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Jong-Keun Park Seoul National University Korean Experience and Future Market Cigre Workshop Study Committee C5 Market Structures and Institutions 2003. 9. 22. Table of Contents Introduction to Korean power industry Restructuring of power industry in Korea Cost Based Pool Market

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slide1

Jong-Keun Park

Seoul National University

Korean Experience and Future Market

Cigre Workshop Study Committee C5

Market Structures and Institutions

2003. 9. 22.

slide2

Table of Contents

  • Introduction to Korean power industry
  • Restructuring of power industry in Korea
  • Cost Based Pool Market
  • Effect of competition in generation sector
  • Preparation for TWBP market
  • Issues on successful restructuring
  • Outstanding tasks to overcome
slide3

I. Introduction to Korean power industry

1. Growth of power industry in Korea

(MW)

slide4

I. Introduction to Korean power industry

2. Ownership of generation capacity

(As of End 2002)

slide5

I. Introduction to Korean power industry

3. Capacity by fuels

(As of End 2002)

slide6

I. Introduction to Korean power industry

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

(MW)

90,000

80,000

12%

70,000

60,000

25%

50,000

20%

40,000

28%

25%

30,000

28%

20,000

35%

10,000

27%

0

00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

Nuclear

Imported Coal

LNG

Heavy Oil

Light Oil

Domestic Coal

Hydro

slide7

I. Introduction to Korean power industry

5. Growth of peak demand and annual consumption

Average growth : 5.4%

2.7%

2.0%

(GWh)

(MW)

450,000

80,000

400,000

70,000

350,000

60,000

300,000

50,000

250,000

40,000

200,000

30,000

150,000

20,000

100,000

10,000

50,000

0

0

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

Yearly Consumption

(LHS)

Peak Demand

(RHS)

slide8

I. Introduction to Korean power industry

6. Electricity consumption

Agriculture & Fishery (2.3)

Mining

(0.4)

Commercial

(28.4)

Manufacturing

(50.0)

Public (3.7)

Total 281,872 GWh

(Year of 2002)

Residential

(15.2)

slide9

765kV Route

345KV Route

DC 180kV Submarine

Cable

345KV Substation

Power Plant

I. Introduction to Korean power industry

7. Characteristics of Korean power network

  • 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

slide10

I. Introduction to Korean power industry

7. Characteristics of Korean power network

Power flow

slide11

II. Restructuring of power industry in Korea

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
slide12

II. Restructuring of power industry in Korea

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
slide13

II. Restructuring of power industry in Korea

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
slide14

II. Restructuring of power industry in Korea

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

slide15

II. Restructuring of power industry in Korea

6. Basic plan of restructuring

PHASE II

PHASE III

PHASE I

Competition in Generation

Wholesale

Competition

Retail

Competition

  • Introduction of the TWBP(Two way bidding pool) and unbundling of distribution sector
  • Transmission system serves as a common carrier
  • Distribution network will be opened and privatized
  • Regional supply franchise will be eliminated
  • Gencos compete in the cost-based pool
  • KEPCO manages transmission and distribution sectors

2001.4

2005

2009

slide16

II. Restructuring of power industry in Korea

7. Market structure

Phase III (2009.4~)

Retail Competition

Phase II (2005.4~)

Wholesale Competition

Phase I (2001.4~)

Generation Competition

Genco

Genco

Genco

Genco

Genco

Genco

Genco

Genco

Genco

Bidding

Bidding

KPX

(Two-way Bidding

Pool)

KPX

(Two-way Bidding

Pool)

KPX

(Cost-Based

Pool)

Bidding

Bidding

KEPCO

Disco /

Retailco

Disco /

Retailco

Disco /

Retailco

Disco /

Retailco

Disco /

Retailco

Disco /

Retailco

Customer

Customer

Customer

Customer

Customer

Customer

Customer

slide17

II. Restructuring of power industry in Korea

8. What has been done thus far?

  • Establishment of New Act on Promotion of Restructuringof

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 KoreaElectricity Commission in MOCIE
  • Commencement of Genco privatization (KOSEPCO)
  • Design of TWBP market rule and procedure (in progress)
slide18

II. Restructuring of power industry in Korea

9. Korea Power Exchange (KPX)

  • Established in April 2001
  • non-profit independent organization
  • Core functions
    • Pool Governance
    • Market Operation
    • System Operation
slide19

II. Restructuring of power industry in Korea

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
slide20

II. Restructuring of power industry in Korea

11. Overview of six Gencos

(As of end 2002)

slide21

II. Restructuring of power industry in Korea

12. Market share by generation

(For the year of 2002)

slide22

II. Restructuring of power industry in Korea

13. Market share by sales

(For the year of 2002)

slide23

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
slide24

III. Cost Based Pool (CBP) Market

2. Market operation flow chart

slide25

III. Cost Based Pool (CBP) Market

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
slide26

III. Cost Based Pool (CBP) Market

4. Settlement

Price setting schedule

ON

OFF

Actual Electricity Generation

SMP + CP

(Scheduled energy payment)

VC + CP

(Constrained on)

No Electricity Generation

SMP – VC + CP

(Constrained off)

CP

slide27

III. Cost Based Pool (CBP) Market

5. Uplift

  • Ancillary service cost
    • frequency control
    • reserve procurement
    • voltage control
  • Constrained on/off cost
slide28

