wind energy in south korea – aiming high

SOUTH KOREA’S ENERGY MARKET – STATUS QUO

As of 2012, South Korea was the 9th largest energy consumer in the world, and given the lack of its own reserves, the country is placed

amongst the largest energy importers (crude oil, coal, liquefied natural gas, etc.) globally

South Korea imports 95-97% of fossil fuels used for domestic power generation; in recent years, the country’s administration has realized that

there is an urgent need to develop alternative energy sources, in order to improve the country’s energy independence, increase energy efficiency,

and reduce energy import bill (estimated at about USD 121 billion in 2010)

Over the past few years, the South Korean government strengthened its commitment to increasing the share of clean and renewable

resources in the overall energy production, as part of the country’s efforts to diversify energy sources

In 2008, Korean president, Lee Myung-bak, announced the government’s decision to increase investment in renewable-generated energy

The total investment in renewable energy is estimated at about KRW 40 trillion (USD 34.2 billion) till 2015, 56% of it to be provided by

Korea’s largest industrial groups, 18% by the government, and about 26% by other private investors

In 2012, South Korea replaced its feed-in tariff for renewable energy with Renewable Portfolio Standard (RPS), a set of targets and

standards that promote the adoption of clean energy, reduce carbon emissions, and drive growth of the green energy industry

In 2012, South Korea Adopted An Ambitious Set Of Targets To Promote Clean Energy Generation

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Source: Renewable Energy Focus; Yonhap News; Energy Korea; Enerone; Renewable Energy World; BC Bioenergy Network; IFLR; FuelCell Energy

Despite an ambitious goal to grow the market over long

term, it is expected that South Korea’s renewable energy

industry is likely to shrink during 2013

This is expected to be another year of decline in the combined

sales of local renewable energy companies, as the market

shrunk by about 7.8% in 2012 over 2011

In comparison, global renewable energy market witnessed a

38% growth during 2011-2012

The decline of the Korean market is believed to be driven by

still insufficient support from the government to

encourage the energy sector to develop renewable energy

space, leaving energy companies sluggish in their efforts in

this area 2012 2022E

KRW 7.4 trillion

(USD 6.9 billion)

KRW 54 trillion

(USD 47.94 billion)

Korean RPS Target for Renewable Energy – Market Size

SOUTH KOREA’S ENERGY MARKET – RISING DEMAND

South Korea’s need for developing new energy sources is apparent, given

the country’s rapid economic growth, including the expansion of energy-

intensive industries

Primary energy consumption increased by about 440% between 1980

and 2007, to an estimated 236-240 million TOE1

This energy consumption growth is expected to slow down over the coming

years, and there are considerable shifts expected in the composition of the

energy consumption by source

South Korea is aiming to increase the share of renewable energy in the

overall domestic energy use by over three times, with a minimum of 11% of

its total energy needs to be met by renewable sources by 2030

Focus On Renewable Energy Has Grown With South Korea Experiencing Rising Energy Demand

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2012 2015E 2020E 2030E

RPS Ratio in Power

Consumption (%) 2.6 4.3 6.1 11.0

Korean RPS Target for Final Energy Use

(Consumption)

Charcoal

25.3%

Renewable

2.5%

Atomic

14.9%

LNG

13.8%

Oil

43.4%

Final Energy Consumption Composition, by Source

(2007)

100% = ~240 million TOE

Final Energy Consumption Composition, by Source

(2030E)

100% = ~300 million TOE

Charcoal

15.7%

Renewable

11.5%

Atomic

27.8% LNG

12.0%

Oil

33.0%

Note: 1) TOE - Tonne of oil equivalent

Source: Korean Energy Management Corporation; Renewable Energy Focus; Enerone

SOUTH KOREA’S ENERGY MARKET – RENEWABLE ENERGY SUPPORT POLICIES

The Ministry of Knowledge Economy is responsible for formulating and implementing energy policies, administering the energy industry,

and providing support for activities in the field of new energy technologies research and development

While still considered insufficient, the development of renewable energy projects receives ever increasing government support in

terms of financial and fiscal help

All renewable energy technologies are subject to a 5% tax credit

Korean government provides subsidies to local authorities of up to 60% for the value of renewable facilities installation

Local authorities can receive low interest loans (5.5%-7.5%) for renewable energy development projects

It is estimated, that during 1993-2012, the government spent KRW 2.77 trillion (USD 2.6 billion) in subsidies and loans on this sector

To Support Renewable Energy Growth, A Range Of Policies And Incentives Have Been Developed

