The Era of Energy Security Is Here

To properly set the right direction for our energy policy, we must accurately understand the characteristics of Korea’s energy industry, along with its strengths and weaknesses. Only on the basis of a clear-eyed understanding of our energy conditions can we present the proper direction for energy policy.

Let us first look at the characteristics of Korea’s energy industry. The most important feature is its high dependence on foreign sources of energy. More than 95% of primary energy is imported from abroad. For this reason, our energy situation is greatly shaken by events that have a major impact on international energy prices, such as wars in the Middle East, Japan’s nuclear accident, and the war in Ukraine.

Second, in terms of energy infrastructure, Korea is an isolated island. Our power grid and gas pipeline network are not connected to those of other countries, which means we must supply and consume electricity and gas on our own.

Third, major metropolitan areas, including the Seoul metropolitan area, have many apartment complexes and other forms of collective housing, which makes the transportation and delivery costs of electricity, gas, and heat very low. Fourth, Korea’s energy industry is led by the government and state-owned enterprises.

In this respect, energy security carries tremendous importance in Korea’s energy policy. Since we have no choice but to depend on overseas energy, it is important to diversify our energy sources and maintain a high share of nuclear power, which can be stockpiled and processed domestically over a long period of time.

In addition, to ensure stable imports of energy sources, we must pursue agile geopolitical maneuvering and diplomatic strategies vis-à-vis major powers and resource-rich countries. At the same time, we must maintain steady interest in the exploration and development of energy and rare resources, and we must not neglect long-term investment.

The diversification of our energy sources from oil-centered energy to nuclear power, bituminous coal, and natural gas around the 1980s was also a decision made from the standpoint of energy security in response to the first and second oil shocks.

Although it is understandable that the Moon Jae-in administration’s emphasis on phasing out nuclear power and coal, and its setting of unrealistically high renewable energy targets for 2030 and 2050, reflected goals presented under pressure from and scrutiny by the international community to reduce carbon dioxide emissions, it is hard to shake the impression that, from the standpoint of energy security, this was an overreach that ignored Korea’s realities.

It is reasonable to judge that the Yoon Suk Yeol administration is moving in the right direction by expanding the role of nuclear power and reducing coal at a rational pace. Korea, as an isolated island, should not benchmark Europe, where power grids and gas pipeline networks are interconnected.

We must not forget that Germany, which was able to adopt a nuclear phase-out and coal phase-out relatively easily by receiving electricity from France’s nuclear power plants and gas from Russia, is now facing a severe energy crisis in the aftermath of the war in Ukraine.

We Must Open the Way for Competition in the Energy Industry

If energy security is the broad framework that Korea’s energy policy must have, then the operating principles of specific energy policies should rationally be based on the market and prices. However, as recently seen in KEPCO’s deficits and the issue of electricity rates, a serious problem is that in Korea’s energy industry, government orders and controls are operating more powerfully than market principles or prices.

Even now, Korea’s energy policy still bears many traces of the high-growth era. During that period, visible outcomes such as building energy infrastructure, importing fuel, and supplying energy were considered more urgent than improving institutions and markets, and so rational incentives and the operation of a pricing system based on market principles were not fully taken into account.

The institutional arrangements and pricing systems that were hastily put in place as temporary expedients have now formed vested interests and interest groups, obstructing institutional reform, industrial restructuring, and rationalization of the pricing system for the efficient production and distribution of energy.

Electricity and natural gas are supplied by the government through state-owned enterprises and are subject to strong price controls. As a result, energy-related public enterprises, including KEPCO and Korea Gas Corporation, have accumulated growing deficits, and most have been designated as “public institutions at financial risk.”

Because of low energy prices, Korea has been unable to escape an energy-intensive industrial structure. The most effective and honest energy policy for achieving carbon neutrality is not to set renewable energy targets that will be impossible to achieve in the future, but to normalize energy prices today.

In this regard, it is encouraging that the Yoon Suk Yeol administration has pledged to establish an electricity market and electricity rate system based on market principles and to strengthen the independence of the Electricity Commission and regulatory governance.

However, as long as electricity and gas rates remain public utility charges subject to inflation management, doubts remain as to how independent they can truly be from government price controls.

What must be improved, along with the price level, is the pricing system itself. For example, electricity rates are the same nationwide, and as a result, electric power facilities such as power plants and transmission lines are not being properly built. The high-voltage HVDC transmission line crossing the Baekdudaegan mountain range in Gangwon Province should have been completed by now, but consent from residents has still not been obtained.

The privately built coal-fired power plants planned for the East Coast and the nuclear power plant in Uljin will also be useless without this transmission line. Gas-fired power plants must be built to replace coal-fired plants, but even after searching the entire country, finding suitable sites is almost as difficult as picking stars from the sky. This is because no incentives are provided to local governments.

If a regionally differentiated electricity pricing system were introduced to lower electricity rates in areas through which transmission lines pass and in regions with many power plants, local governments would be able to attract manufacturers and data centers and revitalize their local economies, and would therefore become more cooperative regarding the siting of power facilities.

For market principles to function properly, the energy industry, which has long been operated under the monopoly of state-owned enterprises, must be opened to the possibility of competition and choice. In this respect, it is promising that the Yoon Suk Yeol administration has said it will gradually dismantle the monopoly sales structure by allowing electricity sales to large-scale users through long-term contracts.

To introduce competition and choice fairly, the neutral operation of the power grid is essential. Likewise, in the gas industry, LNG imports should be allowed to be bought and sold freely, and natural gas supply infrastructure such as pipeline networks and storage tanks should be opened up so that fuel can be supplied efficiently.

Seongbong Cho, Professor, Department of Economics, Soongsil University

---

Original title: 성큼 다가온 에너지 안보 시대

Author: Seong-bong Jo

Date: 2022-07-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24865