Korean Experience and Future Market

Cigre Workshop Study Committee C5 Market Structures and Institutions 2003. 9. 22.

Jong-Keun Park Seoul National University

Table of Contents

I.

Introduction to Korean power industry II. Restructuring of power industry in Korea III. Cost Based Pool Market IV. Effect of competition in generation sector V. Preparation for TWBP market VI. Issues on successful restructuring VII. Outstanding tasks to overcome Korean Experience and Future Market

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I. Introduction to Korean power industry

1. Growth of power industry in Korea

(MW) 60000 53,801 50000 40000 30000 20000 10000 0 Generating capacity Peak demand 18,060 35,715 32,282 21,111 19,124 9,915 367 306 1961 1986 1991 1996 2002 45,773

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I. Introduction to Korean power industry

2. Ownership of generation capacity Power Company Cap.(MW) % KOWACO 2% LG 2% KIECO 3% Others 10% KEPCO & Affiliates 83% KEPCO & Affiliates 49,560 92.1

KIECO (Hanwha) 1,800 3.3

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Others 2,441 4.5

(As of End 2002) Total 53,801 100.0

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I. Introduction to Korean power industry

3. Capacity by fuels

Hydro 7% Oil 9%

Nuclear 29%

Coal 30%

LNG 25% Fuel Cap.(MW) %

Nuclear 15,716 29.2

Coal 15,931 29.6

Korean Experience and Future Market

LNG 13,618 25.3

5 Oil 4,660 8.7

(As of End 2002)

Hydro 3,876 7.2

Total 53,801 100.0

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I. Introduction to Korean power industry

4. Capacity growth by E Source (Gov’s plan) (MW) 90,000 80,000 70,000 12% 60,000 25% 50,000 20% 40,000 30,000 25% 28% 20,000 28% 35% 10,000 27% 0 Nuclear 00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Imported Coal LNG Korean Experience and Future Market Heavy Oil

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Light Oil Domestic Coal Hydro Seoul National University

I. Introduction to Korean power industry

5. Growth of peak demand and annual consumption

(GWh) 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Average growth : 5.4% 2.7% 2.0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 (MW) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Yearly Consumption (LHS)

Korean Experience and Future Market

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I. Introduction to Korean power industry

6. Electricity consumption Agriculture & Fishery (2.3) Mining (0.4) Commercial (28.4) Manufacturing (50.0) Public (3.7) Residential (15.2) Korean Experience and Future Market

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Total 281,872 GWh (Year of 2002) Seoul National University

I. Introduction to Korean power industry

7. Characteristics of Korean power network Kyoung-In area

 Regional concentration of supply (coastal area) and demand(Seoul)  Kyoung-In area demand : 42.6%  Northward loadflow causing network congestion

765kV Route 345KV Route DC 180kV Submarine Cable 345KV Substation Power Plant Korean Experience and Future Market

9  Cheju island is connected through HVDC system (154MW)  Nominal voltages of T/L’s are 765kV(662c-km), 345kV(7,496c km) and 154kV(18,144c-km)

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I. Introduction to Korean power industry

7. Characteristics of Korean power network Power flow Korean Experience and Future Market

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II. Restructuring of power industry in Korea

1. Objectives

 Raising the general efficiency of the power industry by promoting competition  Effective financing of upcoming capital expenditure  Increasing consumer benefits

2. Principles

 Unbundling of generation, transmission and distribution sectors  Introduction of competition into generation and retail sectors  Gradual introduction of competitive market to reduce shocks

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II. Restructuring of power industry in Korea

3. The necessity of restructuring

 Steep increase of electricity demand  additional 45,000MW should be built until 2015.

 Lack of capital due to retail price regulation  Fund of 67 T Won is required by 2015 and 9 T Won/annum.

 Needs private or foreign funds to build new power facilities.

