Fate of South Korea's new coal plants rests with its new president

South Korea's new president sent shockwaves through the Asia thermal coal market when, on his election in May, he announced his intention to halt the building of new coal-fired power plants and to phase out some of the country's ageing coal-fired generators.

Moon Jae-in set June 1 as the date for the temporary closure of eight coal-fired plants aged more than 30 years, and with that deadline fast approaching, thermal coal market watchers are taking a close interest in the shutdowns.

The future of South Korea's coal-fired sector was a hot topic at the Bali Coaltrans industry gathering held after the president's announcement, according to sources who attended the event.

The eight older coal-fired plants on the temporary closure list have a combined generation capacity of 2.75 GW, and from 2018 onwards they will be forced to stop generating during March-June, the off-peak season, until they are closed completely in 2022.

Market sources make the point that these old plants' mid-year electricity output is usually low anyway, and consequently, their enforced shutdown is unlikely to have much of an impact on the market.

"It will not be a major impact as the power plants are very old and represent only 12%-15% of coal import volumes," said a trader.

"Most of these power plants to be shut down in June were scheduled to be disabled, and their fuel source changed from coal to biomass this year," said another market source.

He estimated the immediate impact of the June closures at 500,000 mt of coal consumption.

Of more concern to market watchers is Moon Jae-in's election pledge to stop the construction of any new coal-fired power plants, with 5 GW of new coal capacity under construction this year alone.

"It's what the announcement means for the future -- what will happen to the new power plants that are under construction," said the market source.

According to S&P Global's PIRA Energy Group, South Korea was aiming to build a total of 20.17 GW of coal-fired electricity generators over 2017-2022.

South Korean private-sector companies had already sunk $1 billion into building new coal plants, said the source, and suggested their cancellation could result in "long expensive law suits against the government."

Designed to meet rising demand for electricity from South Korea's expanding economy, including its industrial giants such as Samsung and LG, the coal-fired plants are being sponsored by state-owned utilities and some private companies.

South Korea's seventh electricity supply plan published in 2015 had specified that coal-fired power generation would grow from an installed capacity of 25.1 GW in 2015 to 37 GW in 2020, and then to 43.2 GW by 2025.

This would have merited South Korea's electricity sector increasing its consumption of imported thermal coal to 120 million mt/year by 2020, from 80 million mt/year currently, according to the electricity plan.

But obviously, those numbers are in doubt, with the new president's desire to limit coal-fired power generation for reasons related to curbing the problem of air pollution in South Korea.

There is more at stake in this policy question than South Korea's coal import volumes, as coal consumption underlies the country's transformation into an industrial heavyweight.

"Coal and nuclear power are baseload in [South] Korea, accounting for 60% of electricity generation," said a source, pointing out South Korea's important industrial sectors' dependence on these two cheap sources of electricity.

"If it [cheap power] goes away, it will affect the economy," he said, adding he wondered if the government was willing to give up South Korea's economic competitiveness by reducing coal consumption.

Other sources familiar with the thermal coal market in South Korea said they believe it is unlikely the new president will be able to completely halt the expansion of coal-fired power generation in the country.

"We believe they [the new plants] will be looked at, but they won't be cancelled, as the government will have to pay money [compensation]," said a market source.

"There will not be a decrease in coal demand for [South] Korea, but possibly a decrease in the rate of growth," he added.

In conclusion, the president may face some difficult dilemmas if he moves ahead with curbing South Korea's future use of thermal coal, as the fuel is closely linked to the country's economic prosperity.