Preferential Pricing and Bilateral CfDs: How the Renewable Energy System Will Change

Ministry Holds Public Hearing on Renewable Energy Act Reform

RPS to Sunset Next Year; Transition to Capacity-based Competitive Bidding

Successful Bidders to Sign Long-term Fixed-price Contracts with KEPCO

Two to Four Bids Annually; Price and Non-price Evaluation Within Cap

At the 'Public Hearing on the Revision of Subordinate Legislation under the Renewable Energy Act Reform of RPS,' held on September 30 at the L'Eliena Hotel in Seoul, Wooseok Joong, Climate Department Secretary, is presenting. Photo by Hee-jong Kang

The concept of a "preferential price" will be introduced to replace the Renewable Energy Certificate (REC) multiplier, which has played a decisive role in the profitability of renewable energy operators. Renewable energy generators will now settle transactions with Korea Electric Power Corporation (KEPCO) through a bilateral Contract for Difference (CfD) system.

On September 30, the Ministry of Climate, Energy and Environment held a "Public Hearing on the Amendment to the Subordinate Legislation of the Renewable Energy Act Reform" at the Elliena Hotel in Seoul and released a new proposal for overhauling the renewable energy supply system.

This hearing was organized to gather opinions on changes to the subordinate legislation, following the amended "Act on the Promotion of the Development, Use and Dissemination of Renewable Energy" that was promulgated on September 15. The Ministry of Climate, Energy and Environment gave advance notice for the enactment of the enforcement decree and rules on September 23 and plans to finalize related notices and operational regulations by the first quarter of next year.

The revised Renewable Energy Act, which will take effect on January 1 next year, centers on repealing the Renewable Portfolio Standard (RPS), introduced in 2012, after 15 years and shifting to a contract-based market. Consequently, starting next year, renewable energy will be supplied through competitive bidding based on a government-provided roadmap.

The Ministry plans to announce the bidding amount by energy source, in line with national supply targets. The bidding volume will be outlined in five-year roadmaps to enhance predictability for operators. On the day of the hearing, Deputy Director Woo Seokjoong stated, "We plan to conduct two to four bids every year and select successful bidders based on price and non-price evaluations, all within a set price ceiling." However, small-scale solar power operators, those under 500 kilowatts (kW), will compete in a separate contract market.

The government expects this system to help achieve its policy goals methodically, such as "100 gigawatts (GW) of renewable energy by 2030" and "a 35% share for renewables by 2035." Under the current RPS system, actual supply has fluctuated with market conditions, with a predominant focus on small-scale solar projects.

"20-year Fixed-Price Contracts with KEPCO... Bilateral CfD Settlements"

Renewable energy operators selected through government tenders will sign long-term, 20-year, fixed-price contracts with Korea Electric Power Corporation. Under the existing RPS system, operators secured income based on the combined price of the system marginal price (SMP)—the wholesale electricity price—and the value of REC. The high volatility of REC prices made profitability uncertain, compounding the difficulties of obtaining financing.

By contrast, under a 20-year fixed-price contract with KEPCO, renewable energy operators will have a stable revenue base, greatly facilitating project financing. The government also stated it will calculate the price ceiling applied to bidding every year through the Public-Private Cost Evaluation Committee.

Generators entering long-term fixed-price contracts with KEPCO will settle accounts monthly through the bilateral CfD system. This structure guarantees a steady income by settling the difference between the wholesale price (SMP) and the contract price (the winning bid). That is, if the wholesale price falls below the contract price, KEPCO pays the operator the difference; if the wholesale price exceeds the contract price, the operator reimburses KEPCO accordingly.

The Ministry explained, "Long-term, fixed-price contracts with KEPCO will stabilize operator revenue and reduce financing costs," adding, "This will lower operator costs and ultimately ease the burden of electricity bills for consumers."

On September 30, the 'Public Hearing on the Amendment to the Subordinate Regulations of the Renewable Energy Act under the RPS Reform' is being held at the Elliena Hotel in Seoul. Photo by Heejong Kang

"Preferential Pricing Applied for Contributions to Supply Chains and Energy Security"

The REC multiplier under the current RPS system will be replaced by a preferential price. Currently, operators receive one REC for every megawatt-hour (MWh) of renewable electricity they produce, with additional multipliers based on energy source and site location. REC multipliers granted for resident participation have been used as models for sharing the benefits of renewable energy with local communities, such as through "sunshine income" or "wind income."