III. Cost Based Pool (CBP) Market

6. Demand vs. SMP

2002-9-11 (Wed.)

slide29

III. Cost Based Pool (CBP) Market

7. Settlement amount analysis (2002)

Uplift

11.49%

Schedule Energy Payment

43.36%

Capacity Payment

45.15%

slide30

III. Cost Based Pool (CBP) Market

8. Schedule volume vs. trade volume (2002)

slide31

III. Cost Based Pool (CBP) Market

9. SMP, BLMP, Settlement price (2002)

slide32

III. Cost Based Pool (CBP) Market

10. Voltage & frequency maintaining rate

slide33

III. Cost Based Pool (CBP) Market

11. number of disputes

slide34

IV. Effect of competition in generation sector

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
slide35

2001

2002

IV. Effect of competition in generation sector

2. Increase of generation capacity

  • Total capacity has increased 11.2% since spin-off

(MW)

14.0%

18,000

16,000

14,000

12,000

10,000

10.3%

15.8%

9.4%

2.3%

0.0%

8,000

6,000

4,000

2,000

0

KHNP

KOSEPCO

KOMIPO

KOWEPO

KOSPO

KEWESPO

slide36

2001

2002

IV. Effect of competition in generation sector

3. Increase of net profits

  • Total net profits has increased 42.0%

9.6%

53.3%

37.8%

31.7%

600.0%

N/A

slide37

2001

2002

IV. Effect of competition in generation sector

4. Improvement of debt ratio

  • Total debt has decreased 4.4% since spin-off

-0.6%

-16.0%

-5.4%

-3.6%

0.3%

-14.7%

slide38

2001

2002

IV. Effect of competition in generation sector

5. Improvement of generation cost per kWh

  • Cost for generation has decreased 6.0%

-7.3%

-7.2%

-11.4%

-8.3%

-5.1%

-0.3%

slide39

2001

2002

IV. Effect of competition in generation sector

6. Improvement of labour productivity

  • Labor productivity has been improved by 23%

24.2%

4.0%

23.3%

15.6%

26.6%

53.1%

slide40

IV. Effect of competition in generation sector

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

  • Increase of members

7 regular members

3 associate members

22 regular members

8 associate members

  • Increase of market participating capacity

46,363MW

(91% of the total)

49,921MW

(95% of the total)

slide41

V. Preparation for TWBP market

1. Basic design principles

Supply and demand participation

Trading of electricity only through the TWBP

Clearing price set by commercial offers from generators

KPX contract for reserve

Publication of market information

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

slide42

V. Preparation for TWBP market

2.Features of TWBP

  • KPX is the only market and system operator
  • Generators and purchasers submit offers and bids with price and 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
slide43

V. Preparation for TWBP market

3.CBP vs. TWBP

TWBP

(Two-way bidding pool)

CBP

(Cost-based pool)

Bidding

Two way bidding

(supplier, purchaser)

Supplier bidding only

Content of

bids

Price and quantity

Supply availability

Limited

(competitiveness

predetermined )

Competitive

(strategy)

Competition

Strategic decision

(bidding strategy,

risk management)

Predetermined by structure

(scale, generation mix)

Profitability

Market participants

Multiple suppliers /

Multiple purchasers

Multiple suppliers /

Single purchaser

slide44

CBP market

TWBP

V. Preparation for TWBP market

4. TWBP market opening schedule (modified)

Not fixed

2003

2004

2005

3/4

4/4

1/4

2/4

3/4

4/4

1/4

2/4

Standing

Bidding

Shadow operation based

on cyber trading

Shadow operation

with virtual Discos

Opening

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.
slide45

V. Preparation for TWBP market

5. IT system for TWBP market (Overall)

Generation station

KPX

Commitment,

Measurement

Market

Information

MOS

NEMS

RTU

Operation/

Measurement

information

Bidding, Settlement,

Market Information

MOS

Interface

Trading

Server / DB

Bidding/

Contract

Management

Measure/

Settlement

System

Risk

Management

Market/

Network

Simulator

Genco’s Energy Trading & Risk Management system

slide46

V. Preparation for TWBP market

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 change
    • Limited life – only for beginning of successful implementation
    • Reasonable and agreeable contract price
slide47

V. Preparation for TWBP market

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)

slide48

133.7

116.4

114.8

96.1

100

48.8

48.0

Residential

Commercial

Aggricultural

Educational

Industrial

Midnight

V. Preparation for TWBP market

8. Cross-subsidy between user groups

  • 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.

Relative price to cost (MOCIE)

slide49

V. Preparation for TWBP market

9. Comparison of electricity tariffs

  • Price differences between user groups in Korea are much

bigger than other countries

(Won/kWh)

* Foreign exchange rates : as of end 2002

slide50

VI. Issues on successful restructuring

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

slide51

VI. Issues on successful restructuring

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

slide52

VII. Outstanding tasks to overcome

1. Consistent policy and timetable

  • Recovering the confidence of investors eliminating uncertainties.
  • Stable and realizable timetable to induce thorough preparation

of market participants

  • Elimination of factors hindering competition

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
slide53

VII.Outstanding tasks to overcome

3. Public acceptance of the viability of restructuring

  • 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