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. In Korea, although the generation, transmission, distribution and supply segments of the power industry are unbundled, 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.

As noted in 1.1 Law 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:

• Korea South-East Power Co Ltd, Korea Midland Power Co Ltd, Korea Western Power Co Ltd, Korea Southern Power Co Ltd and the Korea East-West Power Co Ltd (thermal generation companies); and
• Korea Hydro & Nuclear Power Co Ltd (hydro and nuclear generation company).

GENCOs are wholly owned by KEPCO.

General Restrictions

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:

• threatens national security and public order;
• harms public health and sanitation or environmental preservation;
• is against Korean morals and customs; or
• violates any Korean laws or regulations.

Restrictions on Foreign Investment in the Power Industry

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.

General

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.

• Acquisition of all or part of an electricity business.
• Division or merger of an electricity business.
• Acquisition, for the purpose of exercising control, of:
1. 20% or more of the voting shares of an electricity business with generation facilities that have a power generation capacity of 20 MW or greater, becoming the largest shareholder, with shares owned by jointly owned companies counted together to determine whether the voting-share ownership surpasses 20%;
2. 20% or more of the total issued voting shares of a company that holds shares as described in the bullet point above, if by acquiring such shares, the purchaser will become the largest shareholder; or
3. of shares where that acquisition enables dominant influence over the management of an electricity business, such as the power to appoint or dismiss the representative directors or over 50% of the directors of such electricity business.

The acquirer must obtain approval before the closing of the relevant transaction. The approval of the Minister of MOTIE is 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 generally more than two months from submission of the application.

The Electricity Regulatory Commission considers the following factors during its deliberation:

• whether the entity has the financial and technological capacity necessary to operate the electricity business;
• whether the entity will be able to carry out the electricity business as planned;
• for the distribution business and district electricity business, whether the business territory of two or more distribution business entities or the supply territory of two or more district electricity business entities will not fully or partially overlap;
• for the district electricity business, whether the entity will have the supply capacity of at least 60% of the total electricity demand in the particular supply district and the entity’s district electricity business will not cause any disruptions in the electricity supply by other electricity business entities that supply to users residing in neighbouring districts;
• whether the concentration of electric power stations or fuels in a specific district will interfere with electric power systems;
• whether concentration in a specific fuel will interfere with electricity supply;
• compliance with the master plan for electricity supply and demand; and
• whether the achievement of the greenhouse gas (GHG) reduction target will not be interfered with.

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, in addition to the above requirements, “the generation business shall have commenced in the preparatory period for the electric business”. The implications of this are 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 is 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 an 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 oversees 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 (the government announced the tenth plan in early 2023), which includes:

• general direction for the supply and demand of electricity;
• long-term prospects for the supply and demand of electricity;
• plans for generation facilities and major transmission and substation facilities;
• management of electricity demand;
• evaluation of the master plan; and
• other matters deemed necessary for the supply and demand of electricity.

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:

• electricity business licence;
• approval of sale and acquisition of electricity business;
• approval of charges for use of transmission and distribution facilities;
• approval of electric sales entity’s terms and conditions;
• maximum electricity trading price;
• approval of the Rules on the Operation of the Electricity Market;
• annual plan and results of the management of the credibility of the electric power system and establishment, amendment and repeal of related regulations; and
• reorganisation of the electricity industry, such as introduction of competitive systems.

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.

Direct PPA

As a result of the amendment to the Electricity Utility Act on 21 October 2021, the release of the Notice on Renewable Energy Electricity Generator’s Direct Power Sale and Purchase on 1 September 2022, electricity consumers can now directly enter into a direct power purchase agreement (the “Direct PPA”) to purchase power generated from renewable sources. 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”), electricity consumers that purchase power under the Direct PPA can participate in the RE100.

