KOREA
GENERAL ENERGY POLICY
On 28 March 2002, Korea became the 26th member of the IEA.
The Korean economy continues to display signs of maturity, with economic
growth rates that are slower today than in the years that preceded the Asian
economic crisis of 1997-1998. Economic growth was a strong 6.3% in 2002,
but decreased to 3.1% in 2003, a relatively high level compared to other
IEA countries. Being totally dependent upon primary energy imports, Korea
has a strong influence on the world energy markets as the third-largest
crude oil importer, and the second-largest importer of liquefied natural gas
(LNG) in 2002.
Following the publication of the “Vision and Development Strategies for
Korea’s Energy Policy toward 2010”, Korea released “The Second National
Energy Plan” in December 2002. Pursuant to Article 4 of the Rational Energy
Utilization Act, every five years the Minister of Commerce, Industry and Energy
is obligated to formulate a 10-year National Energy Plan.
Accordingly, the objectives of the 2002 National Energy Plan are as follows:
● To promote a stable supply of energy.
● To promote energy conservation to enable a rational use of energy and
stabilise energy demand.
● To minimise energy-related environmental damage and to promote the
development of energy-related technologies.
● To formulate directions and strategies for mid- and long-term national
energy policies as well as the basic guidelines for all other energy plans by
sector, source and region.
The 2002 National Energy Plan projects total energy demand to increase by
an annual average of 3.1% from 2001 to 2010 and by an annual average of
2.4% from 2001 to 2020 to reach 312 Mtoe in 2020. Per capita energy
demand, which stood at 4.1 toe in 2000, is projected to increase to 5.3 toe
and 6.2 toe in 2010 and 2020, respectively. The assumption behind these
forecasts is that, in addition to the existing energy policies, planned policies,
such as the First Plan for Electricity Supply and Demand, the Sixth Long-term
Plan for Natural Gas Supply and Demand (2002), are also carried out.
However, the government plan to increase the share of new and renewable
energy was not reflected in the forecast.
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ENERGY SUPPLY AND DEMAND
In 2003, Korea’s TPES reached 209 Mtoe, up 2.6% from 2002 and 125%
above the 1990 level. The growth of TPES since 1990 amounts to a high 7%
growth per annum. The share of oil in TPES was 49%, followed by coal (22%),
nuclear (16%) and natural gas (10%).
By 2002, total final energy consumption had more than doubled since 1990,
reaching 138 Mtoe, an annual growth rate of 7.5% that exceeded the
economic growth rate during the same period. Likewise, per capita primary
energy consumption grew from 2.2 toe in 1990 to 4.3 toe in 2002. By 2002,
per capita consumption of both petroleum and natural gas had only recovered
to pre-1998 levels.
Less than half of final energy is consumed by the industry. Energy
consumption in the transport sector is gradually expanding along with the
steady increase in the number of cars. Its share is relatively stable, at 24% of
TFC. As for the residential and commercial sectors, energy consumption in
these sectors is expected to expand gradually as income levels continue to
rise, living space expands, home appliances get bigger, and service industries
grow rapidly. Together they contribute 30% of TFC.
ENERGY AND THE ENVIRONMENT
Energy CO2 emissions increased from 226 Mt in 1990 to 451 Mt in 2002.
Total GHG emissions, of which energy-related emissions are the largest
component, increased at an annual average of 5.1% from 1990 to 2002. The
growing trend of greenhouse gas emissions will continue if considerable
efforts to reduce emissions are not made.
As the implementation period of the first action plan to address the climate
change (1999-2001) in Korea came to an end, the government rearranged the
national programmes and established the second action plan (2002-2004) in
March 2002. The plan promotes R&D on GHG reduction technologies, including
new and renewable energy, and medium- and large-scale technologies; it expands
GHG reduction programmes in all sectors (industry, transport, residential, waste
management and agriculture), in particular through establishing an integrated
management system for energy conservation; it facilitates the use of Kyoto
mechanisms such as the Clean Development Mechanism and Emissions Trading
by implementing a range of supporting programmes and by the development of
a GHG registry system (by 2005). The plan foresees the adoption of a CO2
emissions trading system at a later stage, with an emissions reduction target.
In 2003, the government revised the Rational Energy Utilization Act, which
had been enacted in 1979 and revised in 2002, with the aim of promoting
both the efficient use of energy and the reduction of greenhouse gases. In this
context, the government made it mandatory for any public energy planning
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effort to include actions for GHG reduction. This applies to the National
Energy Plan, the Basic Plan for Rational Energy Utilization and the Regional
Energy Plan. The revised act also broadened the scope of greenhouse gases,
so that the six greenhouse gases prescribed in the Kyoto Protocol (CO2, CH4,
N2O, HFCs, PFCs and SF6) are included.
