Korea's 'World First' Fails at Box Office... Only One Clean Hydrogen Power Producer [Why&Next]

'World's First Clean Hydrogen Power Bidding' Aftermath
Production Disruptions of Domestic Blue Hydrogen by SK and Others
Exchange Rate Fluctuation Burden and Utilization Rate Burden on Operators
"Government Policy Support Crucial for Domestic Hydrogen Production"

This year, in the Clean Hydrogen Power Market Auction (CHPS) conducted by the government for the first time, only Korea Southern Power was selected as the successful bidder, raising concerns that establishing a domestic clean hydrogen ecosystem may become difficult. Under this year's system, it is virtually impossible to produce electricity using clean hydrogen produced domestically. Projects aiming to produce clean hydrogen in Korea have faced uncertainty even before breaking ground.

SK Innovation E&S, which planned to build Korea's first blue hydrogen plant in Boryeong, Chungnam, has postponed its construction plan after failing to be selected in this clean hydrogen power auction. A company official said on the 26th, "The construction of the blue hydrogen plant was premised on being selected in the clean hydrogen power auction, so at present, we cannot predict when construction will begin."

Besides SK Innovation E&S, blue hydrogen production projects led by POSCO International, GS Caltex, and others in Korea have also become uncertain. Ultimately, despite being labeled as the "world's first" clean hydrogen power generation, the significance has been diminished as it uses imported fuel (ammonia) from overseas.

Operators Bearing High Exchange Rate Risks

The government conducted the world's first clean hydrogen power auction this year. The plan was to select power producers using certified clean hydrogen fuel and sign long-term contracts for 15 years starting in 2028. To this end, the Korea Energy Economics Institute was designated as the clean hydrogen certification body.

Clean hydrogen refers to hydrogen with greenhouse gas emissions of 4 kg or less per 1 kg of hydrogen produced. It is graded from 1 to 4 based on carbon emissions. Green hydrogen and blue hydrogen fall under this category. Blue hydrogen is produced by reforming liquefied natural gas (LNG) to generate hydrogen, with carbon dioxide generated in the process removed using carbon capture and storage (CCS) technology.

Five companies participated in this year's clean hydrogen power market auction: Korea Midland Power, Korea Western Power, Korea Southern Power, Korea East-West Power, and SK Innovation E&S. On the 2nd, the Ministry of Trade, Industry and Energy selected only Korea Southern Power (750 GWh) as the final operator. Initially, the plan was to secure a total of 6,500 GWh of electricity through clean hydrogen power generation this year, but only 11.5% of that was achieved.

The hydrogen industry views the poor auction design and insufficient government support for the hydrogen industry as major reasons for the auction's failure. The government plans to conduct the clean hydrogen power auction again next year under similar conditions, but it is expected that the same results will repeat if the current system remains unchanged.

The auction was conducted by combining 60 points for price and 40 points for non-price factors. Non-price factors included evaluation by clean hydrogen grade and greenhouse gas reduction contribution (45 points), domestic industry and economic contribution (15 points), fuel import stability and business reliability (22 points), local acceptance and project progress (13 points), and grid acceptance (5 points). Ultimately, price had a significant impact on the auction. Industry sources understand that the minimum bid price was set between 460 and 470 KRW/kWh (kilowatt-hour).

Among participating companies, despite this being the first clean hydrogen auction, there were complaints about the burden of exchange rate fluctuations imposed on power producers and the lack of guaranteed utilization rates. The Korea Power Exchange, which organized the auction, insisted on conducting contracts in Korean won rather than US dollars. Power producers bearing exchange rate risks ended up having to supply fuel at higher prices.

Another issue is that the successful bidder's contract does not guarantee utilization rates. Without guaranteed utilization, it is difficult to estimate hydrogen demand over the 15-year contract period, which puts fuel supply price negotiations at a disadvantage. Many private companies such as Hanwha, GS, Doosan, and POSCO initially showed interest in the clean hydrogen power market but reportedly withdrew after the auction conditions were disclosed.

SK Innovation E&S initially submitted a plan to build the world's largest blue hydrogen plant near the Boryeong LNG terminal and use the hydrogen produced there as fuel for power generation. It was the only bidder to disclose a domestic clean hydrogen production plan. However, it failed to be selected due to price barriers.

An industry insider said, "The cost of producing blue hydrogen domestically is inevitably higher than procuring it from overseas, so without support measures, price competition is difficult." Although 15 points were allocated to industrial and economic contribution in the non-price indicators of this auction, it did not significantly affect the results.

Experts emphasize that various institutional and policy supports are necessary for domestic clean hydrogen production. Ji-Young Ahn, a research fellow at the Korea Energy Economics Institute, said, "The domestic clean hydrogen production base has lower technological maturity and price competitiveness compared to technology-leading countries, and policy and institutional support are insufficient. Active cooperation between the government and industry and institutional improvements are needed."

Aerial view of the clean hydrogen compound infrastructure facility by Nambu Power. Provided by Nambu Power

Meanwhile, Korea Southern Power, selected as the operator this time, plans to carry out a co-firing power generation project by mixing 20% clean ammonia with coal at the existing Samcheok Green Power Unit 1 coal-fired power plant. To this end, it plans to import clean ammonia produced in the Middle East through Samsung C&T to use as fuel.

In April this year, Korea Southern Power signed a contract with Samsung C&T for the construction of the first 30,000-ton ammonia storage tank and loading/unloading and transportation facilities near Samcheok Green Power. This project was selected as a government national project, with the government subsidizing 24 billion KRW out of the total project cost of 40 billion KRW. A Korea Southern Power official explained, "Coal-ammonia co-firing power generation is planned to enter commercial operation starting in 2028."

KEPCO's Burden Could Approach 2 Trillion KRW

Although the world's first clean hydrogen power generation is being implemented, concerns are raised that the burden will ultimately fall on Korea Electric Power Corporation (KEPCO) and the public. The clean hydrogen power auction is conducted similarly to the Renewable Portfolio Standard (RPS) long-term supply contract structure. Contracts are made among the obligated supplier KEPCO, the Korea Power Exchange, and power producers.

Settlements with power producers are made by multiplying total power generation by the system marginal price (SMP), with an additional payment for the cost of clean hydrogen power generation through a contract for difference (CFD) method. KEPCO bears this difference.

If the levelized cost of electricity (LCOE) for the winning clean hydrogen power generation is 460 KRW/kWh and the SMP is 160 KRW/kWh (SMP is usually covered by the final consumer's electricity bill), KEPCO bears the difference of 300 KRW.

If the entire planned 6,500 GWh this year had been awarded, KEPCO would have borne 1.95 trillion KRW (300 KRW × 6,500 GWh). Over a 15-year long-term supply contract, this amount would increase to 29.25 trillion KRW. This ultimately returns as a cost burden on the public. Since 2021, KEPCO has reflected the cost of purchasing renewable energy in the climate environment charge.

This scale is expected to increase further. The government plans to continuously expand the clean hydrogen auction market to 13 TWh (terawatt-hours, 1 TWh = 1,000 GWh) annually by 2030. A hydrogen industry insider said, "Under the current auction system, KEPCO's financial burden will inevitably increase exponentially. A serious reconsideration of a sustainable clean hydrogen power market is necessary."