To combat Korea’s persistently strong imbalance between regions with high energy demand and high power generation, the National Assembly enacted the Special Act on Promotion of Distributed Energy (the “Distributed Energy Act”). Although the Distributed Energy Act (which aims to reduce the highly-centralized nature of the nation’s power supply by (among other things) requiring installation of distributed energy facilities as a condition for the development of certain large-scale multifamily residential and commercial/industrial real estate projects) became effective on June 14, 2024, until recently key details remained unconfirmed.
Following the completion of a public comments period, the “Regulations on Submission of Distributed Energy Facilities Installation Plans and Installation Confirmation, etc.” (the “New Regulations”) came into effect on December 3, 2024. These New Regulations provide much-needed clarity on the installation obligations created by the Distributed Energy Act, as summarized below.
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Distributed Energy Installation Obligation Ratio
As further explained in our earlier newsletter (Link), the Distributed Energy Act generally requires owners of certain buildings with high projected energy consumption requirements and managers or operators of certain large-scale multi-family, commercial and industrial real estate developments (“Mandatory Installers”)[1] to source a certain percentage of their total energy usage from “distributed energy facilities.” This percentage (referred to as the “distributed energy installation obligation ratio”) was to be calculated by multiplying a “regional ratio” by an “annual ratio,” but details for deriving these factors were undetermined. The New Regulations clarify these details.
The New Regulations stipulate that:
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The regional ratio is either (i) 100% (for buildings and developments located within the greater Seoul metropolitan area (i.e., Seoul, Gyeonggi Province and Incheon)) or (ii) 0% (for buildings and developments located outside of the greater Seoul metropolitan area);[2] and
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The annual ratio is set at 2% through 2026 and thereafter gradually increases to 20% after 2040.[3]
In other words, through 2026 Mandatory Installers whose buildings or developments are located within the greater Seoul metropolitan area are subject to a 2% distributed energy installation obligation ratio and (for the time being) Mandatory Installers whose buildings or developments located outside of the greater Seoul metropolitan area face no distributed energy installation obligation.
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Method for Calculating Required Nameplate Capacity
The nameplate generation capacity of distributed energy facilities required to be installed is calculated by dividing the value obtained by subtracting the MWh of direct power purchases from the amount of distributed energy usage (in MWh) by the capacity factor multiplied by 8,760 hours. Therefore, if a Mandatory Installer purchases power through a direct PPA, its mandatory installed capacity decreases, as does the size of the distributed energy facilities that it is required to install.
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The New Regulations stipulate that MWh of distributed energy usage is calculated by multiplying annual electricity usage (in MWh) by the distributed energy installation ratio.[4]
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Submission of Facility Installation Plan and Installation Confirmation Procedure
Mandatory Installers must submit a facility installation plan to the Korea Energy Agency prior to commencing such installation or related business operations setting out its name, land use plan, map of site location, distributed energy facility selection rationale and its mandatory installation quantity on the same timeline as is required for submission of the energy use plan pursuant to Article 10 (1) of Korea’s Energy Use Rationalization Act.[5] The Korea Energy Agency will review the appropriateness of facility installation plans based on review criteria set out in Article 8, Paragraph 1 of the New Regulations. The Mandatory Installer must complete the distributed energy facility installation and receive confirmation of such installation from the Korea Energy Agency within the applicable installation period.[6]
The Distributed Energy Act empowers the Minister of Trade, Industry and Energy to periodically inspect the status of Mandatory Installers’ distributed energy facilities,[7] and failure to comply with distributed energy installation obligations may result in the imposition of a fine of up to 150% of the projected installation costs that would be incurred to achieve full compliance.[8]
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Implications
The New Regulations confirm detailed standards for Mandatory Installers’ compliance with the Distributed Energy Act, such as the method of determining the installation obligation ratio and the mandatory installation amount. These clarifications will presumably largely resolve uncertainty related to distributed energy facility installation obligations and encourage the installation of distributed energy facilities and direct power trading as permitted under the Distributed Energy Act. Mandatory Installers should strategically consider the details of prospective distributed energy facilities installations to ensure full compliance with their distributed energy facility installation obligations in accordance with the Distributed Energy Act.
Mandatory Installers should also bear in mind the different installation obligations for buildings and developments that are and are not located within the greater Seoul metropolitan area, prospective increases in the installation obligation ratio and potential economic impacts of the introduction of direct power trading on their compliance with the Distributed Energy Act.
In addition, it will be crucial to closely follow how the Ministry of Trade, Industry and Energy (and related bodies, such as the Korean Energy Agency) interprets and implements the New Regulations in light of the considerable discretion granted to policymakers with respect to key aspects of the distributed energy promotion scheme (such as reviewing the distributed energy facility installation plans, confirming installation and evaluating performance).
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[1] Mandatory Installers include (i) owners of newly-built or substantially repaired buildings (excluding buildings announced by the MOTIE) that are defined under Article 2 of the Building Act and are expected to use at least 200,000 MWh of energy annually and (ii) operators or managers of projects with an area of at least 1,000,000m2 for development projects, etc., set out in Article 13 (1) 2 of the Distributed Energy Act (e.g., operators of multifamily housing developments, managers of industrial complexes, etc.).
[2] Article 6, Paragraph 1, [Appendix 1] of the New Regulations.
[3] Article 6, Paragraph 1, [Appendix 2] of the New Regulations.
[4] Article 6, Paragraph 1 [Appendix 1] of the New Regulations.
[5] Article 7 of the New Regulations.
[6] Articles 12 to 14 of the New Regulations.
[7] Article 15, Paragraph 3 of the Enforcement Decree of the Distributed Energy Act.
[8] Article 15, Paragraph 1 of the Distributed Energy Act.
[Korean Version]
