Missing Protective Barriers and Fluctuating Policies... Vast Ocean of K-Offshore Wind Power [Domestic Offshore Wind Power Crisis]②

Abolition of Domestic Protection LCR
Safety Net Disappears After 1 Year and 4 Months

Chinese Low-Cost Bids Sweep Last Year's Tender

With the abolition of the Local Content Requirement (LCR), the domestic wind power industry has been exposed to low-price bidding. Since price accounts for a large portion of the bid evaluation criteria, the points allocated to protect domestic manufacturers are insufficient. There are forecasts that Chinese companies, which are penetrating the domestic market with low prices as their weapon, will now expand their business areas to the wind power construction sector.

According to the related industry on the 3rd, the government is selecting power producers through an external procurement method of Renewable Energy Certificates (REC) under the 'Wind Power Fixed Price Competitive Bidding' system instead of the LCR. The bid scoring is largely composed of 60 points for price and 40 points for non-price factors. The non-price factors are divided into qualitative evaluation items such as industrial economic effect (16 points), local acceptance (8 points), and quantitative evaluation items such as grid acceptance (8 points), project progress (4 points), and domestic project performance (4 points).

Initially, wind power projects were mostly developed through negotiated contracts centered on public power companies, and the government evaluated the costs of individual projects to finalize contract prices. However, with the activation of private wind power development creating competitive conditions, the system switched to competitive bidding in September 2022.

After the transition from negotiated contracts to competitive bidding, measures to protect domestic products were not properly maintained. The Ministry of Trade, Industry and Energy announced revisions to the 'Regulations on the Issuance and Operation of Supply Certificates' in February 2023. The revision included the abolition of the clause that allowed additional REC weighting if the LCR of components used in offshore wind power exceeded 50%. Offshore wind power had received REC weighting based on the distance between the coastline and the nearest turbines (internal grid), and the system that granted additional REC if the domestic component ratio exceeded 50% was removed. The REC weighting disappeared in April 2023, just one year and four months after the introduction of the LCR in December 2021.

The LCR recognized 50% when the domestic component ratio was 50% or more, and an additional 10-50% was recognized depending on the utilization of national R&D achievements. The domestic component ratio was determined by the sum of domestic parts usage ratios of wind power components: turbine (36.4%), blade (14.3%), tower (12.7%), substructure (30%), and internal grid cable (6.6%). The turbine was further divided into 13 detailed parts such as nacelle assembly (12.2%), gearbox (8.2%), converter (3.2%), generator (2.4%), and transformer (2.2%). R&D was recognized at 20% for projects between 5 billion and 10 billion KRW and 10% for projects between 3 billion and 5 billion KRW.

The wind power industry expressed concerns that the government's decision undermines policy reliability, discourages investments from domestic and foreign developers, and runs counter to supply chain activation through localization. They pointed out that if the policy is discarded without proper operation, it is questionable which developer would trust government policies and engage in large-scale offshore wind power development requiring substantial capital.

An industry insider said, "When preparing the internal grid application criteria for offshore wind power, we raised concerns about potential trade friction during industry meetings, but were told that the criteria would be set within non-conflicting limits, so there was no problem. Later, suddenly citing trade laws undermined policy reliability."

These concerns materialized in the long-term fixed price contracts for offshore wind power conducted by the Korea Energy Agency in the second half of last year. Most of the selected bidders submitted bid prices below the upper limit price set lower than the previous year. Qualitative evaluation factors such as domestic industrial contribution did not influence the results.

The Ministry of Trade, Industry and Energy, which oversees offshore wind projects, emphasized that the upper limit price was kept confidential during last year's bidding to encourage free price competition among bidders. Previously, most bids clustered around the pre-disclosed upper limit price, but this time, contracts were awarded in order of the lowest price.

Some project operators emphasize that they awarded contracts to European products to avoid criticism of low-price bidding with Chinese products. Myeongun Project Development, a consortium including Thailand's B.Grimm Power, won the Nakwol Offshore Wind Power Project and decided to use turbines made by Germany's Vensys, a key component of wind turbines. However, this company was acquired by China's Goldwind in 2008 and is effectively classified as Chinese. Vensys is also considering aggressive market strategies such as building a manufacturing plant in Korea based on the Nakwol site. Additionally, the external grid connecting the offshore wind farm to the land is considering using products from China's Hengtong Guangdian. According to Nakwol Blue Heart, the project implementation corporation, the Nakwol Offshore Wind Power Project is worth about 2.2 trillion KRW.

The main equipment supply for Gochang Offshore Wind Power, developed by Dongchon Wind Power, is also planned to be supplied by a Korea-China joint venture with more than 50% stake held by China's Mingyang Smart Energy. Although cable and other supply chain companies have not yet been selected, it is reported that Chinese companies are actively courting the project. This joint venture also plans to build an offshore wind turbine production plant in Sacheon, Gyeongnam.

Currently, only three offshore wind power plants are in commercial operation in Korea: Jeju Tamna (30 MW), Southwest Sea (60 MW), and Yeonggwang (34.5 MW). The scale of each site is small, and the total cumulative installed capacity of all three is only 124.5 MW (0.1245 GW).

With the current bidding structure, the rapidly growing domestic offshore wind market will inevitably be handed over entirely to foreign products. According to the Ministry of Trade, Industry and Energy's draft of the 11th Basic Plan for Electricity Supply and Demand, the wind power capacity of 1.9 GW in 2022 is planned to increase to 18.3 GW by 2030 and 40.7 GW by 2038. The number of wind power plants is expected to increase rapidly. As of March this year, 84 offshore wind power projects nationwide, totaling 27.8 GW, have obtained power generation permits and are progressing.

There are forecasts that as the equipment market opens to foreign companies such as those from China, they will expand their business areas to the construction sector as well. It is evaluated that a situation is being created where they are even eyeing operational rights through indirect investment. Nakwol Offshore Wind Power is expected to become the first domestic offshore wind project where Chinese companies perform some design, procurement, and construction (EPC). Thailand's B.Grimm Power, participating as a project operator, is known to have secured project financing (PF) guarantees from China Energy Engineering Corporation (CEEC).

An expert familiar with the wind power industry said, "Although the domestic industrial economic effect is reflected in the bid evaluation process, more emphasis has been placed on economic factors. Globally, countries are strengthening support to foster their own new and renewable energy industries and respond to climate change, but the domestic market is showing the opposite trend by reducing economic support, which is regrettable."