 International trend to deregulation and competitive market  Apply global rules in management of the public sector  Adopt the competition principle to utility field

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II. Restructuring of power industry in Korea

4. The roadmap of the restructuring

 A competitive generation sector consisting of private generation companies  An electricity market operated by a Korea Power Exchange (KPX) as an independent market operator  Single national transmission company and multiple distribution companies  Retail competition for endowing all customers with choices  A regulatory framework based on an independent regulator

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II. Restructuring of power industry in Korea

5. Brief history of restructuring

 ’94.7~’96.6 Management performance evaluation of KEPCO  ’97.6 Establishment of

Electric Power Industry Restructuring Committee

 ’99.1

 ’00.12

 ’01.4

 ’02.10

Basic Plan of Restructuring(MOCIE*)

Act on Promotion of Restructuring of power industry

Spin-off of generation sector from KEPCO Commencement of KOSEPCO (one of six Gencos) privatization

* MOCIE : Ministry of Commerce, Industry and Energy Korean Experience and Future Market

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II. Restructuring of power industry in Korea

6. Basic plan of restructuring PHASE I PHASE II PHASE III Competition in Generation Wholesale Competition Retail Competition

 

Gencos compete in the cost-based pool KEPCO manages transmission and distribution sectors 2001.4



Introduction of the TWBP(Two way bidding pool) and unbundling of distribution sector



Transmission system serves as a common carrier 2005 Korean Experience and Future Market

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Distribution network will be opened and privatized



Regional supply franchise will be eliminated 2009 Seoul National University

II. Restructuring of power industry in Korea

7. Market structure Phase I (2001.4~) Generation Competition Phase II (2005.4~) Wholesale Competition Phase III (2009.4~) Retail Competition Genco Genco Genco Genco Genco Genco

KPX (Cost-Based Pool)

KEPCO

KPX (Two-way Bidding

Bidding

Pool)

Bidding Disco / Retailco Disco / Retailco Disco / Retailco Genco Genco Genco Bidding

KPX (Two-way Bidding Pool)

Bidding Disco / Retailco Disco / Retailco Disco / Retailco Customer Customer Customer Customer Korean Experience and Future Market

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Customer Customer Customer Seoul National University

II. Restructuring of power industry in Korea

8. What has been done thus far?

 Establishment of

New Act on Promotion of Restructuring of power industry

 Division of generation sector into

6 Gencos

(1 nuclear / 5 coal)  Plan for

spin-off of distribution/retail sectors

 Establishment of

Korea Power Exchange(KPX)

 Operation of the

cost-based pool market

 Establishment of

Korea Electricity Commission

in MOCIE  Commencement of

Genco privatization (KOSEPCO)

 Design of

TWBP market rule and procedure (in progress)

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II. Restructuring of power industry in Korea

9. Korea Power Exchange (KPX)

 Established in April 2001  non-profit independent organization  Core functions  Pool Governance  Market Operation  System Operation

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II. Restructuring of power industry in Korea

10. Korea Electricity Commission (KOREC)

 Established in April 2001  Established as a division of MOCIE  Major functions  Restructuring of electric power industry  Deliberation and resolution (of matters in respect of the granting of permission, establishment of fair trade system)  Arbitration of disputes  Investigation of matters in respect of protection of public interests

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II. Restructuring of power industry in Korea

11. Overview of six Gencos (MW, billion Won) KHNP KOSEPCO KOMIPO KOWEPO KOSPO KEWESPO Installed capacity * under plan 16,251 *6,000 5,565 *4,000 6,993 *1,000 7,346 *1,600 5,765 *3,206 7,500 *1,000 Assets 19,953 2,941 2,883 3,282 3,642 4,333 Equity 10,578 1,679 1,743 1,773 1,910 2,373 Liabilities 9,375 1,262 1,140 1,409 1,732 1,959 (As of end 2002) Korean Experience and Future Market

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II. Restructuring of power industry in Korea

12. Market share by generation

O thers 3.3% KEW ES P O 11.4% KO S P O 12.2% KO W EP O 12.4% KHNP 39.8% KO M IP O 10.7% KO S EP CO 10.2%

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(For the year of 2002) Seoul National University

