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Direct Sale of Renewable Energy-based Electricity to be Permitted under Amendment to the Enforcement Decree of the Electric Utility Act

2021.01.04

Tripartite power purchase agreements (“PPAs”) anticipated to increase use of renewable energy 
 
On July 14, 2020, the Minister of Trade, Industry and Energy (“MOTIE”) proposed an amendment to Article 19 of the Enforcement Decree of the Electric Utility Act (the “Amendment”) (MOTIE Announcement No. 2020-431). 
 
The Amendment will allow new and renewable energy generation business entities which have generated more than 1MW of electricity (this may be through a single or multiple generating plant) to directly sell electricity to an electric sales business entity and for such electric sales business entity to supply such electricity to electricity users (Amendment Article 19(1)(3)). The Amendment will effectively create an exception to the principle of ‘electricity trading through the electricity market’ set out in Article 31(1) of the Electric Utility Act. 
 
The Amendment has been proposed to guarantee the electricity users’ right to select their power generation source, thereby promoting voluntary use of renewable energy, and to enhance export competitiveness of domestic companies. Significantly, the Amendment will allow renewable energy to be supplied through tripartite agreements among renewable energy generation business entities, electric sales business entities and electricity users and is anticipated to increase the participation of domestic companies in the global initiative RE100. 
 
RE100 is a voluntary global campaign whereby participant businesses commit to procure 100% of their electricity from renewable energy. IT companies such as Apple and Google, manufacturers such as BMW and GM, and financial institutions such as Goldman Sachs, Citi Bank and UBS are actively participating in RE100; however, Korean businesses are yet to officially participate in RE100. Article 31(1) of the Electric Utility Act, which stipulates for electricity to be traded only through the electricity market, has been cited as a key factor hindering domestic businesses’ participation in RE100. Most foreign companies participating in RE100 opt to enter into power purchase agreements with new and renewable energy generators rather than directly conducting new and renewable energy development projects. In Korea, the current Electric Utility Act, in principle, prohibits electricity transactions that do not go through the electricity market; thus, it is not possible for electricity users to specify new and renewable energy as a source for electricity when purchasing power in the electricity market. 
 
Therefore, the proposed Amendment is meaningful as it permits electricity generation business entities to enter into power purchase agreements with Korea Electric Power Corporation (“KEPCO”) (previously such agreements were only permitted in respect of certain geographic areas or for small-scale new and renewable energy) and allows for the indirect purchase of renewable energy-based electricity by electricity users through KEPCO, whilst preserving the principle of ‘electricity trading through the electricity market’. The tripartite power purchase agreement system involves KEPCO purchasing electricity generated from new and renewable energy directly from electricity generation business entities (as opposed to through the electricity market) and selling the same to electricity users. 
 
Although doubts regarding the effectiveness of this tripartite system have already been raised – in particular, there are concerns that this system will enable KEPCO to control the price of electricity trades and that the widening of the scope of exceptions will dismantle the principle of ‘electricity trading through the electricity market’ – the Amendment is expected to be reviewed by the State Council and officially announced early January 2021. 
 
The fact that the proposed Amendment permits the aggregation of the power generation capacities of multiple power generation facilities of an electricity generation business when determining whether such business entity’s generation capacity meets the 1 MW threshold is also noteworthy particularly considering the domestic renewable energy generation conditions and difficulties of constructing large-scale power plants. The method of trading electricity by bundling small-scale renewable energy power plants is likely to become a predominant trading method as a result of the Amendment. 
 
Domestic companies have been asked constantly by overseas customers participating in RE100 to supply goods manufactured using renewable energy. Once the Amendment becomes effective, it is anticipated that they will be better able to meet these demands of overseas customers.

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