Integrating solar and storage technologies into Korea’s

Integrating solar and

storage technologies

into Korea’s energy

landscape

Business models and policy

implications

Yoonjae Heo ([email protected])

Korea Energy Market

What are key drivers in promoting clean

energy?

Policies

What policy instruments are there to

achieve the national RE target 20% by

2030?

Market Players

How is the energy market structured and

who are winning in the market?

1

2

3Business model

What business model proliferates in the market

and why?4

Page 2

Korea has seen significant growth trajectory in carbon emissions due to

large manufacturing base

0

100

200

300

400

500

600

700

800

1990 2000 2010 2015 2030

Electricity & Heat Industry Agriculture Waste

South Korea’s GHG Emission Trends* and NDC Target

(million ton, CO2 eq.)

292.9

* Gross Emission, excepted LULUCF absorption

Source: National greenhouse gas inventory report of Korea(2017)

500.9

656.2690.2

1990-2015 growth rate: 135.6%

37%

540.0

850.0 BAU

NDC Target

Page 3

Early retirement of 77%

aged diesel vehicles

Authorities announced

package of measures to

reduce fine dust

emission by 30%,

~2022

Local air pollution is threatening daily lives of citizen and calls for policy

intervention toward clean energy

Shut-down of coal power

plants aged over 30yrs

Enhancement of emission

standards for industrial sites

“total 130 of ultra fine dust and fine

dust alarms issued In Korea 2017. 1Q”

Source: Media research

Page 4

Declining cost of technology is making clean energy more competitive

compared to traditional energy technology

Solar PV module price trends

Source: Bloomberg New Energy Finance

1MW ESS installment cost forecast

1.651.35

0.87 0.90 0.82 0.72 0.57

1.85

1.35

0.93 0.7 0.680.58

0.48

`10 `11 `12 `13 `14 `15 `16

System Module

($/W)

3.5

2.7

1.81.6

1.51.3

1.1

631

495

369

`17 `20 `25

($/KWh)

Korea Energy Market


energy?

Policies



2030?

Market Players



1

2

3Business model


and why?4

Page 6

South Korea’s renewable generation trends by source *

525 1,027 1,840

4,656 5,547 6,238

917 1,103

1,605

2,556

3,979

5,122

4,490 3,862

4,228

2,754

2,150

2,859

863 913

1,148

1,146

1,342

1,693

52 466

484

492

496

496

2011 2012 2013 2014 2015 2016

(GWh)

Solar

Bio

Hydro

Wind

Marine

41.1%6,847

9,305

7,371

11,604

13,515

16,407

64.1%

-8.6%

14.4%

56.8%

19.1%Total

GAGR

* Excluding Waste generation

Source: KEPCO statistics

RE grew 19% annually for past 5 years, with significant increase in solar

and biomass

Page 7

41.1%43.0%

36.1%35.7%

26.8%

23.9%

17.9%

21.8%

18.8%

1.6% 1.7% 2.2% 3.1% 3.6% 3.8% 4.3% 5.1%

5.5%6.7%

20.0%

3.7%1.7% 1.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2030

Coal Nuclear Gas New&Renew. Others

South Korea’s Generation mix

* Others: Oil and group energy

Source: KEPCO statistics

While RE accounts for only 7% of total electricity generation in Korea,

the new administration’s ‘Renewable Energy 3020’ has put ambitious

target to increase RE share to 20% by 2030

…

Page 8

RPS is the main policy tool that helps RE projects become economically

competitive by providing market-based incentive

IPPsState-owned

GenCo

South Korea’s RPS Scheme (2017 revised)

REC price REC weights

Source: Korea Energy Agency

Power companies with over 500MW of installed capacity must increase their renewable energy mix to a level set by government

RE mix is defined as the proportion of renewable electricity generation in the total non-renewable electricity generation

Currently the government is working to increase existing RPS target to achieve ‘Renewable Energy 3020’ plan

22.5

3 33.5

4

5

6

7

8

9

10

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

RPS ratio (% of non-RE gen)

