[Green Growth:Korea`s New Strategy (15)]The road to consumerizing renewable energy

The following is the 15th in a series of articles focusing on the

Korean government`s "green growth" strategy. The series will

also introduce the increasing efforts of major advanced countries

of the world to promote a green economy. - Ed.



On Aug. 15, 2008, President Lee Myung-bak proclaimed "low carbon green growth" as a new development initiative. Green growth has become a high priority in U.S. President Obama`s "Green New Deal." While Japan has a vision of a low carbon society, as proclaimed by former Prime Minister Yasuo Fukuda.

Green growth has two substantial benefits.

It could minimize CO2 emissions and environmental damage and spur economic growth and create jobs. Low-carbon green growth can create opportunities for national development -- increasing the quality of life, protecting the environment and contributing to international efforts to address climate change.

<**1>

Korea`s green growth strategy has three pillars: creating new growth engines, minimizing energy/resources consumption and reducing CO2 and other emissions.

In pursuing the development of new growth engines, the essential policies will include R&D investment in green technologies, promotion of green industries to export green products such as renewable energies, and support of international green markets.

To minimize energy/resource consumption without impeding steady growth, the industry structure must be transformed into a more energy-efficient one. It must be led by the knowledge-based service industry, energy efficiency enhancement and a move towards more eco-friendly policies.

Finally, in order to minimize CO2 and other emissions, the necessary policy measures include diffusion of renewable energies, development of clean energy, control of CO2 emissions, development of low carbon/eco-friendly infrastructure and promotion of green product purchases.

<**2>

A Korean road to low carbon green growth



In pursuing a green growth strategy, renewable energies have critical implications for Korea compared with other developed countries. This is because Korea has continued to pursue manufacturing-oriented economic growth despite its limited domestic energy resources. As such, Korea is inevitably dependent on foreign fossil energies. However, Korea`s manufacturing technology competitiveness can take the lead in developing renewable energy sources.

The tight global energy supply and a rapid increase in domestic and foreign demand for energy make renewable energies the inevitable energy source for the future. Recently, the so-called "peak oil" hypothesis, which holds that crude oil reserves cannot meet current or future demand increases, is gaining acceptance, given the explosive petroleum demand of newly-industrializing countries such as China and India.

Korea must drastically alter its energy consumption structure.

Furthermore, considering the recent oil price hikes and Korea`s impending participation in the post-Kyoto emission control regime from 2013, Korea should speed up its search for alternative energy sources.

To meet the challenge, the Korean government has presented its "Energy Vision 2030," which aims to enhance energy security, increase energy efficiency and set up an eco-friendly energy economy.

If the vision comes true, in 2030 foreign crude oil dependence will decrease to 33 percent from 43.6 percent in 2006, while the renewable energy supply ratio will increase to 11 percent from 2.2 percent in 2006.

Even though high costs are associated with increasing the supply of renewable energy, the government should take a more aggressive approach to spur both its supply and demand.

<**3>

Renewable energy policies

in developed countries



A common characteristic of developed countries` renewable energy supplies is the dominance of combustible renewables and waste (CRW) including biomass.

Combustible renewables and waste comprises solid biomass and animal products, gas/liquids from biomass, industrial waste and municipal waste. Biomass includes wood, vegetal waste -- including wood waste and crops used for energy production-- ethanol, animal materials/wastes and sulphite lyes.

Combustible renewables and waste comprises solid biomass and animal products, gas/liquids from biomass, industrial waste and municipal waste. Biomass includes wood, vegetal waste -- including wood waste and crops used for energy production-- ethanol, animal materials/wastes and sulphite lyes.

In countries like Germany, Denmark and the United Kingdom -- which have low hydro power generation capabilities -- CRW accounts for as much as 70 percent of the total renewable energy supply.

Even Japan -- which has a high percentage of hydro power and geothermal power (62 percent of the total renewable energy supply) -- shows a fairly large share of CRW, at 34 percent.

