Global offshore wind: South Korea

Phase 1: 2022 auction award, in construction

Phases 2 and 3: Development

KHNP, KOEN, KOMIPO, KOSPO, KOWEPO, KOWP, EWP, KEPCO

Development

2023 auction award

Development

2023 auction award

Posco Energy and KOSEP

Development

2023 auction award

Development

2023 auction award

“First-in-country” and technology risk

The nascency of the offshore wind sector in South Korea and the significant ambition for floating offshore wind means that South Korea has many “firsts” to traverse in the evolution of its domestic offshore wind industry. The coming years will be key for developing the skill and expertise necessary to deliver offshore projects of this type and size, particularly given the need to facilitate floating offshore wind projects to meet South Korea’s policy targets.

To find out more about the unique challenges inherent in the development of floating offshore wind projects, please click here. 

Wind conditions

Unlike Europe, some of South Korea’s coastal areas are typhoon-prone.This creates obvious difficulties for the manufacture and design of turbines. Contractors and research institutes are partnering to develop solutions (e.g. the research project between Doosan Heavy Industries & Construction and the Korea Institute of Energy Technology Evaluation and Planning). 

Supply chain and procurement

South Korea generally has high-quality infrastructure, but is lacking the required scale of specialist equipment needed for offshore wind projects and more particularly, to support the development of floating offshore wind projects. Installation vessels will need to be built or imported whilst harbour facilities and local manufacturing processes will need to be modified and/or upgraded. These supply chain challenges might be exacerbated given the South Korean REC auction bid evaluation criteria incentivizes local content / component sourcing as well as community benefit and national security.

More generally, South Korea is not immune from the supply chain constraints affecting the global offshore wind industry. Among the topics to consider in this context is the anticipated involvement of Chinese Original Equipment Manufacturers (OEMs). This remains a vexed industrial policy question; however, many developers are considering using Chinese OEMs having regard to the potentially significant cost benefits of doing so.

Permitting

Whilst this is not unusual in the region, developers in South Korea are subject to a complex permitting process, which requires coordination across several government authorities. Examples include separate approval procedures administered by a variety of central government ministries including the Ministry of Trade Industry and Energy (MOTIE), Korea Electric Power Corp. (KEPCO), Ministry of Environment (MOE), Ministry of Oceans and Fisheries (MOF) and Ministry of Defense (MOD), as well as local government, in order to obtain critical approvals ranging from the electricity business license, grid interconnection agreement, environmental impact assessment, maritime traffic safety assessment, and defense facilities impact operability review & radar impact assessment (RIA).

These complexities are exacerbated by the fact the impetus for initiating many of these approval processes is imposed on the developer, and to date the South Korean government has taken a hands-off approach to facilitating stakeholder consents (see below).

Legislation remains under consideration to simplify the licencing procedures.

Local community interests

The Government has been keen to promote community involvement in new renewables projects. In addition to maritime spacial planning (MSP) and related maritime traffic safety concerns raised by the marine shipping industry, the commercial fishing industry is often vocal in its opposition to proposed developments due to possible negative effects wind farms may have on marine life and catch rates. Both issues can lead to lengthy negotiations, delayed government approvals and rising costs.

The Government intends to establish a consultative body made up of business entities, central and local government to manage and facilitate stakeholder consents (including fisheries) in a more efficient manner. To date we understand that one such integrated body has been established. The government’s one-stop-shop legislation is intended to go further by facilitating the establishment of pre-approved development sites to reduce delays resulting from the need for developers to obtain stakeholder consents.

Grid connection

Like many other grids around the world, the Korean grid has faced increasing pressure in recent years, with many projects struggling to obtain firm, timely and uncurtailed grid connection arrangements for their projects. It is pertinent to note that South Korea has curtailment points at both the transmission and distribution levels. Consideration will need to be given to the anticipated timing for connection, and whether a flexible or firm connection is being provided.

Unless a direct wire PPA (or similar alternative offtake arrangement is pursued), developers must enter into a grid connection agreement with KEPCO, who holds the exclusive rights to the transmission, distribution and sale of electricity in South Korea. Renewable projects are not given priority for grid connection and there is potential for delay if several offshore projects seek connection concurrently. As we commonly find internationally, there is little (if any) scope for negotiation of the connection agreement, which has been found to contain certain bankability challenges.

It is also pertinent to note that the offshore wind project is responsible for building out the offshore substation and export cables up to the onshore substation connection point.
Having regard to Korea’s hydrogen ambitions, power-to-X solutions using offshore wind is another opportunity to watch as the hydrogen market in Korea evolves. This would also serve as an alternative offtake solution which would in turn, overcome the need for grid connection.

Financing market

South Korea has a liquid, capital cost competitive and mature domestic project finance market. While this in many respects bodes as an advantage for the development of the South Korean offshore wind sector, the role for international lenders and advisers is likely to remain important for a number of reasons.

The international offshore wind financing market exhibits a number of unique structural features that we expect to also become features of the finance packages in the South Korean offshore wind market. For example, South Korean lenders will need to get comfortable with truly non-recourse financing structures as well as with the impact of multi-contracting procurement structures without the protection of completion guarantees and financing cost support.

There are also a number of South Korean market specific factors that will also need to be considered from a financing perspective, including the impact of the Resident Participation Scheme, which can be used to improve the debt capacity of a project.

The role of multilaterals (including ECAs) is also a topic to follow closely, including vis-à-vis the participation of South Korean multilaterals in the financings of domestic offshore wind farm financings.

REC weighting and REC auction design

While the auction roadmap released on 8 August 2024, and confirmed upon the announcement of the auction on 25 October 2024, represents a positive step forward from a policy perspective as MOTIE has addressed a number of industry concerns therein, it remains to be seen whether these adjustments will facilitate the expeditious development of offshore wind farm capacity in South Korea.

While disclosure of the ceiling price applicable to offshore wind projects in the H2 2024 REC auction is likely to be viewed as a positive development, we note that the proposed ceiling price is the same for both fixed-bottom and floating offshore wind farm projects. It remains to be seen whether this will negatively affect the commerciality of the floating offshore wind projects bidding given the significant cost differences between the two technologies. This means that the REC weighting (which takes into account distance from shore and water depth) will be the primary tool for providing additional support to floating offshore wind projects vis-à-vis their fixed-bottom cousins. The [impending] changes to the REC weighting methodology will also be interesting to consider in this respect, given there are a myriad of factors that go beyond distance from shore and water depth that disproportionately affect the development of floating offshore wind projects (such as the heightened costs of addressing maritime safety related considerations).