II. Restructuring of power industry in Korea

13. Market share by sales

KEW ES P O 13.9% KO S P O 13.6% KHNP 34.6% KO W EP O 14.9% KO M IP O 12.0% KO S EP CO 11.0%

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(For the year of 2002) Seoul National University

III. Cost Based Pool (CBP) Market

1. Features of CBP

   Operated from April 2001 Compulsory Pool Cost reflective market  Generation Cost Evaluation Committee     Limited competition Multiple suppliers & Single purchaser Suppliers bidding (availability bidding) SMP determined in day-ahead market   Unconstrained Scheduling BLMP, SMP   Capacity payment Constrained on/off payment

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III. Cost Based Pool (CBP) Market

2. Market operation flow chart Korean Experience and Future Market

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III. Cost Based Pool (CBP) Market

3. System Marginal Price (SMP)

 BLMP : base load marginal price(nuclear & coal plant)  SMP : for non base load generators  influenced by maintenance schedule , demand, fuel price, etc.

 SMP determination ratio by fuel type 70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

0.10

Nuclear 8.40

D.coal

15.80

Oil 16.20

Coal 59.50

CC

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III. Cost Based Pool (CBP) Market

4. Settlement

Price setting schedule Actual Electricity Generation No Electricity Generation SMP + CP (Scheduled energy payment) SMP – ON VC + CP (Constrained off) OFF VC + CP (Constrained on) CP

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III. Cost Based Pool (CBP) Market

5. Uplift

 Ancillary service cost  frequency control  reserve procurement  voltage control  Constrained on/off cost

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III. Cost Based Pool (CBP) Market

6. Demand vs. SMP 2002 9-11 (Wed.)

45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 demand smp 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 hour 60 50 40 30 20 10 0

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III. Cost Based Pool (CBP) Market

7. Settlement amount analysis (2002)

Uplift 11.49% Schedule Energy Payment 43.36% Capacity Payment 45.15%

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III. Cost Based Pool (CBP) Market

8. Schedule volume vs. trade volume (2002)

27,000 26,000 25,000 24,000 23,000 22,000 21,000 20,000 19,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Scheduled Volume 24,188 20,976 23,382 22,158 22,635 22,076 23,708 23,387 21,662 23,332 24,088 25,965 Trade volume 24,402 21,133 23,625 22,252 23,026 22,545 24,475 23,560 21,968 23,647 24,834 26,401

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III. Cost Based Pool (CBP) Market

9. SMP, BLMP, Settlement price (2002)

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec SMP BLMP 58.22 52.10 51.02 46.76 48.21 39.20 40.06 36.08 40.73 46.31 53.95 54.11 18.90 18.68 18.88 18.84 18.80 18.18 18.21 17.59 17.95 18.62 18.95 18.80 Settlement Price 48.80 47.37 46.58 46.31 46.09 46.44 46.78 46.83 46.93 46.39 47.84 49.92

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III. Cost Based Pool (CBP) Market

10. Voltage & frequency maintaining rate

Voltage Maintaining rate 100.1

100 99.9

99.8

99.7

99.6

99.5

99.4

1 2 3 4 5 2000 6 7 2001 8 9 2002 10 11 12 frequency maintaining rate 100 99.8

99.6

99.4

99.2

99 98.8

98.6

98.4

98.2

1 2 3 4 5 2000 6 7 2001 8 2002 9 10 11 12

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III. Cost Based Pool (CBP) Market

11. number of disputes

2001 2002 2003 16 14 12 10 8 2 0 6 4 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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IV. Effect of competition in generation sector

1. Improvement of efficiency through competition

 Encouraging management innovation and competitiveness  Reducing generation cost due to the improvement of the purchasing process of fuels and materials  Trying to improve the supply ability by shortening the overhaul period  Curtailing operation of high-cost generator  Reduction of labor cost through automation

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IV. Effect of competition in generation sector

