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Korean Experience and Future Market

Jong-Keun Park Seoul National University Korean Experience and Future Market Cigre Workshop Study Committee C5 Market Structures and Institutions 2003. 9. 22. Table of Contents Introduction to Korean power industry Restructuring of power industry in Korea Cost Based Pool Market

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Korean Experience and Future Market

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  1. Jong-Keun Park Seoul National University Korean Experience and Future Market Cigre Workshop Study Committee C5 Market Structures and Institutions 2003. 9. 22.

  2. Table of Contents • Introduction to Korean power industry • Restructuring of power industry in Korea • Cost Based Pool Market • Effect of competition in generation sector • Preparation for TWBP market • Issues on successful restructuring • Outstanding tasks to overcome

  3. I. Introduction to Korean power industry 1. Growth of power industry in Korea (MW)

  4. I. Introduction to Korean power industry 2. Ownership of generation capacity (As of End 2002)

  5. I. Introduction to Korean power industry 3. Capacity by fuels (As of End 2002)

  6. I. Introduction to Korean power industry 4. Capacity growth by E-Source (Gov’s plan) (MW) 90,000 80,000 12% 70,000 60,000 25% 50,000 20% 40,000 28% 25% 30,000 28% 20,000 35% 10,000 27% 0 00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Nuclear Imported Coal LNG Heavy Oil Light Oil Domestic Coal Hydro

  7. I. Introduction to Korean power industry 5. Growth of peak demand and annual consumption Average growth : 5.4% 2.7% 2.0% (GWh) (MW) 450,000 80,000 400,000 70,000 350,000 60,000 300,000 50,000 250,000 40,000 200,000 30,000 150,000 20,000 100,000 10,000 50,000 0 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Yearly Consumption (LHS) Peak Demand (RHS)

  8. I. Introduction to Korean power industry 6. Electricity consumption Agriculture & Fishery (2.3) Mining (0.4) Commercial (28.4) Manufacturing (50.0) Public (3.7) Total 281,872 GWh (Year of 2002) Residential (15.2)

  9. 765kV Route 345KV Route DC 180kV Submarine Cable 345KV Substation Power Plant I. Introduction to Korean power industry 7. Characteristics of Korean power network • Regional concentration of supply (coastal area) and demand(Seoul) • Kyoung-In area demand : 42.6% • Northward loadflow causing network congestion • Cheju island is connected through HVDC system (154MW) • Nominal voltages of T/L’s are 765kV(662c-km), 345kV(7,496c- km) and 154kV(18,144c-km) Kyoung-In area

  10. I. Introduction to Korean power industry 7. Characteristics of Korean power network Power flow

  11. II. Restructuring of power industry in Korea 1. Objectives • Raising the general efficiency of the power industry by promoting competition • Effective financing of upcoming capital expenditure • Increasing consumer benefits 2. Principles • Unbundling of generation, transmission and distribution sectors • Introduction of competition into generation and retail sectors • Gradual introduction of competitive market to reduce shocks

  12. II. Restructuring of power industry in Korea 3. The necessity of restructuring • Steep increase of electricity demand  additional 45,000MW should be built until 2015. • Lack of capital due to retail price regulation • Fund of 67 T Won is required by 2015 and 9 T Won/annum. • Needs private or foreign funds to build new power facilities. • International trend to deregulation and competitive market • Apply global rules in management of the public sector • Adopt the competition principle to utility field

  13. II. Restructuring of power industry in Korea 4. The roadmap of the restructuring • A competitive generation sector consisting of private generation companies • An electricity market operated by a Korea Power Exchange (KPX) as an independent market operator • Single national transmission company and multiple distribution companies • Retail competition for endowing all customers with choices • A regulatory framework based on an independent regulator

  14. II. Restructuring of power industry in Korea 5. Brief history of restructuring • ’94.7~’96.6 Management performance evaluation of KEPCO • ’97.6 Establishment of Electric Power Industry Restructuring Committee • ’99.1 Basic Plan of Restructuring(MOCIE*) • ’00.12 Act on Promotion of Restructuring of power industry • ’01.4 Spin-off of generation sector from KEPCO • ’02.10 Commencement of KOSEPCO (one of six Gencos) privatization * MOCIE : Ministry of Commerce, Industry and Energy

  15. II. Restructuring of power industry in Korea 6. Basic plan of restructuring PHASE II PHASE III PHASE I Competition in Generation Wholesale Competition Retail Competition • Introduction of the TWBP(Two way bidding pool) and unbundling of distribution sector • Transmission system serves as a common carrier • Distribution network will be opened and privatized • Regional supply franchise will be eliminated • Gencos compete in the cost-based pool • KEPCO manages transmission and distribution sectors 2001.4 2005 2009

