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South Korea’s Renewable Portfolio Standard

The South Korean Renewable Portfolio Standard (RPS) is the centerpiece of the nation’s drive towards greening its energy generation and providing for new export industries. Introduced in 2012, the policy stipulates that all power generators are required to source an increasing percentage of their power from new and renewable energy (NRE) sources. For each MW of power generated by a designated NRE source, the producer earns one Renewable Energy Certificate (REC), which power generators can submit to show compliance. In order to stimulate certain technologies that Korea feels it has a comparative advantage in there is a multiplier system such that certain forms of NRE generate more than 1 REC for each MW produced. The generators can invest in NRE projects themselves, contract with third parties to buy the certificates produced by their NRE projects or pay a fine.

Since its inception in 2012, Korea’s RPS has had a mixed record. The amount of total NRE installed in the first two and a half years of the RPS was more than three times as much as had been installed from 2001-2011, when Korea had a Feed in Tariff (FIT) system. However, this impressive figure is heavily skewed by the astronomical growth of biomass co-firing (biomass-generated power increased by an average of 7.5MW a year under the FIT and then a staggering 409MW a year under the RPS). As the biomass is largely imported and provides for little technological learning, the government has this year sought to impose a quota on the amount of RECs that can be secured this way. 

Another area that has seen a large increase in deployments is fuel cells. Only 7.5MW of fuel cells had been deployed from 2001 to 2011, yet in the two and a half years since the RPS was introduced, fuel cell installations totaled 113MW. In 2007 POSCO Energy entered into a strategic partnership with the US firm, Fuel Cell Energy, and has since invested huge sums in its manufacturing capabilities for molten carbonate fuel cells. POSCO has sought to ensure that the RPS reflects the company’s interests; the multiplier for fuel cells is 2.0 meaning that for every MWh produced by a fuel cell the producer receives 2 RECs. More recently, POSCO has had a large influence on the government’s policy to promote the diffusion of fuel cells for both power and heat generation in large buildings.

The RPS has made South Korea one of the most attractive markets for fuel cells in the world. With the help of this policy, POSCO Energy has built the largest fuel cell plant in the world: a 59MW system in Hwaseong. My company, Intralink, has just secured a deal for our alkaline fuel cell client that will see a 50MW plant constructed in Daesan by 2019. When combining the revenue from the electricity produced and the sale of the RECs, the project is expected to generate approximately US $1bn over ten years.

With Doosan’s recent acquisition of the phosphoric acid fuel cell company, ClearEdge Power, LG’s acquisition of Rolls Royce’s solid oxide fuel cell unit and multiple domestic proton exchange membrane fuel cell suppliers, South Korea looks set to become a fuel cell powerhouse both in terms of its domestic market and the international competitiveness of its fuel cell companies.

However, there are still issues that need to be resolved with the RPS. The initial target of 10% of electricity generation from NRE sources by 2022 has been shifted back to 2024 after the power generators complained that the policy was too aggressive. Although power generation has been partially liberalized in South Korea, the state continues to account for over 90% of electricity production in the country. The state-run gencos have been made to pay large fines but complain that there are not enough RECs on the market and licensing for projects (especially wind farms) has not been forthcoming.

The government has been lessening the burden by selling RECs cheaply to the gencos (these RECs are a legacy from the FIT period and a loophole that allows the government to manage the market when necessary). This has helped to mitigate the financial cost of the RPS in the short term. By providing these RECs below market price however, the government is hindering the signaling function of the market – a high REC price means that more NRE projects become viable – and it is creating uncertainty as the market questions the government’s commitment to the RPS. Long-term contracts on non-solar RECs are an essential component of a private-finance application and yet these long-term contracts are only slowly starting to emerge in the Korean market.

The RPS system was created under the Lee Myung-bak government with a view to fostering ‘green growth’ as one of the country’s new export industries. The current government is not quite so keen on the RPS system nor quite so sure that NRE is a sector that can replace Korea’s more established export industries – many of the largechaebol have scaled back their renewable energy businesses over the last two years due to fierce international competition. Park Geun-hye has just finished a symbolic trip to the Middle East where the focus was firmly on promoting Korea’s traditional strengths of constructing power plants, refineries and other civil engineering projects.

The government plans to greatly increase domestic generation capacity from conventional sources over the next decade. This will place a growing burden on the gencos who will need to secure ever more RECs. Moreover, the launch of the Emissions Trading Scheme in January 2015 will create further burdens and uncertainty in Korea’s power generation industry. Business dislikes uncertainty and nowhere is this truer than with new and renewable energy, a sector that continues to be highly dependent on favorable government policy and regulation. If the government is sincere in its commitment to the RPS, then it should stop intervening in the REC market, something that it has pledged to do. Only then will Korea become the exceptionally attractive market for the deployment of new and renewable energy that it promised to become in 2012.

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