The Price Is Right: Advanced Electricity Pricing in South Korea

What are the impacts of advanced pricing options on South Korea’s energy consumption—and who will be the beneficiaries?

Last month, GTM Research released its latest smart grid report, The Smart Grid in Asia, 2012-2016: Markets, Technologies and Strategies. This article is the third in a series of perspectives from the report's author on the tremendous smart grid opportunity in Asia; to read part one of this series, click here; part two is here.

In every market, wholesale and consumer pricing has the ability to impact cost and behavior significantly. South Korea has arguably the most advanced national power grid of any developed country, and its electricity pricing structure is no different. Energy consumption in South Korea has doubled in the past 12 years, having the fastest growth rate among developed countries. The impact of such explosive growth has been the maturation of the wholesale market developed by Korea Power Exchange (KPX) and a well-developed consumer electricity pricing structure that helps smooth out demand growth. These pricing structures, in turn, foster growth in new technologies and services offered, including smart meters and new pricing mechanisms.

South Korea’s wholesale electricity market operates on a cost-based pool, in which the price of electricity has two components: one, the marginal price, representing the variable cost of generating electricity; and two, the capacity price, representing the fixed cost of generating electricity.

Unique to the South Korean electricity market is that the market price is set by actual variable costs, as opposed to the common method of using the bidding price. The nation’s only utility, KEPCO, which is also majority-owned by the government, has fared well over the years with keeping electricity prices low and keeping the lights on -- blackout time in South Korea is in the ultra-low 12- to 18-minute range, just 10 percent that of the reliable North American power grid.

FIGURE: Trading Volume in the South Korean Market and Amount of Energy Generated

Source: Korea Power Exchange, The Smart Grid in Asia, 2012-2016: Markets, Technologies and Strategies

Korea Power Exchange (KPX) and KEPCO are in charge of demand-side management programs, including demand response. Load management programs have been around since the 1970s, including major programs such as night rates for thermal power storage, seasonal tariffs, time-of-use tariffs, and linking an electricity bill to a base rate plus a peak consumption rate. In the 1990s, voluntary load reduction and energy efficiency programs picked up, and in the early 2000s demand response programs formed. Demand response programs have been an effective tool in curbing power system investments in South Korea, including generation, transmission, and substation networks. Demand response plays a key role in KPX’s long-term electricity supply and demand outlook for 2008 to 2022.

Smart pricing systems are another key tool in place that reduces peak demand, in turn slowing down capacity and transmission investments. Residential pricing, for example, is far more advanced than in most U.S. utilities. A demand and energy charge is included in the bill, which is based on six pricing levels. The more energy consumed in a month, the higher the rate for each pricing level. Each pricing level follows a nonlinear structure: using twice as much energy results in a 2.5X increase in the energy charge and a 4X increase in the demand charge. Residential pricing is further broken down into low- and high-voltage customers. This pricing structure incentivizes low energy consumption, reducing demand growth. The same form is followed for larger energy customers, but with increased detail and added benefits for KEPCO.

Outside of residential customers, KEPCO offers many pricing options for each customer class. Take schools, for example. Schools fall under the educational services rate class, and nine different options exist for this rate class. Low demand customers (between 4 kilowatts and 1,000 kilowatts) are offered low- and high-voltage rates with various options, and are charged more than the high-demand customers. Three seasonal rates exist: summer (highest rates), spring/fall (lowest rates), and winter. This level of detail allows for some rate reduction planning, such as incentives to take vacation.

The high-demand educational rates have even more detail, shown in the figure below. In addition to the rate structure defined above, three daily rates exist: off-peak (11 p.m. to 9 a.m.), on-peak (11 a.m. to 12 p.m., 1 p.m. to 5 p.m.), and mid-peak (9 a.m. to 11 a.m., 12 p.m. to 1 p.m., 5 p.m. to 11 p.m.). Customers are also offered different voltage levels: low voltage (220V and 380V) and three high voltage levels ranging from 3.3kV to 345kV. A major price difference exists with peak rates, where on-peak rates can be 325 percent higher than off-peak rates. With this dynamic pricing scheme, consumers are more energy-aware and can change their behavior accordingly to minimize energy consumption. Pricing rates like these have helped mitigate South Korea’s already large electricity demand growth.

FIGURE: South Korea Educational Rate Electricity Pricing

Source: KEPCO, The Smart Grid in Asia, 2012-2016: Markets, Technologies and Strategies

In order for most of KEPCO’s rate classes to exist, advanced meter reading (AMR) meters must be installed. KEPCO is expanding its meter rollout to the residential sector, which accounts for approximately 13 million of the 18 million electricity meters in South Korea. KEPCO has developed three meter types, ranging from an AMR meter with limited reading and pricing options, to a more expensive advanced metering infrastructure (AMI) meter with load control capabilities. KEPCO has plans to install smart meters at a rate of a half million to 1.5 million meters in homes for the next ten years, and it will no doubt include new rate structures and demand response programs as the meters roll out.

LS Industrial Systems, Iljin Electric, and Nuri Telecom will be in charge of installing smart meters and communication infrastructure in a $1.3 billion government-funded project. KEPCO claims its cheap AMR meters will cost $17 to $25, with limited reading functionality, whereas its more expensive AMI meters will cost $120. Cheap meters can do time-of-use and real-time pricing in 60-minute intervals, which is “good enough” for energy reduction strategies with many residential homes. More expensive meters have faster response times and load control options. Meter manufacturing, communication, and energy management companies will benefit, as there will be more demand than the current meter supply can meet.

Some South Korean companies to look out for include LG, SK Energy, GS Caltex, Nuri Telecom, Samsung, and Iljin Electric. LG is producing its Thinq product line, a suite of appliances that can be controlled with an energy management system, potentially responding to load control and pricing events. SK Energy and GS Caltex are involved, among other things, in electric vehicle charging, which will also benefit from pricing structures that KEPCO and KPX set up. Nuri Telecom will benefit from the metering and communication infrastructure, as there will be an increased need for communications solutions. Samsung is developing a suite of home and building energy management system (HEMS and BEMS) solutions, which will be tied into a smart meter and pricing rates. Iljin Electric develops smart metering equipment, which is part of the backbone that drives the new wave of demand-side management and pricing programs. KEPCO and KPX hope to develop a real-time electricity market, with the goal of 30 percent customer adoption (including residential) by 2030.

Companies and institutes interested in studying or collaborating with South Korean groups should look into the Jeju Island smart grid testbed project. Many of the aforementioned technologies and policies are being tested on the island, with hundreds of companies participating. With South Korea being the industrial powerhouse it is today, one day in the not-too-distant future expect to see many of these smart grid technologies manufactured and exported to developing smart grids around the world. 

For more information on South Korea's smart grid build-out and The Smart Grid in Asia, 2012-2016: Markets, Technologies and Strategies, visit www.greentechmedia.com/research/report/smart-grid-in-asia-2012-2016.