KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Reforming Korea’s Wholesale Electricity Market amid Renewable Expansion

As the share of variable renewable energy such as solar and wind rises rapidly, ensuring adequate investment in facilities that prevent outages and maintain reliable supply has become more important. Yet, Korea’s wholesale electricity market relies on rigid pricing rules that fail to provide appropriate investment incentives, delaying the expansion of required resources. It is therefore desirable to reform the pricing framework so that market prices reflect demand and supply conditions effectively as signals for investment and system operation.

- The growing share of renewables raises the question of whether the current wholesale market framework can continue to reliably meet power demand.

- As the renewable share grows and output varies with weather conditions, the electricity system is experiencing greater volatility.

- Renewable expansion is a factor increasing output variability in existing power facilities.

- Reduced utilization of existing generating facilities, limited transmission capacity, and curtailed renewable output indicate declining
efficiency in the wholesale electricity market.

- Investment in new flexibility resources, including ESS, requires appropriate price mechanisms.

- The wholesale electricity market should be designed to reliably meet projected demand while minimizing costs.

- To achieve this, Korea’s wholesale market compensates separately for energy supply, standby capacity, and frequency and voltage control.

- Rising renewable shares erode the profitability of existing generators and increase uncertainty, weakening their incentives to maintain capacity.

- Ensuring a stable electricity supply requires stronger investment incentives for new generation capacity.

- Capacity prices fall when SMP rises, for instance, due to higher natural gas prices.

- SMP, which reflects shortrun variable (fuel) costs, does not serve as an effective market signal for efficient system operation.

- Capacity prices based on fixed investment cost assessments fail to reflect technological and market developments.

- The rigid capacity pricing structure can hinder efforts to secure sufficient reserve capacity as renewable shares expand.

- By tying a fixed compensation pool to last year’s supply, ancillary service prices fall counterintuitively when demand rises.

- Rigid pricing mechanisms risk delaying investment in facilities critical to system flexibility and stability.

- Reforms should enable energy, capacity, and ancillary service prices to be determined by market mechanisms.

- Strengthening market oversight through an independent regulator should be accompanied by efforts to bring wholesale and retail pricing into closer alignment.

Summary

Policy Study KOR Electricity Market Segmentation with Uncertainty in Demand and Supply

This study examines the structural limitations of Korea’s electricity market amid the growing share of renewable energy and seeks approaches to modify the market structure to facilitate a low-carbon transition. Korea’s electricity market currently functions as a cost-based, day-ahead market, which constrains its ability to manage supply-demand imbalances effectively as renewable energy rises. To address this, the study evaluates the necessity of introducing a capacity market as a forward mechanism, combined with generation-specific segmentation. A capacity market, in particular, is identified as a key tool to provide stable investment incentives for marginal generators, especially as the share of high-volatility resources like renewables increases, thus enhancing supply stability. Additionally, the study highlights the need to adjust capacity prices dynamically according to the market share of renewables and energy storage systems(ESS). In considering policies to support renewables and ESS, the study contrasts fixed-price contracts with dedicated capacity markets. While fixed-price contracts are vital in the short term to encourage market entry, it is equally important, in the long run, to operate the spot market in a technology-neutral manner to alleviate excessive risk burdens on wholesale market buyers. These insights offer policy recommendations to maintain a stable power supply and support the sustainable expansion of renewable energy.

Summary

Policy Study KOR Impact of Carbon-Neutrality Policies:Focusing on Trade and Environment

This study examines the impact of carbon neutrality policies on Korea and explores potential government responses to the rapidly evolving global policy landscape concerning carbon and trade. Specifically, it focuses on the European Union’s Carbon Border Adjustment Mechanism (CBAM) and how South Korea's carbon neutrality policies might influence the CBAM's impact. In addition, it analyzes the effects of each carbon neutrality policy option on Korea’s economy, including trade and GDP, and emissions.

