1. Korean Experience and Future Market Cigre Workshop Study Committee C5 Market Structures and Institutions Jong-Keun Park Seoul National University 2003. 9. 22.

2. 2 Korean Experience and Future Market Seoul National University Table of Contents I.Introduction to Korean power industry II.Restructuring of power industry in Korea III.Cost Based Pool Market IV.Effect of competition in generation sector V.Preparation for TWBP market VI.Issues on successful restructuring VII.Outstanding tasks to overcome

3. 3 Korean Experience and Future Market Seoul National University I. Introduction to Korean power industry 1. Growth of power industry in Korea (MW)

4. 4 Korean Experience and Future Market Seoul National University I. Introduction to Korean power industry 2. Ownership of generation capacity (As of End 2002)

5. 5 Korean Experience and Future Market Seoul National University 3. Capacity by fuels (As of End 2002) I. Introduction to Korean power industry

6. 6 Korean Experience and Future Market Seoul National University 4. Capacity growth by E-Source (Gov’s plan) 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15 (MW) 35% 28% 12% 25% 27% NuclearImported CoalLNGHeavy OilLight OilDomestic CoalHydro 28% 25% 20% I. Introduction to Korean power industry

7. 7 Korean Experience and Future Market Seoul National University 5. Growth of peak demand and annual consumption 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 '00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 (GWh) Yearly Consumption (LHS) Peak Demand (RHS) Average growth : 5.4%2.7%2.0% (MW) I. Introduction to Korean power industry

8. 8 Korean Experience and Future Market Seoul National University Public (3.7) Residential (15.2) Commercial (28.4) Agriculture & Fishery (2.3) Mining (0.4) Manufacturing (50.0) 6. Electricity consumption I. Introduction to Korean power industry Total 281,872 GWh (Year of 2002)

9. 9 Korean Experience and Future Market Seoul National University 7. Characteristics of Korean power network 765kV Route 345KV Route DC 180kV Submarine Cable 345KV Substation Power Plant I. Introduction to Korean power industry  Regional concentration of supply (coastal area) and demand(Seoul)  Kyoung-In area demand : 42.6%  Northward loadflow causing network congestion  Cheju island is connected through HVDC system (154MW)  Nominal voltages of T/L’s are 765kV(662c-km), 345kV(7,496c- km) and 154kV(18,144c-km) Kyoung-In area

10. 10 Korean Experience and Future Market Seoul National University 7. Characteristics of Korean power network I. Introduction to Korean power industry Power flow

11. 11 Korean Experience and Future Market Seoul National University II. Restructuring of power industry in Korea 1. Objectives  Raising the general efficiency of the power industry by promoting competition  Effective financing of upcoming capital expenditure  Increasing consumer benefits 2. Principles  Unbundling of generation, transmission and distribution sectors  Introduction of competition into generation and retail sectors  Gradual introduction of competitive market to reduce shocks

12. 12 Korean Experience and Future Market Seoul National University II. Restructuring of power industry in Korea 3. The necessity of restructuring  Steep increase of electricity demand  additional 45,000MW should be built until 2015.  Lack of capital due to retail price regulation  Fund of 67 T Won is required by 2015 and 9 T Won/annum.  Needs private or foreign funds to build new power facilities.  International trend to deregulation and competitive market  Apply global rules in management of the public sector  Adopt the competition principle to utility field

13. 13 Korean Experience and Future Market Seoul National University 4. The roadmap of the restructuring  A competitive generation sector consisting of private generation companies  An electricity market operated by a Korea Power Exchange (KPX) as an independent market operator  Single national transmission company and multiple distribution companies  Retail competition for endowing all customers with choices  A regulatory framework based on an independent regulator II. Restructuring of power industry in Korea

14. 14 Korean Experience and Future Market Seoul National University 5. Brief history of restructuring  ’94.7~’96.6Management performance evaluation of KEPCO  ’97.6 Establishment of Electric Power Industry Restructuring Committee  ’99.1Basic Plan of Restructuring(MOCIE*)  ’00.12Act on Promotion of Restructuring of power industry  ’01.4Spin-off of generation sector from KEPCO  ’02.10Commencement of KOSEPCO (one of six Gencos) privatization II. Restructuring of power industry in Korea * MOCIE : Ministry of Commerce, Industry and Energy