New legislation and policies to mitigate air pollution were enforced. The Special
Act on Seoul Metropolitan Air Quality Improvement was, enacted in December
2003, and will enter into force on 1 January 2005. The act includes the
implementation of total pollution load management in industries, gradual
emissions reduction through the widespread introduction of low-emission
vehicles, attachment of pollution-reducing devices to cars, and other concrete
measures to reduce air pollution. By legislating this special act, the government
aims at markedly improving the air quality of the Seoul metropolitan area to the
level of other advanced OECD countries within ten years
Recognising the seriousness of the air pollution situation in Korea, the government
has implemented a "CNG Bus Supply Plan" in 2000 in order to lower the level of
air pollutants in large cities. By the end of 2000, 58 CNG buses were plying the
roads, and this number rocketed to 3 803 by the end of 2003, thanks to a variety
of public measures such as economic incentives for CNG bus purchase, support
funds for fuel, and an increase in the number of the refuelling stations.
ENERGY EFFICIENCY
Overall energy intensity now seems to have stabilised at 0.3 (toe per $1 000 of
GDP in 1995 US$), after having increased in the 1990s from 0.27 at an annual
average of 1.4%, essentially through investments in energy-intensive industries.
Aware of the high energy intensity and external dependence of the Korean
economy, the government is trying to curb energy consumption through various
measures. In the short run, with the high oil prices observed in recent years, the
government implemented immediate measures to curb the growth of oil
demand, especially in the transport sector. In the medium and longer run, the
government is attempting to rationalise energy prices by eliminating subsidies
and increasing taxes on several energies (see below section on oil). The
government also has energy efficiency measures being implemented by the
Korea Energy Management Corporation (KEMCO; founded in 1980) promoting
energy service companies (ESCOs) and voluntary agreements.
OIL
Though still large, oil’s contribution to TPES and TFC is slowly decreasing. Oil
represented a little above half of TPES in 2003 (110 Mtoe), compared to 54%
in 1990 (50 Mtoe), and 63% of TFC in 2002 (87 Mtoe), compared to 68% in
1990 (44 Mtoe).
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With no domestic oil reserves, Korea imports all of its crude oil. This
represented around 2.3 million barrels a day in 2003, as oil imports recovered
to their pre-Asian financial crisis level of 1997. Korea is one of the main
exporters of refined products in Asia. Thus, Korea’s economy is highly
vulnerable to oil price fluctuations and hikes.
This dependence on oil imports has led the government to implement a policy
of securing and diversifying the country's oil supply and developing a short-
and a long-term approach to oil security.
For short-term security purposes, Korea has developed a strategic petroleum
reserve, managed by the state-owned Korea National Oil Corporation (KNOC).
Strategic stocks reached their highest level in 2004, with 113 days, equivalent
to the previous year’s oil imports in January of that year (108 in June 2004).
Korea has regularly increased its strategic reserve over recent years, in line
with the IEA requirements.
For longer-term supply, KNOC is pursuing equity stakes in oil and gas
exploration around the world. KNOC has 17 overseas exploration and
production projects in 11 countries. This includes seven producing fields in
Yemen, Argentina, Peru, the North Sea, Indonesia, Libya and Vietnam, and
three fields under development in Yemen, Venezuela, and Vietnam. KNOC is
also exploring domestic blocks offshore from Korea. The government expects
KNOC to provide 10% of the country's oil needs by 2010.
Partly to promote energy conservation and rationalise oil products prices, the
government is reforming the relative price system of petroleum products by
modifying their respective taxes. This is being implemented in six stages, from
July 2001 to July 2006, with the goal of adjusting the relative price of
petroleum products to the level of non-oil producing countries of the OECD. In
particular, the government wants to reduce the price differential between
gasoline, diesel and LPG for cars. The government intends to double the
relative LPG price to bring it to half the gasoline price. The government will
also increase the price of diesel by 40% relative to gasoline. Finally, the
government has applied a similar policy to reduce the differential between the
price of kerosene used for cooking and the prices of LPG and natural gas.
COAL
Coal’s contribution to TPES continues to decrease. It represented 22% of TPES
in 2003 (46 Mtoe), against 28% in 1990 (26 Mtoe). Domestic production of
anthracite coal is Korea's only domestic fossil energy source, but its
production is decreasing. It represented an equivalent of 1.4 Mtoe in 2003
against 7.6 Mtoe in 1990.
