[Square] The 'Coming of Age' of the Electricity Market: Strengthening Autonomous Capabilities for Energy Transition

Professor Park Hojung, Department of Food Resource Economics, Korea University

The national basic plan for climate change response announced last October reflects the government's strong commitment to participating in a global environmental conservation plan. National greenhouse gas emissions are expected to be limited to about 540 million tons by 2030, with the transition sector responsible for reducing greenhouse gas emissions by 42.2% compared to business-as-usual (BAU) emissions without any measures. Since greenhouse gas reduction requires research and development (R&D) and investment in various technologies, achieving the reduction target within the remaining nine years is by no means an easy task.

To effectively respond to greenhouse gas reduction in the power industry, which accounts for most of the transition sector, various policy measures are needed. Representative measures include adjusting taxes imposed on power generation fuels to incentivize the early retirement of aging coal power plants or to provide incentives for generators using eco-friendly fuels. If necessary, directly limiting the output of operating coal power plants can also be considered. Among various methods, one effective way to encourage voluntary and active competition among power producers while reducing greenhouse gases is to reflect carbon costs in power generation costs.

Generators participating in the electricity market, like other companies participating in the greenhouse gas emissions trading market, purchase emission allowances when they lack them for business activities and sell surplus allowances. Generators that emit a lot of greenhouse gases during production inevitably spend a significant amount on purchasing allowances. Generally, these costs are naturally reflected in the bid prices of generators competing for dispatch priority in the electricity market. The structure disadvantages generators with higher greenhouse gas emissions. This method is also used in advanced countries such as Europe and the United States.

So, can such a mechanism work well in Korea's electricity market? To put it simply, it would be difficult. Above all, Korea's electricity market trading system is too rigid. In Korea's electricity market, free price bidding by generators is not allowed. Generation costs are evaluated and dispatch order is determined according to a uniform method set by regulatory authorities, mainly based on fuel costs. This method makes it difficult to properly reflect carbon costs in the electricity market.

Fuel costs and emission allowances share the commonality of being essential costs for power production, but there are significant differences. Unlike fuel costs, the purchase and cost of emission allowances are determined after the annual generation performance is confirmed. The purchase of allowances can also be freely made within a specified period, not necessarily at the time of actual generation.

Evaluating allowance costs uniformly on a monthly priority basis and reflecting them together with fuel costs risks distorting the electricity market itself. It is nearly impossible to reasonably reflect carbon costs using the past method applied to priority evaluations of a small number of standardized power facilities during the early stages of structural reform.

Next April will mark 20 years since the electricity market was established. It is time to consider introducing price bidding so that the electricity market can take a step forward from its adolescent phase, which required parental guidance and regulation, to a mature adult evaluated by autonomous rules and discretion. If it takes time to introduce a system where all generators bid prices, at least high greenhouse gas-emitting generators should be exposed to price competition. Competing generators will have no choice but to minimize greenhouse gas emissions while maintaining their dispatch priority to survive in the electricity market. This will also facilitate achieving the greenhouse gas reduction goals of the power industry.

Of course, just as people cannot be fully independent in all respects upon reaching adulthood, Korea's electricity market also needs the wisdom to appropriately balance autonomy and regulation. In the 2030s, when Korea's electricity market enters its 30s, we hope it will be proudly evaluated for its greenhouse gas reduction achievements over the past decade.

Ho-Jeong Park, Professor, Department of Food and Resource Economics, Korea University