LG's solar farm in Mungyeong, North Gyeongsang Province, which is the largest of its kind in Asia so far. |
LG’s Shrewd Strategists Capitalizing on Government’s Green Policies
By Cho Jin-seo
Staff Reporter
The word ``new energy'' is often accompanied by big expectations and small outcomes ― everyone is talking about it but few of them are making big money, and the market still heavily depends on government financial support. That is probably why LG Group officials take a down-to-earth attitude when talking about this sector.
``The market is still uncertain for firms to make aggressive investments,'' said Park Seong-joon, who leads LG CNS' solar power plant projects. ``The government's administrative support to the new energy market is very necessary for Korean firms to become globally competitive.''
However cautious he may sound, LG Group is the outstanding player among Korean conglomerates in the new energy field. What distinguishes LG Group from others in the new-energy hype is its methodical role sharing. The group's portfolio is composed of a vertical lineup, and each firm is assigned with specific roles to minimize the financial risk and to create synergy.
For example, LG Chem and LG Siltron are developing basic materials for solar panels and modules made of silicon wafers. LG CNS is financing and building solar power plants, and LG Solar Energy will run the facilities and sell the electricity to utility companies. LG Electronics, the flagship company of the group, is committed to selling thermal-energy heaters and business-to-business energy consulting.
Such a wide range of new-energy initiatives is orchestrated by the group's holding company, LG Corp. The group headquarters established LG Solar Energy in September by investing 46 billion won. The move drew special attention from investors, as it was the groups' first new business since in three years.
``Launching new businesses such as the LG Solar Energy can create synergy between subsidiaries, and therefore it can be a powerful growth engine for LG,'' said Lee Hoon, an analyst of Woori Investment & Securities, in a report last week.
When LG Group was separated three-way to LG, LS and GS groups in 2004, it is known that their major shareholding families made a gentlemen's agreement not to interfere with each other's business. LG has been focused on the manufacturing field such as electronics and chemicals, while the energy-related businesses such as gas and oil refineries are left to GS.
LG circumvented the tacit agreement by embarking on the new energy field in which GS has shown little interest. The solar business also helps LG have a better corporate image, such as ``green,'' ``high-tech,'' and ``socially responsible.''
``Eco-friendly businesses are a mandatory industry to overcome worsening environmental factors such as high oil prices, global warming and contamination,'' an LG Corp. official said. ``It is also the next-generation growth industry where we can compete globally with our high-tech engineering and manufacturing know-how.''
21st Century Ginseng Field
While LG does not limit its interest to one type of new energy, it is solar energy that the group is showing most interest in. The most conspicuous player in this field so far is LG CNS.
Last week, the firm started building a massive solar farm in Boryeong, South Chungcheong Province, which is its ninth solar project in South Korea since last year. The project will cost 52 billion won and the facility will produce 7 megawatts of electricity per hour from late next year, which will be one of the largest source of new energy in South Korea.
``The solar farm is 21st century's ginseng field by its appearance and by its nature,'' said Park. The rows of black, tilted solar panels look just like the sun shades set up on the Korean herb farms, he explains. ``And they both are harmless to the environment and to people living nearby.''
LG CNS is originally a computer engineering company. It designs, develops and operates all kinds of computer network systems for LG Group and other private and public organizations. The company first joined the solar energy market last year in search of a new growth engine, as the IT service sector has been almost saturated after a decade since the dot-com boom.
Though the IT and solar power sectors do not seem to have much in common, it was a wise choice to start it earlier than most others, Park said.
``We have built up strength in financing and managing business projects. And those are the core part of building a solar power plant,'' he said, adding that there are a number of small companies doing the same job but none of them are as big and as reliable as his firm.
Because there is no Korean manufacturer, LG CNS imports the solar panels from Japan and Germany. The completed facilities are handed over to LG Solar Energy or to local governments on turnkey bases.
LG Electronics executives listen to a briefing at the firm's energy solution conference on Nov. 1. They are, from left, Lee Young-ha, chief of Digital Appliance division; Park Seok-won, chief of Korean marketing team; and Nho Hwang-yong, chief of air conditioner part.