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Coal and fuel oil have traditionally been the two staple fuels for domestic
heating, but are now being surpassed by lighter alternatives such as LPG and
kerosene. Coal still provides 40% of Korea's electricity production, but most
of this is imported bituminous coal. Whilst the expansion of LNG facilities and
nuclear power will limit the growth of coal use, it is likely to remain a
significant fuel source and a counterbalance to Korea’s over-reliance on oil.
Bituminous coal supplies come essentially from Australia, China, and the US.
The state-owned electricity company KEPCO has invested in several Australian
coal mines. China has become a significant supplier of coal to Korea since
2000 as its coal export volumes have increased, displacing some of the
volume from Australia.
NATURAL GAS
Natural gas is the fastest growing energy of the TPES. It grew from less than
3% in 1990 to 11% in 2003, with 22 Mtoe.
The Basic Plan for Restructuring the Gas Industry was completed in November
1999 and the government tried to implement the plan as scheduled. However,
the plan was strongly opposed, especially by trade unions refusing the
possible privatisation of KOGAS and the unbundling of imports and sales
activities from the operation of terminals and transmission facilities.
Opponents have been contesting the real benefits of the plan for both KOGAS
and end-users. Thus, gas market reform has hardly progressed since 2000.
With regard to introducing competition into KOGAS’s import/wholesale
sectors, the final decision on whether to split the sectors from KOGAS or to
open the field to new entrants will be made following sufficient discussion
among the interested parties. In March 2003, the government announced
that the terminals and transmission facilities of KOGAS would maintain their
present status under a state-owned corporation given the strong public
interest nature of the sector.
The uncertainty over the future structure of gas industry has some
implications on the security of gas supply. It has led to delays in KOGAS
concluding agreements with new LNG suppliers while additional volumes of
LNG beyond current contracts will be necessary by 2004. In the short term,
the increased demand is likely to be satisfied through purchases on the spot
market.
Large-scale end-users in Korea are currently considering direct imports of LNG.
POSCO (Pohang Iron and Steel Corporation) and SK Corporation have already
obtained approval to do so from the government. In 2004, they concluded
LNG import contracts with Indonesia, and they are now constructing a
receiving terminal in Gwang-yang. Local gas distribution companies and
district heating companies are also interested in importing LNG directly.
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The government is now considering the new method for implementing gas
industry reform through deregulation, which allows new players to enter the
LNG import/sales business. The new method has merit in terms of easier
implementation of the reform by expanding the scope of direct imports
without modifying the existing legal framework and thus avoiding opposition.
The government requested KOGAS to let POSCO-SK use the trunk line and
KOGAS agreed.
In addition to LNG imports, Korea began producing a small amount of
domestic natural gas in November 2003. KNOC's $320 million Donghae-1
development project is building a natural gas deposit offshore from Ulchin in
south-eastern Korea estimated to contain about 7 bcm of reserves. Donghae-
1 is a relatively minor development, however, and will satisfy only an
equivalent of 2% of Korea's current natural gas demand.
Meanwhile, Korea is also exploring the possibility of a natural gas pipeline
from the Kovykta natural gas deposit in the Irkutsk region of Eastern Siberia.
RENEWABLES AND NON-CONVENTIONAL FUELS
Renewables represented 1.8% of TPES in 2003, a small figure compared to the
IEA average of around 6%. The bulk of renewables is combustible renewables
and wastes, with 3.2 Mtoe in 2003. Hydro represented 0.4 Mtoe for the same
year. This share has been growing regularly over the past few years.
For many years, the emphasis on the development of renewable energy
resources in Korea has been limited. However, the country’s dependence on
external oil and gas and a political willingness to fight climate change are
triggering more policies to develop renewables.
The government also formulated the Second Master Plan for Developing and
Disseminating New and Renewable Energy Technologies in December 2003, and
selected three major areas which have viable market potential: hydrogen fuel
cells, photovoltaic and wind power. Accordingly, the government determined a
goal to boost the share of renewables to 5% of TPES in 2011 and decided to
concentrate support for technology development and deployment in these areas
through RD&D, third-party finance, investment tax credits and obligations.
The government considers that there has been insufficient investment in the
development of new and renewable energy technologies and a lack of support
for disseminating such technologies. In 2002, the government revised the
1987 Alternative Energy Act (Act on the Promotion, the Development, Use
and Dissemination of New and Renewable Energy). According to this revision,
Korea established a centre for new and renewable energy development and
dissemination in February 2003, and introduced a certification system for
new and renewable energy facilities.