Settlement Price Limit for REC Fixed Price Transactions

Renewable energy generators and RPS obligors may enter into a “fixed-price agreement” under which they sell the SMP (System Marginal Price (ie, in general terms the power sales price to KEPCO)) plus REC at a fixed price at the time of the REC transaction. In such a case, the RPS obligor must purchase the REC at a fixed price. If the SMP is greater than the fixed price, then the REC price is deemed KRW 0. In this case, the renewable energy power plant operator could receive electricity sales revenue for the portion exceeding the fixed price. However, from 1 April 2023, the government prevented the receipt of electricity sales revenue where an REC fixed-price agreement exists if the SMP exceeds the fixed price.

Introduction of a Fixed-Price Bidding System for Wind Power Generation

The New and Renewable Energy Centre operates a “fixed-price bidding system” to sell RECs issued for renewable energy generators through competitive bidding. The generator participating in such competitive bidding may obtain greater certainty by entering into a long-term fixed-price agreement with an RPS obligor for a period of 20 years. 

Up until 2022, the fixed-price competitive bidding system has been operated only for solar power generation. Since the second half of 2022, the Ministry of Trade, Industry and Energy (MOTIE) has revised the relevant regulations and has been operating a fixed-price competitive bidding system for wind power generation as well. The fixed-price competitive bidding for wind power generation is held once a year (the second half); the first competitive bidding was conducted in the second half of 2022, and the second competitive bid is expected to be conducted by the second half of 2023.

Opening of Hydrogen Power Bidding Market

Hydrogen power generation, like other new and renewable energy, is receiving attention as one of the non-carbon power sources. However, unlike solar and wind power, costs of hydrogen power generation include fuel costs. Accordingly, there is a need to introduce a system different from the existing mandatory RPS system.

The Ministry of Trade, Industry and Energy has intimated that the hydrogen power market will be opened once in each of the first half and the second half of 2023. The plan is to establish the clean hydrogen power generation market in early 2024.

On 13 March 2023, the Notice on the Calculation of the Annual Purchase Amount in the Hydrogen Power Bidding Market was released, which provides for the method of purchasing and supplying hydrogen power and the establishment of a hydrogen power bidding market. 650GWh has been disclosed as the relevant volume for the second half of 2023.

It is expected that hydrogen power generation businesses and fuel cell businesses, as eco-friendly energy sources,will be given the opportunity to grow. With CF100 emerging as an alternative to RE100, hydrogen power generation is garnering closer attention. The Government argues that CF100 is a more a realistic initiative for Korea.

Dispersed Energy Act

On 13 June 2023, the Dispersed Energy Promotion Special Act (the “Dispersed Energy Act”) was enacted, and will come into effect a year later. The Act seeks to promote the conversion of existing centralised power generation into a dispersed energy system.

“Dispersed energy” refers to energy supplied or produced in the region or vicinity of the area of electric power demand, at a level below a certain capacity scale. The scale remains undetermined until the Enforcement Decree is passed. Having regard to the Electricity Utility Act, it is expected that the relevant scale will be (i) 40 MW or below for a power generation facility, and (ii) 500 MW or below for an integrated energy facility.

A “Dispersed Energy Business” under the Dispersed Energy Act includes a wide range of businesses such as a small and medium-sized nuclear power generation business (SMR), a dispersed energy integrated power plant project, fuel-cell electricity-generation business, hydrogen power generation business, stored energy sales business, renewable energy suppliers, and small-scale power brokers.

The government may designate certain areas as a dispersed energy specialised area in order to introduce a power system matching local characteristics. Dispersed energy business operators may directly supply electricity to users within designated areas without having to go through the electricity market and can trade insufficient or surplus electricity with electricity sellers.

An integrated power plant operator is now able to operate a Virtual Power Plant (VPP) project where electricity is traded in the electricity market by accumulating dispersed generation. It is expected that “intermittency” issues with renewable energy power generation will be partially addressed.

