Strategies for the security of electricity supply

1 Contents 1.Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies 1.Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies 2. Risk factors in the open market and countermeasures 2. Risk factors in the open market and countermeasures 3. The strategy for the stability of price in the open market 3. The strategy for the stability of price in the open market 4. Nuclear energy and governmental support

2 Contents 1.Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies 2. Risk factors in the open market and countermeasures 3. The strategy for the stability of price in the open market 4. Nuclear energy and governmental support

The basic plan of long term electricity supply & demand  Electricity companies enjoy decent profitability considering the rules and policies set by the government  The government is responsible for the Basic Plan The government predicts electricity demands, and devises relevant policies  The basic plan covers 14 years, and is updated every two years  The basic plan reflects basic directions, demands prospects, and construction plan of grid lines Power companies refer to the basic plan, when they make decisions of new investments.

The constructions in the Basic plan  The basic plan includes A, B, C1, classified by the degree of uncertainty. A : under construction, imminent completion B : in pre-construction stage after being approved C1: in planning stage to construct, expected to be approved within 2years (executions and processes are less certain)  C2: in planning stage, not included in the basic plan, not expected to be approved within 2years (some issues such as linkage to power network need further study) Planning (no approval within 2years) Under construction Preparing to start construction Planning (approval within 2years) C2C1BA

The Plan of constructions by GenCos  State owned GenCos plan to commission 31,100 MW facilities (81% of total construction) from 2004 to 2017 they will construct nuclear power plants and coal power plants, which are very capital intnsive  Private GenCo plan to construct 7,100 MW facilities, 19% of capacity entries they prefer to construct LNG power plants, which require less investment 21,200 (55%) 4,000 (11%) 9,900 (26%) 3,100 (8%) 31,100 (81%) 7,100 (19%) State owned Genco Private GenCo In preparation Total Under construction Plan period : 2004~2017, unit : MW 25,200 13,000 38,200

Prospects of capacity reserve margin  Capacity reserve margin is expected to be more than 15~17%, the proper margin level to guarantee supply, when the planned constructions are successfully completed capacity reserve margin is expected to reach 15 ∼ 18% by 2006, afterwards 25%

Risk factors in the execution of the plan  C1 constructions may not be executed if market condition changes unfavorably The government cannot force the private companies’ construction. State owned GenCos 9,900MW, private GenCos, 3,100MW  The constructions of nuclear power plants have many barriers to overcome Low public acceptance (NIMBY) and opposition of NGOs while 6 nuclear power plants (6,000MW) are scheduled for commissioning over the plan period  Prospects of capacity reserve margin by uncertainties The delay of C1 may trigger a demand-supply emergency starting from 2015 The delay of 6 nuclear power plants may trigger an emergency starting from 2013

Strategies to execute the construction plan  The Government (KEPCO) promotes C1 by state owned GenCos to meet the capacity entries timeframe The processes of constructions are cautiously evaluated by KEPCO  State owned GenCos will replace private GenCos in constructing C1 if the private GenCos withdraw  No corporate investment risk exists in constructing nuclear power plants because KEPCO holds 100% shares of the nuclear power company.  However, opposition of NGOs and citizens require continuous promotion to increase public acceptance to nuclear power plants. safety first operation co-prosperity with regional community advertising the necessity of nuclear energy in Korea due to high dependence on imported energy resources

9 Contents 1. Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies 2. Risk factors in the open market and countermeasures 3. The strategy for the stability of price in the open market 4. Nuclear energy and governmental support

Risk factors to secure electricity supply in the open market  Investment decisions are made upon the price signals and predictability in the open market, however, the price signals may not function well when irrational market system distorts the signals when price hike and abnormal volatilities are caused by manipulations of any participants’ market power  The GenCos may fail to secure proper profitability for re-investment when the market is interrupted by regulatory body for the purpose of price stabilisation

Strategies to secure stable supply of electricity Cost Based Pool (CBP) is the realistic best solution  CBP has proven to be the best way to keep the market stability in Korea until effective solution is found: effective promotion of competition for cost reduction reasonable market price stable supply of electricity less distortion of market signal by irrational market system less market manipulation by participants less interruption by regulatory bodies

