Ep 24 Korea power market and offshore wind sector with Marnix Schrijner and David Plunkett

[00:00:00] Hello everyone, I'm Ben and I'm Yiou. Welcome to Sustainable Energy Asia Podcast. Today we're receiving Marnix Schrijner and David Plunkett, Head of Power Market and Korea Market Expert at EFRI, a power market consultancy.

[00:00:17] We discuss with Marnix and David about the Korean power markets and the latest development in the Korean offshore wind sector.

[00:00:24] As always, grateful if you could take the time to rate and comment on the show. It helps listeners to find us.

[00:00:31] Thanks and on with the show.

[00:00:34] Hi Warnix, welcome to Sustainable Energy Asia Podcast. Can you introduce EFRI and how you came to lead the power market analysis in Southeast Asia and East Asia?

[00:00:46] Of course, thank you very much for inviting us. EFRI is basically a global engineering company that's active in many countries around the world.

[00:00:55] And within that engineering footprint, there is a smaller branch that does management consulting work across regions.

[00:01:03] And that is mostly focused on energy and in many cases, power market analysis. We cover Southeast and East Asia with our team.

[00:01:15] And I started at EFRI about four years ago in the height of COVID period, which was very tricky, but managed to actually move from Australia to Thailand in that period.

[00:01:26] And then what basically happened is that we had a very small group that did power market analysis.

[00:01:33] And I think it was maybe six, seven people and started to sort of grow very fast because there was an increasing interest in the Southeast Asian and East Asian markets.

[00:01:43] And at a later stage, I kind of picked up South Korea as well, which is a very interesting market.

[00:01:47] And David joined us and he basically took that role. And I got into a more sort of wider, broader role.

[00:01:56] Exciting and really good to have you on the show and David as well.

[00:02:00] So today we have a really interesting subject. We'll speak about Korea power markets and then we'll spend some time specifically to discuss about the offshore wind sector.

[00:02:11] Our stats with the Korea power market will be really interesting if you can give a quick overview of the power system in Korea, what is the capacity mix and maybe touch on a little bit on the specific role of nuclear in this country.

[00:02:27] Looking at Korea, it's a very energy intensive and large power market.

[00:02:32] For example, its demand is larger than Germany. So Germany is a lot bigger, but Korea has 40% more power demand.

[00:02:42] The per capita power consumption is very high in Korea. So that makes it a very interesting market also for investors because there's a lot of potential to sell power and to build new power.

[00:02:55] So from that perspective is one of the key markets in Asia.

[00:02:59] And you look at what's currently installed in Korea, it's mostly dominated by LNG fire and coal fire power plants with nuclear in the third place, basically also contributing quite a large amount of the generation mix.

[00:03:17] So solar has been growing really, really rapidly over the past few years and has actually in terms of capacity kind of in the same ballpark now as the nuclear capacity that's installed.

[00:03:29] Although we all know that non-solar capacity and generation is a long way from what nuclear sort of output is for the same amount of capacity.

[00:03:38] It's important to note that nuclear is still very important source of generation in the system.

[00:03:44] So it's important to note that the current plan is to be a very, very, very, very, very, very, very, very, very, very, very, very, very, very much.

[00:03:45] Now, there is obviously a lot of changes and then in every so many years, there is a particular plan that's put forward.

[00:03:54] It's called the basic plan by the government and by my Keppco.

[00:03:58] And in that plan, they project or look ahead and look at the outlook of the generation capacity in the long term.

[00:04:05] And the current plan is the 10th basic plan.

[00:04:09] There's a new one coming, which is the 11th.

[00:04:11] It's available in a draft version, but it's not to finalize.

[00:04:15] Prior to the current plan, there was actually no projected growth of nuclear generations.

[00:04:22] That has kind of changed a little bit.

[00:04:24] There was the idea that a lot of the current nuclear generation would be retiring after 40 years.

[00:04:29] But that idea has changed a bit.

[00:04:33] And there is now a more focus on lifetime extension of nuclear plants in the system and increasing the share of nuclear, at least keeping it stable for the long term.

[00:04:44] So there's a little bit of a shift from maybe the big Fukushima accident towards now, a days where we have some gas crisis and prices for fuels have gone up quite a bit.

[00:04:55] Impacting obviously electricity prices a lot.

[00:04:58] And that sort of vision or idea by governments to not slash nuclear power too much and even maybe allow to grow a little bit in the future.

