Converting over from Fossil Fuels to Renewable Energy
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
Currently relying mainly upon fossil fuel, KEPCO is converting over from fossil fuels to renewable energy to help achieve carbon neutrality. By 2030, KEPCO plans to have total renewable energy capacity of 41GW, with offshore wind power generation to account for 10% of overall domestic power generation. These plans offer a chance for KEPCO to transform from being the largest REC buyer to being the largest REC seller.
Converting over from fossil fuels to renewable energy
Under Renewable Energy 3020 (RE3020) policy goals, KEPCO and its power generating subsidiaries (GENCOs) are to form a power generation mix centering upon renewable energy. With the goal of building 41.2GW capacity by 2030, a large-scale offshore wind power and solar power development project is underway. By 2030, KEPCO itself should have solar power capacity of 2.9GW and wind power capacity of 2.9GW, and GENCOs are to have combined solar power capacity of 7.6GW and wind power capacity of 11.5GW.
Of particular note, if proposed amendments to the Electricity Business Act pass the National Assembly, KEPCO will secure the right to conduct renewable energy generation ventures on a separate basis. Currently underway in the form of equity investment (indirect participation) are both a 1,200MW offshore wind power project in the Southwest Sea of Korea (400MW pilot project, 800MW diffusion project) and a 100MW offshore wind power project in Hallim, Jeju. Over the mid/long term, KEPCO is aiming to build an offshore wind farm with a total capacity of 2.7GW. If the Electricity Business Act is revised, KEPCO will be able to participate directly in renewable energy power plant projects.
KEPCO and GENCOs are targeting to achieve greenhouse gas emission reduction of more than 200mn tons pa via the early abolition of coal power plants and the conversion of fuel to LNG. Seocheon #1 and #2 (400MW) and Yeongdong #1 and #2 (325MW) have already been abolished or fuel conversion has been completed. Samcheonpo #1 and #2 (1,120MW), Honam #1 and #2 (500MW), and Boryeong #1 and #2 (1,000MW) are also slated to be abolished. Starting with Samcheonpo #3 and #4 (1,120MW), coal power plants with a total capacity of 9,120 MW are to be converted over to LNG fuel.
Opportunity presented as environmental costs are to be passed along
In general, observers are predicting that KEPCO’s profitability will be limited once it becomes a renewable energy operator, believing that its REC purchases and sales will offset each other. But, we point out that under a new electricity rate scheme modified in Dec 2020, environmental costs of W5.3/kWh are reflected in electricity rates. Against this backdrop, we view securing renewable energy capacity as offering a major opportunity for KEPCO if it can sufficiently pass along environmental cost hikes onto electricity rates.