Voluntary caps to trim South Korean coal burn in 2021

Voluntary restrictions on the use of South Korea's state-owned coal plants this year could cut annual coal-fired power generation by around 3.8TWh or 1.4mn t of NAR 5,800 kcal/kg-equivalent coal, Argus analysis shows.

Much of this decline may have already been recorded in the first four months of 2021 through the government's winter suspension plan, with the outlook for May-December 2021 potentially more stable versus 2020. But rising nuclear availability later this year and potential coal-to-gas fuel switching continue to pose downside risks to South Korean coal demand.

As part of efforts to reduce carbon emissions, Seoul has asked the five state-owned Kepco utilities to voluntarily restrict the use of their coal plants this year. The utilities have been set individual targets to cut their annual coal-fired generation by 18.0-23.8pc compared with the 2017-19 average, according to sources familiar with the matter and documents seen by Argus.

The voluntary cuts would, if enacted by the utilities, reduce Kepco's coal-fired generation by 3.8TWh or 2.2pc on the year to 172.9TWh in 2021, Argus analysis shows. Sources say the voluntary restrictions are likely to be focused in the April-June and September-November periods, meaning utilities could be free to ramp up coal-fired generation to meet any peaks in summer cooling demand.

So far this month, voluntary restrictions have mostly affected operations at Korea East-West Power's 6,040MW Dangjin coal-fired plant and Korea Western Power's 6,100MW Taean plant, KPX data show (see table), with up to 924GWh of output restricted by the measures, Argus estimates.

Argus estimates that Kepco utilities' coal-fired generation has already fallen by 5.5TWh or 9.7pc on the year in January-April, based on the available data for January-February and on estimates based on available capacity and historical average load factors through March-April. This means that Kepco utilities could potentially increase coal-fired generation by 1.4pc on the year in May-December 2021 and still meet the voluntary cuts to annual output from 2017-19 levels.

Coal-fired generation among private utilities — which averaged 2.2GW in 2020 — is not subject to any voluntary cuts, and could grow in 2021 thanks to capacity additions this year. The 1,040MW Goseong 1 coal-fired unit is understood to have commenced operations this month, with the 1,000MW Shin Seocheon 1 and 1,040MW Goseong 2 scheduled to start up in June and October, respectively. As of February 2021, Kepco utilities accounted for 32.8GW of the country's installed coal capacity and private utilities 2.7GW.

Coal burn set for autumn revival?

Based on the seasonal trend in coal-fired generation over May-December in 2019 and 2020, Kepco's coal-fired generation may continue to lag 2020 over May-June, be broadly flat over the peak cooling period in July-September and then grow strongly in October-November (see chart).

Kepco utilities may be incentivised to profile more of their annual coal-fired generation for the autumn shoulder period than the spring, as this is when coal is likely to be most competitive with gas for power generation. The majority of South Korea's LNG import supply is linked to oil with a lag of 3-6 months, which means import costs are set to gradually rise throughout 2021 as the strength in oil prices since November 2020 filters through to contractual prices.

Rising LNG import costs should lift domestic gas prices further above coal-switching prices by the autumn, making coal-fired generation relatively more economical (see chart). This would be in stark contrast to 2020, when oil-linked gas costs were highly competitive with coal for power generation in the autumn, thanks to the collapse in oil prices early in the Covid-19 pandemic in the spring.

The autumn period this year is also expected to be characterised by strong nuclear generation. The latest maintenance schedules suggest that available nuclear capacity will average 19.2GW over July-December, up from actual generation of 16.9GW in the same time last year. And availability could be even higher if the new 1,400MW Shin Hanul 1 reactor starts up as planned around July-August and assuming no changes to the maintenance schedule at other plants.

Coal's potential cost advantage over gas for power this autumn could encourage utilities to pare back gas-fired generation more than coal to accommodate the expected rise in nuclear generation this autumn.

But the potential increase in nuclear generation could also offer utilities a chance to make even deeper cuts to their annual coal-fired output to exceed the voluntary cuts while sustaining gas-fired generation at 2020 levels in the autumn, although this would likely hit the Kepco utilities' bottom line and potentially raise power prices — something the government is often keen to avoid. South Korean president Moon Jae-In last week said that he intends to revise up the country's emissions cut target for 2021-30 during the Leaders' Summit on Climate, hosted by US president Joe Biden.

By Jake Horslen and Evelyn Lee

Kepco coal-fired generation TWh

South Korean gas-fired generation TWh

South Korean nuclear generation TWh

South Korean gas prices vs coal-switch levels $/mn Btu