Flexible Operation of Coal Power Plants Needed
Measures Required to Normalize Electricity Rates
Gas prices are fluctuating wildly. In August this year, the price of natural gas in Europe exceeded $90 per MMBtu (a unit of heat energy equivalent to 250,000 kcal), and the spot price of liquefied natural gas (LNG) in Northeast Asia also surpassed $70 per MMBtu. These figures represent increases of more than 12 times and 9 times, respectively, compared to prices in January last year. The rise in European natural gas prices has led to the outflow of Asian gas to Europe, causing supply instability and sharp price hikes in the Asian region as well.
Resource development projects take a long time to reach full production, making it difficult to increase supply immediately to meet demand. During the low oil price period in 2016, global investment in resource development was reduced for two consecutive years, which caused supply constraints five years later and increased the risk of even greater price surges. Added to this are geopolitical conditions, which have led countries around the world to fiercely compete for LNG in a gas market where immediate supply is limited.
South Korea imports about 80% of its LNG under long-term contracts linked to oil prices, resulting in relatively low supply uncertainty. However, about 20% of the volume must be procured from the spot market, exposing the country to price surges and competition with other nations for LNG. Ensuring stable natural gas supply during the upcoming winter season is therefore far from an easy task.
In South Korea, gas-fired power generation determines the system marginal price in the wholesale electricity market and serves as the basis for settlement calculations for other power sources. In Japan, a cold wave early last year caused a significant increase in electricity demand, but LNG inventories decreased and other power plants were shut down, causing the system marginal price to rise about eightfold from 13.3 yen in mid-December 2020 to 102.7 yen. This case demonstrates that managing demand for natural gas used in power generation also affects the soundness of the electricity industry.
Purchasing gas at high prices negatively impacts the economy and inflation. To prevent the energy sector, which underpins the economy, from shaking it, this winter season requires not only stable natural gas supply but also strategic and flexible adjustments in power source composition from the demand side. Major European countries facing a more severe energy crisis than South Korea are implementing various measures, such as operating coal-fired power plants, to secure their energy supply stability. However, this does not mean these countries have abandoned carbon neutrality or climate change responses. South Korea also needs to recognize the current crisis and temporarily operate other power sources, such as coal-fired plants, flexibly for energy security.
It is also necessary to normalize tariffs so that prices function properly in the market. People decide their consumption based on prices, and prices that do not reflect reality fail to provide correct signals for decision-making. Of course, tariff normalization affects inflation, but rather than suppressing prices unconditionally, the pros and cons of prices not functioning properly must be carefully considered.
Different responses are required in normal times and during crises. Preparation is needed in normal times, while action is required during crises. The current energy market situation, intertwined with geopolitical conditions, does not seem likely to improve soon. Moreover, the impact of the energy sector is spreading globally rather than remaining localized. This is a crisis. Our response must be appropriate not only on the supply side but also on the demand side.
Yoon-Kyung Kim, Professor, Department of Economics, Ewha Womans University
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