Executive Summary

In this note we present the results of Carbon Tracker’s coal power analysis for South Korea to understand stranded asset risk and relative economic competitiveness. Carbon Tracker has created a techno-economic simulation model to track key economic and financial metrics of coal power at the asset-level throughout the world. These metrics include: the operating cost, gross profitability, relative competitiveness, phase-out year, and stranded asset risk in a below 2°C scenario.

South Korea has the highest level of stranded asset risk in the world due to regulatory loopholes which favour coal power.”

South Korea has the highest stranded asset risk in the world due to market structures

We define stranded asset risk as the difference between cash flows in a business-as-usual (BAU) scenario (which acknowledges existing and ratified air pollution and carbon pricing policies as well as announced retirements in company reports) and cash flows in a below 2°C scenario (which sees coal power phased-out in South Korea by 2040 in accordance with the Paris agreement). A positive stranded asset risk value means, based on existing market structures, investors and governments could lose money in the below 2°C scenario as coal capacity is cash-flow positive. A negative stranded asset risk figure means, based on existing market structures, investors and governments could avoid losses in the 2°C scenario as coal capacity is cash-flow negative.

Our below 2°C scenario finds South Korea has $106 billion of stranded asset risk – the highest of the 34 countries modelled. The figure represents the difference between the cash flow utilities (i.e. Korea Electric Power Corporation’s (KEPCO) generation companies and private generators) may receive under the current South Korean power market and what they would receive in a below 2°C scenario, which sees capacity closed prematurely to meet the temperature goal in the Paris Agreement. This is due to regulatory structures which effectively guarantee coal generators’ high returns. The policies include: the merit order being based solely on fuel costs; large capacity market payments; and compensation for carbon exposure and transmission restrictions. These measures provide coal generators with cash flows larger than that which they would receive in other markets throughout the world. For example, our analysis finds that major coal power markets, such as China, the US, and the EU, are cash-flow negative in our BAU scenario, and thus have negative stranded asset risk.

STRANDED ASSET RISK OF OPERATING COAL CAPACITY AND CAPACITY UNDER-CONSTRUCTION BY COUNTRY OR REGION

South Korea risks losing the low carbon technology race by remaining committed to coal

Independent of additional climate or air pollution policy, our analysis shows it will be cheaper for South Korea to build new solar PV than to operate existing coal plants by 2027, calling into question not only planned coal investments, but also the economic viability of the current operating fleet. This highlights a power sector mega trend: with or without climate policy coal power will likely become a high-cost option.

LONG-RUN MARGINAL COST OF SOUTH KOREA’S COAL CAPACITY VS THE LEVELIZED-COST OF ONSHORE WIND AND SOLAR PV FROM 2018 TO 2040

President Moon Jae-in, has clarified his willingness to move away from coal by announcing plans to decommission several operating coal power plants and cancelling construction plans for two units. Despite ongoing efforts towards a cleaner power mix, coal is the dominant source of electricity in South Korea producing 43% of total gross generation in 2017. South Korea has 5.4 GW of coal under construction and 2.1 GW planned, as well as several retrofits in various stages of planning. The country’s low carbon strategy, which aims to stimulate the economy and secure energy independence, risks being derailed by a continued focus on coal power. For example, according to Bloomberg NEF, South Korea currently has the second highest solar PV costs and the highest onshore wind costs worldwide.

LEVELIZED COST OF ONSHORE WIND AND SOLAR PV FOR SELECT COUNTRIES IN 2018

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

Policy recommendations

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.