As he took office four years ago, South Korean President Moon Jae-in repeatedly pledged to reconsider the construction of nine new coal-fired power plants which are less than 10 percent complete. 

However, four years after being elected, Moon is still going ahead with seven of the planned plants, converting only two into liquefied natural gas (LNG) power plants. 

In South Korea, coal-fired power plants account for 40.4 percent of the total electricity supply as of 2019, still serving as one of the key sources of power. The country was ranked 7th largest emitter of greenhouse gases in 2017, responsible for emitting 600 million tonnes, according to the International Energy Agency. Annual emissions rose to 709 million tonnes in 2018. 

President Moon has pledged to change this trajectory yet South Korea appears to be unable to abandon coal power. Even as it helps shift the economics of electricity production by ramping up an emissions trading system and mandating a greater share for renewable power, the government is investing in what are set to become loss-making assets. 

For now, coal is king. “In Korea, the price of coal is stable, whereas that of LNG is volatile,” an official at the Ministry of Trade, Industry and Energy said at an interview with the Korea Center for Investigative Journalism(KCIJ)-Newstapa. “This makes local coal-fired power plants an economic choice.”

An investigation by KCIJ-Newstapa shows that while coal-fired power plants are the cheapest to operate for now, this will change in coming years. 

KCIJ-Newstapa obtained the production cost data of all local thermal power plants in South Korea, and analyzed the economic feasibility to see if coal power plants are really the cheapest choice for the government.

A total of 146 thermal power plants were operating as of September 2020. Sixty were coal-fired power plants, and 86 were LNG plants.

The production cost of coal power plants ranged from KRW 48.4 to 71.4 per kilowatt hour (4 to 6 cents in USD) in January 2020, whereas that of LNG power plants from KRW 57.8 to 119.9 per kilowatt hour (5 to 11 cents in USD). The monthly average price of LNG plants was KRW 85.1, about 58.5 percent more expensive than that of coal plants’ average KRW 53.7. 

Gwangyang LNG Power, had the lowest production cost of all the LNG plants at KRW 57.8, but this was still higher than the coal plants’ average production cost.

The gap between coal and LNG plants’ production costs has narrowed since, as the global oil prices plunged in the wake of COVID-19 crisis. However, coal power plants are still cheaper to operate than the LNG plants.

South Korea also has an emissions trading system. In this system, businesses are required to purchase emission credits if they emit greenhouse gases above a set limit. As a company’s emissions grow, the carbon credit purchasing cost accelerates.

However, Korean coal-fired power plants have not had to worry about this cost. The government gave out nearly 97 percent of the total credit it allocated to the power generation sector, at free of charge, to all coal plants across the nation. Only the remaining 3 percent was left for sale, but the state-run electricity distributor Korea Electric Power Corporation (KEPCO) has reimbursed this purchasing cost to coal plant operators.

The Korean government also designed the emission quotas that advantaged coal plants. It jointly set a benchmark emission quota for each type of power plant, based on the average emission of each type of power plant. The allowable emission for coal power was a lot larger than the LNG power, due to the coal power industry’s argument that it can’t compete with gas power plants from a standing start. 

At the end of 2020, the benchmark emission quota for LNG plants was set at 389 kilograms per megawatt hour of electricity production. Coal plants had a quota of 889 kilograms, about 2.3 times more lenient than that set for the LNG plants. Thanks to the quota, some coal plants like Dangjin 10 were able to sell their leftover credits to other companies.

But the coal party ended this year when the government strengthened the emission trading system. 

From January, the government has applied the same benchmark emission quota for all sources of power, removing the considerable advantage enjoyed by coal power plants and putting them on the same footing as LNG plants. 

The amount of free emission credits was also reduced to 90 percent this year, down from 97 percent. This puts a heavier burden on the carbon emitting industries to spend more money to buy credits. But for fossil fuel-powered plants, KEPCO still reimburses this cost.

The new benchmark emission quota for all types of power plants is reportedly fixed at 682 kilograms per megawatt hour, which is larger than all 60 coal power plants currently online. 

Still, with the increased volume of purchasable credits, the average production cost of coal-fired power plants is estimated to rise 16 percent to KRW 59.88 per kilowatt hour (5 cents in USD), whereas that of LNG power plants drop 2 percent to KRW 54.32. 

Under the tighter emission trading system, coal power will cost more to produce than LNG power. 

