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The optimal fuel mix and redistribution of social surplus in the Korean power market

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  • Kim, Hyunsook
  • Kim, Sung-Soo

Abstract

This paper investigates the difference between the optimal fuel mix incorporating a pre-installed generation capacity constraint and the actual fuel mix in the Korean power market. Since the restructuring of the market, the fuel mix has been determined partly by investors and partly by the Basic Plan for Long-Term Electricity Supply and Demand (BPE). Both the system marginal price (SMP), and the capacity payment (CP), which has been based on the fixed cost of a specific gas turbine generator, were intended to provide an investment incentive in the market; however, they did not bring about an optimal fuel mix in Korea. Under the circumstances of a shortage of base load generators, these generators may garner excessive profits due to a high SMP level. However, the adjustment scheme of profit between KEPCO and Gencos left scant profit for generators. This paper suggests that a contract is needed to create the appropriate profit and tax levels for these base load generators. The redistribution of profit improves equality between consumers and generators, and the proper margin creates incentives for base load technology investment in Korea.

Suggested Citation

  • Kim, Hyunsook & Kim, Sung-Soo, 2010. "The optimal fuel mix and redistribution of social surplus in the Korean power market," Energy Policy, Elsevier, vol. 38(12), pages 7929-7938, December.
    • Handle: RePEc:eee:enepol:v:38:y:2010:i:12:p:7929-7938
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    2. In-Koo Cho & Hyunsook Kim, 2007. "Market Power and Network Constraint in a Deregulated Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-34.
    3. Peter Cramton, 2003. "Competitive Bidding Behavior in Uniform-Price Auction Markets," Papers of Peter Cramton 03ferc1, University of Maryland, Department of Economics - Peter Cramton, revised 2003.
    4. Joskow, Paul L., 2008. "Capacity payments in imperfect electricity markets: Need and design," Utilities Policy, Elsevier, vol. 16(3), pages 159-170, September.
    5. Cho, In-Koo, 2003. "Competitive Equilibrium in a Radial Network," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 438-460, Autumn.
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    Cited by:

    1. Koltsaklis, Nikolaos E. & Nazos, Konstantinos, 2017. "A stochastic MILP energy planning model incorporating power market dynamics," Applied Energy, Elsevier, vol. 205(C), pages 1364-1383.
    2. Cho, In-Koo & Kim, Hyunsook, 2013. "Assessing welfare impact of entry into power market," Energy Policy, Elsevier, vol. 61(C), pages 1046-1054.
    3. Kim, Eun-Hwan & Park, Yong-Gi & Roh, Jae Hyung, 2019. "Competitiveness of open-cycle gas turbine and its potential in the future Korean electricity market with high renewable energy mix," Energy Policy, Elsevier, vol. 129(C), pages 1056-1069.
    4. Kim, Hyunsook & Kim, Sung-Soo, 2012. "The resource adequacy scheme in the Korean electricity market," Energy Policy, Elsevier, vol. 47(C), pages 133-144.

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