Regulation of electricity utilities – sales of power

Approval to sell power

What authorisations are required for the sale of power to customers and which authorities grant such approvals?

A retail sale business licence is required to engage in the retail sales of electricity. The MOTIE has authority to grant retail sale business licences, although none have been granted so far except to KEPCO, the monopolistic retail electricity seller.

Power sales tariffs

Is there any tariff or other regulation regarding power sales?

The Electricity Business Act and the Price Stabilisation Act set forth the procedures for the approval of tariffs for the retail sales of electricity. The MOTIE has power to approve proposals on tariffs, following consultation with the Ministry of Strategy and Finance and review by the ERC. Under the Electricity Business Act and the Price Stabilisation Act, electricity tariffs are in principle established at levels that would enable KEPCO to recover its costs attributable to its basic electricity generation, transmission and distribution operations as well as receive a fair investment return on capital used in those operations. Electricity tariffs also vary depending upon the voltage, season, time of usage, rate option and other factors.

KEPCO classifies electricity usage into nine categories - residential, general, educational, industrial, agricultural, street lighting, midnight power, electric vehicle, demand management optional - with a different tariff applying to each usage.

Effective from 1 January 2017, the government revised the previous rate structure for the purposes of easing the burden of electricity tariffs on residential consumers. Under the revised scheme, the progressive rate structure previously applicable to the residential sector was changed from a six-tiered structure into a three-tiered structure with the highest rate now being no more than three times the lowest rate (previously the highest rate was 11.7 times the lowest rate).

Rates for wholesale of power

Who determines the rates for sales of wholesale power and what standard does that entity apply?

Cost-based pool system

Since April 2001, wholesale electricity trades have been occurring at the KPX. The KPX has responsibilities under the Electricity Business Act for determination of wholesale electricity prices under the cost-based pool system as set forth in the Market Rules, and processing the trades and their settlements. Wholesale electricity prices have two principal components: system marginal price (largely representing variable costs of generation under the merit order system) and capacity payment (largely representing fixed costs of generation). Because variable costs and capacity payments are determined in advance by the Cost Evaluation Committee (mostly comprised of interested parties, government officers and industry experts), power producers as well as KEPCO have no effective control over the pricing in the wholesale electricity market. The system marginal price is adjusted on the basis of factors including the distance of a generation facility to supplied areas, network and fuel constraints and the amount of power loss such as transmission loss.

In order to prevent wholesale electricity trading resulting in excessive financial imbalances between KEPCO and its subsidiaries which sometimes arise from windfall profit taking by base-load generation facilities and upward fluctuations in fuel prices, the wholesale electricity prices applicable to such related party trades are determined using the following formula: variable cost + [system marginal price - variable cost] x adjusted coefficient. The adjusted coefficient is determined by the Cost Evaluation Committee based on considerations of, among other things, retail electricity tariff rates, the differential generation costs for different fuel types and the relatively fair rate of returns on investment.

In addition to system marginal price, power plants are entitled to capacity payments to compensate for their construction costs. The reference capacity price is determined annually by the Cost Evaluation Committee based on the construction costs and maintenance costs of a standard generation unit, and is paid to each generation company for the amount of available capacity indicated in the bids submitted the day before trading, subject to such capacity being actually available on the relevant day of trading. Previously, the same reference capacity price applied uniformly to all generation units regardless of fuel type. However, since October 2016, the reference capacity price applies differentially to each generation unit depending on the start year of its commercial operation, and ranges from 9.15 won to 10.07 won per kilowatt hour, subject to: the reserve capacity factor relating to the requirement to maintain a standard capacity reserve margin range of 15 per cent to prevent excessive capacity build-up and to induce optimal capacity investment at the regional level; hourly and seasonal adjustments in order to incentivise power producers to operate their generation facilities at full capacity during periods of peak demand; the transmission loss per generation unit in order to favour transmission of electricity from a nearby generation unit; and the fuel switching factor in order to promote environmental sensitivities to climate change and to encourage reduced carbon emissions by penalising generation units for excessive carbon emissions, especially thermal units.

Vesting contract system

The Electricity Business Act introduced a vesting contract system effective from November 2014, under which the difference between strike prices and market prices of traded electricity are settled for specified quantities. The vesting contract system’s primary objective was to prevent windfall profit-taking by low-cost power producers (such as nuclear, coal, hydro and by-product gas-based power producers), and to replace the adjusted coefficient as the basis for determining the guaranteed return to generation companies. The system was also expected to provide more transactional certainties, economic dispatch of electricity and efficient operation to the parties relative to market trading, by requiring long-term contractual arrangements and providing incentives and penalties depending on the extent to which generation companies could supply electricity at costs below the contracted electricity prices. The contractual terms were subject to approval by the MOTIE in order to ensure fair and standardised application of the system to all power producers. In order to minimise disruptions to the electricity trading market in Korea, the vesting contract system was to be implemented in phases starting with by-product gas-based electricity in 2015, which accounted for 1.8 per cent of electricity purchased by KEPCO during that year. Owing to the recent backlash against coal-fired power plants and changes in the electricity business environment, however, the government has opted to apply the electricity pricing adjustment mechanism to independent coal-fired power plants instead of the vesting contract system. Under the electricity pricing adjustment mechanism, independent coal-fired power producers are entitled to recover associated investment costs and a fair rate of return on their investment.

Public service obligations

To what extent are electricity utilities that sell power subject to public service obligations?

The Electricity Business Act specifically provides for electricity utilities’ obligations to contribute to universal supply of electricity. In this respect, a power producer or retail seller may not refuse to supply electricity to a customer without justifiable reasons. To date, the presidential decree of the Act has failed to provide for universal supply of electricity in detail. However, the MOTIE’s regulated retail electricity rate gives relative benefits to certain customers by way of cross-subsidies. No supplier of last resort has been appointed, as KEPCO, having effective monopoly over retail sales, assumes the de facto burden as supplier of last resort.