Coal power is likelier to become even pricier in the long run, considering that the global natural gas price is declining. There will be also less demand, given the government plans to reduce the use of coal power plants to meet the goal of net-zero by 2050.

The utilization of local coal-fired power plants, which is now about 80 percent, is expected to drop to 60 percent by 2030, according to the Korea Energy Economics Institute.

“We use the same amount of electricity regardless of the source of energy, so by allowing coal-fired power plants more emission credits means giving a special favor to coal plant operators,” Rep. Yangyi Won-young of the Democratic Party said in an interview. “If the market is corrected, coal power is not cheap anymore.”

Samcheok coal-fired power, a new plant which is about 35 percent complete, is slated to begin operation in 2025. 

Residents of Samcheok, a small city on the nation’s northeastern coast, and environment groups stood up against the government last October to cancel this new coal plant, saying the plant deteriorates the coastal ecosystem. Construction resumed on July 6 with the government’s green light.

However, beyond its environmental impact, the Samcheok coal plant has a significant economic problem. 

The Korea Development Bank (KDB) arranged financing of KRW 3.9 trillion, more than a half of the total construction cost KRW 5 trillion. The state-run policy financier attracted investors by forecasting the project would generate a profit of 4.2 percent annually from 2025 to 2044. 

The problem is that the bank’s operation estimate, which was the basis of business feasibility calculations, was too rosy. In its estimate, the bank assumed that the Samcheok plant will operate an average 85 percent from 2025 to 2044. However, the average operation rate of Korean coal-fired power plants was 71 percent in 2019. Average operation rate means the average time a power plant is in production annually.

Experts estimate that this average operation rate will keep dropping with the government’s carbon emission reduction plans being implemented. 

The Korean government announced that it aims to raise the portion of renewable power to 20 percent of the total electricity production in 2030, a drastic boost from the 6.5 percent in 2019. 

According to an analysis from NEXT Group, an energy policy research institute, this will mean the operation rate of nation's top 30 percent coal-fired power plants will fall to 79.4 percent in 2030 and to 60 percent in 2035, considering the government’s 2030 Greenhouse Gas Reduction Roadmap and 2050 Long-term Low Carbon Growth Plan.

With President Moon’s 2050 net-zero emissions pledge, the operation rate of current-existing and newly-built coal power plants like the Samcheok plant is expected to drop further.

For a power plant, less operation means lower profit. To avoid losses from lowered operation rates, the research institute concluded electricity prices would have to rise.  However, such a scenario is unlikely. 

“Besides the oil price, which is often volatile, other factors are working towards reducing the price of electricity,” said Song Yong-hyun, director at NEXT Group. “Per unit electricity price can’t rise above KRW 100 per kilowatt hour, so losses are unavoidable.”

Despite the transitional risks, local financiers kept investing in coal-fired power plants because the Korean government has a policy to compensate power plant operators for any costs -- from construction to operation costs.

The policy guarantees that no investors end up with losses, but the burden of recovery costs caused from overcapacity and sloppy operations is eventually laid upon the taxpayers and electricity bill payers. 

Experts warn that South Korea must stop investing in coal, adding that the nation may face economic risks that occur while fossil fuel-related assets become stranded assets. 

Private financiers in Korea are moving quickly to stop investing in coal-fired power. Since September last year, the nation’s largest financial groups KB, Shinhan, Woori, Hana Financial Group and NH Nonghyup Bank have all announced they’re exiting from coal financing. Samsung Life Insurance and Samsung Fire & Marine Insurance, by far the nation’s two top private financiers in the volume of coal power plant investment, also joined this move.

Samcheok Blue Power, the operator of the Samcheok coal-fired power plant, initially tried to finance the construction by issuing corporate bonds, but ended up withdrawing the plan in April this year, according to local media. The move came after the nation’s largest private financiers announced it will stop investing in fossil fuel-related projects. 

Local corporate credit rating agencies have also started lowering the rating of coal power plant operators. In June 2021, NICE Investors Service lowered its outlook on three coal power plant operators including Samcheok Blue Power from stable to negative.

However, the state-run policy banks are still handing over money to coal power plants.

“We have to provide lending to coal power plants if it meets government standards,” Bang Moon-kyu, CEO of the Export-Import Bank of Korea, said at the parliamentary audit last year. KDB Chairman Lee Dong-gull said “if the government and KEPCO decide not to invest in coal power, there’s no reason for KDB to finance coal.” 

Until that time comes, it seems, the money will continue to flow.