15. 15 Korean Experience and Future Market Seoul National University 6. Basic plan of restructuring PHASE I PHASE IIPHASE III Competition in Generation Wholesale Competition Retail Competition 20092005 Gencos compete in the cost-based pool Gencos compete in the cost-based pool KEPCO manages transmission and distribution sectors KEPCO manages transmission and distribution sectors Introduction of the TWBP(Two way bidding pool) and unbundling of distribution sector Introduction of the TWBP(Two way bidding pool) and unbundling of distribution sector Transmission system serves as a common carrier Transmission system serves as a common carrier Distribution network will be opened and privatized Distribution network will be opened and privatized Regional supply franchise will be eliminated Regional supply franchise will be eliminated 2001.4 II. Restructuring of power industry in Korea

16. 16 Korean Experience and Future Market Seoul National University 7. Market structure KPX (Cost-Based Pool) Genco KEPCO Customer Genco Phase I (2001.4~) Generation Competition Bidding Disco / Retailco Disco / Retailco Disco / Retailco Customer KPX (Two-way Bidding Pool) Genco Phase II (2005.4~) Wholesale Competition Phase III (2009.4~) Retail Competition Bidding Disco / Retailco Disco / Retailco Disco / Retailco Customer KPX (Two-way Bidding Pool) Genco II. Restructuring of power industry in Korea

17. 17 Korean Experience and Future Market Seoul National University 8. What has been done thus far?  Establishment of New Act on Promotion of Restructuring of power industry  Division of generation sector into 6 Gencos (1 nuclear / 5 coal)  Plan for spin-off of distribution/retail sectors  Establishment of Korea Power Exchange(KPX)  Operation of the cost-based pool market  Establishment of Korea Electricity Commission in MOCIE  Commencement of Genco privatization (KOSEPCO)  Design of TWBP market rule and procedure (in progress) II. Restructuring of power industry in Korea

18. 18 Korean Experience and Future Market Seoul National University 9. Korea Power Exchange (KPX) II. Restructuring of power industry in Korea  Established in April 2001  non-profit independent organization  Core functions  Pool Governance  Market Operation  System Operation

19. 19 Korean Experience and Future Market Seoul National University 10. Korea Electricity Commission (KOREC) II. Restructuring of power industry in Korea  Established in April 2001  Established as a division of MOCIE  Major functions  Restructuring of electric power industry  Deliberation and resolution (of matters in respect of the granting of permission, establishment of fair trade system)  Arbitration of disputes  Investigation of matters in respect of protection of public interests

20. 20 Korean Experience and Future Market Seoul National University 11. Overview of six Gencos (As of end 2002) II. Restructuring of power industry in Korea

21. 21 Korean Experience and Future Market Seoul National University 12. Market share by generation (For the year of 2002) II. Restructuring of power industry in Korea

22. 22 Korean Experience and Future Market Seoul National University 13. Market share by sales (For the year of 2002) II. Restructuring of power industry in Korea

23. 23 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 1. Features of CBP  Operated from April 2001  Compulsory Pool  Cost reflective market  Generation Cost Evaluation Committee  Limited competition  Multiple suppliers & Single purchaser  Suppliers bidding (availability bidding)  SMP determined in day-ahead market  Unconstrained Scheduling  BLMP, SMP  Capacity payment  Constrained on/off payment

24. 24 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 2. Market operation flow chart

25. 25 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 3. System Marginal Price (SMP)  BLMP : base load marginal price(nuclear & coal plant)  SMP : for non base load generators  influenced by maintenance schedule, demand, fuel price, etc.  SMP determination ratio by fuel type

26. 26 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 4. Settlement Actual Electricity Generation No Electricity Generation SMP + CP (Scheduled energy payment) SMP – VC + CP (Constrained off) VC + CP (Constrained on) CP OFFON Price setting schedule

27. 27 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 5. Uplift  Ancillary service cost  frequency control  reserve procurement  voltage control  Constrained on/off cost

28. 28 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 6. Demand vs. SMP 2002 - 9-11 (Wed.)

