Korean Experience and Future Market Cigre Workshop Study Committee C5 Market Structures and...

Korean Experience and Future MarketKorean Experience and Future Market

Cigre Workshop Study Committee C5

Market Structures and Institutions

Jong-Keun Park Jong-Keun Park Seoul National University

2003. 9. 22.

22Korean Experience and Future Market

Seoul National University

Table of Contents

I. Introduction to Korean power industry

II. Restructuring of power industry in Korea

III. Cost Based Pool Market

IV. Effect of competition in generation sector

V. Preparation for TWBP market

VI. Issues on successful restructuring

VII. Outstanding tasks to overcome




1. Growth of power industry in Korea

53,801

35,715

21,11118,060

367

45,773

32,282

19,124

9,915

3060

10000

20000

30000

40000

50000

60000

1961 1986 1991 1996 2002

Generating capacityPeak demand

(MW)




2. Ownership of generation capacity

PowerCompany

KEPCO &Affiliates

KIECO(Hanwha)

Total

Cap.(MW) 49,560 1,800 53,801

% 92.1 3.3 100.0

Others

2,441

4.5

LG2%

Others10%

KOWACO2%

KIECO3%

KEPCO &Affiliates

83%

(As of End 2002)



3. Capacity by fuels

Fuel Nuclear Coal LNG Oil Hydro TotalCap.(MW) 15,716 15,931 13,618 4,660 3,876 53,801

% 29.2 29.6 25.3 8.7 7.2 100.0

(As of End 2002)

Oil9%

Hydro7%

Coal30%

LNG25%

Nuclear29%




4. Capacity growth by E-Source (Gov’s plan)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

(MW)

35%

28%

12%

25%

27%

Nuclear Imported Coal LNG Heavy Oil Light Oil Domestic Coal Hydro

28%

25%

20%




5. Growth of peak demand and annual consumption

050,000

100,000150,000200,000

250,000300,000350,000

400,000450,000

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

(GWh)

Yearly Consumption(LHS)

Peak Demand(RHS)

Average growth : 5.4% 2.7% 2.0% (MW)




Public (3.7)

Residential(15.2)

Commercial (28.4)

Agriculture & Fishery (2.3)

Mining(0.4)

Manufacturing(50.0)

6. Electricity consumption


Total 281,872 GWh (Year of 2002)



7. Characteristics of Korean power network

765kV Route 345KV Route DC 180kV Submarine Cable 345KV Substation Power Plant


Regional concentration of supply (coastal area) and demand(Seoul)

Kyoung-In area demand : 42.6% Northward loadflow causing network congestion

Cheju island is connected

through HVDC system (154MW)

Nominal voltages of T/L’s are

765kV(662c-km), 345kV(7,496c- km) and 154kV(18,144c-km)

Kyoung-In area



7. Characteristics of Korean power network


Power flow




1. Objectives

Raising the general efficiency of the power industry by

promoting competition

Effective financing of upcoming capital expenditure

Increasing consumer benefits

2. Principles Unbundling of generation, transmission and distribution sectors

Introduction of competition into generation and retail sectors

Gradual introduction of competitive market to reduce shocks




3. The necessity of restructuring

Steep increase of electricity demand additional 45,000MW

should be built until 2015.

Lack of capital due to retail price regulation

Fund of 67 T Won is required by 2015 and 9 T Won/annum.

Needs private or foreign funds to build new power facilities.

International trend to deregulation and competitive market

Apply global rules in management of the public sector

Adopt the competition principle to utility field



4. The roadmap of the restructuring

A competitive generation sector consisting of private generation

companies

An electricity market operated by a Korea Power Exchange

(KPX) as an independent market operator

Single national transmission company and multiple distribution

companies

Retail competition for endowing all customers with choices

A regulatory framework based on an independent regulator




5. Brief history of restructuring

’94.7~’96.6 Management performance evaluation of KEPCO

’97.6 Establishment of Electric Power Industry

Restructuring Committee

’99.1 Basic Plan of Restructuring(MOCIE*)

’00.12 Act on Promotion of Restructuring of power industry

’01.4 Spin-off of generation sector from KEPCO

’02.10 Commencement of KOSEPCO (one of six Gencos)

privatization


* MOCIE : Ministry of Commerce, Industry and Energy



6. Basic plan of restructuringPHASE I PHASE II PHASE III

Competition

in Generation

Wholesale

Competition

Retail

Competition

20092005

Gencos Gencos competecompete in in the cost-based poolthe cost-based pool

KEPCO manages traKEPCO manages transmission and distrinsmission and distribution sectorsbution sectors