RPS ratio (% of non-RE gen)

Current target

RPS mechanism

REC revenue

SMP revenue

KEPCO

Page 9

REC weight for solar PV REC weight for other renewables

Installation type DetailsREC

weights

Install on general site Under 100kW 1.2

100kW – under

3,000kW

1.0

Over 3,000kW 0.7

Install in existing facility

(ex. existing buildings)

Under 3,000kW 1.5

3,000kw and over 1.0

Floating system Installed on water 1.5

On-site generation connected to grid 1.0

Solar + ESS effective in `16, `17 5.0

Installation type DetailsREC

weights

IGCC, By-product gas 0.25

Waste, Land fill gas 0.5

Hydro, On-shore wind, RDF, Waste Gasification,

Marine tidal (with embankment),

on-site generation connected to grid

1.0

Wood biomass, Off-shore wind(~5km of

connection distance), Hydrothermal 1.5

Fuel cell, Ocean energy 2.0

Off-shore wind (over 5km of

connection distance), Geothermal,

Marine tidal (without embankment)

Fixed 2.0

Variable 1.0-2.5

Wind + ESS

`15 5.5

`16 5.0

`17 4.5


REC weight is set to provide strong incentive for small-scale solar and

hybrid application with energy storage

Page 10

10AM

Ou

tpu

t

4PM Time

Solar PV

ESS

PV Peak TimeESS REC ESS REC

Discharge Discharge

Charge

REC weight 5.0 granted to solar PV + ESS

• REC 5.0 applies to all electricity discharged from solar PV+ESS during

off-peak time (peak time: 10AM-4PM)

• Effective from 2017 (to be adjusted after 2018 July)

Optimize connection capacity during

PV peak hours

$300million of Investment Deferral

(20MW)

Create $400million of new ESS

market (800 MWh)

Expectation

Challenge

Peak demand during day-time in

summer season

Efficiency loss during conversion

For PV+ESS, charging during PV peak time will earn the highest REC

weight and also eliminate rapid power/voltage swing

Source: Industry data

Page 11

Government can design funding mechanism to scale-up the investment

and create public awareness on RE

• 1) KOEN: Korea South-East Power

• 2) KDHC: Korea District Heating Corporation

Korea’s citizen fund for solar projects : Seoul Metropolitan Government case

Operating Model

Seoul

Metropolitan

Government

KOEN1)

KDHC2)

Korea

Power

Exchange

Electricity sales

(at SMP)

REC

sales

GS ITM

Dohwa

EngineeringPlant O&M guarantee

Loan + land

Principal

KB Securities

KB Asset

Management

Fund sales

Investment

DividendSolar

Citizen

Fund

4.25MW rooftop solar installed at

four subway depots in Seoul

Sales revenue: $7.5 million

Annual average return:

4.18%

12-year REC contract with power

companies at fixed price

citizens

Construction completion

guarantee

Page 12

However, tax and duty structure across different technology are not

currently consistent with the new administration’s policy direction

Basic duty rate (%)

Source: The 8th basic plan of long-term electricity supply and demand

0%

3%

0%

Coal LNG Nuclear

Tax rate (KRW/kg)

24

60

24.2

4.8

6

Coal LNG Nuclear

Excise tax Import surcharge

Safety management surcharge Planned increase in excise tax

30

89

0

Page 13

The government is considering using LCOE from next energy planning

because LCOE reflects external cost and helps make unbiased investment

decision on future energy mix

2030 LCOE projection by technology assuming maximum external cost (KRW/kWh)

Source: Energy & Climate Policy Institute

0

20

40

60

80

100

120

140

Nuclear Coal LNG Onshore wind Solar

LCOE w/o external cost Disaster prevention Carbon cost Air pollution

Page 14

LCOE comparison by each technology indicates that solar will become

more cost-competitive and reach grid-party by 2030, whereas fossil fuel

will no longer be profitable due to their associated external cost

2030 LCOE projection by technology assuming 50% external cost (KRW/kWh)

Source: Energy & Climate Policy Institute

60.67

95.25

64.55

91.5989.57

100.71

113.04109.42

98.06

82.03

0

20

40

60

80

100

120

2017 2030

Nuclear Coal LNG Onshore wind Solar

SMP (2017 average)

Korea Energy Market


energy?

