If South Korea continues to subsidise coal it will lose the low carbon technology race to those nations who are opening up their power markets to competitive forces which accelerate the deflationary trends of renewable energy.”
Planned retrofits costing $3.6 bn will accelerate the competitiveness of renewables and could impact KEPCO’s finances
The Korean government plans to retrofit a number of coal units to improve performance and reduce air pollution. Our analysis of these retrofits, which is based on publicly-available data in company reports, shows these investments will increase the long-run marginal cost by 18% on average, and thus will further increase the relative competitiveness of renewables. For example, if these retrofits go ahead the long-run marginal cost could on average be higher than building new renewables in 2025 instead of 2028. While analysing the impact of these retrofits for the end power user is beyond the scope of this brief, these investments are capital intensive and should be scrutinised by policymakers before being approved.
THE COST OF PLANNED COAL UNIT RETROFITS FOR PERFORMANCE IMPROVEMENTS AND ENVIRONMENTAL CONTROL TECHNOLOGIES
Source: Carbon Tracker analysis. Notes: LRMC estimates are based on a 10-year payback period. For more information on the methodology used see the main body of this note.
If policymakers fail to implement these recommendations and remain committed to coal power, the nation will face a dilemma: continue to subsidise coal generators either directly (through higher tariffs) or indirectly (through out-of-market payments) to maintain their financial viability; or keep tariffs artificially low to shelter consumers from higher costs. Both outcomes could prove financially and economically unsustainable, as subsidising coal generation will either anger taxpayers or energy consumers, while artificially low tariffs for consumers will impact fiscal resources. In the context of this analysis, Carbon Tracker offers three recommendations for policymakers.
1. Stop investing in new coal (both new build and retrofits).
New investments in coal capacity – both new build and retrofits – will unlikely be a least-cost solution over the capital recovery period. This period is typically 15-20 years for new coal capacity and 5-10 years for retrofits relating to performance enhancements or control technolgy installations. Our analysis highlights how coal power is losing its economic footing independent of additional climate change and air pollution policies. By 2024 at the latest, new solar PV investments will beat new coal investments based on LCOE analysis, and by 2027 it will be cheaper on average to build new solar PV than continue to run coal.
2. Develop a cost-optimised retirement schedule for the operating fleet.
South Korean policymakers should develop retirement schedules based on the LRMC of individual units. This analysis will allow policymakers to close the higher cost units first and lower cost units last, which should help ensure the end consumer receives the lowest cost electricity possible. Alternative retirement schedules, particularly those based on emission intensity targets, may not result in a least-cost outcome and thus could impact economic competitiveness.
3. Subject the retirement schedule to resource planning analysis to understand the system value of units.
Once policymakers have developed a cost-optimised retirement schedule at asset level, they should then undertake a systems planning analysis to take into consideration the system value of individual assets. Understanding system value is outside the scope of this analysis. Carbon Tracker intends to conduct this analysis with local partners and make this research publicly available.