Strategies for the security
of electricity supply
2005. 5
0
Contents
1. Risk factors in the present Basic Plan of long
term Electricity Supply & Demand, and Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in the
open market
4. Nuclear energy and governmental support
1
Contents
1. Risk factors in the present Basic Plan of long
term Electricity Supply & Demand, and Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in the
open market
4. Nuclear energy and governmental support
2
1-1. The basic plan of long term
electricity supply & demand
 Electricity companies enjoy decent profitability considering the rules and
policies set by the government
 The government is responsible for the Basic Plan

The government predicts electricity demands, and devises relevant policies
 The basic plan covers 14 years, and is updated every two years
 The basic plan reflects basic directions, demands prospects, and
construction plan of grid lines

Power companies refer to the basic plan, when they make decisions of new
investments.
3
1-2. The constructions in the Basic plan
 The basic plan includes A, B, C1, classified by the degree of uncertainty.

A : under construction, imminent completion

B : in pre-construction stage after being approved

C1: in planning stage to construct, expected to be approved
within 2years (executions and processes are less certain)
 C2: in planning stage, not included in the basic plan,
not expected to be approved within 2years
(some issues such as linkage to power network need further study)
C2
Planning
(no approval
within 2years)
C1
B
Planning
(approval within
2years)
A
Preparing
Under
to start
construction
construction
4
1-3. The Plan of constructions by GenCos
 State owned GenCos plan to commission 31,100 MW facilities (81% of total
construction) from 2004 to 2017

they will construct nuclear power plants and coal power plants,
which are very capital intnsive
 Private GenCo plan to construct 7,100 MW facilities, 19% of capacity entries

they prefer to construct LNG power plants, which require less investment
Plan period : 2004~2017, unit : MW
7,100
(19%)
25,200
Private
GenCo
4,000
(11%)
State
owned
Genco
21,200
(55%)
Under construction
38,200
13,000
3,100
(8%)
9,900
(26%)
In preparation
31,100
(81%)
Total
5
1-4. Prospects of capacity reserve margin
 Capacity reserve margin is expected to be more than 15~17%, the proper
margin level to guarantee supply, when the planned constructions are
successfully completed

capacity reserve margin is expected to reach 15∼18% by 2006, afterwards 25%
100,000
40%
80,000
30%
(MW) 60,000
20%
40,000
10%
20,000
0
2004
2007
2009
2011
2013
2015
2017
Max Demand
51,260
26,260
59,280
61,930
64,280
66,600
68,740
Capacity
59,130
67,730
76,680
80,390
85,820
86,340
88,040
Reserve Margin
15.4%
20.4%
29.4%
29.8%
33.5%
29.6%
28.1%
0%
6
1-5. Risk factors in the execution of the plan
 C1 constructions may not be executed if market condition changes unfavorably

The government cannot force the private companies’ construction.

State owned GenCos 9,900MW, private GenCos, 3,100MW
 The constructions of nuclear power plants have many barriers to overcome

Low public acceptance (NIMBY) and opposition of NGOs while 6 nuclear power
plants (6,000MW) are scheduled for commissioning over the plan period
 Prospects of capacity reserve margin by uncertainties
33.5%
35%
29.4%
20.4%
25%
15%
15.4%
15.4%
15.4%
18.8%
18.8%
24.3%
29.8%
21.3%
29.6%
21.9%
24.3%
12.8%
18.1%
9.3%
11.3%
5%
2.6%
-5%
2004
2007
28.1%
2009
C1 completed
2011
C1 delayed
2013
2015
-0.6%
2017
Nuclear delayed
The delay of C1 may trigger a demand-supply emergency starting from 2015
 The delay of 6 nuclear power plants may trigger an emergency starting from 2013