Policies



2030?

Market Players



1

2

3Business model


and why?4

Page 16

Korea energy market is largely dominated by the state-owned utility

KEPCO and its 6 affiliate power companies

Solar PV manufacturers

ESS manufacturers

T&D

KEPCO

GenerationPower companies

(KEPCO affiliate) IPP (private)

BTM

ResidentialCommercial

SI&EPC

companies

Equipment Suppliers SI & EPC Users/Operators

Supply Technologies & Business development

1 Public power & utility companies

2 Private Suppliers

Page 17

KEPCO and power companies are exploring new biz opportunities in

downstream due to increasing RE penetration

New-biz area Traditional biz area

Generation Trade T&D Sale Resale BTM

S/G Customer

EVSE

IPP

ESSRE

VPP

PPA

Vesting Contract (Base-load generator ↔ Retailer)

DR Agg

AMIResale

Electricity

informationConsumption

information

Data

Prosumer

DMC1)

1) DMC: Data Management Center

Page 18

KEPCO deployed the world’s largest FR-ESS on its own grid for grid

stability and operational cost saving

376MWInstalled capacity

(2015 - 2017)

Annual

$ 400 millionOperation cost

saving

0.5 yearsPayback period

Source: KEPCO; Media research

Equipment supply

Business track

record

Engineering by KEPCO

Technology

Improvement

Market demand

creation

Industry activation

PCS Battery

∙ ∙ ∙ 14 companies∙ ∙ ∙ 32 companies

Page 19

For solar value-chain, major conglomerates are expanding vertically to

win in cost-driven market

-6.6% -4.9%

2.9%

1,541 1,605 1,700

2014 2015 2016

OCI 1)

(KRW million)

Revenue

ProfitUpstream

0.4%

2.7%

5.4%

-1.6%

4.7%

-5.2%

2,030 2,871

3,912

189 170 191148 197 146

2014 2015 2016

Hanwha 2)

Shinsung 3)

S-Energy

(KRW million)

Revenue

Profit

Middle stream

-111.8%-80.8%

4.2%

14.3% 20.0% 23.1%

17 52

431

112 97 1317 10 13

2014 2015 2016

OCIS-EnergyS-Power

(KRW million)

Revenue

Profit

Downstream

IPP/ O&M

EPC

Module

Cell

Ingot/

Wafer

Polysilicon

Up

str

ea

mM

idd

le s

tre

am

Do

wn

str

ea

m

1) OCI Basic Chemical BU; 2) Incl. subsidiary Hanwha Q-cell’s; 3) consolidated Module~EPC~O&M, mainly from module sales

Source: Company data

Page 20

2016 South Korea solar PV industry revenue by category

1,277

163 294 199

3,873

95%

83%

72% 72%

78%

Polysilicon Ingot Wafer Cell Module

Gross Revenue

(KRW million)

Oversea biz’s share

OCI (Basic Chemical) Shinsung E&G (Cell & Module) S-Energy (Module)

Source: Korea Energy Agency; Company data

72%

80% 82%

2014 2015 2016

41%57%

80%

2014 2015 2016

69% 70%

78%

2014 2015 2016

Solar PV manufacturers are increasing their production capa and sales

in overseas market to gain economies of scale

Page 21

Korea has leading lithium-ion battery manufacturers and they are

starting to make a profit

ESS sector turned around in 2016, cutting losses in EV sector

591

544

188

186

LG Chemical

Samsung SDI

BYD

Tesla

2016 ESS Productions by manufacturers

(MWh, M/S)

(21%)

(19%)

(7%)

(7%)

(KRW Million)

Revenue

Profit

ESS Battery biz

270

5003.0%

4.6%

2016 2017E

(KRW Million)

Revenue

Profit

Medium-large

battery biz

(EV+ESS)

991

1,490

-33.6%

-17.3%

2016 2017E

EV sector accounts for a large portion of the rev.

