Korea weighs revision to CHP AGC settlement system to fix disincentives
Nine district energy companies proposed an amendment to the Power Market Operating Rules to revise the Heat-constrained Variable Cost Compensation (HMWP) settlement for combined heat and power (CHP) plants participating in Automatic Generation Control (AGC), which is scheduled for deliberation by the Rules Amendment Committee on September 18, 2026.
Our take
How would proposed changes to HMWP settlement impact combined heat and power plants?
The proposed amendment to the HMWP calculation mechanism aims to resolve a perverse incentive where CHP plants' participation in AGC for grid flexibility reduces their compensation, potentially increasing overall power supply costs for the system.
As renewable energy generation expands, particularly solar, the need for grid flexibility and stability increases. Combined Heat and Power (CHP) plants, which operate under heat constraints, are being asked to adjust their output, but the current settlement system for Heat-constrained Variable Cost Compensation (HMWP) inadvertently penalizes them for providing these services. The Power Market Operating Rules (governed by Electric Business Act Article 43) define how such market mechanisms are established and amended.
- Renewable energy target: 100 GW (2030)
The current HMWP formula, based on a simple ratio of actual generation to bid volume, inadvertently punishes CHP plants for reducing output to provide AGC services, which are crucial for grid stability with increasing intermittent renewables. By adjusting this ratio to account for AGC-considered bid volume, the proposed rule change seeks to align financial incentives with the operational needs of the grid, encouraging CHP plants to act as flexible resources without incurring financial losses, thereby correcting a market signal that currently discourages grid cooperation.
What the source says
- Nine district energy companies jointly proposed an amendment to the Power Market Operating Rules to enhance flexibility from heat-supply generators.
- The proposed amendment will be deliberated by the Rules Amendment Committee on September 18, 2026.
- The core of the amendment is to reflect the actual response volume of single-unit combined heat and power (CHP) plants participating in AGC during heat supply in the HMWP settlement.
- The current HMWP formula, based on 'generation volume / bid volume', creates a disincentive by reducing compensation for CHP plants that lower heat-constrained generation to participate in AGC.
- The revised proposal suggests applying 'generation volume / AGC-considered bid volume' in the HMWP formula to accurately reflect actual AGC response.
- A working-level committee previously halted an initial proposal that would have uniformly applied a ratio of 1 for 'generation volume / bid volume', citing concerns about not reflecting actual grid contribution.
- An industry official The district energy industry argues that Ancillary Services Payment (ASP) compensates for reserve provision, while HMWP compensates for unrecovered fuel costs from heat-constrained generation, making both adjustments necessary.
- An industry official An industry official stated that correcting the current settlement structure, which disadvantages CHP plants for cooperating with the grid, could lower overall power supply costs by utilizing existing facilities near demand centers without additional transmission grid investment.
For investors — If adopted, the revised HMWP settlement mechanism would improve the economic viability for CHP plants to provide essential grid flexibility services, potentially lowering overall system costs by leveraging existing infrastructure and making CHP assets more attractive for investors.
Watch: Deliberation and approval of the revised Power Market Operating Rules amendment by the Rules Amendment Committee on September 18, 2026.
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