New Horizons for Korean Energy Industry - Shifting paradigms and Challenges ahead - August 2001 Hyun-Joon Chang Korea Energy Economics Institute

Contents Introduction Energy Situation of Korea Long-term Demand Forecast Energy Policy of Korea Korea Energy Industry in Transition From Closed to Open Network Concluding Remarks

Introduction Korean energy industry is at a turning point Paradigm Government directed central planning system  Decentralized market-oriented system Governance structure State owned public utilities  Private owned utilities Industrial organization Vertically integrated and monopolistic structure  Disintegrated and competitive structure

Introduction What caused the change? Liberalization Deregulation Globalization Technical Advance Conservation of Environment Concerns for Energy Security

Energy Situation of Korea Energy consumption has surpassed economic growth Energy/GDP elasticity ’85 - ’90 : 1.16 ’91 - ’00 : 1.32 Growth (1985 - 2000) Steel: 9  25 MMT Cement: 21  51 MMT Cars: 1.1  12.0 mill (1985=100)

Energy Situation of Korea Energy consumption by source(2000) Petroleum Coal Nuclear LNG Hydro 53.8% 26.1% 14.2% 3.2% 1.7% 1990

Energy Situation of Korea Heavy overseas energy dependency Overseas energy dependency ’85 76.2% ’99 97.2% Import amount of energy ’85 US$ 7,290 million ’99 US$ 22,589 million Middle East dependency Crude Oil(’99) 72.3% Natural Gas(’05) 52.6%

Long-term Demand Forecast Energy demand by fuel Oil dependency lessens, but oil will remain the most important fuel Unit: Million TOE LNG’s demand is projected to grow by 5.3% per year, which is the highest Coal and nuclear is projected grow steadily along with electricity demand growth Source: KEEI, May 2001

Long-term Demand Forecast Energy demand by sector Unit: %

Long-term Demand Forecast Energy and GHG indicators Source: KEEI, May 2001

Energy Policy of Korea Past energy policy: Historical perspective Supply oriented energy policy Promote competitiveness of industry Constrain inflation Intervention by the government Central planning rather than market mechanism Regulate price and support monopolistic structure Has been successful in terms of economic growth, stable energy supply, low energy price, and so on

Energy Policy of Korea Shadows of the success Energy Intensity increased 0.35 TOE/million Won in 1990  0.40 in 2000 Environmental Backwardness CO2 emission: 65 MTC in 1990  121 MTC in 2000 Siting problems, in particular, for nuclear power plants Weak Market Mechanisms Reform of energy pricing and privatization of large state-owned enterprises to improve market efficiency

Primary objectives and measures for future Energy Policy of Korea Primary objectives and measures for future Objectives Strengthen market mechanism Establish environmentally friendly energy systems Maintain stable energy supply Measures Remove price controls Reform tax system for fair competition and less pollution Privatize public utilities Encourage energy efficiency technologies and new & renewable energy developments Seek to cooperate with Northeast Asian countries

Energy Industry in transition Restructuring of electricity industry Objectives Raising the general efficiency of the electricity industry by promoting the competition Effective financing of generation facilities Increasing consumer benefits Principles Privatization and introduction of competition into generation (with nuclear excluded) Unbundling and privatization of generation, transmission and distribution Gradual reform for market to absorb the impact

Energy Industry in transition Restructuring schedule PHASE I PHASE III PHASE IV PHASE II Current Monopoly Competition in Generation Wholesale Competition Retail Competition A group of Gencos compete in the Generation Pool Full competition in distribution sectors unbundled from KEPCO (Bid-buying competition) Transmission system serves as a common carrier Distribution network will be opened Regional supply franchise will be eliminated KEPCO manages transmission and distribution sectors 1998 2000 2003 2009

Energy Industry in transition Restructuring of gas industry Principles Introduce competition by unbundling of imports/sales activities from terminal/transmission network operation Separate import/sales part of current monopoly utility “KOGAS” into several private companies Institute an open access regime for receiving terminals and transmission network Introduce competition in retail sector through competition in facility investment Schedule(Revised schedule will be announced soon) phase I : Preparation (2000-2002) phase II : Privatization and introducing competition in import/wholesales phase III : Retail competition

Energy challenges facing the Asia - in Korea’s perspective From Closed to Open Energy challenges facing the Asia - in Korea’s perspective Two paths are ahead: Conflict path vs. Cooperative path Cooperative future ensures mutual benefits Energy importers Ensure stable energy supply Strengthen bargaining power Reduce the energy cost Energy exporters Secure stable energy demand Increase of foreign investment in an upstream sector

From Closed to Open Chances for a new era North-South Korea talks resume From cold war to cooperative games Major obstacle for a complete connection of Asian energy network was removed East Asia shares common features Heavy reliance on the Middle East Korea 76%(2000), China 62%(1998), Japan 82%(1999) Rapid growth of East Asia’s oil demand 50% demand increase is expected during the next decade

Possible areas of cooperation From Closed to Open Possible areas of cooperation Power Interconnections Natural gas pipeline networks Joint oil stockpiling

Restructuring Industry International Cooperation Concluding Remarks Not only growth, but also environment Urgent task of Korea “Establish efficient and environment-friendly energy industry” Restructuring Industry International Cooperation Power industry Gas industry District Heating Power interconnections NG pipeline networks Joint oil stockpiling

Thank you Hyun-Joon Chang Email: hjchang@keei.re.kr Tel: 031-421-0681~2