In the United States, the CRW ratio is 67 percent of the total renewable energy supply. The European OECD countries` CRW share is 59 percent, accounting for 56 percent of the OECD total.

In countries like Germany and Denmark where the renewable energy supply is on the rise, the CRW ratio is increasing as well. In the United States and Japan, where renewable energy supplies are somewhat stagnant, the CRW supply is constant.

<**4>

Members of the EU are obliged by a new directive on renewable energy to increase the share of renewable energy from 8.5 percent in 2005 to 20 percent by 2020. For the transport sector, the target is to increase the share of biofuels to 10 percent by 2020. The EU directive should be implemented by member countries by early 2010.

In the United Kingdom, the share of energy from renewable sources in gross final energy consumption in 2005 was 1.3 percent. The mandatory target for 2020 is set at 15 percent. The U.K. government`s mechanism for renewable energy support is the Renewables Obligation law (RO) introduced in 2002. It requires licensed electricity suppliers to source a specific and increasing percentage of the electricity they supply from renewable sources. The level for 2008/09 is 9.1 percent, with the 2015/16 target set at 15.4 percent and the 2020 goal at 20 percent.

It is expected that the Renewables Obligation law will provide financial support to industry of 1 billion pounds ($1.45 billion) per year by 2010. The U.K. government has also introduced a number of other grants and support mechanisms aiming to support less established renewables.

Germany is probably No. 1 among the G7 countries in terms of overall support for renewable-energy development.

In Germany, the share of energy from renewable sources in gross final energy consumption was 5.8 percent in 2005, with the 2020 target set at 18 percent.

Germany adopted the Renewable Energy Sources Act on April 1, 2000, replacing the 1991 Electricity Feed Act that supported the expansion of renewable energy sources, especially wind power. The new act introduced a fundamental change in energy supply by enabling any citizen to become an energy producer. In just a few years, the new law created an independent and thriving renewable energy industry.

In 2006, renewable electricity generation represented 11.8 percent of the nation`s total electricity supply, with the share expected to grow to 27 percent by 2020 and to 45 percent by 2030. Germany has adopted a number of different incentive mechanisms, including grants, feed-in tariffs, reduced-rate loans and preferential tax treatment schemes, which are all applied to plans for heat generation from biomass, solar power, geothermal energy and wind power.

<**5>

<**6>

In France, energy from renewable sources accounted for 10.3 percent of gross final energy consumption in 2005.

The country plans to raise the ratio to 23 percent by 2020.

In France, hydro power has traditionally been important for electricity generation; it accounted for 9.1 percent of gross electricity generation in 2005. France has two major renewable-energy promotion mechanisms: feed-in tariffs and a tendering procedure. Feed-in tariffs were introduced in 2001 and 2002 and modified in 2005 to support photovoltaics, hydro, biomass, sewage and landfill gas, municipal solid waste, geothermal, offshore wind, onshore wind, and combined heat and power.

A tender system is used for large renewable projects.

In 2007, the French government announced a push to increase the renewable share of the country`s total energy consumption. At the heart of the plan were wind and solar power, which had until then played a marginal role. The plan called for a massive increase in the capacity for wind and photovoltaic power.

In Italy, renewable sources accounted for 5.2 percent of gross final energy consumption in 2005, with the mandatory target for 2020 set at 17 percent.

According to a fact sheet on renewable energy drafted by the European Commission, Italy has seen strong growth in sectors such as onshore wind, biogas and biodiesel. But the country is far from the targets, set at both the national and European level.

To promote power generation based on renewable sources, Italy has made it obligatory for electricity generators to produce a certain amount of electricity from renewable energy sources. In 2006, the target percentage was 3.05 percent. In case of noncompliance, power generators face penalties, but enforcement in practice is considered difficult because of ambiguities in the legislation.

