Brown is the new green

Key Findings

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. The note has four key findings.

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

Our below 2°C scenario finds South Korea has $106 billion of stranded asset risk – the highest of the 34 countries modelled. The $106 billion represents the difference between the cash flow utilities 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. These policy measures include: merit order being based solely on fuel costs; large capacity market payments; and compensation for carbon exposure and transmission restrictions. All together, these measures provide coal generators with cash flows larger than that which they would receive in other markets throughout the world.

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

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 nation’s low carbon strategy, which aims to stimulate the economy and secure energy independence, risks being derailed by a continued focus on coal power. 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.

Planned retrofits to cost $3.6 bn which will accelerate the competitiveness of renewables and could impact KEPCO’s finances.

Our analysis of South Korea’s coal retrofits, which is based on publicly-available data in company reports, shows these investments will, on average, increase the long-run marginal cost (LRMC) by 18%, and thus will further improve the relative competitiveness of renewables. For example, if these retrofits go ahead the LRMC could, on average, be higher than building new solar PV by 2025 rather than 2028.

South Korea should stop investing in new coal and develop a retirement schedule.

If South Korean policymakers 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. Thus, South Korea needs to stop new investments (both new build and retrofits) and develop a cost-optimised retirement schedule.