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Support Type Support Policy Status in South Korea

Regulatory Policies

Feed-in tariff (including premium payment) -

Electric utility quota obligation/ RPS

Net metering

Biofuels obligation/mandate

Heat obligation/mandate -

Tradable REC

Fiscal Incentives

Capital subsidy, grant, or rebate

Investment or production tax credits

Reductions in sales, energy, CO2, VAT, or other taxes

Energy production payment -

Public Financing Support Public investment, loans, or grants

Public competitive bidding -

Source: Renewable Energy Focus; Bloomberg; ‘Renewables 2012 Global Status Report’, Renewable Energy Policy Network For the 21st Century, 2012

SOUTH KOREA’S ENERGY MARKET – RPS TARGET FOR ENERGY GENERATION

RPS Has Been Critical In Pushing Energy Companies To Adopt Renewable Sources Of Generation

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Source: Renewable Energy Focus; Yonhap News; Energy Korea; Enerone; BC Bioenergy Network; IFLR; FuelCell Energy

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

RPS Ratio in

Power

Generation (%)

2.0 2.5 3.0 3.5 4.0 5.0 6.0 7.0 8.0 9.0 10.0

↑ 0.5% p.a. ↑ 1.0% p.a.

Energy Generation

1,000,000 MWh/annually

Target Share of Renewable-generated

Energy : 2% (2012)

Renewable-generated Energy

(mandatory volume): 20,000 MWh (2012)

Renewable Energy Credits/Certificates

(RECs)

An obligation for energy producers to generate a portion of power using renewable energy resources

Electricity producer National RPS Requirement

X =

Under the RPS policy, 13 of the largest power producers in South Korea (public and privately-owned generators with over

500MW of power generation capacity) are required to produce a certain mandatory volume of energy using renewable energy

sources

RPS mandatory renewable-generated energy volumes are calculated by multiplying fossil fuel power generation volume and annual RPS ratio in

power generation

RPS pushes to increase the use of renewable sources in power production by expanding the mandatory share of renewable-

generated energy in the overall energy production, by additional 0.5% annually during 2012-2016, accelerating to 1% increase

annually during 2016-2022

This also brings a requirement of additional 350 MW renewable energy capacity annually through 2016, increasing to 700 MW per annum till 2022

The ratios are subject to review and modification by Ministry of Knowledge Economy every three years, depending on technology review,

performance of generators, and other relevant factors

RPS Also Rewards Energy Companies Which Actively Undertake Renewable Power Generation

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SOUTH KOREA’S ENERGY MARKET – RENEWABLE ENERGY CREDITS

Energy Generation

1,000,000 MWh/annually

Target Share of Renewable-generated

Energy : 2% (2012)

Renewable-generated Energy

(mandatory volume): 20,000 MWh (2012)

Renewable Energy Credits/Certificates

(RECs)

Electricity producer National RPS Requirement

X =

Multipliers:

0.25 for integrated gasification

combined cycle (IGCC), and by-

product gas

0.5 for wastes and landfill gas

1.0 for hydraulic, on-shore wind,

bio-energy, refuse-derived fuel

(RDF) full firing and tidal

(including dams)

1.5 for wood biomass full firing

and off-shore wind (under 5km)

2.0 for off-shore wind (over 5km),

tidal (not including dams) and

fuel cells

Before introducing RPS in 2012, a feed-in tariff mechanism was used, which guaranteed

fixed rates for renewable-generated energy

Feed-in tariff mechanism also put a cap on renewable-energy generation capacity and resulted

in heavy cost burden for energy producers

Therefore, the 2012 RPS replaced the feed-in tariff and introduced tradable Renewable Energy

Credits/Certificates (RECs), resulting in the revenues from renewable energy being

determined by the market

Under the RPS, revenue from renewable-generated energy is derived from the wholesale

electricity price plus sale of RECs , with one REC valued at about KRW 40 (USD 0.035)

RECs are issued by the Korean New and Renewable Energy Center of the Korean

Energy Management Corporation

Once the energy producer is awarded with RECs, it is registered with the New and Renewable

Energy RPS Management System, which is used for trading and tracking RECs

RECs are issued on a monthly basis and are calculated per unit of renewable-generated energy;

each unit of such energy generates one REC

Renewable-generated power receives price above the market rate based on the price of

the REC multiplied by the weighted value of the renewable energy source, depending on

its type, with off-shore wind, tidal and fuel cells receiving the highest multiplier

