Korea Power Exchange reviews must-run generator pricing rules
Korea's electricity market is experiencing a 'strange phenomenon' where System Marginal Price (SMP) drops despite increased operation of expensive LNG generators, as seen by a 56 KRW/kWh fall on September 9. This occurs because 'must-run' generators, essential for grid stability, are excluded from price determination, leading to a significant gap between actual generation costs and market prices. The Korea Power Exchange is reviewing proposals to grant price-setting eligibility to the economic output portion of these units.
Our take
How do Korea's must-run rules distort power prices and generator revenues?
The current exclusion of must-run generators from price determination distorts the System Marginal Price (SMP), reducing revenue for private LNG generators by decoupling market signals from actual operating costs, even as their operational requirements for grid stability increase from 7 GW to 12 GW.
Under the current Power Market Operating Rules, generators designated as 'must-run' for grid stability or transmission constraint resolution are excluded from setting the SMP, regardless of their actual output beyond minimum requirements. This means that when expensive LNG units are forced to operate more than planned—as seen with a 23.5% increase from January to September—their higher marginal costs do not influence the market price, which is instead set by cheaper alternatives like coal. Consequently, private generators face reduced margins from electricity sales, while the Korea Power Exchange still incurs variable costs for these excluded units, creating a disconnect between market price and total system cost.
What the source says
- The average System Marginal Price (SMP) fell from 160.3 KRW/kWh on September 8 to 104.3 KRW/kWh on September 9.
- The number of LNG generators excluded from price determination increased from an average of 17.5 units to 27.2 units between September 8 and 9.
- Actual coal generation from January to September was 2.27 GW less than planned.
- Gas Corporation LNG units determined the SMP for 76 hours in the first week of September, which decreased to 37 hours in the second week and 0 hours in the third week.
- Coal units determined the SMP for 41 hours in the first week of September, increasing to 55 hours in the second week and 89 hours in the third week.
- Private power generators Nine private power generators submitted a Power Market Operating Rules amendment proposal in March to revise the price-setting eligibility criteria for must-run generators.
- The criteria for excluding must-run generators from price determination was introduced in September 2022 with the real-time market based day-ahead market.
- Korea Power Exchange Implementation of revised rules by the Korea Power Exchange may be delayed until next year or later due to necessary system reforms.
For investors — Investors in Korean DER, particularly those with flexible assets like Battery Energy Storage Systems (BESS) or peaker plants, should monitor the proposed revisions to Power Market Operating Rules. The current system masks true generation costs, potentially suppressing SMP and impacting revenue streams for assets that rely on market price signals for profitability.
Watch: Announcement of the Korea Power Exchange's decision on the proposed amendments to the Power Market Operating Rules regarding must-run generator price determination.
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