The preferential price, by contrast, is expected to be directly added to the contract price. For example, if the solar contract price is 150 won per kWh and the preferential price is 5 won, the actual settlement price will be 155 won per kWh.

The Ministry established a fundamental policy of "minimizing economic compensation while assigning preferential prices based on policy needs." This means it will reflect government policy directions in the preferential price. For instance, additional pricing will be awarded for contributions to domestic supply chains and energy security. The preferential price for resident participation, which previously received REC multipliers, will also be maintained.

For solar energy, the government plans to implement new preferential prices for policy-prioritized sites such as floating, agrivoltaic, and rooftop solar installations, as well as grid-available locations. For wind power, the basic multiplier will be eliminated, but water depth and grid connection distance will be reassessed. The Public-Private Cost Evaluation Committee will be responsible for annual recommendations of preferential prices for each energy source.

Private Power Generators Designated as Target Entities for Management... Group Companies May Pursue "Collective Compliance"

Obligated suppliers under the current RPS will be converted into obligated suppliers or designated targets for management. Public power utilities with power generation facilities of at least 500 MW will be required to fulfill their supply obligations calculated by capacity. Only direct construction and equity investments will count toward this obligation.

Private companies, public agencies, or local public enterprises with generation capacity of at least 500 MW will be designated as target entities for management. Depending on the specific organization, they will be required either to supply power generation units themselves or open up their sites. If obligated suppliers fail to fulfill their obligations, they will face administrative fines, while target management entities will receive improvement orders.

The Ministry is considering allowing partial fulfillment through substitute payments if compliance is not feasible. Carry-forward or grace periods will also be allowed, in consideration of project development timeframes. For power generation companies affiliated with large conglomerates, the government is reviewing a "collective compliance" system, which would allow recognition of group-wide performance.

Transitional measures will be implemented to protect existing operators. Starting January 1, 2027, new renewable energy operators will have limited access to REC issuance, but existing operators will be able to issue or trade RECs for up to 20 years. The spot REC market will be operated temporarily until 2029. Thereafter, markets will transition to long-term contracts (20 years or the facility's operational lifespan).

Facilities that have secured generation permits by 2026 may remain in the RPS market for a time. The Ministry is considering allowing entry into the RPS market for solar, wind, and hydro operators that receive pre-operation inspections by 2027, and for bioenergy and fuel cell operators who pass pre-operation inspections by 2028.

"Enhancing Predictability and Flexible Price Ceiling Management"

Given that this marks the first renewal of the renewable energy supply system in 15 years, some 800 audience members attended the hearing, demonstrating keen interest.

Panels at the hearing urged the government to emphasize predictability and reliability. Kim Beomjo, Division Head at energy consulting firm KEIC, stated, "The bidding roadmap's volume should be kept steady to enhance predictability," adding, "Price ceilings must not be a market burden but rather a tool for efficient competition and should be managed flexibly."

Panels are speaking at the "RPS Reform Renewable Energy Act Subordinate Legislation Amendment Public Hearing" held on September 30 at the Elliena Hotel in Seoul. Photo by Hee-Jong Kang

Kim Daejong, Director of Renewable Energy Development at Korea Southern Power Co., Ltd., said, "Fines or substitute compliance payments for obligated suppliers could reach several hundred billion won, which could drive companies into deficit," and suggested, "The supply obligation should be adjusted to a three-year interval rather than annually."

Gwak Youngjoo, Chairman of the Korea Solar Power Association, commented, "Detailed transitional actions are needed to ensure that existing operators are not disadvantaged," and asked for "broad recognition of the preferential price." Kim Myeongryong, Chairman of the Korea National Solar Power Association, warned, "If the government focuses solely on lowering the price ceiling, it could undermine operators' will to participate, which may negatively affect renewable energy deployment."

This content was produced with the assistance of AI translation services.