Introduction of the Introduction of the TWBP(Two way bidding TWBP(Two way bidding pool) and unbundling of pool) and unbundling of distribution sectordistribution sector

Transmission system Transmission system serves as a common carrierserves as a common carrier

Distribution network Distribution network will be opened and will be opened and privatizedprivatized

Regional supply Regional supply franchise will be franchise will be eliminatedeliminated

2001.4




7. Market structure

KPX(Cost-Based

Pool)

Genco

KEPCOKEPCO

CustomerCustomer

Genco Genco

Phase I (2001.4~)Generation Competition

Bidding

Bidding

Disco / Retailco

Disco / Retailco Disco /

Retailco


Retailco

Disco / Retailco

CustomerCustomer

CustomerCustomer

CustomerCustomer

KPX(Two-way Bidding

Pool)

Genco Genco Genco

Phase II (2005.4~)Wholesale Competition

Phase III (2009.4~)Retail Competition

Bidding

Bidding

Disco / Retailco


Retailco


Retailco

Disco / Retailco

CustomerCustomer

CustomerCustomer

CustomerCustomer

KPX(Two-way Bidding

Pool)

Genco Genco Genco




8. What has been done thus far?

Establishment of New Act on Promotion of Restructuring of

power industry

Division of generation sector into 6 Gencos (1 nuclear / 5 coal)

Plan for spin-off of distribution/retail sectors

Establishment of Korea Power Exchange(KPX)

Operation of the cost-based pool market

Establishment of Korea Electricity Commission in MOCIE

Commencement of Genco privatization (KOSEPCO)

Design of TWBP market rule and procedure (in progress)




9. Korea Power Exchange (KPX)


Established in April 2001

non-profit independent organization

Core functions

Pool Governance

Market Operation

System Operation



10. Korea Electricity Commission (KOREC)


Established in April 2001

Established as a division of MOCIE

Major functions

Restructuring of electric power industry

Deliberation and resolution (of matters in respect of the

granting of permission, establishment of fair trade system)

Arbitration of disputes

Investigation of matters in respect of protection of public

interests



11. Overview of six Gencos

(MW, billion Won) KHNP KOSEPCO KOMIPO KOWEPO KOSPO KEWESPO

Installed capacity* under plan

16,251*6,000

5,565*4,000

6,993*1,000

7,346*1,600

5,765*3,206

7,500*1,000

Assets 19,953 2,941 2,883 3,282 3,642 4,333

Equity 10,578 1,679 1,743 1,773 1,910 2,373

Liabilities 9,375 1,262 1,140 1,409 1,732 1,959

(As of end 2002)




12. Market share by generation

(For the year of 2002)




13. Market share by sales

(For the year of 2002)




III. Cost Based Pool (CBP) Market

1. Features of CBP

Operated from April 2001 Compulsory Pool Cost reflective market

Generation Cost Evaluation Committee Limited competition Multiple suppliers & Single purchaser Suppliers bidding (availability bidding) SMP determined in day-ahead market

Unconstrained Scheduling BLMP, SMP

Capacity payment Constrained on/off payment




2. Market operation flow chart




3. System Marginal Price (SMP)

BLMP : base load marginal price(nuclear & coal plant)

SMP : for non base load generators

influenced by maintenance schedule, demand, fuel price, etc.

SMP determination ratio by fuel type

0.10

8.40

15.80 16.20

59.50

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Nuclear D.coal Oil Coal CC

%




4. Settlement

Actual Electricity Generation

No Electricity Generation

SMP + CP(Scheduled energy

payment)

SMP – VC + CP(Constrained off)

VC + CP(Constrained on)

CP

OFFONPrice setting

schedule




5. Uplift

Ancillary service cost

frequency control

reserve procurement

voltage control

Constrained on/off cost




6. Demand vs. SMP

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

hour

dem

and[

MW

]

0

10

20

30

40

50

60

smp

[won

/kW

h]

demand smp2002-9-11 (Wed.)




