Research Study: “A study on institutional obstacles against the New Energy Industry in Korea,” Korea Energy Economics Institute, YS lee and JH Kim, December, 2015
In September 1986, the Korea Energy Economics Institute (KEEI) was launched as South Korea’s principal energy policy research organization. Since then, it has published on national energy and resource policy and made proposals for the country’s mid- and long-term energy policy visions. After the Paris Climate Conference (COP21) was held in December 2015, KEEI released the results of some meaningful studies that are relevant to the country’s post-COP21 policies; for example, it published an analysis on the economic effects of Boarder Carbon Adjustments (BCAs) and a study on price prediction model for Renewable Energy Certificate (REC).
Among KEEI’s recent publications, “A study on institutional barrier factors of the New Energy Industry in Korea” made important contributions. The South Korean government announced the ‘Primary Eight Models for the New Energy Industry’ in April 2015 and the ‘Proliferation Strategy of the New Energy Industry’ in November 2015; it is now promoting the New Energy Industry (NEI) mainly through smart grid technology and linkage between Information and Communication Technology (ICT) and energy industry. However, existing business models for NEI in South Korea are still focusing on changes in supply sides instead of analyzing demand sides and consumers’ behavior, which ultimately limits diversity of new business models. Based on this criticism, the above study reviews South Korea’s energy system, which has traditionally prioritized the production-side as the major institutional barrier that disturbs fundamental and necessary reforms for fostering NEI in the country.
South Korea used to regard producing and selling energy by using large-scale energy facilities and vertically integrated monopolistic public corporations as the most efficient and smartest strategy to ensure the country’s energy security. However, the country’s state-owned energy monopoly spun its electricity generation business into six companies in April 2001. Since then, the electricity wholesale market has become open and competitive but the transmission and distribution sectors still remain under government monopolistic control which means Korean consumers cannot choose their utilities.
Conventional regulation of the energy system also has not changed. The study highlights how current energy prices and entry regulations work as barriers to the development of new businesses. For example, the majority of new business models for NEI discussed now in South Korea are about changes in supply infrastructures lead by the government. Each model is individual, which limits expansion of private investment. This trend is, again, originated from the structural problems. In the Korean electricity market, the price has been maintained at a relatively low level through the monopolistic system, which resulted in the regulation of new entry of alternative utilities. Furthermore, the issues of what changes can be made in demand side and how consumers behavior can be changed have not been addressed. Therefore, the study notes that it is difficult to construct a profitable model for NEI in South Korea because of the low and inflexible energy tariffs.
In conclusion, the study suggests the following three points:
1) South Korea needs to set up an energy price system determined by real energy supply and demand in order to develop NEI.
2) South Korea should encourage new businesses by loosening separations between different energy resources and/or the abolition of other barriers to market entry. In South Korea, each energy market, i.e. electricity, heat, and city gas, is separated and each sector has its own utility and the business cannot encroach one and another.
3) Third, South Korea should institutionally support new businesses by opening up the monopolized nature of energy information sharing in the industry. For example, information about consumers’ behaviors is not open to the market and monopolistically used by the selective utilities. As long as information is not open to the market, it is hard to expect that new business people can reflect the reality fully in their new technologies or business models.
This study contributed to the first step of reforms in the Korean energy market: the South Korean deputy prime minister for economic affairs, Il-ho Yu, announced an initiative titled “Adjustment Method for Function of Energy, Environment, and Education Field” on June 14, 2016. According to this plan, the government will deregulate the current system and help NEI businessmen sell electricity directly to consumers without involving the government.
Oh, KS et al. “A study on the economic effects of Boarder Carbon Adjustments under the new climate agreement,” (KEEI, December 2015)
Lee, CY et al. “A study on price prediction model for Renewable Energy Certificate (REC) and its operation,” (KEEI, December 2015)
Lee, YS, and JH Kim, “A study on institutional obstacles against the New Energy Industry in Korea,” (KEEI, December 2015)
The Primary Eight Models for the New Energy Industry include: 1. Market for Demand Response Resource (DRS); 2. Energy Storage System (ESS) · Electronic Manufacturing Service (EMS) Integration Service; 3. Energy Self-sufficient Island; 4. Electronic Vehicle; 5. Heat energy potential of hot waste water from domestic thermal power; 6. Lease of solar power panels; 7. Zero-energy buildings; and 8. Eco-friendly energy towns.