Power generators use Green Certificates -- which are tradable commodities proving that certain electricity is generated using renewable energy sources -- to fulfill the renewable energy obligation. The price of such a certificate stood at 109 euros per MWh in 2005.

In 2004, Japan generated approximately 2.2 percent of its electricity from non-hydro renewable resources, half accounted for by geothermal, wind and solar sources.

While Japan lowered its reliance on oil for electricity generation significantly, renewable energy played only a minor role in the shift away from oil; it increased the use of gas, nuclear and coal.

<**7>

The Japanese government introduced in 2003 a renewable portfolio standard obligating utilities to produce 1.35 percent of their electricity from renewable sources by 2010, and 1.6 percent by 2014, excluding large hydro-based sources. But utilities can purchase generation from others, invest in new generation, or trade with other power companies through a certificate trading system. Japan applies a range of support measures, with a strong focus on small-scale solar technology. The Japanese Ministry of Economy, Trade and Industry is set to amend the Alternative Energy Law to review its alternative-energy policies and facilitate the use of non-fossil energy sources, including solar and nuclear power, and the use of biofuel and biogas.

Canada is one of the few countries blessed with vast natural resources and abundant supplies of water, solar, wind, biomass and earth energy. All of these resources can be used as renewable sources of energy.

In Canada, support is handled mainly on a provincial level, with a wide variety of approaches employed. But on the whole, the support for renewables outside of traditional sources -- hydro for electricity and biomass for heating -- is lagging.

The federal government`s main support mechanism for renewable energy is the ecoENERGY for Renewable Power program, which will invest $1.48 billion to increase Canada`s supply of clean electricity from renewable sources such as wind, biomass, low-impact hydro, geothermal, solar photovoltaic and ocean energy.

The program provides an incentive of one cent per kilowatt-hour for up to 10 years to eligible low-impact, renewable electricity projects constructed from April 2007 to March 2011.

The United States is expected to see a renewable energy revolution as President Barack Obama has made it clear that he wants to promote the use of green energy in his country.

The $787 billion economic stimulus package approved by the U.S. Congress recently offers an array of benefits to power companies supplying green energy, ranging from tax incentives and loan guarantees to direct payments. The package allows companies to choose between grants and a 30 percent tax credit for investments in manufacturing facilities.

They can also get tax credits based on the amount of energy generated for wind, geothermal energy, biomass and other types of renewable power.

In the United States, solar, wind and geothermal power generation has already seen substantial growth in the last two years, thanks largely to the renewable portfolio standard adopted by 29 states. The standard requires utilities to generate a portion of their power from renewable sources. Congress is expected to create a national renewable portfolio standard with the support of President Obama, giving renewable businesses additional security. The stimulus package is expected to help maintain the momentum for renewable energy.

The United States also has a tax incentive system for renewable energies at the federal level -- the production tax credit for renewable energy. The tax incentives were set to expire on Dec. 31, 2008 but were extended as part of efforts to boost the slumping economy.

Under the program, companies that generate wind, geothermal and "closed-loop" bioenergy (powered by dedicated energy crops) are eligible for the production tax credit, which provides a 1.9-cent per kilowatt-hour benefit for the first 10 years of a renewable energy facility`s operation.



Assessment and implications



To increase the use of renewable energy, advanced countries focus on both supply and demand.

On the supply side, they offer financial compensation to suppliers that suffer from high production costs and low profit margins.

On the demand side, they introduce mandatory use of electricity and fuels produced from renewable energy sources.

In countries like Germany and Denmark, mandatory use on the demand side has been very effective. These countries also offer financial support -- like equipment price support -- and direct financial support for production.

But countries like the United States, Japan and the United Kingdom have not shown outstanding results compared with Germany and Denmark.

In the United States, renewable energy ratios differ from state to state because each state has its own financial support scheme.

The production tax credit for renewable energy -- a federal-level incentive system -- has tended to create boom-bust cycles of renewable energy development due to its on-again/off-again status. The program was off three times between 1999 and 2004 as a result of the U.S. Congress` failure to extend it. When the program was off, investment in renewable energy declined sharply.