[00:05:07] So that doesn't change that much for the buildup of renewables because we still expect a lot of renewables to be built out in South Korea.

[00:05:15] That's an important prospect there.

[00:05:17] In the very long term, we do think that eventually renewables with storage and gas, LNG, would take the majority share.

[00:05:28] And then the nuclear shares would decline eventually over the very long term.

[00:05:34] That's also what we see in the 10th and even the draft 11th plan.

[00:05:38] Other thing that's interesting about Korea is that there's a lot of renewable resources in the southern region of the mainland and around Jeju, offshore wind, etc.

[00:05:48] And in the long term where we see a lot of build out of renewables in the South and there's less renewables potential in the northern regions close to the load center.

[00:05:57] So that might be a challenge in the long term for the country, especially if they have to build a lot of transmission capacity to evacuate the power from those regions to the load centers.

[00:06:07] What we see on project was also that getting the grid connection was something quite challenging in Korea.

[00:06:13] And integrating the variable generation to the grid so that it actually feeds the load center is something a bit challenging.

[00:06:22] So Korea today is quite centralized power market with the KPX and capital handling transmission and distribution.

[00:06:29] I think it would be interesting if you can present the key feature of these power markets, how it's organized and what are the actors.

[00:06:38] So Korea is a very centralized type market and currently it spits the country into two regions, basically Jeju and mainland.

[00:06:48] Kepco acts like a single buyer for both regions.

[00:06:51] So they buy all the power and then they distribute and retail that power to the end users and they mandate all plans to offer their generation into the market.

[00:07:04] And they need to then bid those in at a marginal cost.

[00:07:09] That cost is sort of predetermined.

[00:07:11] It's kind of fixed.

[00:07:12] It's a market that's still in development.

[00:07:15] Similar markets we see in Southeast Asia, for example, Malaysia and Vietnam have similar type of markets where utility buys all the power and then distributes it.

[00:07:26] And that's usually sort of a first step to liberalization process where you see markets are being restructured.

[00:07:34] Those markets could go two ways.

[00:07:36] What we see, for example, a lot in Europe is the markets are based on a self-dispatch type of model with a net pool system or basically a power exchange that only exchanges the power that's offered outside bilateral contracts.

[00:07:54] Whereas in Korea, we see a gross system, a gross pool system where all the power is being dispatched to the market.

[00:08:02] And in that situation, what we typically see is that the latter markets tend to go from a non-real-time market and they would move towards a more real-time type of market with one entity that does all the optimization of the market.

[00:08:17] So basically a market operator.

[00:08:19] And that market operator currently is the Capco, but in more developed markets, you would see that there is an independent party that would then be the market operator and the system operator.

[00:08:32] They have to be very well sort of developed because they have to handle a lot of information.

[00:08:37] So you'd see that Korea is a bit on the pathway towards such a market and such a markets, for example, in Singapore and in Australia.

[00:08:47] So that's a very interesting process.

[00:08:48] And you can see all kinds of examples around in this region.

[00:08:52] One thing which is really key in those sort of centralized gross pool system is that the market operator in the long term has the ability to co-optimize both energy and reserve products and find the best sort of solution and the best technologies to do energy versus reserve capacity.

[00:09:13] So that would be interesting to see what the future would look like for Korea, maybe five years ahead, where it will be.

[00:09:19] My guess is it's going to be something similar to what they have in Singapore or in Australia.

[00:09:25] I think the government is planning also certain reforms of the power market.

[00:09:31] So could you talk about the development of the Jiju Island pilot program and the potential implementation of the zonal pricing in Korea?

[00:09:39] That sort of feeds in with this, obviously, with this whole story about the development of the market into a more sort of complex and sort of more real-time type of market.

[00:09:51] So Jiju itself is an interesting topic now because they are the testing beds of market reforms currently.

[00:09:59] So there's a couple of things really being going on that Jiju is the first one who tested and then it will likely be implemented on the mainland at a later stage.

[00:10:08] So a few things, things there is the real time markets where there's intraday trading going to be allowed very close to the point of delivery, which is really important if you want to provide more efficient markets scheduling.

[00:10:23] And there's also a reserve markets being trialed.

[00:10:26] So reserve products are being offered, which is very important as well for markets to have more pricing signals in the market for new flexible generation, providing the service such as batteries, etc.

[00:10:38] If a reserve market can be set up for the rest of the country, basically for the mainland, then that would be very good for flexible generation of the future, particularly storage.

