The principal law that governs the ownership and structure of the power industry is the Electric Business Act. Electricity business as defined under the Electric Business Act includes the electricity generation business, electric transmission business, electric distribution business, electric sales business, and district electricity business. The Electric Business Act provides for permits and approvals required by each business, structure of the electricity market, permits, approvals and safety requirements for electric facilities.
A distinctive feature of the Korean electricity market is that it is a cost-based pool market, under which the variable costs are reflected in the market price. The market price is determined not by price bidding but by summing the increase in actual variable costs for additional electricity supply (the system marginal price) and a separate capacity price that compensates for fixed costs.
The Korea Electric Power Corporation (KEPCO) exercised a monopoly over the Korean electricity generation market until 2001, when the competitive market structure was implemented. Currently, independent power producers, including six power generation public corporations (GENCOs), are engaged in the electricity generation business. Generally speaking, entities engaged in the electricity generation business and electricity sales business must trade electricity through the Korea Power Exchange (KPX) in accordance with the Rules on the Operation of the Electricity Market (a review of the newly-enacted Enforcement Decree of the Electricity Business Act, which contains exceptions to this rule, is discussed in 1.6 Recent Material Changes in Law or Regulation). In Korea, KEPCO has a monopoly over the transmission, distribution and sales markets, in contrast to other countries that have adopted a district monopoly system for the transmission and distribution markets or a competitive system for electricity sales.
Although the competitive system has been introduced into the Korean generation market, KEPCO has vertical monopoly over certain segments of the electricity market.
As noted in 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry, KEPCO has a monopoly over the transmission, distribution and sales markets, and GENCOs are the principal entities in the generation market.
KEPCO is a stock company established under the Korea Electric Power Corporation Act. Although it is listed on the Korean securities exchange, KEPCO is a market-based public corporation and its major shareholder (approximately 33% shareholding) is the Korean Development Bank, a 100% government-owned bank, which - together with the Korean government (approximately 18% shareholding) - holds approximately 51% of the shares.
The GENCOs are:
GENCOs are wholly owned by KEPCO and as of 2021, GENCOs own approximately 60% of the total generation capacity.
Foreign investment in Korean entities is generally not restricted and unless otherwise provided under relevant laws, foreign investors are treated equally to domestic investors. The Foreign Investment Promotion Act offers certain incentives, such as tax reductions or exemptions and lease subsidies, to foreign investors that meet certain requirements. However, foreign investment in certain industries may be restricted by designation or public notice if foreign investment:
Restrictions on Foreign Investment
The following restrictions apply to foreign investment in the power industry.
Under the Electric Business Act, if an investment in a nuclear power generation business is a foreign investment as defined by the Foreign Investment Promotion Act (investment amount of KRW100 million or more and 10% or more shareholding), the Ministry of Trade, Industry and Energy (MOTIE) is required to revoke the nuclear power generation business permit. The Integrated Public Notice of Foreign Investment provides restrictions on the acquisition of shares issued by generation businesses that operate nuclear power generators (generally these restrictions apply to a 10% or more shareholding) and foreign-investment entities cannot obtain newly issued generation business permits for nuclear power generators.
Under the Financial Investment Services and Capital Markets Act, a foreign entity cannot acquire more than 3% of equity securities of a listed entity in certain industries essential to the national economy, including key national industries (these entities are known as “Public Purpose Corporations”); even if a foreign entity acquires more than 3% of the equity securities of such listed entities, it may not exercise its voting rights for equity securities in excess of 3%. As KEPCO is designated as a Public Purpose Corporation, the foregoing restrictions apply to the acquisition of KEPCO’s shares.
Apart from any merger control issues that may arise under the Monopoly Regulations and Fair Trade Act (the Fair Trade Act), the following activities require the approval of the Minister of MOTIE under Article 10(1) of the Electric Business Act (please refer to 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a link to the English translation of the Electric Business Act).
The acquirer must obtain approval before the closing of the relevant transaction. In practice, the approval of the Minister of MOTIE is immediately granted after passing the deliberation of the Electricity Regulatory Commission (commission established under MOTIE under the Electric Business Act). The general processing time for an approval is one or two months from submission of the application.
The Electricity Regulatory Commission considers the following factors during its deliberation:
Although the Electric Business Act does not explicitly provide for minimum requirements, such as capital requirements, for an acquirer of a generation business, during its deliberation, the Electricity Regulatory Commission comprehensively considers not only the largest shareholder’s financial and technological capacity but also whether the acquisition will affect the sustainable and stable operation of the generation business
Photovoltaic Power and Minimum Requirements
In the case of photovoltaic power generation business, the Electric Business Act was amended in 2020 to include, in addition to the above requirements that “the generation business shall have commenced in the preparatory period for the electric business”. The implications of this amendment which came to effect on 1 October 2020, is that for photovoltaic power generation business, the above approval cannot be obtained until the generation business has commenced in principle. Thus, conducting a transfer of an electric business for photovoltaic power generation has become more difficult, unless the transaction falls under the category of transactions which does not require obtainment of the above approval (for example, a share transfer which involves electric business operator with a power generation facility with a capacity of less than 20 MW).
The Ministry of Trade, Industry and Energy
MOTIE (mainly the Electric Power Division) is the central authority that overseas and administers the government’s electricity supply policy. To stabilise electricity supply, MOTIE establishes the master plan for electricity supply and demand every two years, which includes:
MOTIE must establish and publicly notify of standards to maintain the credibility of the electric power system. If the credibility of the electric power system is not maintained in accordance with such standards, harming the interest of consumers, the Minister of MOTIE, through the deliberation of the Electricity Regulatory Commission, may order the KPX or electricity business entities to take necessary measures.
The Electricity Regulatory Commission
The Electricity Regulatory Commission, established under MOTIE has the authority to deliberate on the following matters:
The Korea Power Exchange
The KPX was established as a separate entity under the Electric Business Act for the operation of the electricity market and electric power system. It is engaged in the establishment and operation of the electricity market, electricity trading, calculation of the volume of electric power traded and operation of the electric power system.