This study finds that the EU CBAM may not affect Korean exports due to its relatively narrow scope of products and emissions covered in the current version of the policy. However, its influence is likely to grow if the scope of regulated products expands and the range of indirect emissions covered increases. The study then considers carbon pricing, green technology R&D, and green supply chain policies as strategic directions for Korea's government to both respond to global policy changes, such as CBAM, and achieve climate neutrality. Although both increasing carbon prices and developing carbon reduction technologies mitigate the negative impacts of CBAM by decreasing CBAM tariff rates, their effects on Korea's production, exports, income, and welfare differ.

Green supply chain policies involve adjusting trade costs according to the carbon intensity and price of intermediate inputs’ origins. This aims to reduce production's embedded indirect emissions and increase the carbon price already paid in source countries. The study evaluates two opposing approaches to implementing this policy: lowering trade costs for 'green' suppliers and raising them for 'dirty' suppliers. The results indicate that decreasing trade costs, as opposed to increasing them, results in higher GDP, greater export competitiveness, and improved welfare. The study shows that although different policy options are themselves effective in responding to CBAM and reducing carbon emissions in Korea overall, their impact on Korea’s economy and emissions are heterogeneous. Therefore, understanding the complex consequences of these policies and selectively implementing them based on the distinct characteristics of the affected industries is crucial.

Summary

Policy Study KOR A Study on Impact of Korea’s Policy Instruments for Battery Electric Vehicles (BEVs) and Fuel Cell Electric Vehicles (FCEVs)

Over the past five years, there has been a swift increase in the registration of clean vehicles, including Battery Electric Vehicles (BEVs) and hydrogen-powered Fuel Cell Electric Vehicles (FCEVs). The total number of registered BEVs and FCEVs reached 1.6% of all vehicles by the end of 2022, driven by various government support policies. In pursuit of its net zero goal, the South Korean government aims to increase the share of BEVs and FCEVs to at least 85% by 2050. The 2023 budget for clean vehicles (3.3 trillion won) accounts for 29.0% of the Ministry of Environment's total budget. Against this backdrop, this study empirically examines the effects of recent deployment policies based on data from newly registered BEVs and FCEVs. Specifically, by compiling datasets of newly registered passenger cars, government subsidy levels, and cumulative charging infrastructure by region from 2019 to 2022, this study conducts regression analyses to determine the impact of regional differences in these variables on the changes in the number of newly registered BEVs and FCEVs, respectively.

The analysis reveals that the price elasticity of newly registered BEVs and FCEVs based on subsidy changes was -1.59 and -2.90, respectively, while the charging infrastructure elasticity was 1.24 and 0.93, respectively. Additionally, the high degree of fiscal independence among local governments and high fuel prices for internal combustion engine vehicles contributed to the increase in new registrations. In the case of EVs, the price elasticity for foreign cars was higher than for domestic cars. Moreover, when analyzing EVs restricted to private use, the price elasticity decreased, and the impact of deploying chargers diminished. Based on the obtained estimates, this study further examines alternative scenarios to evaluate the effectiveness of the EV subsidy policy. It turns out that approximately 27.4% of new registrations over the past four years were attributed to subsidy payments, and that charger installation is more cost-efficient than paying subsidy in terms of government expenditure. Furthermore, a cost-benefit analysis of the subsidy policy indicates that in most scenarios, costs outweigh benefits. However, if carbon emissions from the power sector are zero and the social costs of carbon emissions from internal combustion engine vehicles are high, the benefit-cost ratio (benefit amount ÷ cost amount) increases to 0.97.

Based on the analysis, the main policy implications are as follows. First, as future EV sales must target private use, which is less responsive to price changes, the effectiveness of purchase price support will decrease. Therefore, enhancing charging infrastructure to stimulate demand will become more crucial. From a qualitative standpoint, an effective deployment strategy involves ensuring the proper maintenance, repair, and replacement of previously installed chargers to maintain full functionality and enhance consumer convenience within the charging system. Additionally, enhancing charging infrastructure at mobile hubs such as highway rest stops in line with technological advancements like battery performance improvements would be effective in increasing deployment. For hydrogen cars, the higher price elasticity compared to electric vehicles suggests a greater effect of subsidies on their deployment. However, due to the uncertainty of the eco-friendliness of the hydrogen production process, a promotion strategy considering technological changes is required. Lastly, as the number of clean vehicles continues to grow, reforming the tax system becomes inevitable. This includes an overall reform of the tax structure applied to fossil fuels, alongside comprehensive investigations to secure a competitive advantage for clean vehicles during operation.