[00:10:50] One other one is negative pricing.

[00:10:53] So one of the advantages of that is obviously to allow renewables and other plants to bid in negatively and sort of push themselves front of the merit order and reduce potentially curtailment.

[00:11:05] It does have some impact on nuclear plants that may or may not be able to operate more flexibly and that could help increase interest for a more flexible capacity that markets want to attract to allow for higher levels of renewable penetration in the long term.

[00:11:25] Now we're switching to offshore wind.

[00:11:28] David, could you explain why it is critical for Korea to have offshore wind regarding its energy security, power demand and climate commitments?

[00:11:39] Yeah, and thank you very much for having me today.

[00:11:41] As Marnix previously highlighted and mentioned, South Korea is a country which is seeing huge economic and industrial growth and has relatively ambitious targets for decarbonization.

[00:11:51] We see this economic growth tying extremely closely to electricity demand, primarily through increasing electrification of industries, businesses and the emergence of electric vehicles, etc.

[00:12:04] This highlights the need for new power sources to meet this growing demand.

[00:12:10] South Korea itself is in a very interesting position.

[00:12:12] Currently, it relies very heavily on fossil fuel imports, which can potentially compromise its domestic energy security.

[00:12:19] There is limited opportunities for domestic fuel production and has quite limited interconnection to other countries, if zero.

[00:12:28] So finding ways to produce its own electricity is core to South Korea's energy independence, increasing its sustainability and also delivering value for its customers.

[00:12:37] This is where offshore wind comes to play, where offshore wind presents a pretty unique opportunity for South Korea.

[00:12:43] South Korea is a country with extremely strong offshore wind resource and offshore wind itself inherently is a sustainable generation source.

[00:12:51] Support the diversification of South Korea's electricity mix and can also support South Korea's local energy independence and also growth of local economies for the creation of jobs, repurposing of existing jobs, for example.

[00:13:05] So for these reasons, offshore wind is seen as a key focus technology in South Korea for its future electricity mix.

[00:13:12] And we also see this to be the case going forward.

[00:13:15] The Korean government itself has put strong focus on its commitment to offshore wind developments through a number of different mechanisms.

[00:13:22] Yeah, indeed.

[00:13:22] We can really see that the government has reinforced the commitment.

[00:13:25] What would be really interesting if you can explain what is the general regime for renewable projects to sell electricity in Korea?

[00:13:34] I'm thinking about the S&P and the REC multiplier.

[00:13:37] Essentially, what are the off-take options available for such projects?

[00:13:42] As a generator in Korea and as a cost-based pool, renewables conventionally would bid into the market, as would other generators, and then be dispatched based on its position in the merit order.

[00:13:52] However, what's important is there is this additional component for off-take options in Korea, which stems from what's called the Renewable Portfolio Standard, or also known as the RPS.

[00:14:02] And this, in effect, puts a mandate on generators over a certain size to have a percentage of its generation met by renewable or low-carbon sources.

[00:14:11] And there's a clearly defined percentage which has to be met, and this changes year on year.

[00:14:16] And if you're non-compliant, there is also a financial penalty for not meeting your obligation, which, in effect, incentivizes the uptake of renewable energy.

[00:14:24] In terms of how you determine low-carbon or renewable generation, in effect, a mechanism has been implemented, which is called the RECS or Renewable Energy Certificate.

[00:14:34] And this is for each unit or mega-hour of clean electricity produced.

[00:14:38] A generator would receive a renewable energy certificate to balance the mismatch of different technology maturities and costs.

[00:14:44] For example, when we look at offshore wind, where it's higher cost currently, but has a potential to create multiple jobs compared to, say, solar.

[00:14:52] There's different weightings that are assigned to different technologies.

[00:14:56] So this really means that not each unit of electricity is created equal.

[00:15:00] So for one megawatt hour of solar, you may produce one REC.

[00:15:04] For offshore wind, you may produce three, three and a half, or even four RECs per megawatt hour.

[00:15:09] And these RECs can then be sold on the market for a premium, often to other generators who are currently not meeting their RPS obligations.

[00:15:17] And to summarize basically how you would sell these RECs, there's two primary markets.

[00:15:22] So the first is bilaterally, which is through a regulated spot market generally to other generation companies on a per REC basis.

[00:15:30] So you would produce your electricity, you would generate RECs, and then sell those RECs on the spot market where generators would bid to purchase those as well.