If the obligated generator fails to meet the pre-set RPS ratio in their energy production

volumes, penalties apply in the amount of 150% of the weighted average market price of

each unit of green energy produced below the mandatory volume

Source: Renewable Energy Focus; Yonhap News; Energy Korea; Enerone; BC Bioenergy Network; FuelCell Energy; IFLR

With the RPS and RECs system in place, as well as government support

across regulatory, fiscal and public financing policies, the Korean

government plans to achieve a targeted share of 10% of renewable

resources to be used in power production by 2022

A large part of this planned renewable energy generation is planned

to be wind and tidal generation, which together is expected to

contribute to two-thirds of renewable-generated power

While these two resources are expected to be dominant amongst

renewable sources used for energy generation, government support (in

the form of research and capabilities advancements) is expected to

extend its focus to also include solar and waste power

In case of solar power, the major motivator for focus on this technology

comes from lower production costs of solar-only energy versus wind-only

energy (costs account for an estimated 10% and 66% of overall value of

energy generated, respectively)

The focus on waste-generated power is driven by its efficiency and

sustainability due to large quantity of waste readily available, with

additional benefit of reducing the environmental burden of waste

However, despite lobbying for solar and waste-based energy generation,

it is still expected that majority of new capacity will be added in

wind power in the long term, which finds reflection in the anticipated

share of wind energy in the overall renewable energy generation mix by

2022 (a total of over 46%)

Korea Will Depend On Wind Energy To Achieve A 10% RPS Ratio In Power Generation By 2022

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SOUTH KOREA’S ENERGY MARKET – RENEWABLE ENERGY GENERATION, BY SOURCE

Source: Enerone; Renewable Energy Focus; Korean Ministry of Environment

RPS Target 2022

Renewable Energy Generation, by Source

On-shore

Wind

8.1% Waste

0.4%

Biogas

0.8%

Biomass

2.1%

IGCC

3.1%

Hydraulic

6.8%

Solar

7.5%

Landfill Gas

0.4%

Fuel Cells

12.1%

Tidal

20.0%

Off-shore

Wind

38.7%

Total Wind Energy Share: 46.8%

“The Korea wind power industry has an aggressive target of reaching 23 GW of wind power by 2030, which would, with a production

of around 50 TWh, provide around 10% of the country’s total energy demand.” – Global Wind Energy Council

SOUTH KOREA’S ENERGY MARKET – WIND POWER – INTENSITY MAP

Given the country’s natural landscape, South Korea’s wind power industry can benefit from great potential offered by mountainous

terrain and long costal line

For off-shore farms locations, south and south-eastern waters surrounding Korea offer the strongest air currents and are currently the focal point

for wind power generation development

For on-shore wind power production, Korea offers numerous locations, as the country is 70% mountainous; the most steady winds are observed

along the eastern coast with the highest hill elevation

It is believed that, with the right plan and sufficient investment, wind power alone might help solve Korea's energy dependency issues;

the country has also entered an ambitious path of becoming one of the global leaders in wind power generation over the next 20 years

Thanks To Its Natural Landscape, South Korea Is An Ideal Location For Wind Power Development

8

South Korea is believed to have some of the world’s largest wind resources,

large part of which offer high wind speeds

The country's’ natural potential of total wind resources (on-shore and off-

shore) is estimated at 294 million TOE annually (equivalent to installation

capacity of 433GW)

The available potential, considering the geographical accessibility to construct wind

farms, is estimated at 85 million TOE annually, equaling to installation capacity of

approximately 127GW

Given the country’s enormous wind potential, wind energy stands high on

renewable-generated energy priorities in Korea

Wind power generation is likely to continue to develop rapidly in South Korea, due

to increasing technology maturity and its economic feasibility, as well as focus on

low wind speed turbines development allowing to extend wind energy generation

to locations previously excluded from capacity expansion plans

Source: Renewable Energy World; Korea Wind Energy Industry Association; Korea Institute of Energy Research; Offshorewind

In Early 2013, 41 Wind Power Projects With Total Capacity Of 491.65MW Were Operating In Korea

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SOUTH KOREA’S ENERGY MARKET – WIND POWER – CAPACITY DISTRIBUTION, BY PROVINCE1

Jeju-do

Number of projects: 12

Total installed capacity: ~111MW

Gangwon-do


Total installed capacity: ~195.9MW

Gyeongsangbuk-do (Gyeonbuk)


Total installed capacity: ~122.2 MW

Jeollabuk-do (Jeonbuk)