29. 29 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 7. Settlement amount analysis (2002) Uplift 11.49% Capacity Payment 45.15% Schedule Energy Payment 43.36%

30. 30 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 8. Schedule volume vs. trade volume (2002)

31. 31 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 9. SMP, BLMP, Settlement price (2002)

32. 32 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 10. Voltage & frequency maintaining rate

33. 33 Korean Experience and Future Market Seoul National University III. Cost Based Pool (CBP) Market 11. number of disputes

34. 34 Korean Experience and Future Market Seoul National University IV. Effect of competition in generation sector 1. Improvement of efficiency through competition  Encouraging management innovation and competitiveness  Reducing generation cost due to the improvement of the purchasing process of fuels and materials  Trying to improve the supply ability by shortening the overhaul period  Curtailing operation of high-cost generator  Reduction of labor cost through automation

35. 35 Korean Experience and Future Market Seoul National University IV. Effect of competition in generation sector 2. Increase of generation capacity 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 (MW) KHNPKOSEPCOKOMIPOKOWEPOKOSPOKEWESPO 14.0% 0.0% 9.4% 15.8% 2.3% 10.3% 20012002  Total capacity has increased 11.2% since spin-off

36. 36 Korean Experience and Future Market Seoul National University 3. Increase of net profits 9.6% 20012002 IV. Effect of competition in generation sector 37.8% 53.3% 31.7% 600.0% N/A  Total net profits has increased 42.0%

37. 37 Korean Experience and Future Market Seoul National University 4. Improvement of debt ratio 20012002 IV. Effect of competition in generation sector -0.6% 0.3% -14.7% -3.6% -5.4% -16.0%  Total debt has decreased 4.4% since spin-off

38. 38 Korean Experience and Future Market Seoul National University 5. Improvement of generation cost per kWh 20012002 IV. Effect of competition in generation sector -0.3% -5.1% -8.3% -7.2% -11.4% -7.3%  Cost for generation has decreased 6.0%

39. 39 Korean Experience and Future Market Seoul National University 6. Improvement of labour productivity 20012002 IV. Effect of competition in generation sector 4.0% 53.1% 15.6% 24.2% 26.6% 23.3%  Labor productivity has been improved by 23%

40. 40 Korean Experience and Future Market Seoul National University 7. Growth of electricity market (2001 vs. 2002) 7 regular members 3 associate members 22 regular members 8 associate members  Increase of members  Increase of market participating capacity 46,363MW (91% of the total) 49,921MW (95% of the total) IV. Effect of competition in generation sector

41. 41 Korean Experience and Future Market Seoul National University V. Preparation for TWBP market 1. Basic design principles Supply and demand participation Clearing price set by commercial offers from generators Publication of market information KPX contract for reserve Trading of electricity only through the TWBP KPX contract for ancillary services Compensation for being constrained-on or constrained-off Settlement based on clearing price * Based on 15 basic design principles for TWBP

42. 42 Korean Experience and Future Market Seoul National University V. Preparation for TWBP market 2. Features of TWBP  KPX is the only market and system operator  Generators and purchasers submit offers and bids with price and quantity  Self-committed generators, self-dispatched demands  Ancillary services are procured through contracts between KPX and participants  Single energy price  Five-minute dispatch and pricing on the generation side  Averaged thirty-minutes pricing on the demand side  Individual participants’ prices consider TLFs and DLFs based on their location  Constrained on or off payments,  No capacity payments

43. 43 Korean Experience and Future Market Seoul National University V. Preparation for TWBP market 3. CBP vs. TWBP CBP (Cost-based pool) TWBP (Two-way bidding pool) Bidding Supplier bidding only Two way bidding (supplier, purchaser) Content of bids Supply availability Price and quantity Competition Limited (competitiveness predetermined ) Competitive (strategy) Profitability Predetermined by structure (scale, generation mix) Strategic decision (bidding strategy, risk management) Market participants Multiple suppliers / Single purchaser Multiple suppliers / Multiple purchasers

44. 44 Korean Experience and Future Market Seoul National University 4. TWBP market opening schedule (modified) 200420032005 3/44/41/42/43/44/41/42/4 Shadow operation based on cyber trading Shadow operation based on cyber trading Shadow operation with virtual Discos Shadow operation with virtual Discos Standing Bidding Standing Bidding Opening of TWBP Opening of TWBP  The result of shadow operation and consultation may influence the detailed schedules for the spin-off of distribution sector and opening of TWBP market. Not fixed CBP market TWBP V. Preparation for TWBP market