Summary

Policy Study KOR Renewable Energy Policy in Korea

As global concern and crisis awareness regarding climate change continue to rise, pressure for greenhouse gas reduction and the use of renewable energy is increasing from global investors and supply chains. Reporting of non-financial information, such as corporate greenhouse gas emissions and energy usage, is gradually becoming mandatory, making renewable energy use an important issue not only at the national level but also at the corporate level.

Due to structural issues in the power market, domestic companies in South Korea were unable to separately purchase renewable energy. However, with growing demand for corporate renewable energy purchases, the K-RE100 policy for corporate renewable energy purchases was introduced in 2021. The K-RE100 policy provides various compliance methods, including Green Premium, K-RE100 REC purchase, direct Power Purchase Agreements(PPA), and third-party PPA.

The Green Premium allows companies to pay an additional premium on their existing electricity bills to purchase renewable energy from the Korea Electric Power Corporation (KEPCO). However, unlike other procurement methods, renewable energy purchases through the Green Premium do not allow companies to specify the type of renewable energy source, and the reduction achievements are not recognized in emission trading systems. Direct PPA involves a bilateral agreement where companies can purchase electricity and renewable energy certificates(RECs) from renewable energy generators. Additionally, through the K-RE100 REC market, companies can buy electricity from KEPCO and purchase RECs separately from renewable energy generators. With the introduction of the K-RE100 policy, voluntary markets for corporate renewable energy transactions are emerging.

In South Korea, on the other hand, the Renewable Portfolio Standard(RPS) system has been adopted since 2012 to expand the use of renewable energy. The RPS system mandates large power generators to supply a certain percentage of their total electricity production from renewable sources. To fulfill this obligation, large power generators can purchase RECs from renewable energy generators. Consequently, the RPS has led to the formation of a market for renewable energy transactions between large power generators and renewable energy generators.

As a result, the domestic renewable energy transaction market includes the K-RE100, formed by voluntary demand from companies, and the RPS, formed by regulatory measures. Buyers and sellers of renewable energy face the decision of choosing between these two markets. Buyers, such as companies, can purchase renewable energy through various methods in the K-RE100 market, such as Green Premium, K-RE100 REC, and direct PPA. On the other hand, large power generators participate in the RPS market by purchasing RECs. Despite the increasing number of companies in South Korea declaring RE100 participation, actual adoption of PPA and K-RE100 REC purchases has not been activated. According to surveys, companies prefer direct PPA, REC purchases, and Green Premium in that order, but actual compliance is concentrated on the Green Premium. Currently, the renewable energy transaction market does not seem to adequately reflect the demand for corporate renewable energy purchases. In this context, the price of the Green Premium is forming close to the floor set in auctions.

This study constructs a theoretical model for decision-making by renewable energy buyers and sellers in both markets and examines the relationships between compliance methods within the K-RE100 system. Furthermore, the study analyzes the relationships with adjacent systems such as the RPS, emission trading system(ETS), and electricity pricing in the power market.

Analyzing the results of the model, the regulatory characteristics of the RPS have a significant impact on the K-RE100 market. Renewable energy generators receiving high REC weights in the RPS show low incentives to sell in the K-RE100 market. Therefore, companies in the K-RE100 market face difficulties in diversifying renewable energy sources through direct PPA. Additionally, if compensation for renewable energy supply under the RPS increases, transaction volume decreases, and prices rise in the K-RE100 REC market. In situations where the Green Premium or ETS prices are excessively low compared to renewable energy generation costs, PPA and K-RE100 REC markets expreience difficulties, resulting in a bias towards corporate renewable energy purchases through the Green Premium. When electricity prices are lower than wholesale prices, in addition, PPA transactions are challenging to be active.