  16. II. Restructuring of power industry in Korea 7. Market structure Phase III (2009.4~) Retail Competition Phase II (2005.4~) Wholesale Competition Phase I (2001.4~) Generation Competition Genco Genco Genco Genco Genco Genco Genco Genco Genco Bidding Bidding KPX (Two-way Bidding Pool) KPX (Two-way Bidding Pool) KPX (Cost-Based Pool) Bidding Bidding KEPCO Disco / Retailco Disco / Retailco Disco / Retailco Disco / Retailco Disco / Retailco Disco / Retailco Customer Customer Customer Customer Customer Customer Customer

  17. II. Restructuring of power industry in Korea 8. What has been done thus far? • Establishment of New Act on Promotion of Restructuringof power industry • Division of generation sector into 6 Gencos (1 nuclear / 5 coal) • Plan for spin-off of distribution/retail sectors • Establishment of Korea Power Exchange(KPX) • Operation of the cost-based pool market • Establishment of KoreaElectricity Commission in MOCIE • Commencement of Genco privatization (KOSEPCO) • Design of TWBP market rule and procedure (in progress)

  18. II. Restructuring of power industry in Korea 9. Korea Power Exchange (KPX) • Established in April 2001 • non-profit independent organization • Core functions • Pool Governance • Market Operation • System Operation

  19. II. Restructuring of power industry in Korea 10. Korea Electricity Commission (KOREC) • Established in April 2001 • Established as a division of MOCIE • Major functions • Restructuring of electric power industry • Deliberation and resolution (of matters in respect of the granting of permission, establishment of fair trade system) • Arbitration of disputes • Investigation of matters in respect of protection of public interests

  20. II. Restructuring of power industry in Korea 11. Overview of six Gencos (As of end 2002)

  21. II. Restructuring of power industry in Korea 12. Market share by generation (For the year of 2002)

  22. II. Restructuring of power industry in Korea 13. Market share by sales (For the year of 2002)

  23. III. Cost Based Pool (CBP) Market 1. Features of CBP • Operated from April 2001 • Compulsory Pool • Cost reflective market • Generation Cost Evaluation Committee • Limited competition • Multiple suppliers & Single purchaser • Suppliers bidding (availability bidding) • SMP determined in day-ahead market • Unconstrained Scheduling • BLMP, SMP • Capacity payment • Constrained on/off payment

  24. III. Cost Based Pool (CBP) Market 2. Market operation flow chart

  25. III. Cost Based Pool (CBP) Market 3. System Marginal Price (SMP) • BLMP : base load marginal price(nuclear & coal plant) • SMP : for non base load generators • influenced by maintenance schedule, demand, fuel price, etc. • SMP determination ratio by fuel type

  26. III. Cost Based Pool (CBP) Market 4. Settlement Price setting schedule ON OFF Actual Electricity Generation SMP + CP (Scheduled energy payment) VC + CP (Constrained on) No Electricity Generation SMP – VC + CP (Constrained off) CP

  27. III. Cost Based Pool (CBP) Market 5. Uplift • Ancillary service cost • frequency control • reserve procurement • voltage control • Constrained on/off cost

  28. III. Cost Based Pool (CBP) Market 6. Demand vs. SMP 2002-9-11 (Wed.)

  29. III. Cost Based Pool (CBP) Market 7. Settlement amount analysis (2002) Uplift 11.49% Schedule Energy Payment 43.36% Capacity Payment 45.15%

  30. III. Cost Based Pool (CBP) Market 8. Schedule volume vs. trade volume (2002)

  31. III. Cost Based Pool (CBP) Market 9. SMP, BLMP, Settlement price (2002)

  32. III. Cost Based Pool (CBP) Market 10. Voltage & frequency maintaining rate

  33. III. Cost Based Pool (CBP) Market 11. number of disputes

  34. IV. Effect of competition in generation sector 1. Improvement of efficiency through competition • Encouraging management innovation and competitiveness • Reducing generation cost due to the improvement of the purchasing process of fuels and materials • Trying to improve the supply ability by shortening the overhaul period • Curtailing operation of high-cost generator • Reduction of labor cost through automation

  35. 2001 2002 IV. Effect of competition in generation sector 2. Increase of generation capacity • Total capacity has increased 11.2% since spin-off (MW) 14.0% 18,000 16,000 14,000 12,000 10,000 10.3% 15.8% 9.4% 2.3% 0.0% 8,000 6,000 4,000 2,000 0 KHNP KOSEPCO KOMIPO KOWEPO KOSPO KEWESPO

  36. 2001 2002 IV. Effect of competition in generation sector 3. Increase of net profits • Total net profits has increased 42.0% 9.6% 53.3% 37.8% 31.7% 600.0% N/A

  37. 2001 2002 IV. Effect of competition in generation sector 4. Improvement of debt ratio • Total debt has decreased 4.4% since spin-off -0.6% -16.0% -5.4% -3.6% 0.3% -14.7%