Third-Party Power Purchase Agreements
On 21 June 2021, MOTIE implemented the Guidelines on Contracts for Power Transactions between Third Parties for Renewable Energy Power (the “Guidelines”), which set out the method for trading renewable electricity between third parties (ie, power generators, KEPCO and power purchasers, (the “Third-Party PPA”)). These Guidelines are a supplement to Article 19(1)(3) of the Enforcement Decree of the Electricity Business Act, which was amended on 12 January 2021, and regulate electricity transactions between third parties, procedures for third-party electricity transaction contracts, and the calculation and payment of charges.
The amendment to the Enforcement Decree of the Electricity Business Act on 12 January 2021 allowed electricity generation companies to enter into power purchase agreements with third-party intermediaries in relation to renewable energy generation facilities that have over 1,000 kW of generation capacity. The electricity generation company could then supply electricity to KEPCO without using the KPX, and KEPCO could undertake electricity transactions with the third-party intermediary who on-supplied the electricity to the end customer (the Third-Party PPA Scheme). The implementation of these Guidelines allows companies to selectively purchase renewable electricity outside the electricity market, and in doing so become entitled to recognition for reducing GHG emissions pursuant to the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits for electricity purchased in this manner. This has provided an opportunity for companies to use renewable energy to fulfil their social responsibility obligations to help create a low carbon society, through initiatives such as the RE100 (a renewable energy usage and verification organisation).
As a result of the amendment to the Electricity Utility Act on 21 October 2021, electricity consumers can now directly enter into a direct power purchase agreement (the Direct PPA) to purchase power generated from renewable sources. Unlike the Third-Party PPA Scheme, the Direct PPA system enables direct power purchase transactions between power suppliers and power purchasers without the involvement of KEPCO. In order to supply renewable power to electricity consumers, registration as a renewable power supplier (or new electricity business) is required under the Direct PPA system. Although power sold under the Direct PPA is not eligible for the issuance of renewable energy certificates (RECs) under the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy (the New and Renewable Energy Act) (see below for further information), electricity consumers that purchase power under the Direct PPA can participate in the RE100 (see below for further information) according to MOTIE.
Please note that as of the date of this chapter (July 2022), subordinate statutes with respect to the Direct PPA have yet to be enacted. Future developments must be observed to see how the Direct PPA will be operated.
The RE100 (K-RE100)
The background to the Third-Party PPA Scheme and the Direct PPA system is the RE100. This is a voluntary global initiative that brings together more than 280 companies committed to sourcing 100% of the energy to power their operations from renewable sources. MOTIE has introduced a Korean RE100 (K-RE100). To provide a legal basis for the RE100, MOTIE announced, on 26 December 2020, the Regulations to Support Renewable Energy Facilities. More specifically, MOTIE designated both a management agency and an operational agency to support the implementation of the RE100, and prescribed procedures for establishing a means of using renewable energy and issuing certificates.
Consequently, five methods of implementation have been established for electricity consumers (such as businesses) to use renewable energy for the implementation of the RE100, being:
It should be noted that the Direct PPA system has not so far been added to the Regulations to Support Renewable Energy Facilities as a method of implementation of the RE100. However, the Direct PPA system is expected to be added as one of the methods.
REC Weighting Changes
The weighting scheme for RECs for new and renewable energy power generation (ie, the number of RECs issued for a certain amount of power) has changed with the amendment to the “Guidelines on the Management and Operation of Systems to Mandate Renewable Energy Supply and Blended Renewable Fuels Usage” on 28 July 2021. Primarily, the guidelines deal with:
In particular, in the case of offshore wind power generation, a regulation was newly established to assign weighting to multiple aspects, in accordance with the distance from the shore and the water depth, that result in high investment costs for installation.
As discussed above, while the Direct PPA system has been adopted, the subordinate legislation has yet to be enacted. Applicable laws and regulations are expected to be amended sometime in 2022.
Amendments to the Hydrogen Act
Through a resolution of the Hydrogen Economy Committee on 15 October 2020, MOTIE resolved to separate hydrogen electricity production from the RPS. Until now, hydrogen electricity has been contained within the RPS. MOTIE has instead implemented mandatory requirements to purchase electricity produced at hydrogen electricity facilities separate from the RPS, which requirements are to be known as Hydrogen Portfolio Standards. Through this new system, hydrogen power generation will be expanded to 8 GW by 2024, which is approximately 15 times the current level of 530 MW.
In this regard, on 9 May 2022, the National Assembly Standing Committee (Committee on Industry, Trade, Resources, SMEs and Start-Ups) passed a resolution on the partial amendment to the Hydrogen Economy Promotion and Hydrogen Safety Management Act (the Hydrogen Act) and is currently awaiting a resolution of the plenary session. The main amendments include the addition of a definition of clean hydrogen, a clean hydrogen certification system, an obligation to sell clean hydrogen for hydrogen business operators, and an obligation to purchase and supply hydrogen power generation on the hydrogen power generation auction market. The purpose of this amendment is to regulate the hydrogen power generation market, which is currently regulated under the RPS system as an auction market in accordance with the Hydrogen Act.
Policy Changes on Nuclear Power
The Yoon Seok-Yeol administration, which took office in May 2022, is expected to promote nuclear power generation, unlike the previous Moon Jae-in administration, which advocated for the elimination of nuclear power. Accordingly, although specific laws and regulations have not yet been amended or implemented, a plan to achieve carbon neutrality through the development of nuclear power plants has been suggested, such as maintaining the country’s energy share of nuclear at 30% and promoting the construction of Units 3 and 4 at the Shin Hanul nuclear power plant.
As mentioned in 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry, a distinctive feature of the Korean electricity market is that it is a cost-based pool market. The price of electricity on the wholesale electricity market is not determined based on supply and demand, but on generation entities’ expected costs and expected demand. More specifically, generators bid based on electric capacity without price bidding and KEPCO, having a monopoly on demand, accepts the bid of the generator with the lowest variable costs and adjusts based on costs, not price.
The adjusted unit price is reviewed and determined by the Costs Assessment Commission. The electricity price constitutes of the system marginal price, which reflects variable costs, and capacity payment, which reflects fixed costs.
