POWER November 2013 - 32

Power Policy
South Korea Walks an Energy
Tightrope
South Korea's difficult power supply issues have been aggravated by an ongoing
documentation scandal involving its essential nuclear plants, and the
future of its economy depends upon efforts to balance energy security and
environmental concerns.
Sonal Patel
S
outh Korea, the world's eighth-largest
trading nation, whose trade volume
has surpassed $1 trillion for two
straight years, barely avoided blackouts between
June and August this summer after
the country's nuclear regulator was compelled
to temporarily shut down or suspend
resumption of six of its 23 reactors.
The cause: A wide-ranging documentation
scandal that has since morphed into a political
firestorm of corruption allegations traded between
the state-owned nuclear company and
the industry, and within the government itself.
It began in November 2012 when investigators
found thousands of substandard parts with
forged quality warranties installed in reactors.
This May, further scrutiny uncovered control
cables used in emergency shutdown that failed
safety checks but were still installed in several
reactors with fake warranties.
And as temperatures rose this June, grid
operator the Korea Power Exchange warned
that reserve margins had dipped precariously
low, and it was forced to slash power use by
6 GW to counter debilitating electricity supply
shortages. The country's energy ministry
at the time also demanded that local conglomerates
curb power use by 15% to avoid
a grid failure. The problem now stands to
worsen over the coming winter and through
next summer, putting the country's booming
economy on hiatus.
It was not the first time this country of 49
million people has suffered sporadic power
shortages due to an increasing strain on the
grid. South Korea last suffered rolling blackouts
in September 2011, when unexpectedly warm
temperatures boosted power consumption, and
it narrowly averted another crisis in November
2012 when the first two reactors were implicated
in the documentation scandal.
Evidently, this member of the Organisation
for Economic Cooperation and Development
(OECD) that is poor in natural resources has
been struggling to match its booming rise in
32
energy demand with an associated investment
in power plants. Observers point out
that as power consumption by industries has
skyrocketed along with a rise in income levels,
so have applications that rely on the grid,
attributable to artificially depressed power
prices that are the lowest in the OECD. At the
same time, construction of new power plants
has been limited by delays stemming from
environmental concerns and civil complaints.
The country's reserve margin has been gradually
pinched to a slim 3.8% as recently as
2012-and it shows no sign of recovery until
at least 2015 and as late as 2018, according to
current investment scenarios.
The long term looks no better. The
documentation scandal has eroded public
confidence in the country's lofty nuclear
expansion aspirations, which had been seen
as the best means to achieve long-term energy
security and environmental goals. In
this post-Fukushima age, that means South
Korea is walking a tightrope to future energy
security.
Unsustainable Power Prices
What's causing the dangerous disparity between
power supply and demand? The consensus
is that South Korea's power market is
skewed. Retail prices are controlled in South
Korea, and generators depend heavily on government
subsidies to cover increased costs. Underscoring
supply issues is that investment for
power capacity expansions in recent years has
fallen short because the market " is not providing
sufficient incentives, " Finnish equipment
firm Wärtsilä says in an in-house analysis.
" The Korean electricity market provides a
system marginal price (SMP) for each hour,
which should stimulate new investments if the
supply side is scarce, " it explains. " However,
because the country's generating companies
cannot receive the full SMP for their existing
assets, and because retail prices are regulated
and are currently below the SMP, there is no
www.powermag.com
incentive to invest in new capacity. "
The biggest loser is none other than statecontrolled
monopoly Korea Electric Power
Corp. (KEPCO), which controls 100% of
the transmission and distribution market and
93% of total power generation. KEPCO has
posted annual losses for the past five years.
In August, the company's net loss deepened
to $1.58 billion compared to a year
earlier, even as sales increased by nearly
17%. The company attributed the loss to
surging costs of oil, gas, and coal. Though
the company has been seeking higher tariffs,
the government has only allowed
the company to hike electricity prices by
an average of 4.9%-much less than the
10.7% hike requested in July. South Korea
therefore continues to have some of the
lowest electricity prices (both residential
and industrial) among the world's developed
countries.
According to the International Energy
Agency (IEA), market reform will be the
most critical remedy for South Korea's
economy-crippling power shortages. The
process should entail " greater restructuring
of [KEPCO] and revisiting the design of the
wholesale market; and strengthening the independence
of the sector regulator to enable
fair competition, including the removal of
barriers to new entrants and third-party access
to network infrastructure, and creating
clear roles for publicly owned and private
entities, " it says.
The IEA notes that reform of energy markets
is a " process not an event, " stressing that
the government must clearly articulate goals
for reform that take into account the country's
" green growth " ambitions, its nuclear
expansion program, its targets for new and
renewable energy, and the new emissions
trading scheme.
Teetering " Green Growth "
Complicating the country's overwhelming supPOWER
| November 2013
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POWER November 2013

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