Government to Reveal Wind Power Pricing Standards Next Month

The government will unveil the pricing principles for the long-term wind power contract market, which will be introduced following the abolishment of the Renewable Energy Supply Obligation System (RPS), around mid-September. A key issue will be how to translate the weights assigned to renewable energy certificates (RECs) based on factors such as community participation, water depth, and grid connection distance into contract prices.

Industry stakeholders have urged for a swift establishment of the new system, warning that delays in finalizing detailed regulations could hinder investment decisions and project financing. The government is also considering extending the contract period for offshore wind projects to 25 years and incorporating adjustments for inflation and raw material price fluctuations.
 
At a seminar titled 'Direction and Challenges of Wind Power Bidding System After RPS Sunset,' held on August 27 at the aT Center in Seocho-gu, Seoul, the Korea Wind Energy Association and the Global Wind Energy Council (GWEC) discussed market transition strategies following the RPS abolishment and measures to protect existing operators.

The government plans to shift from a certificate trading system based on generation volume to a long-term fixed price contract market based on installed capacity. In this new market, Korea Electric Power Corporation (KEPCO) will act as the sole buyer, entering into long-term contracts with power producers through competitive bidding.

A contract for difference (CfD) mechanism will be applied for settlement. If the market price is lower than the contract price, KEPCO will compensate the difference; conversely, if the market price exceeds the contract price, KEPCO will reclaim the excess profits from the power producers. Starting next year, new power facilities will receive a Renewable Energy Generation Attribute Certificate (REGO) instead of RECs.

The government is reviewing a plan to convert the existing REC weights into a preferential pricing system by adding a certain amount to the contract price. While the specific amount and application period have not been finalized, the basic standards and principles for the transition, including the preferential pricing, are expected to be disclosed next month.

Woo Seok-jung, a senior official at the Ministry of Climate, Energy, and Environment, stated, "The amendment to the Renewable Energy Act is expected to be announced as early as the second week of September, and we plan to publicly share a draft of the standards or principles by mid-September at the latest."
 
There are suggestions that the price cap should be set considering both actual project costs and consumer burdens. Jo Eun-byeol, director of Ocean Energy Pathways, warned, "If the price cap is set too low, as seen in the UK, there may be no bidders, while setting it too high could impose high costs on the public for 20 to 25 years. We need to determine a reasonable level based on actual costs, including interest rates, exchange rates, raw material prices, installation vessel charter fees, and capital costs."

Transition measures for existing operators are also under consideration. Projects that win fixed-price competitive bids this year will continue to be governed by the current RPS regulations. Projects in the development stage that have not yet participated in bidding will be integrated into the new contract market, with discussions ongoing about how to supplement profitability by considering existing REC weights.

Woo emphasized, "The reform of the RPS should not prevent operators from conducting business or eliminate predictability. We are internally discussing how to protect operators based on their current permitting stages and the costs incurred."

The wind power industry argues that economic factors reflected in existing weights, such as water depth and grid connection distance, should also be maintained in the preferential pricing system. There are calls to apply preferential pricing until 2033, when existing operators can enter the bidding market.

Choi Deok-hwan, secretary general of the Korea Wind Energy Association, stated, "We conveyed to the government that the weighting system should be linked to a fixed amount rather than a percentage, while inheriting the existing system. We should avoid overly segmenting the market and instead create a structure that complements the economics of individual projects."

The extension of the contract period from 20 to 25 years is also under consideration. The industry explains that a longer contract period would secure stable cash flow, reducing project financing risks and levelized cost of energy (LCOE).

The government is also reviewing the introduction of indexation to reflect inflation and raw material price fluctuations in contract prices. The industry demands that exchange rates be included in the indexation metrics, as domestic offshore wind power heavily relies on foreign equipment and raw material procurement.

Yoo Sang-geun, a senior executive at Ørsted, noted, "Even if we maximize the use of the domestic supply chain, foreign currency payments are unavoidable in the raw material procurement process. If the exchange rate risk due to macroeconomic fluctuations is largely borne by the operators, it could become a critical constraint on project financing."