Author urges 1-2 years of Shadow Pricing before Korea's LMP introduction
박성민 (Park Sung-min), author of "The Counterattack of Transmission Congestion and the Great Transformation of the Power Market," recommends that Korea implement a 1-2 year "Shadow Pricing" period before introducing Locational Marginal Pricing (LMP) to ensure a stable transition and avoid market disruptions.
Our take
Why is a preparatory 'Shadow Pricing' period critical for Korea's Locational Marginal Pricing (LMP) success?
The author argues that implementing a 1-2 year Shadow Pricing period is crucial for Korea to avoid the market disruptions seen in California and the UK, allowing market participants to adapt and the government to refine its LMP algorithms before actual price changes.
The author's recommendation for Shadow Pricing stems from the need to de-risk the transition to LMP. By simulating LMP prices for 1-2 years without actual financial impact, market participants (especially generators) can understand how their revenues would change and adjust their strategies, while the government can identify and correct algorithmic flaws and system design issues. This preparatory phase is presented as a mechanism to mitigate the severe market instability and financial distress experienced by other countries that rushed similar reforms.
What the source says
- Korea's government aims to introduce Locational Marginal Pricing (LMP) by early 2027.
- Shadow Pricing involves publicly announcing virtual prices that would apply under an LMP system without actually changing existing charges.
- Unprepared market opening with incomplete wholesale power price signals and lack of risk hedging tools caused severe power market disruption in California.
- The author recommends a 1-2 year Shadow Pricing period as a de facto essential standard procedure to verify power supply and demand variability across four seasons, secure market participant adaptation, and prevent algorithm errors.
- The UK's NETA introduction in 2001, which skipped a two-year re-verification process, led to severe impacts, including serial bankruptcies and worsening management for small and eco-friendly power generators.
- Korea Electric Power Corporation (KEPCO) is actively introducing Dynamic Line Rating (DLR) technology, which uses sensors on existing transmission lines to immediately increase capacity by 20-40%.
- Italy successfully introduced actual LMP in 2005 after operating Shadow Pricing for one year in 2004.
- Large-scale private coal power facilities on Korea's East Coast have an utilization rate in the 20% range due to transmission constraints from delayed construction of East Coast-Seoul metropolitan area transmission lines.
For investors — For investors and operators in the Korean DER market, the proposed Shadow Pricing period means a longer lead time for adapting business models to the new LMP pricing signals, allowing for more informed investment and operational decisions before actual revenue impacts.
Watch: Monitoring for any official announcements or pilot programs regarding a "Shadow Pricing" period for Korea's power market.
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