The price for electricity generated through new and renewable energy is also traded at the system marginal price for a particular point in time. In consideration of the variability of the system marginal price, a long-term fixed price contract system was introduced for new and renewable energy such as solar and wind power. In other words, when GENCOs purchase electricity generated from solar and wind power, they sign a long-term contract for a contract term with approximately 20 years for a sum of the system marginal price and the renewable energy certificate price, and the power generation business operators are guaranteed to expect stable profits in long-term, even if the system marginal price varies from time to time. While long-term fixed price contracts are currently only executed for solar power, MOTIE also intends to have long-term fixed price contracts executed for wind power sometime in 2022.
The Electric Business Act also regulates the structure and functions of the wholesale electricity market (see 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a link to the English translation of the Electric Business Act).
As noted above, an operator of the electricity generation business and an operator of the electric sales business must carry out electricity transactions in the electricity market in accordance with the electricity market operational rules. A GENCO engaged in the operation of the electricity generation business and a private operator of the electricity generation business is in charge of electricity generation in accordance with the power supply instructions of the KPX, and the KPX, taking a neutral position, is in charge of the electricity market and the operation of the power system (including determination of the electric power sales price). KEPCO is in charge of supplying electricity to consumers by purchasing electric power at the price determined by the electricity market.
The electricity generation market is competitive, such that private generation business operators are generating electric power. However, since KEPCO’s monopoly system is still maintained in the transmission and distribution of electricity and in the electricity sales business, there is no wholesale electricity market which is wholly competitive. Furthermore, there is no nodal pricing system.
See 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry and 1.8 Unique Aspects of the Power Industry for details on the structure of the wholesale electricity market, electric power.
It is understood that the act of importing and exporting electric power is not specially prohibited by the relevant laws and regulations. However, whilst there are many cases in which a person who engages in the electricity generation business makes a profit by earning revenue through engineering, procurement, and construction (EPC) contracts, operation and maintenance (O&M) contracts, raw material supply or sales contracts and power facility sales contracts, there is no confirmed case of exporting electricity generated within Korea to jurisdictions outside of Korea or importing electricity generated from other jurisdictions into Korea. This is because in order to import or export electricity, a grid connection is required to connect the power with other countries, and Korea is surrounded by the sea on the eastern, western and the southern borders and is separated from North Korea on the northern border, such that, in reality, South Korea is isolated as an “electric power system island”.
As a result, electricity import and export through a grid system has not been achieved. In 2017, the former government announced that it was pursuing the goal of joint use of clean energy sources by Northeast Asian countries through the so-called “Super Grid” connecting the South Korean-North Korean-Russian and the Korean-Chinese-Japanese electric power systems, but this is still understood as a plan at a declarative level only.
As of the end of 2021, the approximate ratio of generation capacity by fuel source was as follows (2021 Electricity Statistics Korea, KEPCO):
As of the end of 2019, the approximate ratio of actual generation by fuel source was as follows (Electricity Statistics Korea, 2019):
As of the end of 2020, the amount of power generated by new and renewable energy consisted of (2020 renewable energy statistics for distribution, Korea Energy Agency):
In the electricity business industry, including the power supply market, Korea does not specifically restrict the market dominance of specific operators in terms of market share. As mentioned, competition in the power generation market has been introduced, but KEPCO and GENCOs still account for approximately 60% of the total power generation. As the government grants the licences required for transmission, distribution and sale of electricity in Korea to KEPCO only, KEPCO monopolises the power transmission, distribution and sales markets. It is understood that the government has a broad range of authority over regulation of the electricity business based on the nature of electric power and the unique characteristics of electricity business industry, in return for allowing a vertically integrated monopolistic electricity business operator to engage in all of electricity power generation, transmission, distribution and sales.
However, even if KEPCO’s monopoly is accepted in the electricity sales market, the electricity sales business operator under the Electric Business Act has the obligation to supply electric power, such that it is not permitted to deny the supply of electricity without a justifiable reason, pursuant to the licence obtained according to the terms and conditions of electricity supply from the government (MOTIE). Likewise, electricity business operators are prohibited from engaging in unfair trade practices under the Fair Trade Act.
In this regard, the Korea Fair Trade Commission (KFTC) has the authority to regulate abuse of market-dominant positions and unfair trade practices.
The Fair Trade Act is a general law that prohibits anti-competitive behaviour of a specific business in a specific market which provides for market surveillance and enforcement procedures. As explained in 2.4 Principal Laws Governing Market Concentration Limits, the KFTC plays a role as the surveillance and regulatory authority on anti-competitive behaviour (corrective measures, imposition of fines, criminal prosecution, etc), and the governmental authority for the formulation of related regulations and policies.
On the other hand, MOTIE also has the authority to investigate, order measures, take disciplinary action, and levy and collect fines, in the event an electricity business operator commits a prohibited act under the Electric Business Act, such as submitting false data about the electricity generated by the power plant to the KPX for the purpose of setting an unreasonably high price for electricity trading and unjustly discriminating against the end-user when providing usage of electric facilities for power transmission and distribution.
If an electricity business operator undertakes anti-competitive actions in the market, it may be subject to administrative dispositions such as corrective actions and administrative fines, as well as criminal penalties such as imprisonment and fines.
In order to realise GHG reduction and green, low-carbon growth, the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits (the Emission Permits Trading Act) was enacted in 2012 and the Framework Act on Carbon Neutrality and Green Growth (the Carbon Neutrality Act) was enacted in 2021.
A business entity eligible for allocation of an emission permit under the Emission Permits Trading Act (a number of electricity business operators such as KEPCO and GENCOs are designated as entities to be allocated such permit) shall report to the competent authority the amount of GHG emissions actually emitted in each performance year, and the competent authority shall evaluate the appropriateness thereof and certify the actual GHG emissions of the business entity in that particular year. The business entity eligible for allocation of an emission permit must submit to the competent authority the emission permit in compliance with the GHG emissions certified by the competent authority.
If GHG emissions allowed under the emission permit which is allocated to the business entity are less than the actual GHG emissions of the business entity, such entity should purchase and provide for the shortfall in the carbon emission trading market. In the event that the business entity fails to submit the emission allowance corresponding to the certified GHG emissions, an administrative fine that is three times the average market price of the emission permit in the performance year in which the emission obligation shall be carried out may be imposed for the deficit amount, within the range of KRW100,000 per ton of CO₂ equivalent (tCO₂-eq).
