On March 24, 2021 Korea’s National Assembly passed an amendment to the Electric Utility Act proposed by National Assemblyman Sung-Hwan Kim that will enable companies to enter into power purchase agreements (“PPAs”) for electricity generated from renewable energy projects (the “Direct PPA Amendment”).  The Direct PPA Amendment is expected to be officially promulgated soon, and will be effective following a six-month promulgation period, meaning that Korea’s first large-scale corporate PPAs for renewable electricity may be executed as early as the fall of 2021.

At the same time, the National Assembly passed an amendment to the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy (the “Renewable Energy Act”) that sets the stage for more aggressive governmental support for renewable power production by increasing the existing 10% cap on Korea’s Renewable Portfolio Standard (“RPS”) obligation to 25% (the “RPS Amendment”).  Taken together, the Direct PPA Amendment and the RPS Amendment portend continued growth in Korea’s renewable energy sector through 2021 and beyond.
 

• Direct PPA Amendment

Prior to the effectiveness of the Direct PPA Amendment, the Electric Utility Act prohibited “electric generation business entities” (i.e., independent power producers and other power generators (collectively, “IPPs”)) with generation capacity exceeding 1MW from concurrently engaging in an “electric sales business” (i.e., selling electricity directly to electricity consumers other than through the Korea Power Exchange (the “KPX”), Korea’s wholesale cost-pool market operator).  This means that electricity consumers in Korea are currently not allowed to purchase power directly from IPPs and instead must contract for the purchase of electricity with the majority state-owned Korea Electric Power Corporation (“KEPCO”), the only “electric sales business” licensed under the Electric Utility Act.

The Direct PPA Amendment effectively ends KEPCO’s monopoly on the retail sale of electricity (with respect to renewable energy only) by:

• introducing a newly defined “renewable energy electricity supply business” classification;

• stipulating that a “renewable energy electricity supply business may supply electricity generated from renewable sources to electricity consumers directly without going through the [KPX]”; and

• affirming that in such instances “the parties may separately agree on and enter into an agreement on the supply charges and other terms and conditions of supply” (i.e., a PPA).

Although power sold under a direct PPA will not be eligible for issuance of renewable energy certificates (“RECs”), the same agency that issues RECs (the Korea Energy Agency) plans to issue “renewable energy use certificates” with respect to such power.  These use certificates will include the information currently included in RECs to enable easy tracking of the environmental attribute and to prevent double-counting for purposes of compliance with corporate sustainability goals such as the RE100 initiative.
 

• RPS Amendment

Prior to the RPS Amendment, the Renewable Energy Act required power producers that generate 500MW or more annually to source a designated percentage of their overall generation (the “RPS Obligation”) from renewable energy sources (either through self-generation or purchase of off-setting RECs) or face fines of up to 150% of the market value of the REC shortfall that would have been required to offset such percentage of overall power generation.  The Renewable Energy Act stipulated that the RPS Obligation will be set by Presidential Decree on an annual basis, but shall not exceed 10%.  The RPS Amendment replaces this 10% limit on the RPS Obligation with a 25% limit, meaning that future Presidential Decrees may continue to increase the demand for renewable energy from Korea’s largest IPPs subject to the RPS Obligation.
 

• Implications

The Direct PPA Amendment and the RPS Amendment are expected to further catalyze continued growth in Korea’s renewable energy sector.

Even before passage of the Direct PPA Amendment, the Ministry of Trade, Industry and Energy (the “MOTIE”) launched RE100-enabling policies on January 5, 2021 which allow electricity consumers to selectively purchase electricity generated from renewable sources.  MOTIE-approved methods for such selective purchase of renewable power include “third-party PPAs” (by which the MOTIE means indirect PPA arrangements where IPPs and electricity consumers enter into back-to-back PPAs with KEPCO), a new system for trading RECs for RE100 purposes and a green pricing tender auction system.  The MOTIE did not, however, include direct PPAs as a measure to implement the RE100 initiative since prior to passage of the Direct PPA Amendment this was not permitted under the Electric Utility Act.  Following the effectiveness of the Direct PPA Amendment, direct PPAs are expected to be a welcome additional method of implementing the RE100 initiative in Korea.

Passage of the RPS Amendment means that the RPS can continue to play a supporting role in encouraging the development of new renewable power generation facilities for the foreseeable future.  Because the RPS Obligation for 2021 is 9% and is scheduled to increase to 10% for 2022, absent the RPS Amendment the RPS would have no longer played a role in encouraging additionality beyond 2022.  Although the RPS Amendment itself does not include an affirmative increase in the RPS Obligation, by increasing the statutory ceiling on the RPS Obligation by 25% it ensures that the government can continue to use the RPS scheme as an increasingly aggressive tool for encouraging additionality in the domestic market.