Strategies to secure stable supply of electricity  CBP has evolved through improvements such as adoption of BLMP and A/S Adoption of Base Load Marginal Price (BLMP) In a signal market pool, the estimated market price set by System Marginal Price (SMP) used to be too high to be accepted resulting from the portfolio of fuel mix Nuclear power plants and coal power plants determine BLMP LNG and oil power plants determine SMP Payments for ancillary services for grid security and cycle maintenance to meet the market system  Promoting investments by continuously improving CBP system The CBP market system will be improved, i.e. differentiated capacity payment (CP) will be linked to reserve margin low reserve margin, high CP high reserve margin, low CP To Be CP paid on the Pari passu basis to all available capacity As Is

13 Contents 1. Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies 2. Risk factors in the open market and countermeasures 3. The strategy for the stability of price in the open market 4. Nuclear energy and governmental support

Whole sale market and securing the stability of price  Oil and LNG generators determine 75~80% of market pricing at around 5.7¢/kWh under System Marginal Price (SMP) system Oil and LNG generators produce 20% of annual generation volume.  KEPCO may suffer financial risks from high SMP and low tariff regulated at 6.5¢/kWh  Financial health of GenCos and KEPCO through price stabilization measures is essential. Load Duration Curve Nuclear Coal LNG / Oil 75~80% 8,760 hours Reserve Margin ( MW) 100%

Whole sale market and securing the stability of price  Introduction of BLMP has secured price stability The highest marginal price of base load generators is determined as BLMP The highest marginal price of peak load generators is determined as SMP The settlement prices have been maintained at around 4.2~4.4¢/kWh Nuclear Coal CP : 1.79 ¢/kWh Oil LNG CP : 0.63 ¢ Base Load Volume 78% (Variable Cost) 1.64 ¢ 3.44 ¢ 4.19 ¢ 4.80 ¢ 5.43 ¢ 0.35 ¢ BLMP SMP Introduction of Separate Settlement Peak Load 22%

Evaluation on the operation of the wholesale market  State owned GenCos have enjoyed significant increase of operating income ratio (16.5% before separation → 20.9% after separation). They own base load generators (nuclear, coal), and enjoy reasonable profits from market price.  Private GenCos in the market also have enjoyed reasonable profits. They own peak load generators (LNG), and are sufficiently compensated by the CP to recover fixed costs.  Private GenCos having PPA with KEPCO are guaranteed reasonable ROR(8%). ※ Operating income ratio of GenCos after separation classification average Operating income ratio19.1%21.7%21.9%20.9% ROR7.2%8.0%8.2%7.8%

17 Contents 1. Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies 2. Risk factors in the open market and countermeasures 3. The strategy for the stability of price in the open market 4. Nuclear energy and governmental support

The status and the prospects of nuclear generation Prospects of nuclear generation  The further construction of nuclear power plants is necessary for securing stable supply of electricity as the demand is expected to highly increase in South Korea. Korea imports most of its generation fuel (99%), and the prices of fossil fuel rocketed recently (56%). ‘The basic plan of long term electricity supply & demand’ stipulates that nuclear power plant generation will stay at 30% of the total generation capacity.  Expanding public acceptance to safe of nuclear power plants and promoting timely constructions are required.

The status of nuclear generation Current status of nuclear energy in the electricity industry  20 nuclear generators (17,716MW) in operation compose 29% of total capacity in Korea.  The generation by nuclear power plants reached 39 % of total generation volume and 32% of the total traded amount in 2004, the highest shares among generation types.  The low generation costs of nuclear power plants helped Korea not to increase retail prices in spite of recent price hikes of oil and coal.

The status of nuclear generation The profitability of nuclear power plants in the market  The operating income ratio of nuclear power plants (22.4%) was higher than those of any thermal power plants. ROR of nuclear power (5.8%) was higher than the average ROR of GenCos (5.3%) in While thermal power companies suffer fuel cost increase by the coal price increase, the nuclear power company enjoyed market price increase without the increase of fuel costs.  No difficulty is expected in raising new investments in nuclear power plants with stable profitability under the current CBP market.

The governmental support to nuclear generation  Nuclear power plants need governmental support for securing construction site and disposal site, and for continuing operation More constructions of nuclear power plants are inevitable in order to secure electricity supply and stable market price of electricity in Korea  Institutional Support for constructions of nuclear power plants Economic benefits to local areas near power plants $9~14mn/year by “special laws for the support of local area accepting location of low-medium radio active waste $68mn/year by ‘special laws for the support of local area neighboring power plants Reduction of risk of nuclear energy business by ‘laws for nuclear damages’. Public relationship in support of nuclear power plants.