  38. 2001 2002 IV. Effect of competition in generation sector 5. Improvement of generation cost per kWh • Cost for generation has decreased 6.0% -7.3% -7.2% -11.4% -8.3% -5.1% -0.3%

  39. 2001 2002 IV. Effect of competition in generation sector 6. Improvement of labour productivity • Labor productivity has been improved by 23% 24.2% 4.0% 23.3% 15.6% 26.6% 53.1%

  40. IV. Effect of competition in generation sector 7. Growth of electricity market (2001 vs. 2002) • Increase of members 7 regular members 3 associate members 22 regular members 8 associate members • Increase of market participating capacity 46,363MW (91% of the total) 49,921MW (95% of the total)

  41. V. Preparation for TWBP market 1. Basic design principles Supply and demand participation Trading of electricity only through the TWBP Clearing price set by commercial offers from generators KPX contract for reserve Publication of market information KPX contract for ancillary services Compensation for being constrained-on or constrained-off Settlement based on clearing price * Based on 15 basic design principles for TWBP

  42. V. Preparation for TWBP market 2.Features of TWBP • KPX is the only market and system operator • Generators and purchasers submit offers and bids with price and quantity • Self-committed generators, self-dispatched demands • Ancillary services are procured through contracts between KPX and participants • Single energy price • Five-minute dispatch and pricing on the generation side • Averaged thirty-minutes pricing on the demand side • Individual participants’ prices consider TLFs and DLFs based on their location • Constrained on or off payments, • No capacity payments

  43. V. Preparation for TWBP market 3.CBP vs. TWBP TWBP (Two-way bidding pool) CBP (Cost-based pool) Bidding Two way bidding (supplier, purchaser) Supplier bidding only Content of bids Price and quantity Supply availability Limited (competitiveness predetermined ) Competitive (strategy) Competition Strategic decision (bidding strategy, risk management) Predetermined by structure (scale, generation mix) Profitability Market participants Multiple suppliers / Multiple purchasers Multiple suppliers / Single purchaser

  44. CBP market TWBP V. Preparation for TWBP market 4. TWBP market opening schedule (modified) Not fixed 2003 2004 2005 3/4 4/4 1/4 2/4 3/4 4/4 1/4 2/4 Standing Bidding Shadow operation based on cyber trading Shadow operation with virtual Discos Opening of TWBP • The result of shadow operation and consultation may influence the detailed schedules for the spin-off of distribution sector and opening of TWBP market.

  45. V. Preparation for TWBP market 5. IT system for TWBP market (Overall) Generation station KPX Commitment, Measurement Market Information MOS NEMS RTU Operation/ Measurement information Bidding, Settlement, Market Information MOS Interface Trading Server / DB Bidding/ Contract Management Measure/ Settlement System Risk Management Market/ Network Simulator Genco’s Energy Trading & Risk Management system

  46. V. Preparation for TWBP market 6. Vesting contract for pool-price stabilization • Background • Market price in the TWBP is influenced by changes in market environment • Buyers and sellers are exposed to financial risk • Reduce risk exposure in early stage of TWBP • Designed by Freehills consortium • Factors to be considered • Optimal allocation of profits among market participants • Adjustable contract price to reflect market environmental change • Limited life – only for beginning of successful implementation • Reasonable and agreeable contract price

  47. V. Preparation for TWBP market 7. Transmission network access rules & fees • Open access to the transmission and distribution network for all market participants without any discrimination • Imposing the cost for connecting the generator to common network on the owner of generator • Levying fares based on MW sold • Regionally different tariff to provide signals to reduce transmission and distribution cost • Access rules for both transmission and distribution network have been approved by MOCIE(2002.12)

  48. 133.7 116.4 114.8 96.1 100 48.8 48.0 Residential Commercial Aggricultural Educational Industrial Midnight V. Preparation for TWBP market 8. Cross-subsidy between user groups • Profits of Discos will significantly differ without eliminating cross-subsidy between user groups • Government announced the plan to reduce the cross- subsidy (gradual reduction for 4 years) • Tariff system should be readjusted in a way that the customers in industrial sector bear the reasonable price of power and energy. Relative price to cost (MOCIE)

  49. V. Preparation for TWBP market 9. Comparison of electricity tariffs • Price differences between user groups in Korea are much bigger than other countries (Won/kWh) * Foreign exchange rates : as of end 2002

  50. VI. Issues on successful restructuring 1. Conflicts between labor and management • Nurturing for employees including labor unions on paradigm shift. • Win-win Strategy for both shareholder and employees . • Job Creation/Maintenance for the matured relationship with Labor Union. 2. Public acknowledgement • Enlightening the public about the possibility of tariff hike due to continuing suppression of tariff, NOT due to restructuring • Retail tariff should be floated depending upon the fuel prices in the international market just like petroleum price in Korea

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