To adequately reflect the demand for corporate renewable energy purchases in the market, it is necessary to improve the K-RE100 policy by considering the interconnectivity between procurement methods and the additionality of renewable energy. The appropriateness of the Green Premium's price floor and sales volume selection should be reviewed, and continuous improvement and enhancement of direct PPA are required. South Korea's renewable energy policy has progressed based on the RPS, emphasizing obligations and compensation for renewable energy supply. Renewable energy policies should be redesigned by considering both the voluntary demand for corporate renewable energy and the RPS. Simplifying the REC weight distribution is necessary not only to address distortions in supply but also to rectify imbalances between procurement methods within the K-RE100. Furthermore, improvements to the RPS are needed to stimulate demand-side competition in the REC market. Finally, it is essential to recognize that distortions in adjacent systems, such as ETS and the power market, have a significant impact not only on those systems but also on the K-RE100 market.

Summary

KDI FOCUS Impact of Policy Incentives on Adoption of Electric Vehicles in South Korea

South Korea’s strategies for deploying battery electric vehicles (BEVs) primarily include providing purchase subsidies and expanding charging infrastructure. An empirical analysis of new vehicle registrations from 2019 to 2022 shows that investing in charging facilities is more costeffective than offering purchase incentives for increasing BEV adoption. To achieve a higher share of BEVs, a stronger policy focus on improving the charging network is necessary to stimulate overall demand for BEVs.

- Achieving the target of ‘deploying 4.5 million BEVs and FCEVs by 2030s’ requires a substantial increase in the number of these vehicles, necessitating a comprehensive review of effective policy strategies.

- While Korea has witnessed a consistent increase in the cumulative number of BEVs (and PHEVs), it still lags behind the global average.

- Recent data indicates a deceleration in the growth rate of new BEV registrations.

- Korea’s government policy support to promote the adoption of BEVs and FCEVs primarily comprises purchase subsidies and charging infrastructure installation. Fiscal spending for these measures has increased dramatically, with the related budget accounting for 25.3% of the Ministry of Environment’s total budget in 2023.

- Analysis reveals that a 10% increase in the cumulative number of chargers correlates with a 12.4% rise in new registrations, while a 10% price reduction due to subsidies results in a 15.8% increase in new registrations.

- Also, private vehicles exhibit lower elasticity in response to changes in the number of chargers and in price compared to their government and business counterparts.

- Subsidy-induced adoption accounted for about 27.4% of the 240,000 BEVs eligible for purchase subsidies in 2019~22.

- Analysis suggests that promoting BEV adoption through the expansion of charging infrastructure would be more cost-effective than offering purchase subsidies. Additionally, the direct social benefits derived from BEV subsidies generally fail to outweigh their costs, indicating current subsidy levels may be excessive.

- Future BEV deployment policies should prioritize reinforcing charging infrastructure over providing purchase subsidies. In particular, deploying enough fastchargers at key travel hubs is essential to improve convenience and facilitate long-distance travel.

Summary

Research Monograph KOR Green Transition Strategy and Implementation

It is imperative for the Republic of Korea to prioritize the development of elaborate green transition strategies and implementation plans. In light of this urgency, this study offers ten chapters addressing select issues on green transition, which provide policy recommendations drawn from identification of problems, assessment of current policies, and empirical analysis.

Chapter 2 (Dr. Yong Hyeon Yang) assesses the national greenhouse gas emission reduction plan the Korean government announced in Oct. 2021. It finds the sectoral strategies to be insufficient for the stated targets and suggests that an energy transition ambition has to be increased as either targets have to be decreased in other sectors or there could be a need for more extensive electrification. Chapter 3 (Prof. Wonhyuk Lim) offers insights on energy transition strategies and their implication for the electricity industry. Periodical simulations should be conducted for multiple scenarios, and the overall cost of transition, including the expenses for networks and standby facilities as well as the levelized cost of energy, should be minimized. Accordingly, transition and phase-out of fossil fuel plants should be systematically planned in stages.

