South Korea’s current high carbon prices could cut power sector CO2 emissions 11% next year, according to analysts Energy Aspects, but a potential political intervention in the ETS and lack of access to the spot LNG market could combine to push emissions up instead.
Korean Allowance Units (KAUs) are currently valued at 18,450 won ($16) sufficiently high to start driving significant fuel-switching from coal to gas-fired power, despite nearly 10GW of new coal units slated to come online by the end of next year, the London-headquartered research firm said.
“With current international coal, spot LNG and Korean Allowance Unit (KAU) prices, we estimate that most gas plants in Korea should be more competitive than most coal plants. At current price levels, gas should be pushing coal out of the merit order,” it said in a report released late last week.
The Korean emissions trading scheme regulates around 280 million tonnes of CO2 from the power sector, around half the emissions covered by the scheme.
Those emissions could fall 31 million tonnes, or just over 11%, next year at current price levels, compared to a scenario where coal remains the baseload fuel, the analysts said.
BARRIERS
Two elements in particular could stand in the way of fuel-switching, which in turn would see power sector emissions grow 10 million tonnes, the report said.
Firstly, there is a risk that political intervention in the market may bring KAU prices down, which would reduce the incentive for generators to use LNG over coal.
Responsibility for the ETS will be handed over to the Ministry of Strategy and Finance in June, a move most market participants expect will lead to changes in the ETS settings – either by increasing allocation, boosting the number of early action credits given to emitters, or allowing in international credits earlier than previously planned.
Any of those changes would alleviate the shortage of KAUs and eventually bring down the carbon price.
Secondly, the country’s dominant LNG importer and wholesale firm, Kogas, has signed several long-term contracts tied to the international oil price.
“If oil prices start to increase further than the current rally, which we expect to see in H2 16, then both LNG contract prices and city gate prices would start to increase again. This would work against coal to gas switching,” Energy Aspects said.
Unless generators can get increased access to the cheaper LNG spot market, some of the potential ETS-driven emission cuts are unlikely to materialise, it said.
“However, the combination of spot LNG and KAU prices at 16 $/t is a powerful argument for using gas rather than coal in Korean power generation.”
By Stian Reklev – stian@carbon-pulse.com
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