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Regulatory Trends:
Introduction of Auction System for Fixed Price Contracts for Wind Power Projects
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On August 3, 2022, the New and Renewable Energy Center (the “NREC”) of the Korea Energy Agency announced the proposed amendment to the Rules on Issuance of Supply Certificates and Operation of Trading Market (the “REC Rules”) to launch a fixed price contract auction system for wind power projects. In order to expand the supply of offshore wind power, the Ministry of Trade, Industry and Energy (the “MOTIE”) has been committed to extend the fixed price auction system, which has thus far been open to only solar power projects, to wind power projects. The wind power energy industry has also urged the adoption of the auction system to enhance the profitability of offshore wind power projects. We have outlined the key details of the proposed amendment and anticipated timeline as below:
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Eligibility to Participate
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In order to participate in fixed price bids for wind power projects, an entity engaged in the generation business must hold an Electricity Business License, while at the same time, having no history of receiving subsidies for the feed-in tariff or other support for the mandatory supply of new and renewable energy in accordance with the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy will be required. Moreover, in the case of a new and renewable energy power generating business in which Genco or the Korea District Heating Corporation has invested, no feasibility study should have been completed for the relevant project. Other specific terms and conditions will be announced in a public notice (Article 62(5) of the proposed amendment).
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It is anticipated that the fixed price contract auction to be introduced for wind power projects will proceed in a similar manner to the procedures that are currently in place for solar power projects as per the REC Rules. Once an RPS obligator requests the NREC to select a renewable energy generator for a fixed price contract, the NREC will post a notice of auction and receive auction participation forms from wind power generators. The successful bidder will be selected after going through the deliberation and evaluation by the Auction Committee (Articles 62 through 66 of the proposed amendment). The successful bidder will enter into an REC sale and purchase agreement with the RPS obligator assigned by the New and Renewable Energy Center within 24 months, in case of offshore wind, within 36 months (Articles 66 through 67 of the proposed amendment).
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In the process of evaluating bidders participating in auctions, it is anticipated that the bid price would account for the highest proportion (60 points out of 100 points), but non-measurable factors, including local acceptance (10 points), industrial and economic effect (20 points), domestic business performance (4 points), progress of project (2 points), and grid acceptance (4 points) will all be evaluated in due course (Annex 3-2).
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Meanwhile, the capacity of wind power for the fixed price auction will be determined by the Steering Committee of the NREC separately from the capacity of solar power, based on a comprehensive review of the annual facility plan for renewable energy, the annual supply of renewable energy, and the conditions of RPS Obligor’s fulfillment of obligation.
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The NREC plans to collect opinions, complete the process of revising the rules, and implement the revision by the second half of the year at the latest. Following the amendment of the REC Rules, the NREC plans to issue a bid notice for fixed price contracts in the second half of 2022, and hold the first bid within the year.
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Under the mandatory supply system of new and renewable energy, the ‘under-reimbursement’ issue has been continuously raised, because reimbursement has been made solely based on solar power projects despite the relatively low generation costs compared to those of wind power. However, once the fixed price auction bid is introduced for wind power projects, it is expected that the ‘under-reimbursement’ issue would be resolved as it allows the contract prices to be calculated based on volumes awarded in the bid separately from solar power.
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Moreover, in line with the introduction of fixed price auction bids for wind power projects, there is a possibility that contracts may be reorganized in the long run, to be proceeded based on auction, rather than individual private contracts. Therefore, it is advisable to monitor future development in the renewable energy sector in this regard.
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