Chapter 4 (Dr. Yeochang Yoon) points out the limitations of the Korean emission trading system (ETS) and presents potential solutions. The current restrictions on banking need to be relaxed to keep the ETS allowance prices from dropping, but such adjustments should be introduced gradually to prevent a sudden decline in supply. Chapter 5 (Prof. Hyungna Oh) raises a possibility of insufficient investment in decarbonization technologies due to first-mover disadvantages. It advocates introduction of carbon contracts for difference to incentivize R&D in green technologies, especially when carbon prices are low or uncertain. Chapter 6 (Dr. Karam Jo) presents the empirical result that patents in some digital transformation technologies can increase patents in climate technologies by an average of 17.3% and underscores the need to promote such digital transformation technologies.

Chapter 7 (Dr. Junghyun Kwon and Dr. Joseph Han) reveals that elevated outdoor temperatures decrease working hours in an inequitable manner and deteriorate workers’ health. These observations imply that climate change could magnify income inequality. As such, protective measures for outdoor workers against high temperatures and support for their job transitions are crucial. Chapter 8 (Dr. Hyunseok Kim) proposes selective subsidies for regions heavily impacted by climate change and green transition, and highlights the necessity of assessing those impacts objectively. Most importantly, local governments should formulate transition plans in line with central government guidelines.

Chapter 9 (Prof. WooRam Park) indicates that a large portion of greenhouse gas comes from establishments with more than 300 workers, and in such industries as petrochemical and steel. It also shows higher carbon productivity in industries with lower greenhouse gas emissions and establishments using less energy. Chapter 10 (Dr. Joseph Han) reveals the empirical result that firms who entered in the first stage of ETS had significantly lower greenhouse gas emissions, energy usage, annual turnover, and employment than those who did in the second stage. The performance of these firms was influenced by the design of the ETS, for example, on what basis the allowances were assigned free of charge or for a fee. Hence, policy design for green transition should pay particular attention to its effects on businesses and employment. Lastly, Chapter 11 (Dr. Sora Chon) observes that the global green transition might trigger both green and energy inflation. Analyzing the effect of inflation factors on the Korean economy finds that such impacts vary based on whether inflation arises from a demand or a supply shock. Consequently, the Korean government's responses should differentiate between inflation factors that are demand-side and supply-side.

Summary

Other Research KOR International Development Cooperation in the Post-pandemic Era: Health and Medicine

International development cooperation in health infrastructure and services has been significant; however, the recent economic and social crises triggered by the COVID-19 pandemic have further emphasized its importance. Major donor countries and international organizations have supported global health security post-COVID-19 by strengthening assistance in the health and medical sectors to partner countries and collaboratively striving towards global resilience recovery.

South Korea has actively aligned with the Sustainable Development Goals (SDGs) by supporting the health sector. This commitment is evident in initiatives such as the third Comprehensive Basic Plan for International Development Cooperation (2021-2025), which emphasizes enhancing global health threat response, expanding humanitarian support in vulnerable areas, and prioritizing the improvement of quality of life. Currently, there is a growing need to explore the direction of health development cooperation post-COVID-19 for sustainable development, drawing upon South Korea's policy experience of economic and social development.

This research explores, firstly, the general trends and recent advancements in international development cooperation, knowledge sharing, and the strategies employed by major donor countries and international organizations in the health sector. Secondly, it examines South Korea's developmental experience in enhancing global resilience during the post-COVID era, considering both institutional and technological aspects. The study concludes by offering recommendations to improve access to health facilities and services, emphasizing the importance of the National Health Insurance System and the capacity building of the biohealthcare industry.

The study organizes the South Korean National Health Insurance System chronologically according to its development stages and compares it with the insurance systems of major countries such as China and Japan. In the biohealthcare industry, the study encompasses biopharmaceuticals, innovative medical devices, regenerative medicine, and digital healthcare. It offers an overview of the post-COVID-19 digital healthcare market, as well as explains domestic policies for nurturing the digital healthcare and biohealthcare industries and the export status of the biohealthcare industry.

To enhance the development effectiveness in health infrastructure and service, the research suggests focusing on areas where Korea's biohealthcare sector has a comparative advantage while utilizing its innovative potential of partner countries. It also emphasizes the active participation of bio-pharmaceutical companies, the key players in Korea's biohealthcare technology and production capabilities. Collaboration with various global partners, including advanced countries and research institutions in low- and middle-income countries, is necessary for international development cooperation. The establishment of a collaborative system with various global partners is crucial, and domestic conditions, including close cooperation between relevant agencies such as the Ministry of Health and Welfare, the Korea Centers for Disease Control and Prevention, and the Ministry of Food and Drug Safety based on official development assistance, are essential.