Certain entities which operate a business in a certain geographic area may be required to install dispersed energy facilities. Such entities must establish a business plan for installing dispersed energy-using facilities before implementing a certain project to use a minimum amount of dispersed energy. Failure to meet the minimum installation amount may lead to a penalty. Relevant entities will need to factor in these obligations and any additional costs. 

Business operators intending to use electricity exceeding a certain amount in certain designated areas must conduct a power system impact assessment and submit to the Minister of Trade, Industry and Energy before the project will be approved. Depending on location and size of certain projects, separate to the power system impact assessment, a small-scale environmental impact assessment may be required to be conducted under the relevant environmental laws. The impact of these possible assessments on the timing of any projects should be taken into consideration.

Developments in the Korean Hydrogen Industry

On 9 November 2022, the Fifth Hydrogen Economy Committee held a meeting in accordance with the Hydrogen Economy Promotion and Hydrogen Safety Management Act. The Committee set three policy directions, to:

• increase scale and scope of the hydrogen industry;
• build up infrastructure and systems; and
• take the industry and relevant technology to the next level.

Measures to Improve Renewable Energy Policy

On 3 November 2022, the Ministry of Trade, Industry and Energy (MOTIE) held the first New and Renewable Energy Policy Council and announced “Renewable Energy Policy Improvement Measures Following Changes in Energy Environment”.

The main points of focus include: (i) promoting mid- and large-sized solar development; (ii) over-crowding of offshore wind projects; (iii) strengthening system connection requirements when granting an electricity business license; (iv) reviewing the participation of renewable energy companies in the electricity generation market; and (v) reviewing termination of the RPS system.

New Government Energy Policy Direction

The government announced the “New Government Energy Policy Direction” (the “New Energy Policy”) at the cabinet meeting that was presided over by the President Yoon on 5 July 2022.

The New Energy Policy elaborates on the government’s campaign promises, with the goal of expanding the nuclear energy ratio to a minimum of 30% by 2030, establishing energy security, shifting focus from energy supply to energy demand efficiency, and alleviating monopoly on sale of electricity.

The New Energy Policy intends to “replace prior government’s energy policies, including the prior administration’s ‘Energy Conversion (Denuclearization) Roadmap’ (October 2010) and the Third Energy Master Plan (June 2019)”.

As mentioned in 1.1 Law 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 is constituted 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 the 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 2023.

The Electric Business Act also regulates the structure and functions of wholesale electricity.

As noted above, an operator of an electricity generation business and an operator of an electricity 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 an electricity generation business and a private operator of an 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 Law 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 and electric power.

It is understood that the acts of importing and exporting electric power are not specially prohibited by the relevant laws and regulations. However, 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 (according to the Tenth Basic Plan for Power Supply and Demand):

• coal (bituminous coal plus anthracite coal) – 28%;
• liquid natural gas (LNG) – 31%;
• nuclear – 17%;
• new and renewables – 19%; and
• others – 5%

As of the end of 2021, the approximate ratio of actual generation by fuel source was as follows (according to the Tenth Basic Plan for Power Supply and Demand):

• coal (bituminous coal plus anthracite coal) – 34%;
• LNG – 29%;
• nuclear – 27%;
• new and renewables – 7%; and
• others – 2%.

As of the end of 2020, the amount of power generated by new and renewable energy consisted of the following, (according to the 2020 renewable energy statistics for distribution, Korea Energy Agency):

• solar power – 44.8%;
• wind power – 7.3%;
• hydropower – 9.0%;
• marine power 1.1%;
• bioenergy – 23.1%;
• waste treatment – 1.0%;
• fuel cell – 8.2%; and
• IGCC (Integrated Gasification Combined Cycle) – 5.5%.

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 the 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 Law 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 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 (other than nuclear power generation and renewable energy power projects) will first be subject to this impact assessment from September 2022. 