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The government wants to modify the structure of renewables’ overall
contribution to TPES with a smaller share of combustible waste energy (57%
of total renewables in 2011 against 94% in 2002), a larger share of small
hydro (12% in 2011 against 0.1% in 2002), wind (10% in 2011 against 0.1%
in 2002), and biomass (8% by 2011 against 4% in 2002).
ELECTRICITY AND NUCLEAR
ELECTRICITY
Along with the rest of the economy, electricity production and demand have
been growing steadily. Production reached 345 TWh in 2002, against 281
TWh in 2001. In 2003, coal remained the leading fuel, with around 40% of
the generation, followed by nuclear (38%) and gas (13%). Gas is the fastest
growing fuel with 46 TWh in 2003 against 9 TWh in 1990.5
Following the January 1999 Basic Plan for Restructuring the Electricity
Industry, the generating assets of the state-owned Korea Electric Power Corp.
(KEPCO) were separated into six competing entities in 2001, paving the way
for partial privatisation. According to the plan, five of these entities are
supposed to be sold, while the last one, which owns nuclear and hydro assets,
will remain state property. KEPCO had been planning to sell a 34 to 51%
stake in the first of these units in 2003 – Korean South-East Electric Power
(KOSEPCO) – but the process was repeatedly delayed partly because of fierce
union opposition, but also because of financial uncertainties facing key
potential buyers, reducing the prospect of these sales’ revenues.
The distribution/retail sector was expected to be separated from KEPCO and
divided into several companies by April 2003. However, during the course of
the restructuring process, it was postponed by more than a year. Finally, in
June 2004, the government decided to halt the split of the distribution
business from KEPCO following a recommendation by the Korea Tripartite
Commission, and the plan for introducing wholesale competition based on
demand-side bidding has been suspended.
To reduce the electricity price differential between industrial and
residential/commercial consumers, the government is now implementing a
three-stage electricity tariff reform policy from 2003 to 2006. Measures to
achieve this goal were taken by the government in January 2003 and March
2004. The government has a plan to adopt an incentive regulation such as
RPI-X in order to enhance competitiveness of the electricity supply industry.
Following the restructuring plan mentioned above, large consumers have the
option of participating in wholesale competition since 2003. Consumers
5. Electricity production using gas began in Korea in 1986.
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above 50 MW contract capacity are eligible to buy power from either Korea Power
Exchange. For customers living in certain areas, electricity can be provided by a
third party (local franchised electricity provider) other than KEPCO.
NUCLEAR
As the government expects demand for electricity to grow at a rate above 4%
per annum in the coming years, future plans envisage the development of
more nuclear power plants to fulfil a large part of this additional demand. A
dozen nuclear plants are planned before 2015.
With regard to radioactive waste management, the government announced a
plan to secure a radioactive waste disposal site in May 2003, which has been a
pending national issue for a long time. The local government which volunteered
to make such facilities available was supposed to be provided with financial
support for regional development. Starting from June 2003, the government
initiated promotional visits to four candidate areas to explain the potential
benefits to local inhabitants and to identify a suitable disposal site. After this
visit, Buan – in the middle south-west of Korea – was considered to be the best
place for the repository. However, because of strong resistance from local
residents and NGOs, in February 2004 the government announced that it would
start to receive bids for a new site in which the radioactive waste repository will
be built. With this announcement, not only Buan but other provinces can also
bid for the site. This announcement focused on guaranteeing the participation
of citizens and securing the safety of the repository.
RESEARCH AND DEVELOPMENT
The fund for government energy R&D comes from the Electric Power Industry
Basis Fund and the Energy Project Special Account. The amount of R&D funded
through the Electric Power Industry Basis Fund increased from 72.5 billion won
in 2002 (€50 million), to 98.4 billion won in 2003 (€70 million), and this
should be used for the R&D on stabilising the electricity supply, strengthening
market competitiveness, environment-friendly electricity supply technology and
innovative electric power technology.
Also, the government supports the development and dissemination of new and
renewable energy technologies with money from the Energy Project Special
Account, arising from a surcharge on the price of imported oil, kerosene, natural
gas and LPG sales. In 2002, the Energy Project Special Account generated
25.9 billion won (€18 million) for R&D (5.4 billion won for fuel cells, 4.7 billion
for photovoltaic and 3.3 billion for wind power). In 2003, the total amount of
R&D increased to 33 billion won (€23 million), fuel cells to 7.5 billion won,
photovoltaic to 5.1 billion, waste to 4.1 billion and wind power to 3.7 billion).
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