As investments in advanced industries, including semiconductors, increase and global sanctions on carbon neutrality tighten, the need for renewable energy deployment is growing. However, two bottlenecks—power grid issues and capital procurement—are hindering the expansion of renewable energy, necessitating a rationalization of subsidy systems, according to research findings.
In a report released on July 27, the Korea Development Institute (KDI) stated that to achieve the government's target of 100 gigawatts (GW) of cumulative renewable energy capacity by 2030, an average of over 6.8 GW of new installations must be deployed every six months. This figure is four times higher than the performance over the past 5.5 years.
However, the current performance has resulted from the investment of tens of trillions of won in subsidies. The Renewable Portfolio Standard (RPS) alone saw 4.5 trillion won invested last year, with a total of 28 trillion won spent since its introduction in 2012.
An analysis of the cost-benefit of the renewable energy subsidy system revealed that the current system incentivizes operators to deploy renewable energy by providing additional revenue from the sale of renewable energy certificates (RECs) alongside generation profits. This combination increases the incentive for power producers to expand their capacity.
On the other hand, there has been no investigation into how much benefit this increased deployment provides to consumers who ultimately bear the burden of the settlement subsidies. KDI evaluated the cost efficiency of the RPS-REC system.
KDI researcher Lim Hee-hyun stated, "As of 2020, the estimated social benefit per won of subsidy was 1.33 won for solar power and 1.18 won for onshore wind power, indicating that both technologies have confirmed at least minimal economic feasibility as their social benefits exceed costs."
However, KDI's analysis warns that if REC prices rise, this benefit could decrease, highlighting the need for fundamental improvements in cost efficiency.
In South Korea, the pace of increasing renewable energy generation capacity has outstripped the expansion of the transmission network. From 2003 to 2023, generation capacity increased by 154%, while the expansion of the transmission network was only 26%. The construction of transmission lines has faced challenges, including site selection, community acceptance, and regulatory hurdles.
Market conditions to bridge the supply-demand gap are also lacking. Although a legal framework for decentralized energy production, which reduces transmission burdens by generating power near consumption areas, has been established, the practical effects remain minimal due to the lack of regional pricing systems.
KDI also identified capital procurement as a significant obstacle to the expansion of renewable energy. The predictability of operators' revenues influences capital procurement. Under the current system, renewable energy operators' income is affected by wholesale electricity market prices (SMP) and REC prices, both of which are highly volatile, making revenue predictions difficult. Consequently, operators are exposed to a volatile market, leading to increased financing costs due to the inability to secure stable long-term revenues.
The dual bottlenecks of power grid issues and capital procurement create a vicious cycle. When grid bottlenecks lead to output limitations and connection delays, the actual amount of electricity sold by operators decreases, complicating revenue predictions. Financial institutions, facing increased cash flow uncertainty, demand higher risk premiums, further raising capital procurement costs.
KDI warns that if these two bottlenecks are not resolved, the previously mentioned benefits per won of subsidy cannot be guaranteed. The interconnection of power grid issues, capital procurement, and deployment support means that underperformance in one area can delay overall deployment.
Researcher Lim emphasized the need to timely expand transmission networks and flexible resources to reduce output limitations and connection delays. He also called for the enhancement of long-term contract systems, increased policy financing, and improved revenue predictability.
He suggested designing subsidy policies to facilitate a virtuous cycle of learning effects and supply elasticity, while regularly conducting cost-benefit analyses to maintain the efficiency of support.
* This article has been translated by AI.
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