0 2005. 5 Strategies for the security of electricity supply.

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2005. 5

Strategies for the security of electricity supply

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Contents

1. Risk factors in the present Basic Plan of long term Electricity Supply & Demand, and Strategies


2. Risk factors in the open market and countermeasures


3. The strategy for the stability of price in the open market


4. Nuclear energy and governmental support4. Nuclear energy and governmental support

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Contents




4. Nuclear energy and governmental support

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1-1. The basic plan of long term electricity supply & demand

Electricity companies enjoy decent profitability considering the rules and

policies set by the government

The government is responsible for the Basic Plan

The government predicts electricity demands, and devises relevant policies

The basic plan covers 14 years, and is updated every two years

The basic plan reflects basic directions, demands prospects, and

construction plan of grid lines

Power companies refer to the basic plan, when they make decisions of new

investments.

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1-2. The constructions in the Basic plan

The basic plan includes A, B, C1, classified by the degree of uncertainty.

A : under construction, imminent completion

B : in pre-construction stage after being approved

C1: in planning stage to construct, expected to be approved

within 2years (executions and processes are less certain)

C2: in planning stage, not included in the basic plan,

not expected to be approved within 2years

(some issues such as linkage to power network need further study)

Planning(no approval within 2years)

Under

construction

Preparing

to start construction

Planning(approval within

2years)

C2 C1 B A

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1-3. The Plan of constructions by GenCos

State owned GenCos plan to commission 31,100 MW facilities (81% of total

construction) from 2004 to 2017

they will construct nuclear power plants and coal power plants,

which are very capital intnsive

Private GenCo plan to construct 7,100 MW facilities, 19% of capacity entries

they prefer to construct LNG power plants, which require less investment

21,200(55%)

4,000(11%)

9,900(26%)

3,100(8%)

31,100(81%)

7,100(19%)

State ownedGenco

PrivateGenCo

In preparation TotalUnder construction

Plan period : 2004~2017, unit : MW

25,200

13,000

38,200

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1-4. Prospects of capacity reserve margin

Capacity reserve margin is expected to be more than 15~17%, the proper

margin level to guarantee supply, when the planned constructions are

successfully completed

capacity reserve margin is expected to reach 15 18% by 2006, afterwards 25%∼

0

20,000

40,000

60,000

80,000

100,000

(MW)

0%

10%

20%

30%

40%

Max Demand 51,260 26,260 59,280 61,930 64,280 66,600 68,740

Capacity 59,130 67,730 76,680 80,390 85,820 86,340 88,040

Reserve Margin 15.4% 20.4% 29.4% 29.8% 33.5% 29.6% 28.1%

2004 2007 2009 2011 2013 2015 2017

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1-5. Risk factors in the execution of the plan

C1 constructions may not be executed if market condition changes unfavorablyThe government cannot force the private companies’ construction.State owned GenCos 9,900MW, private GenCos, 3,100MW

The constructions of nuclear power plants have many barriers to overcomeLow public acceptance (NIMBY) and opposition of NGOs while 6 nuclear power

plants (6,000MW) are scheduled for commissioning over the plan period

Prospects of capacity reserve margin by uncertainties

The delay of C1 may trigger a demand-supply emergency starting from 2015 The delay of 6 nuclear power plants may trigger an emergency starting from 2013

15.4%20.4%

33.5%29.6% 28.1%

18.8%

9.3%15.4%18.8%

24.3%

18.1%

11.3%

2.6%-0.6%

29.8%29.4%

12.8%

21.9%21.3%24.3%

15.4%

-5%

5%

15%

25%

35%

2004 2007 2009 2011 2013 2015 2017

C1 completed C1 delayed Nuclear delayed

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1-6. Strategies to execute the construction plan

The Government (KEPCO) promotes C1 by state owned GenCos to meet the

capacity entries timeframeThe processes of constructions are cautiously evaluated by KEPCO

State owned GenCos will replace private GenCos in constructing C1 if the

private GenCos withdraw

No corporate investment risk exists in constructing nuclear power plants

because KEPCO holds 100% shares of the nuclear power company.

However, opposition of NGOs and citizens require continuous promotion to

increase public acceptance to nuclear power plants. safety first operation co-prosperity with regional communityadvertising the necessity of nuclear energy in Korea due to high dependence on

imported energy resources

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Contents





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2-1. Risk factors to secure electricity supply in the open market

Investment decisions are made upon the price signals and predictability

in the open market, however, the price signals may not function well

when irrational market system distorts the signals

when price hike and abnormal volatilities are caused by manipulations of

any participants’ market power

The GenCos may fail to secure proper profitability for re-investment

when the market is interrupted by regulatory body for the purpose of price

stabilisation

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2-2. Strategies to secure stable supply of electricity

Cost Based Pool (CBP) is the realistic best solution

CBP has proven to be the best way to keep the market stability in Korea

until effective solution is found:

effective promotion of competition for cost reduction

reasonable market price

stable supply of electricity

less distortion of market signal by irrational market system

less market manipulation by participants

less interruption by regulatory bodies

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2-2. Strategies to secure stable supply of electricity

CBP has evolved through improvements such as adoption of BLMP and A/S Adoption of Base Load Marginal Price (BLMP)

In a signal market pool, the estimated market price set by System Marginal Price (SMP) used to be too high to be accepted resulting from the portfolio of fuel mix

Nuclear power plants and coal power plants determine BLMP LNG and oil power plants determine SMP

Payments for ancillary services for grid security and cycle maintenance to meet the market system

Promoting investments by continuously improving CBP systemThe CBP market system will be improved, i.e. differentiated capacity payment

(CP) will be linked to reserve margin

• low reserve margin, high CP• high reserve margin, low CP

To Be

• CP paid on the Pari passu basis to all available capacity

As Is

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Contents





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3-1. Whole sale market and securing the stability of price

Oil and LNG generators determine 75~80% of market pricing at around 5.7¢/kWh under System Marginal Price (SMP) system

Oil and LNG generators produce 20% of annual generation volume.

