Korea's Proposed Regional Power Pricing Faces Paradox Criticism
The Korean government's proposed regional electricity pricing system, intended to fund up to 10% industrial electricity bill discounts requiring approximately 2.8 trillion KRW annually, faces criticism for creating a paradox where transmission grid reinforcement reduces the available discount funds.
Our take
How might Korea's proposed regional power pricing paradoxically hinder grid investment?
The proposed regional electricity pricing system, by earmarking KEPCO's power purchase cost savings from Locational Marginal Pricing (LMP) for industrial electricity bill discounts, creates a disincentive for KEPCO to invest in transmission grid reinforcement and increases unhedged price risk for power generators.
If KEPCO, as the transmission operator, reinforces the grid, congestion decreases, narrowing regional wholesale price differences and reducing its power purchase cost savings. This directly diminishes the funds available for retail electricity bill discounts, creating a conflicting incentive for KEPCO. For generators, the system imposes new wholesale price signals and potential regional price drops without providing adequate tools like Financial Transmission Rights (FTR) or Contracts for Difference (CfD) to manage price volatility, thereby shifting significant financial risk onto them.
What the source says
- Professor Jeong Yeon-je of Seoul National University of Science and Technology stated that if transmission grids are reinforced, congestion disappears, regional prices no longer diverge, and the funds available for retail electricity bill discounts decrease.
- Professor Jeong Yeon-je highlighted that the government's Locational Marginal Pricing (LMP) discussion in 2024 initially aimed at 'enhancing regional signals for efficient distribution of power resources'.
- An August 2026 public hearing on industrial regional electricity pricing focused on utilizing KEPCO's power purchase cost savings from LMP to fund industrial discounts.
- Lawyer Park Jin-pyo of Law Firm Bae, Kim & Lee LLC warned that using power purchase cost savings for electricity bill discounts instead of grid expansion could weaken the transmission operator's investment incentive.
- Professor Lee Yu-su of Soongsil University argued that imposing wholesale price reductions without providing price risk management tools like Financial Transmission Rights (FTR), Contracts for Difference (CfD), or Capacity Payment (CP) adjustments would be a harsh burden on power generators.
- Kim Dong-hyun, Head of Division at Kosung Green Power, noted that Kosung Ha-i Units 1 & 2, which began commercial operation in 2021, face a shortened cost recovery period due to the government's 2040 coal phase-out policy.
- Kim Dong-hyun added that regional price drops, combined with the shortened cost recovery period, would increase the burden of unrecovered costs for generators.
- The US utilizes Financial Transmission Rights (FTR) and Auction Revenue Rights (ARR) to mitigate regional price difference risks for existing transmission users.
- Europe prioritizes using congestion revenue for maintaining and expanding transmission grid interconnection capacity.
For investors — Investors in Korean DER should factor in potential delays in transmission grid upgrades due to conflicting incentives for KEPCO and anticipate increased price volatility and unrecovered cost risks for generation assets, particularly those in non-capital regions or facing early retirement policies.
Watch: Announcement of the final design and implementation details for the regional electricity pricing system, specifically addressing the allocation of congestion revenue and mechanisms for price risk hedging.
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