2. Increase of generation capacity

 Total capacity has increased 11.2% since spin-off (MW) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

14.0%

KHNP

0.0% 9.4% 15.8% 2.3%

2001 2002

10.3%

KOSEPCO KOMIPO KOWEPO KOSPO KEWESPO

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IV. Effect of competition in generation sector

3. Increase of net profits

 Total net profits has increased 42.0%

(Wb) 1000 9.6% 800 600 400 37.8% 53.3% 31.7% 200 0 -200 -400 KHNP KOSEPCO KOMIPO KOWEPO 600.0% KOSPO

2001 2002

N/A KEWESPO Korean Experience and Future Market

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IV. Effect of competition in generation sector

4. Improvement of debt ratio

 Total debt has decreased 4.4% since spin-off

(Billion Won) -0.6% 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 KHNP 0.3% KOSEPCO -14.7% KOMIPO -3.6% KOWEPO

2001

-5.4% KOSPO

2002

-16.0% KEWESPO Korean Experience and Future Market

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IV. Effect of competition in generation sector

5. Improvement of generation cost per kWh

 Cost for generation has decreased 6.0%

(Won/kWh) 70.0

2001 2002

-7.3% 60.0

-7.2% -11.4% -5.1% -8.3% 50.0

-0.3% 40.0

30.0

20.0

10.0

0.0

KHNP KOSEPCO KOMIPO KOWEPO KOSPO KEWESPO Korean Experience and Future Market

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IV. Effect of competition in generation sector

6. Improvement of labour productivity

 Labor productivity has been improved by 23%

(MWh/person) 35,000 4.0% 30,000 23.3%

2001 2002

24.2% 15.6% 25,000 53.1% 20,000 15,000 10,000 5,000 KHNP KOSEPCO KOMIPO Korean Experience and Future Market

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KOWEPO 26.6% KOSPO KEWESPO Seoul National University

IV. Effect of competition in generation sector

7. Growth of electricity market (2001 vs. 2002)

 Increase of members

7 regular members 3 associate members 22 regular members 8 associate members

 Increase of market participating capacity

46,363MW (91% of the total) 49,921MW (95% of the total) Korean Experience and Future Market

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V. Preparation for TWBP market

1. Basic design principles Supply and demand participation Trading of electricity only through the TWBP Clearing price set by commercial offers from generators KPX contract for reserve Publication of market information Compensation for being constrained-on or constrained-off KPX contract for ancillary services Settlement based on clearing price * Based on 15 basic design principles for TWBP Korean Experience and Future Market

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V. Preparation for TWBP market

2. Features of TWBP

      KPX is the only market and system operator Generators and purchasers submit offers and bids with price and quantity   Self-committed generators, self-dispatched demands Ancillary services are procured through contracts between KPX and participants Single energy price Five-minute dispatch and pricing on the generation side Averaged thirty-minutes pricing on the demand side Individual participants’ prices consider TLFs and DLFs based on their location   Constrained on or off payments, No capacity payments

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V. Preparation for TWBP market

3. CBP vs. TWBP Bidding Content of bids Competition Market participants CBP (Cost-based pool) Supplier bidding only Supply availability Limited (competitiveness predetermined ) Profitability Predetermined by structure (scale, generation mix) Multiple suppliers / Single purchaser TWBP (Two-way bidding pool) Two way bidding (supplier, purchaser) Price and quantity Competitive (strategy) Strategic decision (bidding strategy, risk management) Multiple suppliers / Multiple purchasers Korean Experience and Future Market

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V. Preparation for TWBP market

4. TWBP market opening schedule (modified)

2003 3/4 4/4 2004 1/4 2/4 3/4 4/4 2005 1/4

Not fixed

2/4 Standing Bidding Shadow operation based on cyber trading Shadow operation with virtual Discos

CBP market

Opening of TWBP

TWBP



The result of shadow operation and consultation may influence the detailed schedules for the spin-off of distribution sector and opening of TWBP market.