[00:15:40] And you can also sell them off-market to other corporates looking to decarbonize or acquire green attributes.

[00:15:46] However, for the latter, this is quite a small market right now, and there's limited trading volume in this market.

[00:15:51] And the general volume is sold to other REC obligators.

[00:15:55] The second mechanism is through long-term contracts, which can either be negotiated just bilaterally or more popularly right now through government-run auctions,

[00:16:04] where companies in effect will bid their capacity at a desired price.

[00:16:09] And this will be auctioned to different generation companies who are looking to procure RECs to meet their mandated percentage.

[00:16:15] If you're trading bilaterally, obviously you're likely running your plant on a merchant basis,

[00:16:20] which means that your plant would be exposed to price volatility both on the S&P and then also on the REC value itself.

[00:16:27] And then obviously, if you're trading in a contract, it's more likely that you would have more of a guarantee in your payment as some bundled payment based on your S&P

[00:16:35] and then the value of the RECs that you're selling.

[00:16:38] I think we want to focus on the auction mechanism because today for Offshore Wind, all the projects are really going for these offtake options.

[00:16:47] Maybe about the Offshore Wind auction, it would be interesting if you can first explain how the tariff mechanism works into compensating each of the projects for the distance from shore and the water depth.

[00:17:01] And also maybe just explain what is the scoring criteria of last year's option.

[00:17:07] Of course.

[00:17:07] So as mentioned previously, different technologies have different REC weightings.

[00:17:12] Offshore Wind itself is quite unique where it doesn't have a specific fixed REC weighting based on certain criteria.

[00:17:19] Instead, it varies by distance to shore and water depth, as you mentioned.

[00:17:23] The reason for this, again, is to try and enable projects which may otherwise not be installed, for example,

[00:17:28] because it's a lot more expensive to install it further from shore or with deeper seabed,

[00:17:33] which can obviously drive up the overall cost, but may provide other benefits, again, such as jobs creation or being able to access much higher wind resource as well.

[00:17:43] And so there's a baser weighting for offshore wind, which is two and a half RECs per megawatt hour.

[00:17:48] And then there's an additional weighting, which grows linearly with the two metrics you mentioned, distance to shore and water depth.

[00:17:57] In terms of last year's auction, the scoring criteria last year was split into two components and was scored as one combined score.

[00:18:05] So the first was a quantitative score, which weighted around about 60% of the overall final score.

[00:18:11] And this is just your financial bid.

[00:18:13] The financial bid itself is interesting because it's based on your S&P plus one REC bid.

[00:18:18] And I note here that I say S&P plus one REC rather than S&P plus all RECs, as the REC value is levelized to the price for one REC for the intention of comparing different projects,

[00:18:29] which have different REC weightings in effect, to give more of a fair baseline for comparison.

[00:18:35] This would still be compensated for your S&P plus all of your RECs that you would be allocated as well.

[00:18:41] And yeah, so basically the second component here is based on a more qualitative scoring,

[00:18:47] which comes through a number of factors such as local residence acceptance, contribution to local economy,

[00:18:53] and if it can provide any other wider benefits to the system.

[00:18:57] And this is weighted at around about 40% of your overall score.

[00:19:00] What's interesting in last year's auction is that the ceiling price was not announced prior to bidding.

[00:19:06] Instead, it was announced afterwards.

[00:19:07] And this was aimed at encouraging bidders to bid based on their own estimated costs and how they can provide value,

[00:19:13] rather than trying to aim for a target cap price.

[00:19:16] It's quite interesting what you were saying about the cap price not being announced.

[00:19:20] What a lot of players were saying is they felt that last year auction was really driven by the cap price.

[00:19:28] And that was the only criteria that really mattered, whereas you were supposed to have like a balance between the tariff and some qualitative criterias.

[00:19:37] And maybe on the back of that, the government has announced just last month that it would implement some changes into this auction process.

[00:19:47] So there are a couple of things about timing, there's two-stage bidding, etc.

[00:19:51] So it could be interesting if you can explain these changes and comment on the potential impacts that you would see for project currently under development.

[00:20:01] Of course, this was an exciting announcement by the Ministry of Trade, Industry and Energy, or RMOTE for short.

[00:20:07] As part of their, I think, what's called the Offshore Wind Power Competitive Bidding Roadmap, translated to English,

[00:20:13] and really highlights its commitment to encouraging the uptake of offshore wind into the electricity mix.

[00:20:18] So as you mentioned, there's a few components in this announcement.