While the Framework Act on Low-Carbon Green Growth which was enacted in 2010 to promote green growth has been abolished, the Carbon Neutrality Act and the Enforcement Decree of the Carbon Neutrality Act were enacted on 25 March 2022 to respond to the climate crisis. Accordingly, the government updated its nationally determined contributions (NDC) setting a target to cut GHG emissions at least 40% below of 2018 levels by 2030. The government must formulate a national master plan for carbon neutrality every five years in order to establish a carbon-natural implementation system.
In addition, for projects that emit large amounts of GHGs or are vulnerable to the climate crisis, a climate change impact assessment has been implemented for an advance evaluation of the impact on climate change when the environmental impact assessment is performed. Energy development projects will first be subject to this impact assessment from September 2022.
In addition, on 27 October 2021, the government announced the “2050 Carbon Neutrality Scenario” that outlines policy directions for achieving carbon neutrality in each of the major sectors by 2050. The Carbon Neutrality Scenario presents two options, Plan A and Plan B, which aim to achieve a net zero GHG emissions by 2050. Plan A focuses on the complete cessation of thermal power generation, while Plan B consists of reducing GHG emissions by actively utilising carbon capture, utilisation, and storage (CCUS) while maintaining LNG as a flexible power source.
Under the Comprehensive Plan on Fine Dust and the Master Plan for Electricity Supply and Demand and for the Reduction of Fine Dust and Environmental Protection, the government is enforcing policies to discontinue or suspend springtime operation of coal-fired thermal power plants. Under coal energy reduction policies, taxation on coal will increase and taxation on LNG will decrease, and environmental power dispatch, which reflects environmental costs, will be adopted.
In particular, the draft of the Ninth Basic Plan for Power Supply and Demand was announced on 8 May 2020. According to this plan, all coal generators which shall have operated for 30 years up until 2034 shall be replaced by LNG power generation. Furthermore, 30 out of 60 coal-fired units (15.3 GW) are expected to be abolished by 2034. New and renewable energy is anticipated to expand by 62.3 GW via installation of new facilities by 2034 (totalling 40% of power generation facilities in 2034), and the proportion of new and renewable energy projects is expected to continuously increase in the future.
In addition, as the voluntary restrictions on the use of the country’s state-owned coal plants were implemented from April 2021 (92% of the total coal power generation), coal-fired power plants operated only up to 80% from April to June 2021 and from September to November 2021 (during the period in which the fine dust seasonal management system was not in operation). However, this year, due to the rise in energy prices, the coal power generation cap system only applies on weekends. Although the coal power generation cap system that would include private power generation companies was intended to be implemented this year, the implementation is being delayed as the relevant law has not yet been passed by the National Assembly.
New and Renewable Energy Act
To diversify energy sources through technology development and utilisation/supply of new and renewable energy and promotion of new and renewable energy industries, and to promote stable supply of energy, environment-friendly conversion of energy structures and reduction of GHG emissions, the New and Renewable Energy Act is in operation.
Under the New and Renewable Energy Act, the term “new energy” includes hydrogen energy, fuel cells, energy from liquefied or gasified coal, and energy from gasified heavy residual oil, and the term “renewable energy” includes solar energy, wind power, hydroelectric power, marine energy, geothermal energy, bio energy converted from biological resources, and energy from waste materials. See 1.7 Announcements Regarding New Policies for a discussion of the separate Hydrogen Portfolio Standards which are set to implemented in 2022.
The Renewable Portfolio Standards
The New and Renewable Energy Act introduced the Renewable Portfolio Standard (RPS) (as such, the feed-in tariff system, which was introduced in 2002, was suspended at the end of 2011 due to the adoption of the RPS system), providing that an electricity generation business operator under the Electric Business Act, which owns a power generation facility of a certain size (500 MW) or more (the mandatory supplier) is obliged to supply greater than a certain amount of new and renewable energy per year within a range of 25% of the total amount of power generated. For the observance of the above obligation, electricity generation business operators shall obtain a Renewable Energy Certificate (REC) certifying the energy supply using new and renewable energy and submit the REC to the supply certification authority. More specifically, the system operates in accordance with the following procedure:
The REC is issued based on the MWh unit computed by multiplying the weighted value by the actual amount of electricity supplied from the supply facility, and it certifies that the mandatory supplier has produced and supplied electricity using new and renewable energy facilities. A mandatory supplier may purchase an REC and appropriate it for mandatory supply. The government issues RECs with greater weighted value for electricity supply through certain new renewable energy sources.
In addition, the mandatory supplier is granted a monthly allowance from the KPX for a portion of the cost incurred in fulfilling the obligation to supply new and renewable energy. Such costs are indirectly reflected in the end-user’s electricity consumption price and are not paid directly as tax or funded amounts.
Resident participation system
Article 27-2 of the New and Renewable Energy Act provides a legal basis for residents of areas where renewable energy facilities are installed to participate in renewable energy power generation projects. Accordingly, residents or groups consisting of residents residing near solar power plants with a capacity of 500 kW or more or wind power plants with a capacity of 3 MW or more can participate in the power generation projects by way of making equity contributions or through bonds, funds, etc.
If the participation of residents accounts for more than a certain percentage of the equity capital or the total project cost, an additional REC weight is provided, and profits from the RECs are shared with the residents.
New and renewable energy cluster complex
Under the amendment to the Enforcement Decree of the New and Renewable Energy Act, as of 29 September 2020, procedures for the development of renewable energy cluster complex projects have been implemented.
The purpose of this new and renewable energy cluster complex system is to actively secure local residents’ acceptance and ensure environmental characteristics from the initial planning stage while identification of the locations is led by the local governments.
For power generation projects within such new and renewable energy cluster complexes, a preferential REC weight is given within the maximum range of 0.1. The offshore wind power generation project in the southwest region of Jeollabuk-do and the floating solar power generation project at Imha Dam in Andong-si, Gyeongsangbuk-do were designated as the first new and renewable energy cluster complexes on 15 December 2021.
