In October 2020, Korea announced its pledge to achieve net zero emissions by 2050. With 586 million tonnes of CO₂-equivalent in 2019, Korea accounts for 2% of global annual emissions. Its power and industrial sectors are major contributors to annual national emissions at 37% and 36% respectively.

Net zero emissions by 2050 would require very strong support measures and incentives that introduce renewable and other low‑carbon energy sources and interventions to rein in emissions of greenhouse gases in all sectors of the Korean economy. The power sector is the largest source of emissions in many countries, including Korea, and should be the first sector to decarbonise as shown in the Net Zero by 2050 roadmap by the International Energy Agency (IEA). 

The purpose of this report is to examine how electricity market design in Korea must change to facilitate national decarbonisation without undermining electricity security. The IEA and the Korean Energy Economics Institute (KEEI) have developed the Korea Regional Power System Model, which includes six power system regions. This model simulates what would happen to the Korean power sector after implementation of the 9^th Basic Plan for Long-Term Electricity (BPLE) in 2034, and under the Announced Pledges Scenario (APS) in the World Energy Outlook (WEO) 2021 by the IEA in 2035. The latter is aligned with Korea’s pledge to achieve net zero emissions by 2050.  

Korea aims to reduce emissions from the power sector in a cost-effective way, without compromising electricity security. In liberalised power markets, like Korea’s, the wholesale market should be the key enabler to reach policy objectives and to ensure the efficient dispatch of all resources. However, Korea’s current cost-based system does not account for factors such as emissions and system security. In recent years, this has resulted in higher profits for technologies with lower fuel costs and higher emissions, like coal-fired generation.

Maintaining this pricing regime would not enhance the power system’s ability to secure sufficient low-carbon energy and dispatchable capacity by 2035. Considering the recent introduction of policies to phase out coal-fired generation and limit nuclear electricity, it will be important to secure enough investment in alternative low-carbon dispatchable resources such as hydro, pumped storage hydropower (PSH) and battery storage. 

Korea’s annual variable renewable energy (VRE) share of electricity supply was 4% in 2020, and the country is in Phase I in the Phases of VRE integration framework developed by the IEA. Following the 9th BPLE would bring their VRE share to around 21% in 2034 and place the country in Phase III. This would require coping with maximum hourly VRE penetrations of 60% relative to load and coping with three-hour ramp-down requirements equivalent to 51% of the daily peak already by 2030.

Korea’s annual variable renewable energy (VRE) share of electricity supply was 4% in 2020, and the country is in Phase I in the Phases of VRE integration framework developed by the IEA. Following the 9th BPLE would bring their VRE share to around 21% in 2034 and place the country in Phase III. This would require coping with maximum hourly VRE penetrations of 60% relative to load and coping with three-hour ramp-down requirements equivalent to 51% of the daily peak already by 2030.

Even with enhancements in pricing and market design, achieving Korea’s policy objectives of electricity security and decarbonisation may still require additional incentives for investments in certain technologies. Regulatory or revenue uncertainty and the lack of visibility over decarbonisation paths can be significant barriers to securing investment at the scale or pace required.

Capacity payments can thus help to complement market revenues and ensure enough investment. They should be technology neutral and remunerate new technologies, such as battery storage, VRE and demand response, which have typically been excluded from such schemes.

Moreover, the remuneration to these assets should reflect their contribution to the system’s most critical conditions, such as net load peaks or reserve shortfall hours, which may evolve over time. It is also important to remember that capacity payments are not meant to pay twice for the investment, so they need to be designed in such a way that they reflect only the “missing money” required by generators to break even, subtracting net revenues received in the wholesale electricity market. 

At present, large industrial consumers constitute the largest share of participants in the country’s demand response programmes. However, recent advances in digitalisation technologies for the power sector are already driving the deployment of distributed assets, such as electric vehicles (EVs), battery storage, and cogeneration for active participation in balancing markets. This, however, will require a greater deployment of advanced metering and control technology and, potentially, the entry of new service providers. 

In the 2035 Korea APS scenario, optimising the charging pattern of 30% of EVs could lead to significant savings in average energy costs (19%) and peak capacity costs (30%) for the EV fleet. Emissions from EV charging would be reduced by 20%. However, the current retail tariff structure would not encourage such optimisation of EV charging patterns, as Korea’s current schedule for time-of-day tariffs sets the peak load period during the middle of the day in summer. In the future, this would end up discouraging the use of electricity from solar PV for charging EVs, thus increasing costs and emissions.

Moreover, the participation of behind-the-meter battery energy storage systems for flexibility and system services could be encouraged by providing new revenue opportunities, beyond the existing potential for savings through avoided network charges. In other jurisdictions, the shift from so-called critical pricing of network costs to active participation in ancillary services and balancing markets has contributed to reducing system costs and improving the dispatch of battery storage as the system decarbonises.