KEPCO may suffer financial risks from high SMP and low tariff regulated at 6.5¢/kWh

Financial health of GenCos and KEPCO through price stabilization measures is essential.

Load Duration Curve

Nuclear

Coal

LNG / Oil

75~80%

8,760 hours

Reserve Margin

( MW)

100%

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3-1. Whole sale market and securing the stability of price

Introduction of BLMP has secured price stability

The highest marginal price of base load generators is determined as BLMP

The highest marginal price of peak load generators is determined as SMP

The settlement prices have been maintained at around 4.2~4.4¢/kWh

NuclearCoal

CP : 1.79 ¢/kWhOil

LNG

CP : 0.63 ¢

Base Load Volume 78%

(Variable Cost)

1.64 ¢

3.44 ¢

4.19 ¢

4.80 ¢

5.43 ¢

0.35 ¢BLMP

SMPIntroduction of Separate Settlement

Peak Load 22%

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3-2. Evaluation on the operation of the wholesale market

State owned GenCos have enjoyed significant increase of operating income

ratio (16.5% before separation → 20.9% after separation). They own base load generators (nuclear, coal), and enjoy reasonable profits

from market price.

Private GenCos in the market also have enjoyed reasonable profits. They own peak load generators (LNG), and are sufficiently compensated by the

CP to recover fixed costs.

Private GenCos having PPA with KEPCO are guaranteed reasonable

ROR(8%).

※ Operating income ratio of GenCos after separation

classification 2001 2002 2003 average

Operating income ratio 19.1% 21.7% 21.9% 20.9%

ROR 7.2% 8.0% 8.2% 7.8%

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Contents





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4-1. The status and the prospects of nuclear generation

Prospects of nuclear generation The further construction of nuclear power plants is necessary for securing

stable supply of electricity as the demand is expected to highly increase in South Korea.

Korea imports most of its generation fuel (99%), and the prices of fossil fuel rocketed recently (56%).

‘The basic plan of long term electricity supply & demand’ stipulates that nuclear power plant generation will stay at 30% of the total generation capacity.

Expanding public acceptance to safe of nuclear power plants and promoting timely constructions are required.

28.4%

23.8%

30.9%

30.3%

28.8%

30.9%

25.7%

25.3%

26.2%

26.1%

26.8%

26.3%

16.6%

19.2%

16.6%

18.2%

0% 20% 40% 60% 80% 100%

2005

2010

2015

2017

Nuclear Coal LNG Others

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4-2. The status of nuclear generation

Current status of nuclear energy in the electricity industry 20 nuclear generators (17,716MW) in operation compose 29% of total

capacity in Korea.

The generation by nuclear power plants reached 39 % of total generation volume and 32% of the total traded amount in 2004, the highest shares among generation types.

The low generation costs of nuclear power plants helped Korea not to increase retail prices in spite of recent price hikes of oil and coal.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

4

8

12

(￠/kWh)

Generation Volume 39.0% 37.0% 2.0% 6.0% 15.0% 1.0% 0.5% 0.2%

Traded amount 32.0% 31.0% 2.0% 9.0% 24.0% 1.0% 1.0% 0.3%

Settllement Price 3.5 3.7 4.6 7.0 6.9 5.4 10.2 5.1

Nuclear Imp. Coal Dom. Coal B.C Oil LNG HydroPump

StorageOthers

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4-2. The status of nuclear generation

The profitability of nuclear power plants in the market The operating income ratio of nuclear power plants (22.4%) was higher

than those of any thermal power plants.ROR of nuclear power (5.8%) was higher than the average ROR of GenCos

(5.3%) in 2004.

While thermal power companies suffer fuel cost increase by the coal price increase, the nuclear power company enjoyed market price increase without the increase of fuel costs.

No difficulty is expected in raising new investments in nuclear power plants with stable profitability under the current CBP market.

0

200

400

600

800

1,000

1,200

(Million US$)

0%

5%

10%

15%

20%

25%

Income before Taxes 1,017 184 256 201 123 118

Operating Income Ratio 22.4% 13.8% 16.3% 12.7% 6.9% 7.4%

Rate of Return 5.8% 4.5% 9.0% 8.2% 2.9% 2.4%

KHNP KOSEPCO KOMIPO KOWEPCO KOSPO KEWESPO

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4-3. The governmental support to nuclear generation

Nuclear power plants need governmental support for securing construction site and disposal site, and for continuing operation

More constructions of nuclear power plants are inevitable in order to secure electricity supply and stable market price of electricity in Korea

Institutional Support for constructions of nuclear power plants

Economic benefits to local areas near power plants

$9~14mn/year by “special laws for the support of local area accepting location of low-medium radio active waste

$68mn/year by ‘special laws for the support of local area neighboring power plants

Reduction of risk of nuclear energy business by ‘laws for nuclear damages’.

Public relationship in support of nuclear power plants.

0 2005. 5 Strategies for the security of electricity supply.

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