7
1-6. Strategies to execute
the construction plan
 The Government (KEPCO) promotes C1 by state owned GenCos to meet the
capacity entries timeframe
 The processes of constructions are cautiously evaluated by KEPCO
 State owned GenCos will replace private GenCos in constructing C1 if the
private GenCos withdraw
 No corporate investment risk exists in constructing nuclear power plants
because KEPCO holds 100% shares of the nuclear power company.
 However, opposition of NGOs and citizens require continuous promotion to
increase public acceptance to nuclear power plants.
 safety first operation
 co-prosperity with regional community
 advertising the necessity of nuclear energy in Korea due to high dependence on
imported energy resources
8
Contents
1. Risk factors in the present Basic Plan of long
term Electricity Supply & Demand, and Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in the
open market
4. Nuclear energy and governmental support
9
2-1. Risk factors to secure electricity supply
in the open market
 Investment decisions are made upon the price signals and predictability
in the open market, however, the price signals may not function well

when irrational market system distorts the signals

when price hike and abnormal volatilities are caused by manipulations of
any participants’ market power
 The GenCos may fail to secure proper profitability for re-investment

when the market is interrupted by regulatory body for the purpose of price
stabilisation
10
2-2. Strategies to secure stable supply
of electricity
Cost Based Pool (CBP) is the realistic best solution
 CBP has proven to be the best way to keep the market stability in Korea
until effective solution is found:

effective promotion of competition for cost reduction

reasonable market price

stable supply of electricity

less distortion of market signal by irrational market system

less market manipulation by participants

less interruption by regulatory bodies
11
2-2. Strategies to secure stable supply
of electricity
 CBP has evolved through improvements such as adoption of BLMP and A/S
 Adoption of Base Load Marginal Price (BLMP)
 In a signal market pool, the estimated market price set by System Marginal
Price (SMP) used to be too high to be accepted resulting from the portfolio
of fuel mix
 Nuclear power plants and coal power plants determine BLMP
 LNG and oil power plants determine SMP
 Payments for ancillary services for grid security and cycle maintenance to meet
the market system
 Promoting investments by continuously improving CBP system
 The CBP market system will be improved, i.e. differentiated capacity payment
(CP) will be linked to reserve margin
As Is
• CP paid on the Pari passu basis
to all available capacity
To Be
• low reserve margin, high CP
• high reserve margin, low CP
12
Contents
1. Risk factors in the present Basic Plan of long
term Electricity Supply & Demand, and Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in the
open market
4. Nuclear energy and governmental support
13
3-1. Whole sale market and
securing the stability of
price
 Oil and LNG generators determine 75~80% of market pricing at around
5.7¢/kWh under System Marginal Price (SMP) system

Oil and LNG generators produce 20% of annual generation volume.
 KEPCO may suffer financial risks from high SMP and low tariff regulated
at 6.5¢/kWh
 Financial health of GenCos and KEPCO through price stabilization
measures is essential.
Load Duration Curve
Reserve Margin
( MW)
LNG / Oil
Coal
75~80%
Nuclear
100%
8,760 hours
14
3-1. Whole sale market and
securing the stability of
price
 Introduction of BLMP has secured price stability

The highest marginal price of base load generators is determined as BLMP

The highest marginal price of peak load generators is determined as SMP

The settlement prices have been maintained at around 4.2~4.4¢/kWh
Introduction of Separate Settlement
(Variable Cost)
5.43 ¢
SMP
CP : 0.63 ¢
4.80 ¢
4.19 ¢
3.44 ¢
CP : 1.79 ¢/kWh
Oil
1.64 ¢
0.35 ¢
LNG
BLMP
Coal
Nuclear
Base Load Volume 78%
Peak Load 22%
15
3-2. Evaluation on the operation
of the wholesale market
 State owned GenCos have enjoyed significant increase of operating income
ratio (16.5% before separation → 20.9% after separation).

They own base load generators (nuclear, coal), and enjoy reasonable profits
from market price.
 Private GenCos in the market also have enjoyed reasonable profits.

