This report describes the development of the electricity industry of Korea since its restructuring in 2001, analyzes the policies of the Korean government, focusing on competition policy for the wholesale electricity market, and proposes a set of recommendations that could potentially improve the efficiency of the industry. The most serious problem plaguing the wholesale electricity market is the inadequate rules for determining energy prices and the capacity price. Rules for determining energy prices kept changing since restructuring but have always been based on cost based. Further, the rules allowed energy prices to vary according to the ownership structure of a generation company and the fuel type. Capacity price is ostensibly based upon the concept of an equilibrium price in the spot market for capacities. But it is actually determined by a formula that relies on a particular PPA contract which has little to do with the opportunity cost of capacities in the spot market.
Current regulation of tariffs for transmission, distribution, and retail services imposed on KEPCO, which officially takes the form of rate of return regulation, also deviates considerably from a standard practice of rate of return regulation and causes inefficiency in both the monopoly parts and the wholesale market. It targets not only KEPCO but also its subsidiary gencos that compete with other gencos in the wholesale market and attempts to regulate the profitability of KEPCO and its gencos through a combination of regulation on retail tariff level and special discount factors that apply selectively to KEPCO’s gencos in the wholesale market. In addition, current policy on the governance of KEPCO and KEPCO’s gencos put serious restrictions on the profit incentives of them and allow the government a large degree of freedom in intervening in their management.
Based on the analysis of the structural problems and the comparison of the institutional arrangements governing electricity industry in other countries, this report proposes a set of alternative policies on the horizontal and vertical structures of the electricity industry of Korea, wholesale market rules, vesting contracts, incentive regulation of bottleneck facilities, and the governance of public enterprises in the electricity industry.