Total installed capacity: ~9.9 MW Busan City



Incheon City



Gyeonggi-do



Ulsan City



Jeollanam-do (Jeonnam)



Gyeongsangnam-do (Gyeognam)



Total number of projects: 41

Total installed capacity: 491.65MW

Total number of units: 295

Note: 1) Data as of February 2013; both on-shore and off-shore projects

Source: Korea Wind Energy Industry Association

Initially Slow To Take Off, South Korean Wind Energy Market Is Now Expected To Accelerate…

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SOUTH KOREA’S ENERGY MARKET – WIND POWER – CAPACITY AND GROWTH

18.2 68.1

98.7

177.7 196.1

304.1 348.4

373.3 406.3

482.6 491.61

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Wind Power Capacity Growth (MW, 2003-2013)

CAGR 2003-2013 = 39%

Wind Power Generation Growth (GWh, 2003-20122)

24.9 47.4 129.9

238.9

375.6 436.0

680.2

812.4 857.2

911.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CAGR 2003-2012 = 49%

Note: 1) Data for 2013 is as of February ; the year-end data might reflect new capacity added post 2013

2) Data for 2013 is not available

Source: Korea Wind Energy Industry Association; Renewable Energy Focus; Global Energy Network Institute; Offshorewind

At the end of 2012, installed wind power capacity

in South Korea exceeded 482 MW, vast majority of

which was on-shore

Though wind power capacity has recorded

significant growth over the past decade, the wind

market in Korea has not been developing as

fast as it was hoped for, due to several

challenges

Initial public reluctance and opposition to wind

farm development projects

Relatively low tariffs assigned to wind power under

the pre-RPS feed-in tariff mechanism, resulting in

low revenue as compared with solar or hydro

power

Difficulty in development of suitable on-shore sites

Slow advancements in wind-generated power

transmission

Currently, with reforms supporting the wind

energy market in place, along with the RPS

mechanism, wind farm projects have become

economically more viable; it is expected that

wind power capacity development will speed up in

South Korea

…With An Ambitious Goal To Develop 23GW Of Wind Generation Installed Capacity By 2030

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SOUTH KOREA’S ENERGY MARKET – WIND POWER – INSTALLED CAPACITY TARGET

Targeted Wind Power Installed Capacity (MW, 2010-2030E)

1,900 3,000

6,000 7,400

2,700

5,800

10,000

17,000

3,500

7,500

13,500

23,000

2015E 2020E 2025E 2030E

Reference Scenario

Moderate Scenario

Advanced Scenario

CAGR 2012-2030E

Reference Scenario: 16.0%

Moderate Scenario: 20.9%

Advanced Scenario: 22.8%

380

2010

911.5

GWh

50

TWh

2012 2030E

CAGR 2012-2030E = 24.9%

Targeted Wind Power Generation

(2012 and 2030E)

Source: Korea Wind Energy Industry Association; Renewable Energy Focus; Korea IT Times

In 2010, Korea’s government set a plan for wind capacity development, outlining

three scenarios starting with 2010 capacity level of 380MW

Capacity development was marginally behind schedule as of 2010, with planned 380MW

versus the actual 373.3MW; similarly, 2011 and 2012 targets were lower than planned

though it is believed that long-term targets are still achievable

Moderate scenario was based on private investors’ as well as national and local

governments’ plans and capacity development projects already under development

Reference scenario represented an option scaled down by 30-50% to account for potential

unfavorable factors affecting capacity development, while the ambitious advanced scenario

is quoted as the actual achievable target

As on-shore locations for wind power development are limited, the country

increasingly focuses on off-shore locations

Off-shore wind power capacity development alone is expected to receive USD 8.2

billion by 2019, primarily in the south Korean waters with favorable volcanic seabed

SOUTH KOREA’S ENERGY MARKET – WIND POWER – PROMOTING LOCAL MANUFACTURING

South Korea’s plans of wind energy development are not only driven by the country’s need to become more self-sufficient in its energy

needs, but also by the objective of becoming one of the leaders in the wind power industry globally, aiming to become net

exporter of technologies, equipment, and skill-set over long term

Korean heavy industry companies have been receiving considerable support from the government

Korean suppliers are provided with majority of opportunities in installation, cable laying as well as development and manufacturing of

the key equipment needed in wind farm construction and operation, such as generators, transformers, control systems, switchgears, towers,

shafts, and, increasingly, turbines

The government also continues to allocate considerable R&D budgets to support development of local component supply chain and strong

know-how of core technologies and skills for wind power industry

Government co-sponsored development projects cover production of components such as brake calipers, pitch system and controllers, off-

shore floating simulation codes, condition monitoring, yaw bearings, blade damage smart sensing, shrink disks, gearboxes, yaw and pitch drives