The principal laws that govern the construction and operation of generation facilities are the Electric Business Act and Electrical Construction Business Act (Regarding the Electric Business Act, see 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a link to the English translation).
As discussed above, the Electric Business Act provides for general regulations on the electricity business including:
The major approvals required under the Electric Business Act are the generation business permit, approval for the acquisition of a generation business (or change in largest shareholder), approval or report of the construction plan for electric facilities for electric utility and pre-use inspection. In general, the Minister of MOTIE (in certain circumstances, the mayor or do governor) has the authority to issue such permits, approvals and reports.
The Electrical Construction Business Act provides for the standards regarding construction, management and supervision of generation facilities and regulates the electrical construction business registration, orders for and subcontracting of electrical construction and technical management. The major approval required under the Electrical Construction Business Act is the registration of electrical construction business, which must be filed with the relevant local authority.
Administrative regulations provide guidelines and elaborate on the obligations of generation business entities and the following are material regulations that affect the electricity industry: Specific Standards for Electricity Business Licences, Standards for Calculation of Electric Utility Charge, Public Notice on Permissible Errors of Electric Meters and Operation of Electric Power System and Standards on Electric Facilities Technology.
All entities engaged in the electricity business have the obligation to maintain facilities that it has installed or operates to comply with such standards and are subject to regular inspections.
The regulatory process for obtaining all approvals can be categorised into the below five categories and the relevant laws are as follows:
The general order for obtaining approvals are as follows:
Under the New and Renewable Energy Act, facilities utilising new and renewable energy must, within one month from pre-use inspection, additionally apply for REC facilities confirmation.
As noted in 1.4 Principal Laws Governing the Sale of Power Industry Assets, the following factors are considered for the issuance of the generation business permit:
In addition to the above, as of 1 October 2020, when approving permits for photovoltaic, wind and fuel cell power generation businesses – which require either a small-scale or full-scale environmental impact assessment – the opinions of residents will be taken into account by providing prior notice to those residents.
Technical Capacity for Electrical Construction Business
An entity applying to register as an electrical construction business must have certain technical capacities (at least three electrical construction engineers); capital of at least KRW150 million (if a foreign entity establishes a Korean branch applies to register, the establishment capital of the Korean branch must be at least KRW150 million); and office for the operation of the electrical construction business. Generally, the project implementer does not register as an electrical construction business for the installation of electric facilities and EPC duties are subcontracted to entities that have obtained the electrical construction business permit.
Standards for Development Activity Permit
The following standards must be complied with to obtain the development activity permit:
Environmental Impact Assessment
If required under the Environmental Impact Assessment Act, full-scale or small-scale environmental impact assessments must be conducted. Opinion hearings of residents are required at certain stages, such as the development activity permit.
Although it may vary based on the scale and location of the project, the general processing time is as follows.
Effective 1 October 2020, in order to ease the administrative burden on small-scale photovoltaic power generation businesses with a generation capacity of less than 3,000 kW, the permit process for photovoltaic power generation businesses has been simplified by allowing the development activities permit, which is required under the National Planning and Utilisation Act, to be deemed granted.
Approvals for Operation
Licences and permits are not particularly required by law for the operation and maintenance of generation facilities. However, if an O&M operator performs electrical work as part of operation and maintenance, that O&M operator must hold an electrical construction business licence.
The Electrical Construction Business Act provides that electrical work cannot be entirely subcontracted to a third party, but the main part thereof must be performed directly by an electrical contractor.
Generally, generation business permits provide for obligations under the Electric Business Act regarding the installation and operation of electric facilities; and approval of division, merger or business acquisition and a generation business permit may be cancelled for violation of such obligations.
The following additional conditions are frequently imposed, although the conditions will vary for each business. The operator:
Other than modification approvals or reports, the Electric Business Act does not explicitly provide for required procedures to amend or relax a term or condition of a generation business permit. Accordingly, negotiations with the relevant authority will be required and if a term or condition of an approval violates the relevant laws and regulations, such term or condition will be deemed to be a separate measure of the relevant authority and may be challenged through administrative litigation.
Under the Korean Constitution, compensation for expropriation, use or restriction of private property for public necessity must be in accordance with the relevant laws and just compensation must be paid. The Act on Acquisition of and Compensation for Land, etc, for Public Works Projects (the Land Compensation Act) provides that installation of electric business facilities under the Electric Business Act is a business for which land may be acquired or used under the Land Compensation Act. The Electric Business Act also allows for the use of a third party’s land under the Land Compensation Act. Accordingly, land may be acquired or expropriated for the installation of electric business facilities and compensation must be paid. Under the Land Compensation Act, lump-sum compensation must be paid in cash to each individual and the amount of compensation is to be determined by an appraiser.
In general, government-led businesses and privately-led large impact businesses are acknowledged as public works projects and the majority of privately-led businesses are conducted through purchase, lease or establishment of surface rights on land. Issuance of the generation business permit may be restricted if land is not secured for the business. An entity that has obtained the approval public works project execution plan must prepare land and goods protocol, publicly announce, notify and make available the compensation plan, determine the compensation amount and negotiate with landowners and other interested parties. If negotiations are not concluded, compensation for expropriation or use are paid through alternative procedures such as adjudication by the relevant land tribunal and objection to adjudication. Compensation under the Act on the Compensation and Support for Areas Adjacent to Transmission and Substation Facilities may additionally be required.
Under the Electric Power Source Development Promotion Act, which provides for relaxed regulations, if an electric power source business entity obtains an approval of an execution plan for electric power resource development, it is deemed to have acquired all permits, licences, decisions, designations, approvals, cancellations, agreements and measures required under each separate law. Upon approval of the execution plan, the electric power source business entity may also expropriate or use required land. Accordingly, expropriation and use rights may also be obtained under the Electric Power Source Development Promotion Act.
Under the Nuclear Safety Act, construction of nuclear power reactors and relevant facilities requires a permit from the Nuclear Safety and Security Commission and the permit application must include a decommissioning plan, which must thereafter be regularly renewed. The Nuclear Safety and Security Commission’s approval is also required for the decommissioning of nuclear power reactors and relevant facilities (as noted in 1.3 Foreign Investment Review Process, foreign investment in a nuclear power generation business is a cause for revocation of the nuclear power generation business permit).
