As the share of renewable energy expands rapidly, a national research institute analysis indicated that the current rigid structure of the wholesale electricity market makes it difficult to support stable power supply and necessary facility investments. The Korea Development Institute (KDI) suggested that the pricing system of the wholesale electricity market should be flexibly reformed according to market principles.
Yoon Yeo-chang, a research fellow at KDI, presented the KDI Focus titled 'Directions for Improving the Structure of the Wholesale Electricity Market in Response to the Expansion of Renewable Energy' on the 4th. According to the report, the share of renewable energy, including solar and wind, in the domestic market significantly increased from 0.04% in 2001 to 8.5% in 2023. The share of renewable energy generation is projected to rise to 18.8% by 2030 and 29.2% by 2038.
The expansion of renewable energy is greatly increasing volatility in the electricity market. Due to the nature of renewable energy, which can cause supply levels to fluctuate drastically depending on weather conditions, the maximum monthly variation in daily electricity trading volume at 1 p.m. on average in 2023 rose 27% compared to 2017.
The problem lies in the current rigid price determination structure of the wholesale electricity market. Wholesale electricity prices are determined based on variable cost assessments based on fuel costs, rather than bids from market participants, making it difficult to apply to renewable energy, which has almost no variable costs.
Capacity pricing is also rigid. Unlike abroad, where prices reflect technological changes and electricity market conditions through operations, in Korea, prices are determined based on evaluations of fixed investment costs, such as construction costs, using the construction cost of the Shin Incheon Combined Cycle Power Plant, completed in 1998, adjusted only for inflation.
The pricing of ancillary services exhibits a contradictory structure where prices drop even as demand increases. This is because the total compensation for ancillary service provision is pre-allotted and then divided by the preceding year's actual supply of ancillary services to determine prices.
In particular, the 'primary reserve supply' among ancillary services, which immediately controls frequency, increased by 33.3% between 2021 and 2024; however, the total allocation remains fixed at 48.5 billion won. In years when demand increases, the price drops for the following year. Ultimately, adequate compensation for ancillary service demand is not reflected in prices, hindering long-term investment incentives for the flexible resources needed in the electricity market.
KDI warned that this supply-demand imbalance could trigger a lack of reserve power or large-scale blackouts. It proposed solutions to address structural problems, including transitioning to a price bidding system for wholesale electricity prices, determining capacity prices based on market conditions, and linking ancillary service prices to demand.
In particular, it emphasized that the current variable cost assessment method should be changed to a price bidding system where power generation companies directly compete for bids, allowing wholesale electricity prices to properly reflect the overall supply and demand situation in the market, and that capacity pricing based on market conditions should be established to provide stable revenue flows to investors in infrastructure and encourage proactive securing of necessary facility capacity.
KDI also added that the independence and expertise of the electricity market regulatory body should be strengthened, and that improvements to the retail pricing system should be made to ensure smooth transmission of wholesale electricity market price fluctuations to retail rates.
Research fellow Yoon stated, "As the share of renewable energy fluctuates with changing weather conditions, the importance of facility investment for stable power supply is growing," and noted, "The wholesale electricity market pricing system must be improved to flexibly reflect supply and demand so that it operates as a standard for facility investment and market operations."