Korea considers opening up coal generation to private sector

PUBLISHED : Monday, 10 December, 2012, 11:33am
UPDATED : Monday, 10 December, 2012, 11:36am

South Korea is considering allowing non-state companies to generate coal-fired power for the first time in three decades, as it adds capacity to prevent blackouts that cost the economy US$11 billion.

“It will be good to allow a certain number of private coal power generators,” Nam Ho Ki, the chairman of Korea Power Exchange, the government-run company that oversees the country’s power supply and is helping to decide on the new policy, told Bloomberg. “We are positively considering that option.”

Korea Power is aiming to decide on more than 30 applications from state and private companies to build new plants by the end of the year, as part of its review with the government of the nation’s energy mix, Nam said.

South Korea, Asia’s fourth-largest economy, should retain its equal weighting between coal, natural gas and nuclear, said Nam, who is 62 year old. And, while he can’t see the country dropping nuclear power, neither does he foresee non-government controlled companies entering the business, after a unit of steelmaker Posco Group made and then withdrew an application to build a nuclear plant.

Nam, who began his career in 1968 at Korea Electric Power Corp., or Kepco, became chairman of Korea Power Exchange in November 2011, after his predecessor resigned following nationwide blackouts in September, the first since 2001.

Among private applicants for coal power plants are units of Posco Group, Tongyang Group, SK Group, Dongbu Group, and STX Group, who benefit from their control of the supply chain, he said. It costs 3 trillion won to 3.2 trillion won to build a 2,000-megawatt coal generator.

“Private power generators believe they can cut costs by 20 per cent to 30 per cent by bringing in coal from their invested mines or using their shipping lines,” Nam said. “We assess that many of their intentions are commercially feasible.”

Private coal plant operators sold out to Kepco in 1982.

South Korea is vulnerable to blackouts after the government miscalculated demand when planning power plants over the last decade. Some projects were either canceled or delayed because South Korea caps electricity prices to control inflation. Monopoly power distributor Kepco has reported operating losses since 2008. Kepco’s president resigned last month, having failed to win a big enough increase in tariffs.

The Ministry of Knowledge Economy estimated in June 2012 that such “uncontrolled power supply reductions” cut gross domestic product by 11.6 trillion won ($10.7 billion) each time they occur, the equivalent of 1.1 per cent of the value of goods and services produced in the country last year.

Another blackout looms this winter because of forecasts for unusually cold temperatures and possible supply interruptions because of the unscheduled shuttering of two nuclear reactors on Nov. 5. South Korea has sounded power demand alerts five times in December after reserve capacity plunged to near or below the 4,000-megawatt safety threshold.

Two reactors at Yonggwang nuclear plant were closed to replace components supplied with faked quality accreditation. The chief executive officer at Korea Hydro & Nuclear Power, which runs the plant, said November 7 that he would quit after “rectifying the mess” caused by the scandal.

National power reserves may range between 3,430 megawatts and 4,830 megawatts this week, the ministry said December 6.

“A solution to resolve the power shortage is to raise electricity tariffs and the increase should be up to the level that people begrudge every penny,” said Nam. “There’s no other solution for the moment, except to spread out power demand by giving incentives. In terms of costs, power-demand management is cheaper than building a power plant.”

Korea Power Exchange buys electricity from generators for 100 won per kilowatt-hour on average, while power generating costs are 40 won from nuclear, 60 to 70 won from coal, and 130 to 140 won from natural gas, Nam said.

The country’s weighting on nuclear power generation will probably remain intact, even as some presidential candidates for the December 19 election claim they would shut down reactors, Nam said. Korea has 23 reactors with two more due to come online next year.

“A successful candidate could restrict construction of new reactors or shift to other fuel sources when an existing reactor reaches its lifespan,” Nam said. “Any decision would be linked to the burden on citizens. It’s doubtful whether a next president could drop nuclear energy.”

Unlike Japan, which is considering its nuclear future in the wake of the Fukushima disaster last year, Korea doesn’t have the power reserves to remove nuclear from its energy mix, he said.

“It’s inevitable for our country to approach nuclear energy policies differently than Japan,” Nam said. “Japan shut down all reactors after the March disaster and conducted safety check-ups on all of them. They could as they had abundant reserve ratios, which exceeded 36 per cent of their demand, and their electricity tariff was three times that in our country.”

Posco Engineering & Construction Co., a unit of Asia’s third largest steelmaker, submitted an application to build a reactor in Samcheok, southeast of Seoul, and then withdrew it after the ministry selected state-run Korea Hydro & Nuclear Power as the operator for a new reactor in that city in September, said company spokesman Kim Hyun Joon.

“A state operator’s top priority is to avoid any accident related to safety even as that possibility is very rare, once a century,” said Nam. “It’s doubtful whether a private operator can do that as a profit-seeking entity.”

Nam cautioned against increasing the weighting for natural gas in Korea’s energy mix, despite the boom in projects to extract gas from shale in the US.

“It’s not our holding. No one knows whether the US government will keep its export stance like this. It’s risky to bet the boom would drag down gas prices significantly and sustainably,” he said.