Politics, pricing create new uncertainties for South Korean gas demand
Natural gas plays a critical role in South Korea’s energy economy and will continue to do so for decades to come. In turn, South Korea plays an important role in the global LNG market.
The country has negligible gas production of its own and no cross-border pipelines, meaning it is wholly dependent on imported LNG for its gas consumption. Its share of the global LNG market has declined from nearly 17% in 2013 to 11.5% in 2021.
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Mindful of its high level of import dependency, South Korea has tried to maintain a balanced energy mix, relying predominantly on coal (also imported), gas and nuclear power.
However, how big a role natural gas plays and for how long is uncertain, particularly given the election in March of Yoon Suk-yeol as the country’s new president. Although the country’s legislature retains a more liberal majority, Yoon, who represents the conservative People Power Party, has very different views on energy policy to his Democratic Party predecessor, Moon Jae-in.
Swing generator
Power generation is the main contributor to growth in South Korean gas demand. In 2020, gas-for-power generation for the first time exceeded city gas use, with the two sectors accounting for almost 90% of total consumption.
In the period 2018-2020, gas-fired generation made up on average about 27% of total electricity generation. Coal-fired generation remains the largest source of electricity generation overall, with a share of 37% in 2020; renewable energy sources, including hydropower, made up only 7.2%.
Gas’ key role in electricity generation can be seen from its role as a swing generator. In the first half of 2021, the government curtailed coal plant operations for environmental reasons, and, in the second quarter of last year, a third of the country’s nuclear fleet experienced a combination of planned and unplanned outages. Gas-fired generation filled the gap.
Pricing pressures gas use
Since then, both spot LNG and oil prices have risen. In 2021, South Korea sourced 30mn mt of its 47mn mt/yr LNG imports from long-term contracts, the majority of which are indexed to oil. It sourced the remainder as spot LNG or under short-term contracts from a variety of sources.
Pricing pressures led to a decline in gas demand from fourth-quarter 2021. Russia’s invasion of Ukraine, and Europe’s consequent thirst for LNG to replace Russian pipeline imports, means LNG prices are likely to remain elevated.
As a result, the International Energy Agency forecasts a decline of 8% in South Korea’s LNG imports this year. Reduced gas-fired generation will be compensated for by an increase in coal-fired and nuclear generation, owing to, in the second half of last year, just over 1 GW of new coal-fired capacity coming online and the restart of a 1.4 GW reactor.
In the short-term, at least, pricing pressures look set to stall gas’ growing role in South Korea’s power generation mix.
Policy shifts
The long-term outlook is, or rather was, very different. Under Moon, South Korea adopted a goal of net zero carbon emissions by 2050, alongside the phasing out of both coal and nuclear power plants.
The net zero target implies an end to, or at least severe curtailment of, both coal and LNG imports. Coal would go first, leaving a transitional energy mix based increasingly on LNG and renewables. The role of gas would thus increase before it declined. Gas demand would be heavily dependent on the growth of renewables on the one hand, and the successful implementation of the country’s planned nuclear and coal phase outs on the other.
A key weakness in the plan was South Korea’s relatively unimpressive performance on renewables to date. While solar capacity has increased significantly to reach over 15 GW, wind power development has been much more limited. Onshore wind faces a combination of local opposition, complex permitting procedures and grid connection issues. Wind capacity at the end of 2020 amounted to only 1,636 MW, of which 136 MW was offshore.
As a result, the country’s renewable energy expansion relies predominantly on solar and a still nascent offshore wind sector. 2030 targets for the two energy sources have been set at 30.8 GW and 12 GW respectively, while that for onshore wind is a much more modest 4.5 GW.
The outlook, under Moon, suggested significant potential for gas playing a bigger and more extended role in the country’s energy mix as coal and nuclear were phased out, but variable renewable energy capacity struggled to fill the resulting gap in generation capacity.
Pro-nuclear president
In contrast, Yoon has indicated that he may adopt a less aggressive timetable for the phase out of coal. He has said that coal plants under construction should not be suspended.
Yoon has also argued that the country’s current greenhouse gas emissions reduction plans are too burdensome for industry. Given the high price of LNG, policies which favour lower-cost generation sources are likely to find support from industry at least, if not more widely.
Yoon differs from the former president even more so when it comes to nuclear power. The People Power Party is traditionally pro-nuclear and Yoon has said he favours a reversal of the nuclear phase-out policy and a resumption of the construction of new reactors. The government will also support lifetime extensions for the existing fleet of nuclear reactors.
In contrast, Moon presided over the early retirement of the 679 MW Wolsong-1 reactor and scrapped plans to build 1.4 GW of new capacity at the Shin-Hanul nuclear site and 1.5 GW at Cheon-Ji.
Climate change targets
South Korea has little hope of achieving its climate change targets without ridding itself of its extensive fleet of coal-fired power plants. In fact, coal use in the country’s heavy industries – electronics, cars, ship building and steel production – mean that South Korea’s carbon emissions per capita in 2018 were almost double the averages for the EU and OECD, according to the World Bank.
The country therefore needs to pursue extensive decarbonisation policies both in the power sector and more widely across its economy, if it is to get on track for net zero by 2050.
Nor, for the same reasons, does the country have much choice but to pursue an aggressive expansion of its renewable energy capacities, given its heavy dependence on fossil fuels. A slower phase out of coal under Yoon will not help, but a recommitment to nuclear power should in terms of maximising low carbon power generation.
Moreover, South Korea has been successful in terms of keeping the cost of new nuclear construction in check, in comparison with Europe and the US, where the construction of new reactor types has seen huge delays and massive cost inflation.
The bill for the Vogtle 3 and 4 units in the United States, for example, the only two reactors under construction in the country, now tops $30bn for 2.28 GW of capacity. In contrast, South Korean companies have completed two units in the United Arab Emirates, the first in the country, and are completing two more, under a contract worth $20bn for a total capacity of 5.4 GW.
Continuing civilian nuclear exports would also offset the country’s extensive role in financing and building coal-fired power plants abroad. These activities face fierce environmental criticism and are likely to decline in any case as the energy transition progresses.
Basic power plan projections
Under the country’s Ninth Basic Power plan, developed by the Ministry of Trade, Industry and Energy (MOTIE) under president Moon, the share of nuclear power was to drop from 25.6% of the generating mix in 2019 to 10.4% in 2034. Coal’s share was to plummet from 40.4% to 15.6%. To compensate, gas’s share would rise from 25.9% to 31.8% and renewables from 6.5% to 41.8%.
It now seems likely that the shares of both nuclear and coal of the mix will be larger, leaving gas’s fortunes heavily dependent on the speed with which South Korea expands its renewable energy capacities. If these follow the path of the Ninth Basic Power plan, gas’s projected share of generation will almost certainly be lower.
It may be, however, that renewable energy growth lags, or that Yoon takes a harder line on coal than expected. The most effective way to deliver South Korea’s energy transition would almost certainly be to maximise, in the first instance, nuclear, LNG and renewables at the expense of coal.
MOTIE projects a base case for LNG demand of 47.97mn mt in 2034, only slightly higher than in 2021, despite the addition of 12.7 GW of new LNG-fired power plants. The high-case projection was 52.53mn mt/yr. Under Yoon, and amid high LNG prices, it seems the transitional energy mix will now have at least a higher component of nuclear, if not coal, suggesting the pendulum for gas has swung back towards the base case or lower.
This feature first appeared in the daily newspaper of the World Gas Conference 2022, which took place in Daegu, South Korea, between May 23 and 27, 2022.