Japan has tended to focus its financial support on renewable energy equipment manufacturing for exports. The country focuses on increasing power generation through nuclear power, coal and natural gas as a means of lowering its reliance on oil.

The United Kingdom, which has a market-based mandatory-demand system for renewable energy, has not shown very good results. Therefore, in those countries, the introduction or expansion of mandatory use of renewable energy is now being seriously considered.

The renewable energy policies of the developed countries described above offer the following policy implications.

Firstly, Combustible renewables and waste are still very important for increasing the use of renewable energies.

Municipal waste comprises wastes produced by the residential, commercial and public service sectors that are collected by local authorities for disposal in a central location for the production of heat and/or power.

Secondly, the demand-side measures designed to make renewable energy use mandatory are of overriding importance, as financial support measures alone are not effective. Japan and the United Kingdom -- which had focused on providing financial support for producers -- changed direction by introducing the renewable portfolio standard. But mandatory use has had a more powerful effect than the RPS. In this regard, Germany has shown a good example.

While emphasis on the demand side is justified, it is also important to increase investment in R&D on renewable energy sources. This will accelerate the uptake of renewable energy. Japan has steadily invested in photovoltaic R&D and has become one of the most advanced countries in photovoltaic technology in the world.



Renewable energies in Korea



In Korea, renewable energy accounted for 2.24 percent of the total primary energy supply of 233.37 million barrels of oil equivalent in 2006.

The use of photovoltaic, wind and geothermal energies has drastically increased. Waste energy accounts for the lion`s share of the country`s renewable energy supply.

In 2006, of the renewable energy supply, waste energy accounted for 76.1 percent, hydro power 16.6 percent, bio energy 5.3 percent, wind energy 1.1 percent and solar energy 0.6 percent.

Korea`s renewable energy development efforts started with a government-funded alternative energy R&D project -- launched after the first global oil shock in the early 1970s.

In the early 1980s, with the establishment of the Korea Energy Management Corporation, renewable energy development efforts gained momentum.

The history of renewable energy-related policy is as follows:



-- 1988: The Alternative Energy Development Promotion Act was enacted (The Alternative Energy Development and Use Promotion Act after 1997).

-- 1988: The Alternative Energy Center was established at KEMCO.

-- 1992: The Energy Resources R&D Support Center was established at KEMCO.

-- 1997: First long term plan for energy R&D was initiated

-- 2002: Schemes initiated included: cost compensation for renewable energy generation and introduction of renewable energy certification.

-- 2003: Second long term plan for energy R&D and use was launched (2003-2012).

-- 2005: Renewable portfolio agreement concluded between the Korea Electrical Power Corporation and Korea Water Corporation (K-Water), regional heat suppliers and the government.



Korea invested a total of 706 billion won ($522 million) into renewable energy R&D between 1988 and 2006. Of the total, 433.8 billion won came from the government and the remaining 267 billion won from private companies.

About 68 percent of these funds were invested in four key areas -- hydrogen fuel cells, photovoltaic, wind energy and coal use -- while the remaining 32 percent was spent on development of general-purpose technologies.

The Korean government began to drastically increase its R&D support in 2000.

Under such policy support, Korea could achieve positive results in renewable energy supply, crude oil import substitution, CO2 reductions, commercialization of new renewable energy technologies and research manpower cultivation. The commercialization rate has steadily increased from 15.81 percent in the 1988-1996 period to 23.33 percent during the 1997-2006 period and to 31.25 percent in the 2002-2006 period.

Sales revenue generated from commercialized technologies totaled 280.3 billion won during the 1988-2006 period, with exports accounting for 4.39 billion won.

In the five years between 2007 and 2011, commercialized technologies are expected to generate revenue of 2.79 trillion won, benefiting the companies who participated in the commercialization projects.