The report concludes by hoping that the insights provided on international development cooperation trends and strategies in health, as well as South Korea's development experience in health insurance and the biohealthcare industry, will contribute to formulating future development strategies in the post-COVID era.

Summary

KDI FOCUS Approaches to Enhance the Market Functionality of the K-ETS

South Korea has set ambitious greenhouse gas (GHG) emission reduction targets. However, the country currently confronts a decline in the price of emission permits. This downward trend could obstruct the successful realization of GHG objectives through market mechanisms. The current emissions trading scheme (ETS) restricts banking of excess emission allowances, which has been identified as the main reason of the ongoing price decline. Consequently, this restriction hinders the adequate reflection of updated targets within the emissions trading market. To address this issue and avert potential shocks from a substantial reduction in emission allowance supply during Phase IV, it is necessary to relax the banking restrictions. At the same time, to proactively manage potential price escalations resulting from eased restrictions on permit banking, supplementary measures are required. These measures could include the introduction of explicit market stability mechanisms utilizing allowance reserves and the expansion of allowance supply channels.

- South Korea has ambitious GHG reduction targets, but the demand and prices for emission permits are lagging, both displaying a decline.

- The pricing mechanism of the K-ETS is currently underperforming, consequently compromising market efficiency.

- In its current framework, the K-ETS imposes restrictions on the banking of unused emission permit in order to stimulate the trading market.

- The banking restrictions impede the price function and overall efficiency of the scheme.

- To brace for potential reductions in allowance supply in the future, it is crucial to relax the banking restrictions.

- Relaxing the banking restrictions could result in a short-term surge in demand and prices for emission permits. Therefore, alongside a gradual relaxation of banking restrictions, complementary measures should be implemented.

- By implementing an explicit market stabilization scheme utilizing reserves, emissions prices can be stabilized and market efficiency can be enhanced.

- As for the price tiers in the market stabilization scheme, they should ideally consist of two straightforward tiers with a considerable disparity between them.

- Eligibility for participation in emissions auctions, currently confined to entities subject to auctioned allocation, must be expanded to secure a consistent supply of emission permits.

- Given the long-term nature of decisions to reduce GHG emissions, it’s crucial to improve the predictability of the emissions trading market.

Summary

KDI Policy Forum Impacts of Climate Policies on Industrial Competitiveness in Korea

■ As carbon reduction targets are being strengthened globally, it is increasingly important in Korea to comprehend the impact of two major greenhouse gas (GHG) reduction policies, Target Management System (TMS) and Emissions Trading System (ETS), on industrial competitiveness.

- ETS relies more on individual firms’ economic incentives compared to TMS, which is a command-andcontrol regulation.

■ While the transition from TMS to ETS in 2015 is found to have partially alleviated the burden for manufacturing firms, there is a need to enhance policy effectiveness by acknowledging their limited performance in reducing carbon emissions thus far.

- While TMS was introduced in 2011 with the aim of enforcing emissions reduction and enhancing energy efficiency across different sectors, heavy emitters have been managed separately through ETS since 2015.

- Knowing the low abatement performance in the manufacturing industry after mid-2010, the reduced burden can be attributed to two factors: i) improvement in efficiency resulting from the transition, and ii) alleviation of the burden through the provision of free allocations.

- The policy efforts should aim for a greater reduction by strengthening the targets for the regulated firms, which is in line with the reinforced policy goals announced in October 2021.

■ Stricter goals are inevitable in the future, and therefore, policymakers must endeavor to bolster the sustainability of the manufacturing sectors by developing a detailed roadmap based on multiple indicators.

- Taking into account the varying impacts of GHG reduction policies on the competitiveness based on the energy intensity and emission intensity of each sector, the roadmap needs to be carefully crafted in order to impose a feasible burden on the regulated firms.

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