Generation businesses other than the nuclear generation business are not subject to specific decommissioning requirements except general obligations under environmental laws and construction laws. However, if the generation facility site is within a mountainous district or farmland, a deposit for restoration is required. If the generation facility site is leased, the premises must be restored to the original state under the lease agreement with the lessor.
The principal laws governing the construction and operation of transmission facilities is the Electric Business Act and Electrical Construction Business Act (see 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a link to the English translation of the Electric Business Act, and 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities for the same regarding the Electrical Construction Business Act).
Under the Electric Business Act, transmission businesses must obtain a permit from the Minister of MOTIE. The registration of electrical construction business must be obtained in accordance with the Electrical Construction Business Act (see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities for registration standards).
As discussed, KEPCO has a monopoly over the Korean transmission market.
The factors considered for the issuance of the electricity business licence (electricity business includes the generation business, transmission business, distribution business sales business and district electricity business), as noted in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities also apply to transmission businesses.
Although KEPCO has a monopoly over the transmission business, a power generator is generally obligated to construct transmission lines for grid connection at its own cost and responsibility. Also, the electricity plan, which is one of the documents submitted when applying for the electricity business licence should include, among others:
Accordingly, it would be necessary to consult in advance with KEPCO about, among other things, where the transmission lines would be located. In such process, KEPCO may require that transmission lines be placed in different locations than originally planned.
Under the Electrical Construction Business Act, electrical construction includes the installation of electric facilities. The Electric Business Act’s definition of electric facilities includes facilities for generation, transmission, distribution, supply and use. Accordingly, the standards for the electrical construction business as mentioned in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities also applies to construction of transmission facilities. Other procedures, such as the development activity permit and environmental impact assessment, also apply to the construction of transmission facilities. See 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities regarding the typical processing time.
See 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities. As the Electric Business Act’s definition of electric facilities includes facilities for generation, transmission, distribution, supply and use, the terms and conditions imposed in an electricity business licence also apply, where relevant, to the transmission business and construction of transmission facilities.
As with the installation of generation facilities, installation of transmission lines require ownership, surface rights or lease rights for the installation site. As mentioned in 4.4 Proponent’s Eminent Domain, Condemnation or Expropriation Rights, under the Electric Business Act and Land Compensation Act, land may be acquired or expropriated for the installation of electric business facilities, which includes transmission facilities. Accordingly, the procedures for compensation mentioned in 4.4 Proponent’s Eminent Domain, Condemnation or Expropriation Rights apply.
KEPCO has a monopoly over the entire Korean transmission market, as compared to other countries’ entities that have exclusive rights within a defined territory.
The Electric Business Act does not restrict the issuance of a transmission business permit to KEPCO, and KEPCO’s monopoly over the transmission market is not explicitly provided for in the relevant laws or regulations or governmental authority’s administrative measures. Historically, KEPCO had a monopoly over the entire electricity market and in the early 2000s, a plan to implement competition in the electricity market in phases was introduced. After competition in the generation market was implemented, the next phases of the plan were suspended, resulting in the current structure of the Korean electricity market.
To prevent monopoly pricing and ensure the stable supply of electricity, the Electric Business Act requires the transmission business to:
As noted in 5.1.5 Transmission Service Monopoly Rights, the Electric Business Act provides for certain requirements to prevent monopoly pricing and ensure the stable supply of electricity (see 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a link to the English translation of the Electric Business Act). It also regulates the charges for use of transmission and distribution facilities. The transmission business must obtain the approval of the Minister of MOTIE regarding the charges for use and other terms and conditions and before the approval of the Minister, deliberation of the Electricity Regulatory Commission is required.
In accordance with the above requirements, KEPCO provides for the regulations on the use of transmission and distribution facilities, which have been approved by the Minister of MOTIE. Under the Enforcement Decree of the Electric Business Act, the following must be included in such use regulations:
The approval criteria for the usage charges for the use of transmission and distribution facilities and other usage conditions, as well as the criteria for the approval for change, are as follows:
According to MOTIE Notification, “Standard for Calculation of Transmitted Electricity Usage Charges”, the transmission charge should be determined at a level that compensates for the overall cost of transmission. The total cost is the sum of the appropriate cost for transmission business plus the appropriate investment compensation incurred under good faith and efficient management. The appropriate cost is the amount obtained by deducting a part of non-operating income and expenses and the asset depreciation from the cost of sales related to the transmission business, general administrative expenses, and appropriate corporate income tax.
The appropriate amount of investment compensation is defined as the appropriate compensation for the actual invested assets that are directly utilised in connection with the transmission business. Such amount is calculated by multiplying the “appropriate investment compensation ratio” determined at a level that can harmonise the corporate performance and the public interest in consideration of factors such as capital cost of transmission business, risk, interest rate, inflation rate, reinvestment and expansion plan of the fiscal year, repayment plan of principal, and price prospects, by the “base fee” based on the sum of the average net operating facility assets at the beginning of the fiscal year and at the fiscal year-end, the working capital for a certain period, and the assets under construction by self-financing for the fiscal year under review.
Transmission Charge System
The transmission charge system is composed of basic charge and usage fee, and it should be structured so that the burden on the users of the electricity transmission facility is fairly maintained and the resources are distributed reasonably based on the cost of transmission business.
The Electric Business Act does not explicitly stipulate how an electricity transmission business operator shall contest the approval of the Minister of MOTIE in relation to the regulation for the use of transmission facilities. However, if the licence is illegal or unfair, KEPCO will be able to contest it in accordance with the general principles and procedures of administrative litigation. Whilst there is no explicit procedure for a complaint to be raised about the current regulation, but one can submit an application for the change to the licence conditions by attaching the statement of grounds for change.
As described in 5.2.2 Establishment of Transmission Charges and Terms of Service, that “the use of electric facilities without discrimination shall be guaranteed” is one of the licensing criteria in the facility usage regulation.
