Strategies for the security of electricity supply

1
Strategies for the security of electricity supply

• 2005. 5

2
Contents

• Risk factors in the present Basic Plan of long
• term Electricity Supply Demand, and
  Strategies

2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in
the open market
4. Nuclear energy and governmental support
3
Contents

• Risk factors in the present Basic Plan of long
• term Electricity Supply Demand, and
  Strategies

2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in
the open market
4. Nuclear energy and governmental support
4
1-1. The basic plan of long term
electricity supply demand

• Electricity companies enjoy decent profitability
  considering the rules and policies set by the
  government
• The government is responsible for the Basic Plan
• The government predicts electricity demands, and
  devises relevant policies
• The basic plan covers 14 years, and is updated
  every two years
• The basic plan reflects basic directions, demands
  prospects, and construction plan of grid lines
• Power companies refer to the basic plan, when
  they make decisions of new investments.

5
1-2. The constructions in the Basic plan

• The basic plan includes A, B, C1, classified by
  the degree of uncertainty.
• A under construction, imminent completion
• B in pre-construction stage after being
  approved
• C1 in planning stage to construct, expected to
  be approved within 2years (executions
  and processes are less certain)
• C2 in planning stage, not included in the basic
  plan, not expected to be approved within
  2years (some issues such as linkage
  to power network need further study)

C2
C1
B
A
Under construction
Planning (no approval within 2years)
Preparing to start construction
Planning (approval within 2years)
6
1-3. The Plan of constructions by GenCos

• State owned GenCos plan to commission 31,100 MW
  facilities (81 of total construction) from 2004
  to 2017
• they will construct nuclear power plants and
  coal power plants, which are very capital
  intnsive
• Private GenCo plan to construct 7,100 MW
  facilities, 19 of capacity entries
• they prefer to construct LNG power plants, which
  require less investment

38,200
Plan period 20042017, unit MW
7,100 (19)
25,200
31,100 (81)
Private GenCo
4,000 (11)
13,000
3,100 (8)
21,200 (55)
State ownedGenco
9,900 (26)
Total
Under construction
In preparation
7
1-4. Prospects of capacity reserve margin

• Capacity reserve margin is expected to be more
  than 1517, the proper margin level to guarantee
  supply, when the planned constructions are
  successfully completed
• capacity reserve margin is expected to reach
  1518 by 2006, afterwards 25

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1-5. Risk factors in the execution of the plan

• C1 constructions may not be executed if market
  condition changes unfavorably
• The government cannot force the private
  companies construction.
• State owned GenCos 9,900MW, private GenCos,
  3,100MW
• The constructions of nuclear power plants have
  many barriers to overcome
• Low public acceptance (NIMBY) and opposition of
  NGOs while 6 nuclear power plants (6,000MW) are
  scheduled for commissioning over the plan period
• Prospects of capacity reserve margin by
  uncertainties

• The delay of C1 may trigger a demand-supply
  emergency starting from 2015
• The delay of 6 nuclear power plants may trigger
  an emergency starting from 2013

9
1-6. Strategies to execute
the construction plan

• The Government (KEPCO) promotes C1 by state owned
  GenCos to meet the capacity entries timeframe
• The processes of constructions are cautiously
  evaluated by KEPCO
• State owned GenCos will replace private GenCos in
  constructing C1 if the private GenCos withdraw
• No corporate investment risk exists in
  constructing nuclear power plants because KEPCO
  holds 100 shares of the nuclear power company.
• However, opposition of NGOs and citizens require
  continuous promotion to increase public
  acceptance to nuclear power plants.
• safety first operation
• co-prosperity with regional community
• advertising the necessity of nuclear energy in
  Korea due to high dependence on imported energy
  resources

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Contents
1. Risk factors in the present Basic Plan of
long term Electricity Supply Demand, and
Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in
the open market
4. Nuclear energy and governmental support
11
2-1. Risk factors to secure electricity supply
in the open market

• Investment decisions are made upon the price
  signals and predictability in the open market,
  however, the price signals may not function well
• when irrational market system distorts the
  signals
• when price hike and abnormal volatilities are
  caused by manipulations of any participants
  market power
• The GenCos may fail to secure proper
  profitability for re-investment
• when the market is interrupted by regulatory body
  for the purpose of price stabilisation

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2-2. Strategies to secure stable supply
of electricity
Cost Based Pool (CBP) is the realistic best
solution

• CBP has proven to be the best way to keep the
  market stability in Korea until effective
  solution is found
• effective promotion of competition for cost
  reduction
• reasonable market price
• stable supply of electricity
• less distortion of market signal by irrational
  market system
• less market manipulation by participants
• less interruption by regulatory bodies