[00:20:21] And the number of them to highlight would be first, the frequency of bids.

[00:20:25] So currently bidding is held in the fourth quarter of each year.

[00:20:29] This is being moved actually forward to the second quarter, with auctions still being held annually, at least up until 2026.

[00:20:37] And in effect, these auctions would run as they would normally.

[00:20:41] And if there's any quantity of tender capacity still remaining from the auction in the second quarter,

[00:20:48] they would subsequently hold a second auction towards the end of the year or in quarter four.

[00:20:53] The second is bid volume, which was announced.

[00:20:56] And there's a total bid volume between 7 to 8 gigawatts to be awarded by 2026,

[00:21:02] which translates to around about 2 to 3 gigawatts per year awarded.

[00:21:06] There's actually a split between fixed offshore wind and floating offshore wind in these auctions based on capacity as well.

[00:21:12] With this separation, again, intended to account for the varying costs, supply chain requirements,

[00:21:18] complexities, distances, etc., to more fairly compare technologies to encourage the development of both,

[00:21:24] as they're both seen as priorities in Korea.

[00:21:27] The third is how bids are scored, in effect.

[00:21:29] And as you mentioned, this is now going to be split from one stage to two stages.

[00:21:33] The first is the qualitative criteria or the non-price criteria, where projects will be cut off after this.

[00:21:41] And these qualitative scorings would be based very similarly to what I'd mentioned previously.

[00:21:46] And this is really to ensure that you cannot just bid focusing purely on the price-based criteria.

[00:21:53] You have to also score highly in the qualitative criteria.

[00:21:56] And what will happen is a number of projects will be cut off from that first section.

[00:22:01] And then the rest of the bids would be moved to a second component, which would then be based on the quantitative scoring.

[00:22:07] And this is the exact same where you're scored based on your S&P plus REC bid.

[00:22:12] And one thing that's also been changed is the proportion of both of these,

[00:22:16] where it's now evenly 50-50 rather than the 60-40 split mentioned previously.

[00:22:21] And part of this also stems from industry concerns that the price-oriented score from last year's auction slowed down the development of things such as domestic supply chain in favor of cheaper components to really lower your price as well.

[00:22:35] And then the last one, which I think is quite important to highlight, is the criteria to reach your COD.

[00:22:40] The criteria to be extended from a 60-month period for larger projects to somewhere between 70 to 80 months to give developers extra time.

[00:22:49] One concern which was raised from the last auction was that projects have a relatively short turnaround from securing these long-term contracts to reaching financial close to then completing construction.

[00:22:59] So this extension has alleviated a number of concerns from developers, particularly since offshore wind projects are often delayed due to unforeseen circumstances, weather events, etc. as well, and that's common for offshore wind.

[00:23:13] So in effect, all these amendments aim to effectively improve transparency in the market, foster the local development, supply chain and industry,

[00:23:22] and shows the government's desire to listen and address barriers in offshore wind development.

[00:23:27] And we're expecting to see more formal announcements on the next bidding round shortly.

[00:23:32] And it'll be great to see the interest in this coming auction.

[00:23:35] In conclusion, what are the main trends you're expecting in the Korean power market?

[00:23:41] Yes, so I think there's a few that are going to be exciting to see.

[00:23:45] And I think a lot of this is really going to stem from the results of the Jeju pilot program as well.

[00:23:50] Where again, as Marinix mentioned, it's being used effectively as a testbed for some market reforms.

[00:23:55] I think it'll be interesting to see the mainland rollout, which is expected to happen in 2025.

[00:24:01] And we'll see as and when that occurs from the outcomes of the Jeju pilot program.

[00:24:06] I think one challenge which will be interesting to see will particularly be through the zero and negative pricing.

[00:24:11] I think obviously there's a lot of technologies and there's a lot of expertise around the world and understanding how we can manage these price periods.

[00:24:19] And I think as a result of this, we'll see a lot more battery storage coming into the grid to support with system balancing,

[00:24:25] to take advantage of these price spreads, etc. as well in the market.

[00:24:28] And I think another thing to watch out for in South Korea, again, as Marinix mentioned, would be how pricing is going to change within the market.

[00:24:37] From this two price regions in mainland and Jeju to multiple price regions around the country,

[00:24:43] to potentially even nodal pricing in the future as well, depending on government priorities and what the value would be for consumers.

[00:24:50] Thank you so much, David and Marinix.

[00:24:52] Thank you.