The usage regulation provided by KEPCO also provides that “KEPCO, in providing usage of electricity transmission and distribution facilities, shall ensure that the customers are able to use such facilities without being unfairly discriminated against” (customers include both consumers in demand and power generators).
If a customer makes an application to use KEPCO’s transmission and distribution facilities, KEPCO shall conduct a technology review of the access plan and make an offer of connection to the customer. The customer shall accept the offer and KEPCO shall allow the customer to use the transmission and distribution facilities by negotiation and execution of a Term of Use agreement with the customer within one month after KEPCO receives the acceptance of offer notice.
The main laws governing the construction and operation of the distribution facilities are also the Electric Business Act and the Electrical Construction Business Act (see 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a link to the English translation of the Electric Business Act and 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities for the same of the Electrical Construction Business Act).
Under the Electric Business Act, a licence is required for electricity business operation and the authority to grant such licence lies with the Minister of MOTIE in principle. For the construction of electricity distribution facilities, the electricity construction business should be registered according to the Electrical Construction Business Act (see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities for registration standards).
Meanwhile, Korea’s electricity distribution market is also dominated by KEPCO, as mentioned above.
The Electric Business Act stipulates the provisions for the transmission facilities and the distribution facilities in parallel and applies the same rules, therefore please refer to 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities for details.
See 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities. The electricity business is inclusive in that it refers to all electricity-related businesses such as the electricity generation business and the electricity distribution business. The conditions of the electricity business licence (EBL) apply similarly to the distribution business.
As for the installation of electricity distribution facilities, the right of ownership such as land on the business site or the right of superficies, lease, etc, shall be required as in the case of installation of electricity generation facilities. However, since projects recognised as projects for public benefit under the Land Compensation Act and the Electric Business Act – for which the acquisition, acceptance, or use of the land are recognised – are installation businesses for installation of electric facilities for the electricity business, and given that the electricity business and installation of electric facilities include the electricity distribution business and electricity distribution facilities, the same procedure with regard to the business site of power generation facilities is applied. See 4.4 Proponent’s Eminent Domain, Condemnation or Expropriation Rights.
Unlike countries such as Japan, the UK, France and the USA, where the transmission/distribution market has a regionally monopolistic structure, the Korean distribution market is also dominated by KEPCO (that is, it is not a monopoly by region, but an exclusive structure where KEPCO is the exclusive operator of the entire transmission market in Korea). See 5.1.5 Transmission Service Monopoly Rights.
The Electric Business Act stipulates the provisions for the transmission facilities and the distribution facilities in parallel and applies the same rules, see 5.2.2 Establishment of Transmission Charges and Terms of Service for details.
The Electric Business Act stipulates the provisions for the transmission facilities and the distribution facilities in parallel and applies the same rules, therefore please refer to 5.2.2 Establishment of Transmission Charges and Terms of Service for details.
Whilst there is a notice for the “standard for calculation of distributed electricity usage fee” separate from the notice for the “standard for calculation of transmitted electricity usage fee” from MOTIE, the contents of the two are almost the same. Thus, the explanation for “transmission” of electricity in 5.2.2 Establishment of Transmission Charges and Terms of Service can be read as “distribution” of electricity.
The Emergence of a New Conservative Government in South Korea: Possible Changes in the Energy Mix
A conservative government has emerged in South Korea as a new president was elected in the 20th presidential election held on 9 March 2022. The new president, Yoon Suk-Yeol, unveiled, on 3 May 2022, the energy policies that he intends to tackle during his five-year term. The most eye-catching of these consists of continuously expanding the use of nuclear power to achieve the country’s national determined contribution (NDC) in accordance with the Paris Agreement.
As the dropping of the nuclear phase-out policy has been designated as a major task by the new government, reversing the policy is expected to gain momentum under the new administration. While maintaining the 2030 NDC target for carbon neutrality, a change in the energy mix is expected to occur in the mid to long-term with the active use of nuclear power as a carbon-free energy source. As a result, the proportion of renewable energy in power generation sources is likely to be adjusted, and accordingly, the business environment of renewable energy suppliers is expected to change in the future.
As an extension to the dropping of the nuclear phase-out policy, the energy mix is expected to change with the adjustment of the renewable energy ratio. In particular, the new administration is focusing its renewable energy policy on advancements in the solar power and wind power industry rather than the renewable energy supply promotion policy that the previous government had focused on. Accordingly, the Yoon Suk-yeol administration is likely to present policies for the advancement of renewable energy power generation facilities, rather than the policies for the promotion of the supply of renewable energy, such as loan support policies that were popular with the previous government. The entry into the Korean market of major foreign energy companies – with experience in operating offshore wind power plants in Europe’s North Sea – to pursue offshore wind power projects in the districts of Ulsan and Shinan indicates that the development of the wind power industry is an emerging trend.
Lastly, the restructuring of the electricity market based on competition and market principles was also declared by the new administration as a major national task. A number of policies related to the electricity market, including strengthening the independence of the Electricity Regulatory Commission and establishing an advanced electricity market through market structure reforms, are likely to be implemented. The following institutional supplementary measures are likely to be put in place for the establishment of a more reasonable electricity market:
Diffusion of distributed power supply is expected to be activated through direct power transactions, including direct power purchase agreements (PPAs) and third-party PPAs.
Implementation of the Tenth Basic Plan for Power Supply and Demand
According to the energy policy of the new government, the Tenth Basic Plan for Power Supply and Demand will be prepared by the end of 2022.
The Tenth Basic Plan for Power Supply and Demand is likely to
However, in connection with the supply of new and renewable energy, the Fifth Renewable Basic Energy Plan, which was established in 2020, will be maintained until 2025 (please see the next section for additional information.)
Introduction of the Fifth Renewable Basic Energy Plan
The Ministry of Trade, Industry and Energy of Korea (MOTIE) published the Fifth Basic Plan for the Technological Development and Promotion of Use of Renewable Energy on 29 December 2020 (the Fifth Renewable Basic Energy Plan), six years after the release of the Fourth Basic Plan for the Technological Development and Promotion of Use of Renewable Energy. The Fifth Renewable Basic Energy Plan was formulated with the objectives of accelerating the country’s transition to a low-carbon and green economy based on renewable energy and eventually achieving carbon neutrality by 2050.