Source: Company data; Media research

Page 22

Heavy electronic/IT companies perform as SI and/or EPC in ESS market

Hokkaido PV+ESS power plant

SI or EPC players in private sector develops oversea business on their own or in cooperation with public utilities

Electronic

Equipment

IT

Heavy industry

ESS SI & EPC players

Energy

Product (local partner)

• Project development

• Investment (80%)

• EPC

• O&M

• Project development

• Investment (20%)

Source: Media research; EY Analysis

Korea Energy Market


energy?

Policies



2030?

Market Players



1

2

3Business model


and why?4

Page 24

Model 1: Third-party ownership (residential)

Third-party ownership enables system owner to build PV on residential

customer premise and get monthly lease payment

1) Renewable Energy Point: eligible for single house under 3kW @234 KRW / kWh based on 2017 solar lease program

Korea Energy

Agency

Cash

Residential

REP sales

REP1)

PV Installation

& AS

PV lease

cost

3rd party system owner

Procurement

EPC

O&M

Construction

O&M

Third-party owned model

Cashflow

Goods & service

GenCo

KEPCO

Reduced

rate

Lease term

Base: 7 years

Extension(optional): 8 years

Solar Lease Program

Page 25

Model 1: Third-party ownership (residential)

Solar lease program is on track to achieve its goal of installing PV in 1

million houses due to the program’s economic benefit

1) 3kW single house; maximum least cost assumed based on 2017 solar lease program

Consumer cost (annual)1)

1,940

926

540

Pre-installation Post-installation

Electricity cost Lease cost

6,000

(120)

846

Investment O&M Lease revenue REP revenue

System owner cost/revenue (annual)

(Unit: Thou KRW)

420

24% saving

Payback period: 5~6 years

Page 26

Model 1: Third-party ownership (C&I)

Industrial sector accounts for over half of total electricity consumption,

and thus energy storage will have bigger impact on reducing the bill


61.2 61.6 63.5 64 62.7 63.8 66.2

149.8 151.3 153.9 154 150.3 154.2 160.9

223.2 242.2 249.1 256.8 264.6 265.6 270

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 2015 2016

Residential Commercial Industrial

Annual electricity consumption by sector (2010-2016)

Page 27


For C&I, hybrid application of PV + energy storage has become popular

as the customer can offset their electricity bill with REC

1) Source: News Clipping

GenCo Utility (KEPCO)

Equity

Commercial & Industrial

Dividend

Cash REC x 5.0 SMP Electricity

Rental

fee

Rooftop /

land

SPC

Procurement

EPC

O&M

Construction

O&M

Third-party owned model

Cashflow

Goods & service

Project sponsors

ESS

Page 28

Project sponsor: Hanwha Q Cell

Project size: solar 3.6MW

Rental contract: 10 years

Wastewater treatment facility (Seonam/Joongrang)


Wastewater treatment facility provides project developers sufficient

space to install PV and earn high REC weight, while allowing provincial

government to create new source of steady income

Project sponsor: KD power, Q1 solar

Project size: 1.8 MW

Rental contract: 10 years

Rental fee: 30,000 KRW / kW (approx. USD

50k / year)

Wastewater treatment facility (Gwangmyeong)

Page 29


Companies also use their own property as marketing tool to showcase

their technology


LS-IS Busan Office (PV+ESS)

System: PV 1MW, PCS 1MW, Battery 3MWh (USD 4 million)