The ratio of actual and expected revenue from commercialized technologies to government expenditures stands at 20.3, a figure that illustrates a big payoff from government investment.

The amount of renewable energy supplied during the period as a result of the R&D program totaled 100,000 tons of oil equivalents. During 2007-11, the figure is expected to grow to 458,000 tons of oil equivalents. The crude oil import substitution effect was 28 billion won based on the 2006 price level. CO2 reduction was about 300,000 tons, or worth 8.1 billion won.

The number of researchers who participated in the R&D program totaled 2,514. To carry out the R&D projects, 567 more researchers were hired. The research workforce is expected to gain another 1,350 researchers in the near future.



The way forward



There are some fundamental barriers for commercialization of renewable energy sources.

Among other things, renewable energy commercialization requires significant investment. Furthermore, most renewable energy projects require a long-term investment horizon. For instance, wind energy development projects require on average 12 years to break even.

Consequently, renewable energy investment inevitably involves high risks, which means companies with no technological leadership cannot easily invest in renewable energy. Instead they should take a wait-and-see strategy.

For technological pioneers, the risk is that their technology could be stolen, negating years and billions of dollars spent on R&D.

Often, using traditional technologies can help lower the costs of producing energy, hindering the uptake of high-cost renewable energy sources. Also, the interests of traditional energy businesses may conflict with newly emerging renewable energy companies.

Besides these general barriers, Korea has its own obstacles.

Foremost is a shortage of available capital. A lack of funds makes it difficult for the government to adopt aggressive policy measures needed to boost demand.

Technological inferiority in competing with developed countries also has not been overcome yet. Therefore, although Korea has made progress in terms of renewable energy growth, there is still much to be done.

The experience of developed countries allows us to suggest some policy recommendations.

First, in the short term, the policy focus should be placed on seeking relatively low cost sources of renewable energy such as combustible renewables and waste.

In the longer term, it is important to develop domestic renewable energy technologies that are cost competitive. To do this it is crucial to tap the technologies of related industries. For example, photovoltaic parts and materials are basically similar to those used in the semiconductor industry, where Korea has established a high level of cost and technology competitiveness. Also, the parts and materials used to generate wind energy can be supplied by the shipbuilding industry, where Korea is a global leader. In addition, R&D policy for renewable energy must aim to enhance the commercialization of developed technologies.

Regarding electricity supply networks, policymakers need to learn a lesson from Germany and build a distribution system focusing on small regional electrical sources. The German electricity supply system favors small sources. In Germany, it is mandatory for grid operators to link individual renewable power generators to national/regional supply networks.

In Korea, this is not the case.

Linkage to the national networks is determined on a case by case basis here. Certain qualifications are needed for distributed sources. But in Germany, there is no limit in connecting renewable generation to national or regional networks. Buying electricity from a distributed source is mandated in Germany, but in Korea it is simply encouraged.

In Germany, power purchase agreements for renewable generation are valid for 20 years, while in Korea the period is 15 years. Germany has two-phase buying price schemes in which producers of renewable energy are paid a higher price in phase 1 and a lower price in later phase 2. In Korea, producers get a fixed price throughout the contract period.

In view of different production costs by location, Germany offers different tariffs after the appraisal of phase 1 results.

Germany encourages large-scale wind power generation plants by applying renewables tariffs to plants with a generation capacity of 500kW or more. In Korea, the minimum capacity is 10kW. Germany has no budgetary limit in providing compensation, but in Korea the limit is set at 10 billion won.

The compensation schemes also differ between the two countries. In Germany, grid operators purchase renewable generation from producers at the government-set price and transfer the cost incurred to final power consumers, while in Korea, producers are compensated for the cost differentials by the Electricity Infrastructure Fund, which is raised with levies from all electricity consumers.

By Gwak Dae-jong



The above article is an updated version of a paper the author published in the KIET-Industrial Economic Review, May/June 2008 vol. 13 no. 3. -- Ed.