Policy trends in renewable energy in Korea
The Fifth Renewable Basic Energy Plan is currently the leading policy trend in renewable energy in Korea. Under these policies, the Korean government is committed to pushing renewables. For these commitments to take effect, changes to the Korean regulatory framework for renewable energy have taken place or are due to take place as further discussed below.
Expected renewable energy policy reforms
Under the 2020–34 Plan, the government is committed to increasing the share of renewable energy of the nation’s electricity generation to 42% by 2034, for which reforms to the regulatory and legal framework of the renewable energy sector are expected. Certain of the key reforms that are expected to take place with respect to the regulatory and legal framework of the renewable energy sector are summarised below.
At present, any person who intends to engage in the business of development of renewable energy in Korea must obtain licences and permits (development permits, electricity utility business licences, etc) required under the relevant laws and regulations. However, in order to reduce the regulatory burden on businesses in the renewable energy sector, the government is expected to reform licensing and permitting processes (for example, an integrated licence and permit system for wind projects will be introduced).
Due to the increase of the lifespan of renewable energy facilities, the lease term of government-owned properties for the installation of renewable energy facilities will be extended from the current term of 20 years.
The minimum legal distance between renewable energy facilities and roads or residential areas will be amended.
Local governments plan to expand renewable energy businesses by encouraging investment activities through financial support, by way of customised loan and green guarantee programmes and renewable ecosystem funds to ensure the availability of credit, for example.
Five key strategies under the Fifth Renewable Basic Energy Plan
The Fifth Renewable Basic Energy Plan sets out five main strategic objectives: (i) market innovation, (ii) demand innovation, (iii) industry innovation, (iv) infrastructure innovation, and (v) distribution innovation.
I – Market innovation – RPS market efficiency improvement and expansion of the non-electric power sector
In addition to the regulatory and legal reforms in the renewable energy industry discussed above, oil refiners and oil importers and exporters (obliged parties) will be required to raise the Renewable Fuel Standard (RFS) ratio on a step-by-step basis until 2034 to increase the distribution rate of renewable energy pursuant to the amended Presidential Decree on the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy, which will become effective on 1 July 2021. The government is planning on adjusting the mandatory blend ratio of biodiesel in diesel fuel (thus, the RPF ratio) upward from the current 3% to approximately 5% in 2030. The RFS market is also expected to be reformed by the introduction of a long-term fixed-price contract bidding system to increase the profitability of operators. In addition to the above measures, the government is also considering adopting a renewable heat supply system (RHI or RHO) to expand the use of renewable heat and to diversify energy sources by reviewing the RFS targets and replacing biofuel with renewable energy such as hydrogen.
II – Demand innovation: RE 100 and expansion of renewable energy for direct consumption
The government plans to allow various implementation schemes, such as allowing direct trade between power generation companies and consumers of new and renewable energy pursuant to the Emissions Trading Scheme of Korea (KETS), to enable companies and public institutions to participate in the RE100 initiative, and induce public sector actors to take the lead. In addition to granting credit to those that are successful in reducing greenhouse gas emissions, incentives such as green guarantee support and RE100 labelling will be available to those that participate in the RE100 pursuant to the KETS. The scope of those that can participate in the RE100 will be expanded in the future to include industrial complexes, local governments and residents. The government is also seeking to implement measures to provide incentives such as issuing, to electricity consumers, self-generation renewable energy certificates (RECs) for direct consumption to expand the use of renewable energy for direct consumption.
III – Industry innovation: enhancing innovation capabilities, including promoting hydrogen-specialised companies and innovative energy companies
The government aims to foster 1,000 hydrogen-specialised companies and 100 innovative energy companies with sales of at least KRW100 billion by expanding R&D and investment in materials, parts and equipment related to hydrogen. The goal is to localise core technologies, including technologies related to high-efficiency solar cells, ultra-large wind turbines, mass production of green hydrogen, and hydrothermal heat. The government is also committed to expanding the market for high-efficiency and eco-friendly products by upgrading the minimum efficiency and carbon certification systems.
IV – Infrastructure innovation: improvement of transmission and distribution network
For the improvement of the transmission and distribution network system, flexible transmission systems will be introduced in Korea. In addition, in order to respond to the volatility in renewable energy supply, the government plans to enhance the facilities’ self-predictive and control capabilities and strengthen energy infrastructure, such as integration of renewable energy control infrastructure.
V – Distribution innovation: reinforcement of supply-delivery-trading technology
To achieve carbon neutrality, it is necessary to respond to the changes in the energy security environment along with technological innovation. To this end, the government is pursuing innovation in the supply of technologies such as ultra-high efficiency solar cells, ultra-large wind turbines, and high-efficiency liquefied hydrogen, while developing next-generation power system technologies such as AC-DC hybrid transmission systems and distribution system technology to respond to the instability of new and renewable energy sources. In addition, the government is revitalising new businesses by upgrading new and renewable energy trading technology using ICT, while enhancing new energy source security in the era of carbon-neutrality by securing technologies for recycling and remanufacturing new and renewable core materials and stabilising the supply of materials and parts.
Power system conversion: establishment of a power system centred on renewable energy
In order to stabilise the power grid in the process of turning renewable energy into the main source of power, the measures to be implemented by the government will include the following:
Expansion of green hydrogen and integration of the energy market: making green hydrogen a core resource for sector coupling
The government has accelerated the implementation of the green hydrogen economy by gradually expanding and enforcing mandatory green hydrogen across power generation facilities, transportation, and industrial processes. For this, the government will
The National Assembly recently passed a bill to amend the Hydrogen Economy Promotion and Hydrogen Safety Management Act reflecting the above.
In Korea, despite the Yoon Suk-yeol administration’s new energy policy to bring back nuclear power, as the development of renewable energy generation is also essential for the achievement of the 2030 NDC target, reinforcement and implementation of renewable energy policies will likely continue to go ahead. The Korean Green New Deal and the relevant amendments to the laws governing the renewable energy sector in Korea that have been or will be implemented in response to the COVID-19 pandemic demonstrate that Korea has joined the international move towards building a sustainable future built on renewable energy.