Plan to Change RPS Reduces Project Unpredictability
The Independent Power Producer Association, the Korea New & New Renewable Energy Association and the Korea Wind Energy Industry Association recently submitted a written proposal to the Ministry of Trade, Industry and Energy regarding its plan to change the Renewable Portfolio Standard (RPS).
In the current RPS, power companies purchase electricity produced by new and renewable energy businesses at a fixed price and the fixed price is the sum of system marginal price (SMP) and renewable energy certificate (REC). Regardless of a change in the SMP, the REC is calculated in accordance with the fixed price and, as such, investment predictability is high.
However, the predictability is likely to decrease as the ministry is planning to calculate the SMP based on a market price with the REC fixed. At present, power companies determine the fixed price in accordance with the SMP at the time of their contract with new and renewable energy businesses. Meanwhile, according to the ministry’s plan, the reference is the SMP at the time of commercial operation initiation. In other words, unpredictable investment occurs between contract conclusion and commercial operation initiation.
The time lag is two years according to the industry. “Power generation requires large-scale investments and estimated profit calculation is a must, and yet it is impossible to predict what will happen in two years given the nature of the SMP, which is highly affected by external variables,” a power company explained, adding, “No large-scale investment will be made in the new and renewable energy sector although the government is planning to raise the ratio of the sector to the entire power industry to 40 percent by 2034.”
According to power companies, the ministry’s plan is to reduce the deficit of Korea Electric Power Corp. (KEPCO). The unit cost of new and renewable energy-based power generation is relatively high and this means KEPCO’s costs cannot but increase along with the amount of the generated power. Last year, KEPCO spent approximately 1.8 trillion won on REC purchase. However, the SMP is likely to fall in the long term with the LNG price, which determines the local SMP, having dropped with the international oil price. In other words, KEPCO’s deficit can be reduced by the SMP-based calculation.
The government is considering backdating the new RPS to last year’s contracts. This means a new and renewable energy investment of approximately 86 trillion won may fail, including 5.4 GW of photovoltaic projects, 13 GW of wind power projects and 11 GW of photovoltaic projects on salt-affected reclaimed land permitted so far. “The backdating will suffocate the industry and we will respond to it by administrative litigation if necessary in that it is against the principle of good faith and the statutory principle of non-retroactivity,” said a power company.