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V. Preparation for TWBP market

5. IT system for TWBP market (Overall)

KPX Generation station

Commitment, Measurement

MOS Market Information NEMS RTU

Bidding, Settlement, Market Information Operation/ Measurement information

MOS Interface Trading Server / DB Measure/ Settlement System Bidding/ Contract Management Risk Management Genco

’

s Energy Trading & Risk Management system Market/ Network Simulator

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V. Preparation for TWBP market

6. Vesting contract for pool-price stabilization



Background

 Market price in the TWBP is influenced by changes in    market environment Buyers and sellers are exposed to financial risk Reduce risk exposure in early stage of TWBP Designed by Freehills consortium 

Factors to be considered

 Optimal allocation of profits among market participants    Adjustable contract price to reflect market environmental change Limited life – only for beginning of successful implementation Reasonable and agreeable contract price

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V. Preparation for TWBP market

7. Transmission network access rules & fees

 Open access to the transmission and distribution network for all market participants without any discrimination  Imposing the cost for connecting the generator to common network on the owner of generator  Levying fares based on MW sold  Regionally different tariff to provide signals to reduce transmission and distribution cost  Access rules for both transmission and distribution network have been approved by MOCIE(2002.12)

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V. Preparation for TWBP market

8. Cross-subsidy between user groups

133.7

 Profits of Discos will 114.8

48.8

96.1

100

48.0

116.4

Residential Midnight Commercial Aggricultural Industrial Educational

Relative price to cost (MOCIE) Korean Experience and Future Market

48 significantly differ without eliminating cross-subsidy between user groups  Government announced the plan to reduce the cross subsidy (gradual reduction for 4 years)  Tariff system should be readjusted in a way that the customers in industrial sector bear the reasonable price of power and energy.

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V. Preparation for TWBP market

9. Comparison of electricity tariffs

 Price differences between user groups in Korea are much bigger than other countries

Tariff Residential Commercial Industrial Composite (index) Base year Korea 87.01

(118) 102.66

(139) 59.02

(80) 73.88

(100) 2002 Taiwan 88.92

(120) 89.61

(121) 61.93

(84) 73.35

(99) 2001 Japan 228.71

(310) 212.91

(288) 143.93

(195) 191.13

(256) 1998 USA 101.79

(138) 93.15

(126) 60.26

(82) 85.95

(116) 2001 (Won/kWh) UK 125.03

(169) 97.56

(132) 75.77

(103) 100.2

(135) 1999 * Foreign exchange rates : as of end 2002 Korean Experience and Future Market

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VI. Issues on successful restructuring

1. Conflicts between labor and management

 Nurturing for employees including labor unions on paradigm shift.

 Win-win Strategy for both shareholder and employees .  Job Creation/Maintenance for the matured relationship with Labor Union.

2. Public acknowledgement

 Enlightening the public about the possibility of tariff hike due to continuing suppression of tariff,

NOT

due to restructuring  Retail tariff should be floated depending upon the fuel prices in the international market just like petroleum price in Korea

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VI. Issues on successful restructuring

3. Restructuring of LNG industry

 Currently LNG import is regulated and monopolized by KOGAS  In the competitive market LNG generators will show very low profitability due to high import price and luxury tax  LNG industry should be deregulated for the users to be able to purchase LNG at competitive basis  Reasonable profitability of LNG generators will promote the investment of private-owned companies and, thus, the lower electricity price

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VII. Outstanding tasks to overcome

1. Consistent policy and timetable

 Recovering the confidence of investors eliminating uncertainties.  Stable and realizable timetable to induce thorough preparation of market participants  Elimination of factors hindering competition

2. Enhanced opportunities of participating in market design by market participants

 Increasing the understanding of market operation by participants  Enhancing the smoothness of market operation

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VII.Outstanding tasks to overcome

3. Public acceptance of the viability of restructuring

 Compromise with labor union  Public acceptance  Better services to customers  Enhancing the role of competitive market  Increasing social welfare by the guarantee of autonomous management and operation

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