The IEA applauds Korea’s rapid development to a modern energy system and now urges reform of energy markets and action on environmental concerns

(Seoul) — 31 May 2007

“The IEA is greatly impressed with the rapid speed with which the Republic of Korea has grown into a modern economy with a modern energy system. The country has built a sophisticated energy industry that underpins its economy, despite lacking infrastructure enabling it to rely on electricity imports or natural gas flowing from international pipelines,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Seoul at the launch of Energy Policies of IEA Countries – Republic of Korea 2006 Review. “As Korea is the newest IEA member country, joining in 2002, we are pleased to see the recent expansion of its energy policy objectives to include not only energy security, but also economic efficiency and environmental sustainability,” he added.

“We now strongly urge the government to better align the energy system with the new realities of its market economy by undertaking reforms that will put in place flexible, liberalised electricity and natural gas markets,” Mr. Mandil said. “Furthermore, we advise the government to take on a more active role in addressing energy-related environmental issues. Greater efforts to improve energy efficiency and reduce the growth of carbon dioxide emissions are needed.”

Nuclear industry
Despite the relative youth of Korea’s nuclear industry, it is a model for other countries. The government has put in place a comprehensive regulatory framework and the industry has an excellent safety record. In recent years, Korea’s most notable achievement has been the selection of a site for a low- and medium-level waste disposal facility. The government established a world class site-selection process that was transparent, fair and democratic – a model for other countries. It also provided regulatory certainty and economic incentives. Korea, like many IEA countries, faces NIMBY challenges. NIMBY (“not in my backyard”) can hinder investment in needed energy infrastructure. “Development of new infrastructure must, of course, take into account local concerns,” said Mr. Mandil, “but it is critical that it balance these concerns with the country’s overall infrastructure needs to ensure security of energy supply for the longer term.”

Liberalisation and energy market reform
While the government originally put in place an ambitious long-term plan to liberalise its electricity and natural gas markets, these plans have been put on hold. The result is uncertainty in the sector, as market participants require confidence in government policies before making the large investments needed to build new electricity and natural gas capacity. Furthermore, liberalised energy markets would better support Korea’s current economy. Though continuing to be robust, the economy can no longer guarantee double-digit economic growth and the huge energy capacity additions such growth entails. Instead, a liberalised market could ensure that existing energy assets are used more efficiently and that new energy assets are added when and where necessary.

To create a more flexible and efficient energy sector, the IEA strongly encourages the government to set out a clear plan with milestones and dates for reform of its energy markets. There are a number of critical stages in this process, but the most important first step is the establishment of an energy regulator that is fully independent from the government. An independent regulator would give market participants faith that the energy sector will be monitored and regulated fairly and openly from the beginning of the process and for the long term. Also critical to the success of energy markets is the functional separation of network assets (transmission lines and gas pipelines) from other competitive assets, such as generation and retail supply. There are many models for successful network unbundling and energy market liberalisation, some of which do not require privatisation. The question of whether or not to privatise government assets is a separate and less urgent question from whether and how to liberalise the sector.

Climate change, environment and efficiency
Consistent with its expanded energy policy goals, the government is working to improve energy efficiency and lower the growth of greenhouse gas emissions. This is commendable. However, the government has not taken on a greenhouse gas emissions target, and its current energy efficiency targets don’t qualify as particularly ambitious. As the country’s emissions are expected to grow by over two-thirds between 2000 and 2030, setting an objective to slow the growth of these emissions is critical. “We strongly urge the government to set such a target, using cost-effective energy efficiency gains to help meet its goal,” Mr. Mandil emphasised.

Research and development (R&D)
In a time of falling R&D budgets, the IEA applauds Korea’s rising budget for energy R&D. Korea should also be commended for its commitment to international co-operation and its recent explicit linking of its R&D funding framework with its overall energy policy goals, helping better ensure that Korea’s long-term policy goals are met. As Korea continues to develop its R&D funding framework, the IEA encourages the country to make cost-effectiveness a key criterion for project selection in most cases; to fund some risky projects that could have a high payoff; to better incorporate environmental goals in the project-selection process; to fund research that looks at domestic resources of wind, biomass, geothermal, ocean and coal-bed methane; and to conduct research on international experience with the energy market liberalisation process.

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