7. Settlement amount analysis (2002)

Uplift

11.49%

Capacity Payment

45.15%

Schedule Energy Payment

43.36%




8. Schedule volume vs. trade volume (2002)

19,000

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

GWh

Scheduled Volume 24,188 20,976 23,382 22,158 22,635 22,076 23,708 23,387 21,662 23,332 24,088 25,965

Trade volume 24,402 21,133 23,625 22,252 23,026 22,545 24,475 23,560 21,968 23,647 24,834 26,401

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec




9. SMP, BLMP, Settlement price (2002)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

won/

kWh

SMP 58.22 52.10 51.02 46.76 48.21 39.20 40.06 36.08 40.73 46.31 53.95 54.11

BLMP 18.90 18.68 18.88 18.84 18.80 18.18 18.21 17.59 17.95 18.62 18.95 18.80

Settlement Price 48.80 47.37 46.58 46.31 46.09 46.44 46.78 46.83 46.93 46.39 47.84 49.92

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec




10. Voltage & frequency maintaining rate

Voltage Maintaining rate

99.4

99.5

99.6

99.7

99.8

99.9

100

100.1

1 2 3 4 5 6 7 8 9 10 11 12

2000 2001 2002

frequency maintaining rate

98.2

98.4

98.6

98.8

99

99.2

99.4

99.6

99.8

100

1 2 3 4 5 6 7 8 9 10 11 12

2000 2001 2002




11. number of disputes

0

2

4

6

8

10

12

14

16

J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

2001 2002 2003




1. Improvement of efficiency through competition

Encouraging management innovation and competitiveness

Reducing generation cost due to the improvement of the

purchasing process of fuels and materials

Trying to improve the supply ability by shortening the

overhaul period

Curtailing operation of high-cost generator

Reduction of labor cost through automation




2. Increase of generation capacity

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

(MW)

KHNP KOSEPCO KOMIPO KOWEPO KOSPO KEWESPO

14.0%

0.0%9.4% 15.8%

2.3%10.3%

2001 2002

Total capacity has increased 11.2% since spin-off



3. Increase of net profits

-400

-200

0

200

400

600

800

1000

(Wb)


9.6% 2001 2002


37.8% 53.3%31.7%

600.0%N/A

Total net profits has increased 42.0%



4. Improvement of debt ratio

0100020003000400050006000700080009000

10000

(Billion Won)


2001 2002


-0.6%

0.3% -14.7% -3.6%-5.4%

-16.0%

Total debt has decreased 4.4% since spin-off



5. Improvement of generation cost per kWh

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

(Won/kWh)


2001 2002


-0.3%

-5.1% -8.3%-7.2% -11.4%

-7.3%

Cost for generation has decreased 6.0%



6. Improvement of labour productivity

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

(MWh/person)


2001 2002


4.0%

53.1%

15.6%

24.2%

26.6%

23.3%

Labor productivity has been improved by 23%



7. Growth of electricity market (2001 vs. 2002)

7 regular members3 associate members

22 regular members8 associate members

Increase of members

Increase of market participating capacity

46,363MW(91% of the total)

49,921MW(95% of the total)





1. Basic design principles

Supply and demand participation

Clearing price set by commercial offers from generators

Publication of market information

KPX contract for reserve

Trading of electricity only through the

TWBP

KPX contract for ancillary services

Compensation for being constrained-on

or constrained-off

Settlement based on clearing price

* Based on 15 basic design principles for TWBP




2. Features of TWBP KPX is the only market and system operator Generators and purchasers submit offers and bids with price an

d quantity Self-committed generators, self-dispatched demands Ancillary services are procured through contracts between KPX

and participants Single energy price Five-minute dispatch and pricing on the generation side Averaged thirty-minutes pricing on the demand side Individual participants’ prices consider TLFs and DLFs based on

their location Constrained on or off payments, No capacity payments




3. CBP vs. TWBP

CBP(Cost-based pool)

TWBP(Two-way bidding pool)

Bidding Supplier bidding onlyTwo way bidding

(supplier, purchaser)Content ofbids Supply availability Price and quantity

CompetitionLimited

(competitiveness predetermined )

Competitive(strategy)

Profitability Predetermined by structure(scale, generation mix)

Strategic decision(bidding strategy, risk management)

Market participants

Multiple suppliers /Single purchaser

Multiple suppliers /Multiple purchasers



4. TWBP market opening schedule (modified)

2004

2003

20053/

44/4

1/4

2/4 3/4 4/4 1/4 2/4

Shadow operation based on cyber trading

Shadow operation based on cyber trading

Shadow operationwith virtual DiscosShadow operationwith virtual Discos

StandingBidding

StandingBidding

Opening of TWBPOpening of TWBP

The result of shadow operation and consultation may influence the detailed schedules for the spin-off of distribution sector and opening of TWBP market.