Construction period: Sep - Dec 2017

Target revenue: USD 600k from SMP + REC sales

Page 30

Model 2: Customer ownership

Similar to automotive lease model, customer ownership model

eliminates customer's burden of paying upfront cost and transfers the

asset ownership to the customer once the term expires

Industrial customer

ESS rental agreement & installation

3rd party system installer

Procurement

EPC

O&M

Construction

O&M

Cashflow

Goods & service

KEPCO

Reduced

rateInvestor

Lease cost

Installation

cost

Insurer

premium guarantee

Customer owned model

Page 31


ESS has different applications from power generation to end customers

and thus have multiple business model in accordance with its application

T&D

Generation

BTM

Capacity firming Maintain the intermittent power

output from RE at a firm level for

a period of time

Smooth the output and control ramp rate (MW/min)

to eliminate rapid voltage and power swings on the

electrical grid

Load levelling Store power at off-peak and

delivering it at on-peak

Reduce the load on less economical peak-

generating facilities

Frequency regulation ESS is charged or discharged in

response to an increase or

decrease in grid frequency

Improve power quality

Voltage support Protect loads against sharp drop

of voltage in grid

Maintain voltages within the acceptable range

Spinning reserve Provide seconds-scale reserve

to respond to generation or

transmission outage

Eliminate the need to have back-up generators

T&D deferral Maintain adequate T&D capacity to

serve load requirement

Defer the need for the upgrade

Peak shaving Reduce peak demand Avoid installations of additional capacity

Energy arbitrage Charge at off-peak, discharge at

on-peak

Save on electricity bills

Application Purpose Benefit

Page 32

Overview of ESS rate discount program

• Special electricity rates apply to ESSs deployed in general, industrial and educational buildings

• Effective 2017 – 2020

Off-peak Peak demand Off-peak

Demand

Time

kW

9AM 11PM

Discharge

Charge

Charge


The government’s temporary ESS rate discount program boosted

customer-owned ESS as peak shaving is heavily compensated

Source: Industry data

Base rate discount for peak shaving

Base rate

(KRW/kW)

1

Peak

reduced

(kW)

300%

Discount for off-peak time charge2

Consumption

rate

(KRW/kWh)

Charging

consumption

(kWh)

50%

Weight by installed capacity

ESS capa. compared to contracted capa Weights

10% and over X 1.2

5% ~ less 10% X 1.0

Less 5% X 0.8

Weight by

capa

Weight by

capa

Daily load pattern with ESS peak shaving ESS rate discount program

Page 33


Large-scale ESS is being deployed as investment payback period is

reduced to 3-4 years

Hyundai heavy industries (Ulsan)

Project sponsor: Korea Energy Agency, KEPCO energy solution, Hyundai commercial

Configuration: Battery 51.5MWh, PCS 24MW

Project financials

- Total investment: $24 million

- Expected annual saving: $8 million (~’20), $5 million (‘21~)

Commission date: Nov 2017 (total 20 years)

Operation strategy: 10% peak-shaving, ESS rate discount program

Page 34

Model 3: Utility ownership

Utility firm builds and owns PV through SPC and sell power to the grid as

intra-company transaction

GenCo Utility (KEPCO)

SPC Consortium

Equity

Public infrastructure

(e.g. school)Co-op

Encourage participation

Policy designsupport

Dividend

Cash REC SMP Electricity

Rental

fee

Rooftop /

land

SPC

Procurement

Ministry of

Energy

Ministry of

Education

EPC

O&M

Construction

O&M

Utility-owned model (school solar)

Cashflow

Goods & service

Page 35

<KEPCO-Daejon education authority MOU signing

ceremony, 2016>


As utility-ownership model, KEPCO launched school solar program to

install 250MW in 2,500 schools by 2020

<Solar PV installed on school rooftop>

1) Source: News Clipping

Project sponsor: SPC(KEPCO / 6 Power Companies)

Investment cost: $550 million

Project size: 250MW (2,500 out of 11,446 schools)

PPA contract: 20 years

Page 36


Utility firm has set fixed KW-based price for renting school rooftop,

enabling project economics indifferent from installation location

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18

SMP REC x 1.5 Rooftop rental

40,000 KRW / year

Rooftop solar PV revenue simulation for school solar program1)

1) SMP and REC price based on spot price

(Unit: Thou KRW/kWh)

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Integrating solar and storage technologies into Korea’s