The Era of the Renewable Energy Spot Market Ends... Transition to a Long-Term Contract System

Phasing Out RPS: Transition to Government-Led Long-Term Fixed-Price Contract Market from 2027
Private Sector Participation in Power Grid Construction via BT Method and Introduction of Joint Offshore Wind Connections
Special Act to Support Regions Affected by Coal Power Phase-Out Passes Standing Committee

Solar panels installed at the LS Electric Cheonan DC Factory in Chungnam on the 20th. Photo by Jinhyung Kang

The government is launching an "energy transition" initiative that will completely overhaul the renewable energy supply system and the power grid construction structure. The Renewable Portfolio Standard (RPS), which has been in place for over a decade, will be effectively abolished and replaced by a government-led long-term fixed-price contract market starting in 2027. In addition, the legal framework will now include the Build-Transfer (BT) method, which allows private sector participation in transmission network construction, as well as support systems for regions affected by the phase-out of coal-fired power plants, signaling the full-scale restructuring of the overall energy transition policy.

Lee Ho-hyun, Second Vice Minister of the Ministry of Climate, Energy and Environment, stated at a briefing held at the Government Complex Sejong on the 21st, "Major institutional changes of this scale have rarely been announced in the history of energy policy," adding, "It is quite meaningful that, after the launch of the Ministry of Climate, bipartisan consensus has been reached to produce legislation related to the energy transition."

Previously, on the 19th, the National Assembly's Climate, Energy, Environment and Labor Committee passed several bills: ▲the amendment to the Renewable Energy Act, which includes reform of the RPS; ▲three power grid laws (the Special Act on Power Grid, the Electric Utility Act, and the Electric Power Source Development Promotion Act) to ensure timely construction of the transmission network; and ▲the Special Act to Support Coal Power Plant Workers and Affected Regions.

The core of the Renewable Energy Act amendment is a complete overhaul of the renewable energy supply system. The current domestic renewable energy market operates based on the RPS. Under this system, power generators above a certain scale are required to supply a fixed percentage of their total power generation from renewable sources, and they fulfill this obligation by purchasing Renewable Energy Certificates (RECs).

The mandatory RPS ratio has expanded from 2% in 2012 to 15% this year. However, as power companies have relied more on purchasing RECs from the market rather than directly investing in facilities, a spot market-centric structure has become entrenched, and there have been ongoing concerns about the volatility of project profitability due to fluctuations in the System Marginal Price (SMP) and REC prices.

The Ministry of Climate, Energy and Environment plans to transition to a government-led long-term fixed-price contract market. The RPS and REC systems will only operate until the end of this year, and from January 2027, the government will set supply targets based on generation capacity (GW) and unify the system by signing long-term contracts through competitive bidding.

Vice Minister Lee explained, "Since the share of renewable energy generation has already surpassed 10%, it is time to shift from the RPS, which focused on early-stage market expansion, to a system centered on stable long-term contracts," adding, "The government will present a ceiling price and design a structure that gradually lowers unit costs over time."

For existing REC holders, a three-year grace period will be provided. Trading on the REC market will be allowed, and options such as trading with RE100 demand companies or transitioning to the long-term contract market will be made available.

Protective measures for small-scale operators are also being established. Solar and wind power operators below a certain size will be able to compete through a separate bidding market, thereby alleviating the burden of direct competition with larger operators.

The government expects that this institutional reform will enhance investment stability in renewable energy. In fact, industry insiders predict that the dependence on the REC spot market will decrease and revenue structures based on long-term contracts will be strengthened as a result of the RPS reform.

However, some civic groups have expressed concerns that the effectiveness of renewable energy expansion may be weakened, pointing out that the obligations for private power producers have been eased to the level of "target management."

In the power grid sector, the BT (Build-Transfer) method, which allows private sector participation, will be introduced. Under this system, private operators construct sections of the transmission network and transfer ownership to Korea Electric Power Corporation (KEPCO) upon completion.

Vice Minister Lee stated, "With the expansion of the AI industry and the spread of renewable energy, demand for the power grid is surging, but it is difficult for KEPCO alone to build all transmission and distribution networks in a timely manner," emphasizing, "It is necessary to utilize private sector capabilities to quickly resolve bottleneck sections."

He drew the line regarding concerns about "privatization of the power grid" due to private sector participation. He said, "This is not a BTO (Build-Transfer-Operate, profit-driven private investment) model, but a BT model. Both ownership and operation will remain with KEPCO," stressing, "The private sector will only receive compensation after construction and will not have operational rights over the power grid."

The government also plans to introduce competitive bidding, profit ceilings, and penalty systems in the operator selection process to prevent the possibility of excessive profits.

In the offshore wind sector, a Special Purpose Company (SPC) system will be introduced to establish joint connection facilities. Instead of each offshore wind farm connecting its own transmission line, a shared connection network will be built to reduce costs and alleviate the burden on the power grid. The SPC will be granted the status of "power source developer," similar to KEPCO, giving it the authority for land acquisition and managing complaints from local communities.

Regarding the phase-out of coal-fired power plants, the special act to support affected regions has passed the standing committee. Although the government is pursuing a policy to phase out coal power by 2040, concerns are growing over the impact on regional economies and employment instability.

The government will require power generation operators to submit business plans detailing phase-out schedules, alternative industries, and plans for grid utilization, which will then be comprehensively reviewed by the Korea Power Exchange and the Ministry of Climate, Energy and Environment. The plan also includes the legal basis for supporting worker reemployment, job training, and the development of alternative regional industries.

However, from an energy security perspective, the law also includes provisions allowing certain coal-fired power plants to be maintained as "security power sources" for temporary use in emergency situations.

Vice Minister Lee stated, "Experiencing choke point risks such as those in the Strait of Hormuz has led to a growing recognition that energy transition is not merely a response to climate change, but a matter of national security strategy," adding, "Previously, we only had energy transition goals without the institutional means to implement them, but these new bills will provide the foundation to actually drive the transition forward."

This content was produced with the assistance of AI translation services.