Price Distortions in Korea's Electricity Market: Barriers to Renewable Integration and Reform Pathways

TL;DR

This paper analyzes price distortions in Korea's electricity market, identifies their causes, and proposes a comprehensive reform package to improve market efficiency and support renewable energy integration.

Contribution

It introduces a holistic reform framework including locational pricing, real-time markets, and system integration to address fundamental market distortions.

Findings

Current market design fails to reflect transmission constraints and real-time dynamics.

Proposed reforms aim to align price signals with policy objectives.

Joint implementation of reforms is necessary for effective market functioning.

Abstract

Structural distortions in price signals within the Korean electricity market, governed by a cost-based pool (CBP) and a uniform pricing mechanism, fundamentally undermine the nation's energy transition goals. The current market design fails to reflect transmission constraints, real-time supply and demand dynamics, and generator-specific costs, leading to inefficient resource allocation and hindering long-term investments in renewable energy and grid flexibility. This paper identifies the key drivers of these distortions and proposes a holistic reform package to enhance market efficiency. The package includes four key reforms: \stepcounter{excep}(\roman{excep}) introducing a locational marginal pricing system to manage transmission constraints; \stepcounter{excep}(\roman{excep}) establishing a real-time market to reflect temporal value; \stepcounter{excep}(\roman{excep}) integrating market and system operations to resolve inconsistencies; and \stepcounter{excep}(\roman{excep}) transitioning from CBP to a price-based bidding system. Each reform targets a distinct source of inefficiency. The broader contribution of this study, however, lies in showing that, under the current Korean market design, the market cannot readily provide effective price signals. These reforms therefore need to be implemented jointly to establish a coherent market design in which price signals are aligned with Korea's energy policy objectives.