In addition, on 10 April 2023, the government announced “The First Carbon Neutrality and Green Growth Basic Plan” that outlines policy directions for achieving carbon neutrality in each of the major sectors by 2050. The Plan amended the former NDC (Nationally Determined Contribution) 2030 but maintained the goal of 40% emission reduction compared to the total emission in 2018 and aims to achieve net zero GHG emissions by 2050. When compared to the existing plan, the new Plan proposes a reduction in emissions through hydrogen and CCUS.

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 Tenth Basic Plan for Power Supply and Demand (2022–2036) was announced on 13 January 2023. According to this plan, the reduction of coal power generation will continue to be promoted, so that 30 out of the 60 total coal power plants in Korea are decommissioned and converted into LNG power generation plants.  The generation of new and renewable energy is anticipated to expand by 21.6% in 2030 and 30.6% in 2036. Further, the generation of nuclear energy is anticipated to expand by 32.4% in 2030 and 34.6% in 2036.

In order to reduce fine dust, since April 2021, the government policy has been to introduce a voluntary cap on coal power generation, and GENCOs have participated in this policy. Although the coal power generation cap system that would include private power generation companies was intended to be implemented in 2022, 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.

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:

• designation of a mandatory supplier;
• imposition of mandatory supply;
• fulfilment of obligation;
• confirmation of performance; and
• imposition of fines.

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.

As discussed above, the Electric Business Act provides for general regulations on the electricity business including:

• generation business permits;
• stabilisation of electricity supply, safety management of electric facilities and composition of the electricity market; and
• the KPX, Electricity Regulatory Commission and the Korea Electrical Safety Corporation.

The major approvals required under the Electric Business Act are the generation business permit, 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.

Also, 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 they have installed or operate to comply with such standards, and are subject to regular inspections.

Regulatory Categories

The regulatory process for obtaining all approvals can be categorised into the below five categories, and the relevant laws are as follows:

• new and renewable energy policy – New and Renewable Energy Act;
• entry into and operation of generation business – Electric Business Act;
• construction, management and supervision of generation facilities – Electrical Construction Business Act;
• generation facilities site – National Land Planning and Utilisation Act; and
• environment – Environmental Impact Assessment Act and various laws regulation emission of pollutants.

Obtaining Approvals

The general order for obtaining approvals are as follows:

• generation business permit under the Electric Business Act;
• development activity permit or urban planning facility decision under the National Land Planning and Utilisation Act;
• if required, (small-scale) environmental impact assessment;
• approval of the construction plan under the Electric Business Act;
• construction of the electric facilities in accordance with the Electrical Construction Business Act;
• pre-use inspection of the electric facilities;
• test run;
• report of business commencement; and
• commercial operation.

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 Law Governing the Sale of Power Industry Assets, the following factors are considered for the issuance of the generation business permit:

• whether the entity has the financial and technological capacity necessary to operate the electricity business;
• whether the entity will be able to carry out the electricity business as planned;
• for the distribution business and district electricity business, whether the business territory of two or more distribution business entities or the supply territory of two or more district electricity business entities will not fully or partially overlap;
• for the district electricity business, whether the entity will have the supply capacity of at least 60% of the total electricity demand in the particular supply district and the entity’s district electricity business will not cause any disruptions in the electricity supply by other electricity business entities that supply to users residing in neighbouring districts;
• whether the concentration of electric power stations or fuels in a specific district will interfere with electric power systems;
• whether concentration in a specific fuel will interfere with electricity supply;
• compliance with the master plan for electricity supply and demand; and
• whether the achievement of the GHG reduction target will not be interfered with.

In addition to the above, 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 and 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:

• the development plan must be in accordance with the development scale limits prescribed by the Enforcement Decree;
• the development plan must not run counter to any urban or local management/growth plans;
• the development plan must not impede any urban or local management/growth plans;
• the development plan must be harmonious with surrounding land usage, local environment and scenery; and
• the infrastructure and securing of sites under the development plans must be appropriate.

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.

Processing time

Although it may vary based on the scale and location of the project, the general processing time is as follows.

