Shift in Renewable Energy Policy: Abolishing RPS and Promoting the Introduction of a 'Contract Market'

The government is pushing to abolish the Renewable Portfolio Standard (RPS), which has been operated for the past 15 years to promote the supply of renewable energy, and transition to a 'contract market' system where the government determines the volume and operators compete on price. This is a measure to resolve the revenue uncertainty issues inherent in the current RPS system and to increase the efficiency of renewable energy deployment.

Uncertainty driving up costs... Limitations of the RPS system

In a video released on the YouTube channel 'Understanding: All the Knowledge in the World', Professor Jo Sang-min of Tech University of Korea and Deputy Director Woo Seok-jung of the Ministry of Climate, Energy and Environment explained the direction of changes in renewable energy policy. Professor Jo analyzed that although the current RPS system is a system focused on market efficiency, it has resulted in increasing costs by transferring uncertainty to operators.

Under the RPS system, power generation operators sell the electricity they produce to the electricity market and receive revenue compensation by separately trading Renewable Energy Certificates (REC). However, it was pointed out as a problem that it is difficult for operators to predict revenue because both electricity prices and certificate prices are subject to fluctuations. Professor Jo explained that due to this uncertainty, the required rate of return and financing costs for operators increase, which ultimately leads to a vicious cycle of decreasing participants and rising unit prices.

'Contract Market' where the government presents volume and prices are determined by bidding

The new 'contract market' system being promoted by the government is a method where the government first announces the volume to be contracted for each energy source, such as solar and wind, every year, and then operators compete by presenting prices through bidding. The government manages the market by presenting a bid ceiling price and not accepting bids above a certain price.

In this system, a Contract for Difference (CfD) is applied to the winning operators, guaranteeing the contract price for 20 years. This is a form that combines the advantages of the Feed-in Tariff (FIT), which was a price-based system in the past, with the characteristics of a volume-based system. Professor Jo added that to protect the revenue of existing operators, existing contracts will be maintained, but a structure will be established where power plants that have reached the end of their lifespan can participate in bidding again through 'repowering' by improving facilities.

Reflecting overseas trends and aiming to achieve targets by energy source

This institutional reform by the government also contains the purpose of managing renewable energy volumes by separately categorizing them into solar and wind. It has been pointed out that under the current RPS, it is difficult to perform precise volume management in line with the Basic Plan for Electricity Supply and Demand or greenhouse gas reduction targets because the distinction between energy sources is ambiguous. Through the new system, the government will be able to establish specific plans to achieve targets for each energy source.

Professor Jo mentioned that major overseas countries such as the United Kingdom, Japan, and Italy are also trending toward transitioning to contract market systems instead of the RPS method, which involves high uncertainty. Regarding concerns that competition may not function properly if there are insufficient market participants even after introducing the bidding system, the government is considering a method to gradually lower prices by setting a bid ceiling price.

Source: original video (YouTube)