They own peak load generators (LNG), and are sufficiently compensated by the
CP to recover fixed costs.
 Private GenCos having PPA with KEPCO are guaranteed reasonable
ROR(8%).
※ Operating income ratio of GenCos after separation
classification
2001
2002
2003
average
Operating income ratio
19.1%
21.7%
21.9%
20.9%
ROR
7.2%
8.0%
8.2%
7.8%
16
Contents
1. Risk factors in the present Basic Plan of long
term Electricity Supply & Demand, and Strategies
2. Risk factors in the open market and
countermeasures
3. The strategy for the stability of price in the
open market
4. Nuclear energy and governmental support
17
4-1. The status and the prospects
of nuclear generation
Prospects of nuclear generation
 The further construction of nuclear power plants is necessary for securing
stable supply of electricity as the demand is expected to highly increase in
South Korea.

Korea imports most of its generation fuel (99%), and the prices of fossil fuel
rocketed recently (56%).

‘The basic plan of long term electricity supply & demand’ stipulates that nuclear
power plant generation will stay at 30% of the total generation capacity.
 Expanding public acceptance to safe of nuclear power plants and promoting
timely constructions are required.
2017
30.3%
2015
30.9%
2010
23.8%
2005
26.3%
25.7%
60%
Coal
19.2%
26.2%
40%
Nuclear
16.6%
26.1%
28.8%
20%
18.2%
26.8%
30.9%
28.4%
0%
25.3%
LNG
16.6%
80%
100%
Others
18
4-2. The status of nuclear generation
Current status of nuclear energy in the electricity industry
 20 nuclear generators (17,716MW) in operation compose 29% of total
capacity in Korea.
 The generation by nuclear power plants reached 39 % of total generation
volume and 32% of the total traded amount in 2004, the highest shares
among generation types.
 The low generation costs of nuclear power plants helped Korea not to
increase retail prices in spite of recent price hikes of oil and coal.
50.0%
12
40.0%
8
30.0%
(￠/kWh)
20.0%
4
10.0%
0.0%
Nuclear
Imp. Coal Dom. Coal
0
B.C Oil
LNG
Hydro
Pump
Storage
Others
Generation Volume
39.0%
37.0%
2.0%
6.0%
15.0%
1.0%
0.5%
0.2%
Traded amount
32.0%
31.0%
2.0%
9.0%
24.0%
1.0%
1.0%
0.3%
3.5
3.7
4.6
7.0
6.9
5.4
10.2
5.1
Settllement Price
19
4-2. The status of nuclear generation
The profitability of nuclear power plants in the market
 The operating income ratio of nuclear power plants (22.4%) was higher
than those of any thermal power plants.

ROR of nuclear power (5.8%) was higher than the average ROR of GenCos
(5.3%) in 2004.

While thermal power companies suffer fuel cost increase by the coal price
increase, the nuclear power company enjoyed market price increase without
the increase of fuel costs.
 No difficulty is expected in raising new investments in nuclear power
plants with stable profitability under the current CBP market.
1,200
25%
1,000
20%
800
(Million US$)
15%
600
10%
400
5%
200
0
KHNP
KOSEPCO
KOMIPO
KOWEPCO
KOSPO
KEWESPO
Income before Taxes
1,017
184
256
201
123
118
Operating Income Ratio
22.4%
13.8%
16.3%
12.7%
6.9%
7.4%
Rate of Return
5.8%
4.5%
9.0%
8.2%
2.9%
2.4%
0%
20
4-3. The governmental support
to nuclear generation
 Nuclear power plants need governmental support for securing
construction site and disposal site, and for continuing operation

More constructions of nuclear power plants are inevitable in order to
secure electricity supply and stable market price of electricity in Korea
 Institutional Support for constructions of nuclear power plants


Economic benefits to local areas near power plants

$9~14mn/year by “special laws for the support of local area
accepting location of low-medium radio active waste

$68mn/year by ‘special laws for the support of local area
neighboring power plants
Reduction of risk of nuclear energy business by ‘laws for nuclear
damages’.
 Public
relationship in support of nuclear power plants.
21