45. 45 Korean Experience and Future Market Seoul National University 5. IT system for TWBP market (Overall) MOS NEMS Market Information KPX MOS Interface MOS Interface Bidding, Settlement, Market Information Trading Server / DB Trading Server / DB Measure/ Settlement System Measure/ Settlement System Market/ Network Simulator Market/ Network Simulator Risk Management Risk Management RTU Commitment, Measurement Operation/ Measurement information Genco ’ s Energy Trading & Risk Management system Generation station Bidding/ Contract Management Bidding/ Contract Management V. Preparation for TWBP market

46. 46 Korean Experience and Future Market Seoul National University 6. Vesting contract for pool-price stabilization  Background  Market price in the TWBP is influenced by changes in market environment  Buyers and sellers are exposed to financial risk  Reduce risk exposure in early stage of TWBP  Designed by Freehills consortium  Factors to be considered  Optimal allocation of profits among market participants  Adjustable contract price to reflect market environmental change  Limited life – only for beginning of successful implementation  Reasonable and agreeable contract price V. Preparation for TWBP market

47. 47 Korean Experience and Future Market Seoul National University 7. Transmission network access rules & fees  Open access to the transmission and distribution network for all market participants without any discrimination  Imposing the cost for connecting the generator to common network on the owner of generator  Levying fares based on MW sold  Regionally different tariff to provide signals to reduce transmission and distribution cost  Access rules for both transmission and distribution network have been approved by MOCIE(2002.12) V. Preparation for TWBP market

48. 48 Korean Experience and Future Market Seoul National University 8. Cross-subsidy between user groups 114.8 48.8 96.1 133.7 Residential Midnight Commercial Industrial Aggricultural 116.4 Educational 100 48.0 Relative price to cost (MOCIE)  Profits of Discos will significantly differ without eliminating cross-subsidy between user groups  Government announced the plan to reduce the cross- subsidy (gradual reduction for 4 years)  Tariff system should be readjusted in a way that the customers in industrial sector bear the reasonable price of power and energy. V. Preparation for TWBP market

49. 49 Korean Experience and Future Market Seoul National University V. Preparation for TWBP market 9. Comparison of electricity tariffs (Won/kWh) * Foreign exchange rates : as of end 2002  Price differences between user groups in Korea are much bigger than other countries

50. 50 Korean Experience and Future Market Seoul National University 1. Conflicts between labor and management  Nurturing for employees including labor unions on paradigm shift.  Win-win Strategy for both shareholder and employees.  Job Creation/Maintenance for the matured relationship with Labor Union. 2. Public acknowledgement  Enlightening the public about the possibility of tariff hike due to continuing suppression of tariff, NOT due to restructuring  Retail tariff should be floated depending upon the fuel prices in the international market just like petroleum price in Korea VI. Issues on successful restructuring

51. 51 Korean Experience and Future Market Seoul National University 3. Restructuring of LNG industry  Currently LNG import is regulated and monopolized by KOGAS  In the competitive market LNG generators will show very low profitability due to high import price and luxury tax  LNG industry should be deregulated for the users to be able to purchase LNG at competitive basis  Reasonable profitability of LNG generators will promote the investment of private-owned companies and, thus, the lower electricity price VI. Issues on successful restructuring

52. 52 Korean Experience and Future Market Seoul National University VII. Outstanding tasks to overcome  Recovering the confidence of investors eliminating uncertainties.  Stable and realizable timetable to induce thorough preparation of market participants  Elimination of factors hindering competition 1. Consistent policy and timetable 2. Enhanced opportunities of participating in market design by market participants  Increasing the understanding of market operation by participants  Enhancing the smoothness of market operation

53. 53 Korean Experience and Future Market Seoul National University VII.Outstanding tasks to overcome  Compromise with labor union  Public acceptance  Better services to customers  Enhancing the role of competitive market  Increasing social welfare by the guarantee of autonomous management and operation 3. Public acceptance of the viability of restructuring