.

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.

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, South Korean renewable energy producers earn revenue by selling electricity to KEPCO through KPX plus additional income by trading RECs with the 23 large power generation companies.

As at April 2022, the REC price is settled at 53,200 won per unit of REC, approximately twice higher than the 29,700 won recorded in July 2021.

Subject to fulfilment of certain requirements, these entities may also obtain greenhouse gas emission rights by generating renewable energy.

Hydrogen obligations under the CHPS

With the adoption of the CHPS, different quotas and a different trade system will apply to hydrogen energy and fuel cells. However, the target quota and scope of persons subject to the obligations are currently unspecified. In comparison to the RPS, the CHPS imposes an obligation to purchase in addition to the obligation to supply a certain amount of hydrogen generation.

Most notably, the trading system sets the CHPS apart from the RPS, as electricity generated from hydrogen will be traded on a contractual basis through a bidding market in which non-price factors (i.e., residents' receptivity) will be counted as determinants for winning bids. As to the settlement cost, the government plans to use incentive-based settlements such as feed-in premium and contract for differences depending on the type of power generation and market participation (among other factors) under its recently announced First Basic Plan for the Implementation of the Hydrogen Economy.

In terms of transition, the existing hydrogen power generation will remain under the RPS scheme and operators whose construction plan is approved or reported under the Electricity Business Act within one year of the enforcement of the CHPS may choose to remain subject to the RPS scheme.

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. For large-scale power generation projects (over 100,000kW), an environmental impact assessment must be carried out and approved by the MOE.

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 approximately 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 because it requires an environmental impact assessment.

Renewable energy project development

i Project finance transaction structures

In renewable energy projects, the project operator typically acquires ownership or lease rights 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:

  1. loan agreements;
  2. security documents in respect of the real property, mortgage and equity;
  3. pledge agreements with respect to accounts and insurance proceeds;
  4. security assignment agreement; and
  5. 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 the KPX. This adds complexity when structuring the project finance, especially in terms of structuring the collateral package, as the 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 renewable energy quota under the RPS scheme) are not so straightforward and change from time to time at the government's discretion, making the legal landscape less predictable. To implement a structured RPS scheme, 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 for solar power), there were no government policies that purported to support low-income and marginalised communities, individuals or rural residences. To date, the current government has not rigorously enforced relevant rules and regulations. This may account for the slow development in the renewable energy market. For example, if the government determines that the renewable energy quota is not being met, the government simply adjusts this quota 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 quota 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 renewable energy resources.

Nonetheless, it is expected that the new government will strongly push for the expansion of new and renewable energy. If the relevant power supply companies do not meet the renewable energy quota, it is anticipated that the government will impose sanctions. The budgets are now allocated by the government to develop:

  1. agricultural infrastructure, solar and wind power generation projects;
  2. core technologies for new and renewable energy;
  3. energy efficiency projects; and
  4. emissions trading.

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 as well as 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 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. ESCO is 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 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 to 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 South Korean government has announced a public notice (MOTIE Public Notice No. 2020-217) enabling Korean companies' participation in RE100. Korean companies can now participate in RE100 by:

  1. paying a so-called Green Premium to KEPCO, which will then provide to such companies power generated from renewables and issue a certificate confirming use of renewables;
  2. purchasing renewable RECs (not utilised in the existing RPS scheme) from the transaction platform prepared by the Korea Energy Agency;
  3. purchasing power from renewable power generators by executing an indirect power purchase agreement with KEPCO, which will execute a separate agreement with renewable power generators supplying power directly to the companies;
  4. investing in the renewable power generation projects; or
  5. installing its own renewable power generators and utilising them.

The Korea Energy Agency will issue certificates to confirm the company's use of renewable energy.

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 the 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

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.

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 greenhouse gas 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.

Renewable energy supply chains

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 geographical limitations 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 the 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.

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 obstacles 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, although beginning with smaller installations and improvements. These elements may include solar panel roofs in public highway rest areas and on streetlights, panel installations on roofs of public and private buildings, and installations on reservoirs, among other things. Thus, the first immediate developments may be realised through less intrusive methods, while development of larger-scale projects will progress more slowly.

Footnotes

1 Tong Keun Seol is a partner, and Yun Sung Kim and Seulbin Park are associates at Lee & Ko.

2 The Task Force on Climate-related Financial Disclosures was established by the G20's Financial Stability Board following its review of how the financial sector can take account of climate-related issues. See fsb-tcfd.org/publications/.

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