IEA Reviews Korea Energy Policy, Commends Diversification of Supply and Energy Markets Reforms, but Calls for more Attention to Energy Efficiency

(Seoul) — 5 June 2002

Robert Priddle, Executive Director of the International Energy Agency, today released the IEA’s in-depth review of the energy policies of the Republic of Korea. The review was conducted by a team of international energy experts from IEA Member countries and the IEA Secretariat.

“This is the third time the IEA has reviewed Korea’s energy policies, but the first time since Korea became an IEA Member country”, Mr. Priddle said. Korea became the twenty-sixth Member of the IEA on 28 March 2002.

“Korea is highly dependent upon external sources of energy, but the country has managed successfully to diversify its supply” said Mr. Priddle. “Energy supply per unit of GDP is disproportionately high in Korea. The challenge now is to give higher priority to energy efficiency, with additional measures to curb energy consumption in all sectors”. Mr. Priddle said that “the government deserves credit for the ambitious reform policies it has formulated and implemented in the electricity sector, and now in the gas sector. Such reforms are never easy, but competition, especially in the electricity sector, will bring numerous benefits. Several more steps must be taken before competition becomes effective. The most important are that the government set and adhere to a firm timetable for market liberalisation, and that it establish a regulator fully independent from the government.”

General Energy Policy
Korea’s main energy policy objectives are coherent with IEA policy principles. They focus on energy security, economic growth and the environment. The Asian economic crisis of 1997-1998 triggered a change in Korean energy policy, which became much more market-oriented in the oil refining, electricity and natural gas sectors. In coming years, the energy markets will generate more efficiency gains in response to increased competition and deregulated prices. But, since Korea depends heavily on external sources of energy, the government needs to continue to encourage energy diversification.

Energy Efficiency
In contrast to what has happened in other IEA countries, energy intensity in Korea has increased consistently as the economy has grown over the last decades. With per capita income close to the average of European OECD countries, Korea consumes 20% more energy per inhabitant and almost double the energy per unit of GDP. The energy intensity of the Korean economy needs to be reduced substantially. Energy efficiency must be given higher priority. The establishment of prices that fully reflect costs will go a long way toward improving efficiency. This is true in particular for electricity sold to industry. Including the negative environmental externalities of transport fuels in their prices will also help.

Energy and the Environment
Once more effective measures are taken to curb energy demand, the job of mitigating greenhouse gas emissions is likely to become easier. Of particular concern is the emission trend in the transportation sector. Further encouraging the use of smaller vehicles and public transportation would be beneficial. Korea, as an OECD country, will need to take on appropriate environmental responsibilities to mitigate its polluting emissions, especially under the United Nations Framework Convention on Climate Change (UNFCCC).

The government has ambitious plans to expand the use of renewable energy sources, which are now a marginal component of the energy supply. Their realisation will require careful assessment of the technical and economic potential of the various renewable options and the definition of policies on technology development, industrial expansion and the market deployment of renewables. Introducing green pricing would be a first step toward creating a green market for electricity.

Electricity and Nuclear
Korea Electric Power Corporation (KEPCO) has been split into five new generating companies that are to be privatised, while nuclear power and hydro-electricity will remain in public hands in a sixth entity. The government needs to set and adhere to a firm timetable for market liberalisation and to establish a fully independent regulator. While a competitive electricity market is being put in place, careful monitoring of developments will be necessary. Further measures may be needed to encourage market participants to invest in new capacity. Subsidies to certain consumer categories or for consumption at certain times of day should be eliminated.

Future plans for nuclear power plants within the imminent competitive electricity market should be established at an early stage. Otherwise, doubts about the uncertain place of nuclear power in the competitive market may make potential investors unwilling to add other forms of capacity. For nuclear power to continue playing an important role, the government needs to work hard to improve the image of nuclear power in public opinion and allocate more resources to the nuclear waste-management programme.

The Korean government forecasts 3.5 per cent annual growth in oil demand over the next decade. This is not as high as in the past, but is still very strong compared with most IEA countries. The share of oil in primary energy supply is still large, although it has been lessened by diversification. Ensuring a stable oil supply remains a key policy objective.

Korea has been actively exploring for oil both on its own territory and in traditional oil-producing countries. Good quality emergency oil stocks have been developed by the government and have reached a comfortable level.

Korea’s progress toward freeing up the oil-products market is commendable. It has stimulated industry restructuring and increased efficiency. There is concern, however, that certain companies now have undue market influence. It is important that the competition authority monitor the market closely to ensure fair competition.

The gas sector is closely following the electricity sector in the reform process. Because of Korea’s total dependency on imported LNG, the implications of gas reform for supply security will have to be carefully monitored. Uncertainty about future plans could negatively affect investment. There is a need to set and adhere to a firm timetable to reform the gas industry. Korea Gas Corporation (KOGAS) should be privatised without delay, and without prejudice to existing KOGAS shareholders. As for the electricity sector, an arm’s length relationship has to be established between the newly privatised KOGAS and the independent regulator.