Not fixed

CBP market TWBP




5. IT system for TWBP market (Overall)

MO

S

MO

SNEMSNEMS

Market Information

KPX

MOS

Interface

MOS

Interface

Bidding, Settlement, Market Information

Trading

Server / DB

Trading

Server / DB

Measure/

Settleme

nt

System

Measure/

Settleme

nt

System

Market/

Network

Simulato

r

Market/

Network

Simulato

r

Risk

Managem

ent

Risk

Managem

ent

RTURTU

Commitment, Measurement

Operation/ Measurement

information

Genco’s Energy Trading & Risk Management system

Generation station

Bidding/

Contract

Managem

ent

Bidding/

Contract

Managem

ent




6. Vesting contract for pool-price stabilization Background

Market price in the TWBP is influenced by changes in

market environment Buyers and sellers are exposed to financial risk Reduce risk exposure in early stage of TWBP Designed by Freehills consortium

Factors to be considered Optimal allocation of profits among market participants Adjustable contract price to reflect market environmental cha

nge Limited life – only for beginning of successful implementation Reasonable and agreeable contract price




7. Transmission network access rules & fees

Open access to the transmission and distribution network for

all market participants without any discrimination

Imposing the cost for connecting the generator to common

network on the owner of generator

Levying fares based on MW sold

Regionally different tariff to provide signals to reduce

transmission and distribution cost

Access rules for both transmission and distribution network

have been approved by MOCIE(2002.12)




8. Cross-subsidy between user groups

114.8

48.8

96.1

133.7

Residential

Midnight

CommercialIndustrial

Aggricultural

116.4

Educational

100

48.0

Relative price to cost (MOCIE)

Profits of Discos will

significantly differ without

eliminating cross-subsidy

between user groups

Government announced the

plan to reduce the cross-

subsidy (gradual reduction for

4 years)

Tariff system should be

readjusted in a way that the

customers in industrial sector

bear the reasonable price of

power and energy.





9. Comparison of electricity tariffs

Tariff Korea Taiwan Japan USA UK

Residential87.01(118)

88.92(120)

228.71(310)

101.79(138)

125.03(169)

Commercial102.66(139)

89.61(121)

212.91(288)

93.15(126)

97.56(132)

Industrial59.02(80)

61.93(84)

143.93(195)

60.26(82)

75.77(103)

Composite(index)

73.88(100)

73.35(99)

191.13(256)

85.95(116)

100.2(135)

Base year 2002 2001 1998 2001 1999

(Won/kWh)

* Foreign exchange rates : as of end 2002

Price differences between user groups in Korea are much

bigger than other countries



1. Conflicts between labor and management

Nurturing for employees including labor unions on paradigm shift.

Win-win Strategy for both shareholder and employees .

Job Creation/Maintenance for the matured relationship

with Labor Union.

2. Public acknowledgement

Enlightening the public about the possibility of tariff hike due to

continuing suppression of tariff, NOT due to restructuring

Retail tariff should be floated depending upon the fuel prices

in the international market just like petroleum price in Korea




3. Restructuring of LNG industry

Currently LNG import is regulated and monopolized by KOGAS

In the competitive market LNG generators will show very low

profitability due to high import price and luxury tax

LNG industry should be deregulated for the users to be able

to purchase LNG at competitive basis

Reasonable profitability of LNG generators will promote the

investment of private-owned companies and, thus, the lower

electricity price




VII. Outstanding tasks to overcome

Recovering the confidence of investors eliminating uncertaintie

s.

Stable and realizable timetable to induce thorough preparation

of market participants

Elimination of factors hindering competition

1. Consistent policy and timetable

2. Enhanced opportunities of participating in market design by market participants

Increasing the understanding of market operation by

participants

Enhancing the smoothness of market operation



VII.Outstanding tasks to overcome

Compromise with labor union

Public acceptance

Better services to customers

Enhancing the role of competitive market

Increasing social welfare by the guarantee of autonomous

management and operation

3. Public acceptance of the viability of restructuring

Korean Experience and Future Market Cigre Workshop Study Committee C5 Market Structures and...

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