"Electricity Wholesale Market Pricing Structure Must Be Improved to Expand Renewable Energy"

Improvements Needed in Pricing for Energy and Capacity
Shift from Variable Cost Evaluation to Price Bidding System
Independent Regulatory Agency Required for Institutional Reform

An analysis has found that the rigid price-setting structure of the electricity wholesale market is a limiting factor in rapidly increasing the share of renewable energy. Experts have diagnosed that structural improvements are needed so that the market's pricing system can flexibly reflect supply and demand, and that an independent regulatory agency should be established to reduce market distortions.

The Korea Development Institute (KDI) released a KDI Focus report on the 4th under the theme "Directions for Improving the Structure of the Electricity Wholesale Market in Response to the Expansion of Renewable Energy," which addresses these issues.

Yoon Yeo-chang, Research Fellow at the Industrial and Market Policy Research Department of the Korea Development Institute (KDI), is presenting a report titled "Measures to Improve the Structure of the Electricity Wholesale Market in Response to the Expansion of Renewable Energy" at the central briefing room of the Government Complex Sejong on the 4th. KDI

The electricity wholesale market is where power generation companies supply electricity and Korea Electric Power Corporation purchases it. In South Korea, the Korea Power Exchange operates this market. The report points out that this market has remained unchanged structurally for more than 20 years. While it functioned without issue when fossil fuels were the main source, it has now reached its limits as the share of renewable energy has rapidly increased.

In the overall electricity market, the proportion of renewables such as solar and wind power increased from 0.04% in 2001 to 8.5% in 2023. According to the Korea Energy Agency, as of 2023, solar power accounted for 5.32%, wind power for 0.54%, and other renewables for 2.4%. Going forward, the share of renewable energy is expected to rise to 18.8% by 2030 and 29.2% by 2038.

The report concluded that the current structure of the electricity wholesale market will not be able to reliably meet electricity demand as the share of renewables continues to grow. To prevent large-scale blackouts, facilities capable of flexibly adjusting output and an adequate reserve margin are needed, but the rigid capacity pricing structure is cited as an obstacle.

Yoon Yeo-chang, Research Fellow at the Industrial and Market Policy Research Department of KDI and author of the report, explained, "As the share of renewable energy rises steeply, the electricity wholesale market must balance stable electricity supply with efficient price formation. In particular, a structure must be created in which resources needed in the electricity market, such as energy storage systems (ESS), can secure profits in the wholesale market."

He added, "To achieve this, improvements are needed in the pricing methods for energy, capacity, and ancillary services. First, the electricity wholesale market should be shifted from a variable cost evaluation method to a price bidding system, in which generators directly compete by bidding their electricity prices." He also mentioned, "Capacity prices should be determined based on the market so that the necessary facility capacity can be secured in advance."

Institutional improvements must also be made to reduce market distortions that may arise when improving the structure of the domestic electricity wholesale market and strengthening market mechanisms. This includes strengthening the independence and expertise of the regulatory agency overseeing the electricity market. Yoon stated, "Through an independent regulatory agency, it would be possible to uniformly regulate not only retail electricity rates but also the compensation systems for capacity and ancillary services in the wholesale market, as well as pricing rules and monitoring of market dominance."

Resolving structural bottlenecks in retail electricity pricing is also a challenge. Yoon explained, "It is necessary to improve the system so that price fluctuations in the wholesale market are smoothly transmitted to retail rates, and to ensure that investment incentives in response to demand reactions function properly."

Regarding the ongoing discussions on locational pricing, he commented, "As regional imbalances in electricity supply and demand have led to congestion due to delays in transmission network construction, the topic of locational pricing has been widely discussed. It is preferable to promote locational pricing based on the concept of compensating for basic functions."

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