Majority of Korean shipbuilding and heavy industry companies are adding components used in the wind power industry in their

product portfolios

Companies, including Hyundai Heavy Industry, Samsung Heavy Industry, Daewoo Shipbuilding and Marine Engineering, and Doosan Heavy

Industry, have started working on the development of key parts needed for wind production; Unison is currently the leading Korean

manufacturer of wind energy equipment, including turbines

Most of these Korean manufacturers focus mostly on R&D of products and technologies, with limited actual production

Those components that reached production stage, are largely installed and operated for testing purposes to accumulate track record of their

performance as part of the overall wind energy generation system; it is, however, estimated that with the current commitment to R&D, these

manufacturers’ equipment might hold a lion share in the equipment installed in the new wind farms

Several other domestic companies, such as Pyongsan, Taewoong, Hyunjin Materials, Younghun Base Materials, Dongkuk S&C and CS Wind, supply

a range of components, including wind turbine parts, to international wind power systems producers including Vestas, Siemens, and GE

Wind Energy Sector Development Is Also Expected To Boost Local Manufacturing And Exports

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"If the Korean government’s proactive wind power policies go hand-in-hand with investment by local companies and efficient R&D

projects, the wind power industry will create synergy with Korea’s world-class technologies related to shipbuilding, automobiles and

the heavy industry. This will catapult Korea into the ranks of the world’s wind powerhouses in the near future.” – Rim-taig Lee,

Chairman of Korea Wind Energy Industry Association (KWEIA), June 2012

Source: Renewable Energy World; Global Energy Network Institute ; Offshorewind.; International Energy Agency; Korea IT Times

A FINAL WORD

With an energy bill in excess of USD 125 billion, it is not surprising that South Korea has taken a step towards transitioning from fossil

fuels to renewable sources for domestic energy production; the fact that about USD 35 billion has been allocated for investment in

renewable energy by 2015 clearly indicates the country’s will to reduce its reliance on imports and, in time, become clean energy

dependent

To support renewable energy growth, a range of policies and incentives have been developed; feed-in-tariff was replaced with a

Renewable Portfolio Standard system, which pushes to increase the use of renewable sources in power production by expanding the

mandatory share of renewable-generated energy in the overall energy production

The government aims to achieve a targeted share of 10% of renewable resources to be used in power production by 2022; a large part of

this planned renewable energy generation is to be wind and tidal generation

Favorable geographic location, with mountainous terrain and long coastal lines, provides South Korea with the ideal environment to

develop wind farms to harvest energy; it is estimated that over 45% of renewable energy in 2022 will be generated by wind power, with an

ambitious goal to develop 23GW of wind generation installed capacity by 2030

The country's’ available potential of total wind resources (on-shore and off-shore), considering the geographical accessibility to construct wind

farms, is estimated at 85 million TOE annually, equaling to installation capacity of approximately 127GW

With clear indication that wind power harvesting is key to Korea’s ambitious renewable energy plans, it seems natural that the

government, together with the country’s leading industrial groups, is keen on developing the wind energy space into a long-term business

opportunity

Several Korean shipbuilding and heavy industry companies are already adding components used in the wind power industry in their product

portfolios; in time, it is expected that South Korea will become a net exporter of wind energy technologies, equipment, and skill-set

Korea’s Renewable Energy Plans, Largely Wind Power Focused, Is A Step In The Right Direction

13

The renewable energy development plan is an important step for South Korea to achieve a sustainable energy environment for its future;

with strong government and business commitment, and a holistic approach to developing the sector into a long-term business

opportunity, the country is on the right direction of fulfilling its clean energy ambition

However, as with several such initiatives globally, the cost and the time-to-generate is significant and countries have failed to keep on the

path originally envisioned; it is important that the Korean government maintain the momentum and ensure that investment on projects is

undertaken in a planned manner

Perspective

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What is your perspective on South Korea’s ambitious wind energy plans? Do you believe that wind energy is the right solution

for South Korea’s energy woes?

What investment opportunities exist in the wind energy sector in South Korea? What impact will growth of local South Korean

players have on global wind energy companies?

We would like to hear from you. Write to us with your perspective at [email protected].

Notes

mailto:[email protected]



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wind energy in south korea – aiming high

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