The Basic Plan on Electricity Demand and Supply lays out the basic strategy for power supply and demand, the long-term outlook, plans for power generation, transmission and distribution facilities, and the organization of power systems every two years, in accordance with the Electric Utility Act. In the 6th Basic Plan on Electricity Demand and Supply (hereafter, the "6th Plan"), announced in February, the required power generation capacity was set at 29,570 kW following a forecast that maximum power usage will increase by an annual average of 2.4% through 2027. The plan consisted of a KRW 16 trillion investment in power generation facilities, including 10 coal-fired power plants and 4 LNG combined-cycle power plants, which will supply 10,500 kW and 4,800 kW, respectively.
While electricity accounts for 20% of the nation's overall energy consumption, it takes up about 44% of energy consumption in the household and commercial sectors. Moreover, since the locations of power generation facilities and power cable routes have a significant impact on their regions, the public has a considerable interest in the whereabouts and timing of facility investments. Consequently, this report evaluates system and demand outlook, and the power generation facility plan of the 6th Basic Plan on Electricity Demand and Supply.
An evaluation of the 6th Plan shows a lack of consideration of new power cable systems following construction of new power plants and of the resulting social conflict costs. Recent construction of transmission and distribution facilities have been noted for higher investment costs, lengthier construction periods, and reduced stability. Construction of a power transmission network costs KRW 4 trillion per year, and over the past 5 years more than KRW 22 trillion has been invested. The investment costs for transmission facilities have become greater than the costs for power generation facilities, a factor that could contribute to social conflict. Under such circumstances, planning for future power supply and demand should focus on possible transmission facility installations rather than on power generation plants.
Second, the 6th Plan has set too great a range for annual facility power reserve ratios. While the Korean government has set the optimal reserve ratio at 22%, an increase in the number of coal and nuclear power plants is likely to increase the reserve ratio to as high as 30%, compared with the government’s estimated 22%, for the 10-year period spanning 2016 to 2026. This will lead to an over-investment in power generation facilities so that as much as 30% of power generation facilities will not be operated, even during periods of maximum power consumption. As a result, if the current power generation policy based on an economic load dispatch system is maintained, utilization of many LNG generation facilities is expected to drop. With the increases in base-load generation station facilities, this is the likely scenario for the 7-year period covering 2019 to 2025 as most LNG generation facilities have high power generating costs.
The 6th Plan estimates power costs based not on energy generation costs but on inflation rates. Between 2013 and 2030, while the consumer price is expected to increase by 43% it is assumed that electrical bills will only increase by 19%. This means that real electricity costs will decrease over time. Electricity expenses should be calculated based on power generation costs, not inflation rates, and should be forecasted using multiple scenarios.
With respect to issues of the 6th Basic Plan on Electricity Demand and Supply, it appears necessary to adjust the timing of construction of power stations. Since power generation plants operate for 30 years or more on average, the investment scale and timing of new construction should be determined in line with the appropriate facility reserve rate. Rather than focusing on building new power generation stations in a single year and raising the reserve ratio to 30%, it seems more desirable to build them consecutively. Based on the facilities finalized in the 5th Basic Plan on Electricity Demand and Supply, the facility reserve rate was reviewed by adjusting the timing of launches of new power generation facilities. The results show that power supply and demand can be maintained in a stable manner even when the new facilities planned in the 6th Basic Plan on Electricity Demand and Supply are introduced 2 to 3 years later than originally expected. Therefore, the timing of construction of new power generation stations confirmed in the 6th Plan need to be adjusted, in line with technical prudence and regional concurrence, and based on the transmission network plan. Furthermore, the public should be made aware of the need to normalize electricity prices as well as the electricity price increase plan. The plan for electricity price increases should be announced as soon as possible in order for consumers to prepare for price hikes, and should be a medium- to long-term plan based on the cost of electricity generation.
In order to draft a Plan on Electricity Demand and Supply that is more efficient and easily accepted by Korean society, the transmission and distribution facilities plan, apart from the power generation facilities plan, should be included in the Electric Utility Act. Moreover, it is recommended that an evaluation be conducted of the previous plans and that the results of such an evaluation be used to draft the upcoming plans.
Hur Gahyeong
While electricity accounts for 20% of the nation's overall energy consumption, it takes up about 44% of energy consumption in the household and commercial sectors. Moreover, since the locations of power generation facilities and power cable routes have a significant impact on their regions, the public has a considerable interest in the whereabouts and timing of facility investments. Consequently, this report evaluates system and demand outlook, and the power generation facility plan of the 6th Basic Plan on Electricity Demand and Supply.
An evaluation of the 6th Plan shows a lack of consideration of new power cable systems following construction of new power plants and of the resulting social conflict costs. Recent construction of transmission and distribution facilities have been noted for higher investment costs, lengthier construction periods, and reduced stability. Construction of a power transmission network costs KRW 4 trillion per year, and over the past 5 years more than KRW 22 trillion has been invested. The investment costs for transmission facilities have become greater than the costs for power generation facilities, a factor that could contribute to social conflict. Under such circumstances, planning for future power supply and demand should focus on possible transmission facility installations rather than on power generation plants.
Second, the 6th Plan has set too great a range for annual facility power reserve ratios. While the Korean government has set the optimal reserve ratio at 22%, an increase in the number of coal and nuclear power plants is likely to increase the reserve ratio to as high as 30%, compared with the government’s estimated 22%, for the 10-year period spanning 2016 to 2026. This will lead to an over-investment in power generation facilities so that as much as 30% of power generation facilities will not be operated, even during periods of maximum power consumption. As a result, if the current power generation policy based on an economic load dispatch system is maintained, utilization of many LNG generation facilities is expected to drop. With the increases in base-load generation station facilities, this is the likely scenario for the 7-year period covering 2019 to 2025 as most LNG generation facilities have high power generating costs.
The 6th Plan estimates power costs based not on energy generation costs but on inflation rates. Between 2013 and 2030, while the consumer price is expected to increase by 43% it is assumed that electrical bills will only increase by 19%. This means that real electricity costs will decrease over time. Electricity expenses should be calculated based on power generation costs, not inflation rates, and should be forecasted using multiple scenarios.
With respect to issues of the 6th Basic Plan on Electricity Demand and Supply, it appears necessary to adjust the timing of construction of power stations. Since power generation plants operate for 30 years or more on average, the investment scale and timing of new construction should be determined in line with the appropriate facility reserve rate. Rather than focusing on building new power generation stations in a single year and raising the reserve ratio to 30%, it seems more desirable to build them consecutively. Based on the facilities finalized in the 5th Basic Plan on Electricity Demand and Supply, the facility reserve rate was reviewed by adjusting the timing of launches of new power generation facilities. The results show that power supply and demand can be maintained in a stable manner even when the new facilities planned in the 6th Basic Plan on Electricity Demand and Supply are introduced 2 to 3 years later than originally expected. Therefore, the timing of construction of new power generation stations confirmed in the 6th Plan need to be adjusted, in line with technical prudence and regional concurrence, and based on the transmission network plan. Furthermore, the public should be made aware of the need to normalize electricity prices as well as the electricity price increase plan. The plan for electricity price increases should be announced as soon as possible in order for consumers to prepare for price hikes, and should be a medium- to long-term plan based on the cost of electricity generation.
In order to draft a Plan on Electricity Demand and Supply that is more efficient and easily accepted by Korean society, the transmission and distribution facilities plan, apart from the power generation facilities plan, should be included in the Electric Utility Act. Moreover, it is recommended that an evaluation be conducted of the previous plans and that the results of such an evaluation be used to draft the upcoming plans.
Hur Gahyeong