• One to three months for the generation business permit.
• If required, one year for a full-scale environmental impact assessment or three months for a small-scale environmental impact assessment.
• One year or more, excluding environmental impact assessment, for the development activity permit, which is divided up between:
1. the assessment based on the evaluation criteria – three months;
2. the consultation and discussion with relevant administrative bodies – three months;
3. the evaluation by the Urban Planning Commission – two to three months; and
4. the evaluation by the Central Urban Planning Commission – two to three months.
• The Minister of MOTIE’s approval of the construction plan may require one to two months.

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:

• must comply with the obligations under the Electric Business Act and other relevant laws and regulations;
• must commence operations within the approved preparation period and in the event of a cause of delay, must apply for extension before the installation period;
• must obtain approvals required for development activity, construction, conversion of mountainous districts, occupation and use of roads under the Mountainous Districts Management Act, Building Act, National Land Planning and Utilisation Act, Cultural Heritage Protection Act, Road Act and environmental laws;
• must conduct prior negotiations with relevant authorities if the generation capacity is to be modified during the process of obtaining the above approvals and must comply with the review of the relevant agencies;
• must report the construction plan to the relevant local authorities to commence construction under the Electric Business Act after obtaining the above approvals;
• must use best efforts to implement safety measures during construction to promote safety and minimise environmental damage and in the event of inevitable environmental damage, must restore without delay after construction completion; and
• must sufficiently gather and reflect the opinion of interested parties, including neighbouring land owners and residents, through information sessions, and conduct the business after implementing measures to prevent civil complaints.

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.

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 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 Obtaining Approvals for the Construction and Operation of 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:

• an opinion issued by KEPCO concerning the effect of grid connection; and
• an electricity transmission map.

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 Obtaining Approvals for the Construction and Operation of 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 Obtaining Approvals for the Construction and Operation of Generation Facilities regarding the typical processing time.

See 4.3 Terms and Conditions Imposed in Approvals for the Construction and Operation of 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 requires ownership, surface rights or lease rights for the installation site. As mentioned in 4.4 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 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:

• obtain the prior approval of the Minister of MOTIE regarding the charges for use of transmission facilities; and
• ensure that electricity businesses may use the transmission facilities without discrimination.

As noted in 5.5 Monopoly Rights to Provide Transmission Services, the Electric Business Act provides for certain requirements to prevent monopoly pricing and ensure the stable supply of electricity. 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:

• use charges;
• method of calculation of volume traded and use charges;
• liabilities between the transmission business and distribution business and liabilities between the transmission and distribution businesses and users of the transmission and distribution facilities;
• method and procedure for application for use of the transmission and distribution facilities;
• standards and payment method of costs to be borne by transmission and distribution facilities users;
• access point and standards for access between the transmission and distribution businesses and transmission and distribution facilities users; and
• any other matters regarding the protection of the transmission and distribution facilities users’ interests.

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:

• the usage fee should be an amount which is equal to a reasonable cost plus a reasonable profit;
• the use of electric facilities is free from discrimination; and
• the relationship of rights and obligations with respect to the use of electric facilities shall be clearly specified.

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.

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. While there is no explicit procedure for a complaint to be raised about the current regulation, one can submit an application for the change to the licence conditions by attaching the statement of grounds for change.

As described in 5.6 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.

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 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 transmission facilities and distribution facilities in parallel and applies the same rules, therefore please refer to 5.2 Obtaining Approvals for the Construction and Operation of Transmission Lines and Associated Facilities for details.

See 4.3 Terms and Conditions Imposed in Approvals for the Construction and Operation of 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.

In respect of 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 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 5.5 Monopoly Rights to Provide Transmission Services.

The Electric Business Act stipulates the provisions for the transmission facilities and the distribution facilities in parallel and applies the same rules, see 5.6 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 5.6 Transmission Charges and Terms of Service can be read as “distribution” of electricity.