A likely re-issuance of South Korea's low-carbon hydrogen power generation tender, which was recently undersubscribed, would need sweeteners to draw in more bidders and help the government achieve its decarbonization goals, according to experts.
Korea Power Exchange's 6,500-GWh, 15-year tenders launched in May under the Clean Hydrogen Energy Portfolio Standards, on Nov. 22 picked Korea Southern Power Co, or KOSPO, as the only preferred bidder, with a capacity award of 750 GWh/year, raising concerns over the design of the tender.
"The South Korean government will have some headache because they thought ammonia co-firing would play an important role in meeting the 2030 NDC targets," Vince Heo, research and analysis associate director at S&P Global Commodity Insights, said. "Now they realize it's not going to be easy because of the high cost of low-carbon ammonia."
Heo said the ceiling of KRW 500/kWh ($0.35/kWh) in the tender, as estimated by the industry, is unlikely to be raised to please suppliers because Korea Electric Power Corp recently raised retail prices by 9.70% and would have no appetite for further hikes.
The ceiling price is more than four times the current wholesale power price in South Korea, resulting in a high premium that must be absorbed by KEPCO and could only be funded through further hikes in retail prices, according to Heo.
KPX may then revisit other contentious aspects of the original tender, such as the take-or-pay clause, which burdens the buyer, the tight timeline to commencement in 2028, and the lack of foreign exchange indexation at KPX, Heo said.
Looking at the big picture, other factors, such as a less established supply chain and bottlenecks in domestic transmission grids, must be improved to obtain confidence of the industry, Heo said.
To meet the ceiling of KRW 500/kWh, low-carbon ammonia would need to be at around $640/mt, but most of the bids in the tender reportedly were in a range of $700/mt-$800/mt, industry members said.
Platts, part of Commodity Insights, assessed the Japan/Korea low-carbon ammonia price at $455/mt Dec. 13, up 2.48% month over month.
It assessed Middle East blue ammonia at $463.45/kg Dec. 13, basis FOB, down 2.01% from a month ago.
Price discovery
However, with part of the tender already awarded to KOSPO, the Korean government could find itself in a bind and be unable to usher in major changes, and may therefore seek other ways of attracting bids, other industry members said.
"It is meaningful that this round of auction played a role in creating large-scale clean hydrogen demand and discovering clean hydrogen prices," Park Chan-ki, top hydrogen policy maker at the Ministry of Trade, Industry and Energy, said.
"The second auction next year could attract more bidders on the back of improved infrastructure and power grid connection," he said.
Heo said the industry will examine the upcoming 11th Electricity Generation Plan, which will spell out the future share of power generated via hydrogen and ammonia.
The draft of the plan foresees 2.4% of Korea's electricity being generated via hydrogen and ammonia by 2030 and 5.5% by 2038.
South Korea's updated and enhanced target is to reduce total national greenhouse gas emissions by 40% from 2018 levels by 2030 and become carbon neutral by 2050.
In particular, South Korea seeks to phase down coal-fired power generation while ramping up renewable power. It also plans to close aged coal power plants and utilize hydrogen to procure electricity at an economical price through cost competition among clean hydrogen power generators.
The industry therefore expects a larger capacity to be offered in the hydrogen power tenders in the new year, likely for 8,700 GWh, including the 5,750 GWh of undersubscribed capacity, industry members said.
Wider concerns
Bidders watching South Korea's tenders will keep an eye on the supply side for projects to advance and meet their timelines, which will also be a crucial factor for future tenders, industry members said.
"Power generators are asking for only projects with final investment decisions to qualify even for the next tender," a trader in South Korea said. "If projects fail to progress, the new tenders might face the same issues."
Commodity Insights' Hydrogen Production Assets database shows 131 projects are in the advanced planning or construction stage, representing 3.57 million mt/year of renewable or low-carbon hydrogen, while 15 have been canceled or are on hold, representing 1.39 million mt/year.
If South Korea is unable to carry forward its ambitious hydrogen power tender, it may be left scouting for other options to decarbonize, which may mean increasing solar or nuclear energy, but those will have their own difficulties.
Another option includes expanding sector coverage beyond the power sector and adding other hard-to-abate sectors such as steel or petrochemical, which could foster more competition and potentially help bring down the cost of low-carbon hydrogen, according to Heo.