13
2-2. Strategies to secure stable supply
of electricity

• CBP has evolved through improvements such as
  adoption of BLMP and A/S
• Adoption of Base Load Marginal Price (BLMP)
• In a signal market pool, the estimated market
  price set by System Marginal Price (SMP) used to
  be too high to be accepted resulting from the
  portfolio of fuel mix
• Nuclear power plants and coal power plants
  determine BLMP
• LNG and oil power plants determine SMP
• Payments for ancillary services for grid security
  and cycle maintenance to meet the market system
• Promoting investments by continuously improving
  CBP system
• The CBP market system will be improved, i.e.
  differentiated capacity payment (CP) will be
  linked to reserve margin

To Be
As Is

• low reserve margin, high CP
• high reserve margin, low CP

• CP paid on the Pari passu basis to all
  available capacity

14
Contents
1. Risk factors in the present Basic Plan of
long term Electricity Supply Demand, and
Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in
the open market
4. Nuclear energy and governmental support
15
3-1. Whole sale market and
securing the stability of price

• Oil and LNG generators determine 7580 of market
  pricing at around 5.7/kWh under System Marginal
  Price (SMP) system
• Oil and LNG generators produce 20 of annual
  generation volume.
• KEPCO may suffer financial risks from high SMP
  and low tariff regulated at 6.5/kWh
• Financial health of GenCos and KEPCO through
  price stabilization measures is essential.

Load Duration Curve
Reserve Margin
( MW)
LNG / Oil
Coal
7580
Nuclear
100
8,760 hours
16
3-1. Whole sale market and
securing the stability of price

• Introduction of BLMP has secured price stability
• The highest marginal price of base load
  generators is determined as BLMP
• The highest marginal price of peak load
  generators is determined as SMP
• The settlement prices have been maintained at
  around 4.24.4/kWh

Introduction of Separate Settlement
(Variable Cost)
SMP
5.43
CP 0.63
4.80
LNG
4.19
Oil
3.44
CP 1.79 /kWh
1.64
Coal
BLMP
0.35
Nuclear
Base Load Volume 78
Peak Load 22
17
3-2. Evaluation on the operation
of the wholesale market

• State owned GenCos have enjoyed significant
  increase of operating income ratio (16.5 before
  separation ? 20.9 after separation).
• They own base load generators (nuclear, coal),
  and enjoy reasonable profits from market price.
• Private GenCos in the market also have enjoyed
  reasonable profits.
• They own peak load generators (LNG), and are
  sufficiently compensated by the CP to recover
  fixed costs.
• Private GenCos having PPA with KEPCO are
  guaranteed reasonable ROR(8).

? Operating income ratio of GenCos after
separation
18
Contents
1. Risk factors in the present Basic Plan of
long term Electricity Supply Demand, and
Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in
the open market
4. Nuclear energy and governmental support
19
4-1. The status and the prospects
of nuclear generation
Prospects of nuclear generation

• The further construction of nuclear power plants
  is necessary for securing stable supply of
  electricity as the demand is expected to highly
  increase in South Korea.
• Korea imports most of its generation fuel (99),
  and the prices of fossil fuel rocketed recently
  (56).
• The basic plan of long term electricity supply
  demand stipulates that nuclear power plant
  generation will stay at 30 of the total
  generation capacity.
• Expanding public acceptance to safe of nuclear
  power plants and promoting timely constructions
  are required.

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4-2. The status of nuclear generation
Current status of nuclear energy in the
electricity industry

• 20 nuclear generators (17,716MW) in operation
  compose 29 of total capacity in Korea.
• The generation by nuclear power plants reached 39
  of total generation volume and 32 of the total
  traded amount in 2004, the highest shares among
  generation types.
• The low generation costs of nuclear power plants
  helped Korea not to increase retail prices in
  spite of recent price hikes of oil and coal.

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4-2. The status of nuclear generation
The profitability of nuclear power plants in the
market

• The operating income ratio of nuclear power
  plants (22.4) was higher than those of any
  thermal power plants.
• ROR of nuclear power (5.8) was higher than the
  average ROR of GenCos (5.3) in 2004.
• While thermal power companies suffer fuel cost
  increase by the coal price increase, the nuclear
  power company enjoyed market price increase
  without the increase of fuel costs.
• No difficulty is expected in raising new
  investments in nuclear power plants with stable
  profitability under the current CBP market.

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4-3. The governmental support
to nuclear generation

• Nuclear power plants need governmental support
  for securing construction site and disposal
  site, and for continuing operation
• More constructions of nuclear power plants are
  inevitable in order to secure electricity
  supply and stable market price of electricity in
  Korea
• Institutional Support for constructions of
  nuclear power plants
• Economic benefits to local areas near power
  plants
• 914mn/year by special laws for the support
  of local area accepting location of
  low-medium radio active waste
• 68mn/year by special laws for the support of
  local area neighboring power plants
• Reduction of risk of nuclear energy business by
  laws for nuclear damages.
• Public relationship in support of nuclear power
  plants.