/ Courtesy of LG Group |
Four Steps of Solar Business
Known as photovoltaics (PV), solar power generation is a method of producing electricity from sunlight. It is different from the traditional solar heating, which is used by many households to warm the house and the water they use.
There are four categories of PV businesses. The first part is manufacturing of basic elements such as silicon wafers, which is dominated by American and Japanese firms. This is basically a similar but less complicated work than making semiconductor chips, so Korean semiconductor firms such as LG Siltron and Samsung Electronics can fast catch up, Park says.
The second part is manufacturing of the solar module packages. According to the Samsung Economic Research Institute, it is by far the most important, profitable and protected part of solar generation. Japan's Sharp and Germany's Q-Cells are dominant players here, and they are tightly controlling the supply, producing a bottleneck effect.
The third part is the building of solar farms with the modules, which is mostly done by local companies such as LG CNS. In solar projects, the land price only accounts for 10 percent of the total budget since they are mostly built on unused and remote areas such as closed schools in rural towns and deserted salt farms, Park says.
The last part is to actually run the plant and sell the produced electricity to utility companies. LG Solar Energy was born to do this job.
External Factors
Solar energy is still enormously expensive than more traditional types of electricity produced from coal, oil, natural gas, uranium and even wind. Many view that it cannot stay afloat without generous subsidies from the government.
In South Korea, which aims to raise the portion of new energy to 5 percent in its total energy supply by 2011, the Korea Electric Power Corporation (KEPCO) is buying back the electricity made in solar farms for 677 won per kilowatt ― nine times the price of ordinary electricity. The so-called feed-in-tariff will be inevitably reduced in the future, but the question is when and how much.
``It is quite surprising that the project in Korea has been moving forward in the face of a possible cut in feed-in-tariff,'' said Lia Choi, an analyst for New Energy Finance, a London-based research firm. ``As we understand, the feed-in-tariff is set to fall under 500 won, which many industry players think would wreak havoc on the market.''
Another critical issue for the growth of LG's solar business is the capacity limit for the government subsidy. Currently, the government promised to provide its subsidy for the first 100 megawatts of solar-generated electricity. About 20 percent of the quota was filled by the end of 2006, and Park estimates the rest will quickly fill up by next fall unless the government raises its quota.
Even by today's standards, solar generation is not a lucrative business. According to government statistics, building a 1 kwp (kilowatt at peak time) unit costs between 4.5 million won to 6.5 million won. But one unit can only produce about 800,000 won worth of electricity every year. Furthermore, the profit is expected to go down gradually as the government lowers its buy-back price because of financial pressure ― providing subsidies to 100 megawatts of electricity needs around 1.5 trillion won from the government, Park says.
Other Opportunities
Since the outlook of the solar market is so unclear, diversifying its business portfolio has been a crucial mission for LG. So Park's Strategic Business Development Division carries out wind and fuel-cell generation projects.
Wind is a more cost-efficient source of energy than sunlight, though it is hard to find good locations and to earn consent from residents and local governments. Producing bio fuels from plants and crops is another opportunity, he says.
Another unique and sure-footed approach is being made by LG Chem. The chemicals company specializes in making glass and tiles exterior finishing materials for buildings. Its new business item is to attach solar panels to coated glass panels and place them on the outer wall of buildings as a built-in wall-generator.
The technique is called building-integrated photovoltaic (BIPV). As a first step, the company is building a 5 billion won BIPV system in a retail complex in Songpa, southeastern Seoul, which is to start operation next month.
Still, LG Chem is not very ambitious about this solar business because the BIPV is a government-oriented business, too. The Songpa BIPV building is designed to produce 300 megawatts of electricity every year. This is worth only 18 million won at today's electricity price, or 0.36 percent of the building cost.
``Solar projects are not aimed for the money. It is our commitment to building eco-friendly buildings,'' said a company spokeswoman.
But she didn't forget to tell that the BIPV market will nevertheless grow to 150 billion won over the next three years, because newly constructed public buildings are obliged to assign 5 percent of their budget to renewable energy facilities. There again, the government rules everything about the sun. And LG is the first to take the chance.
indizio@koreatimes.co.kr
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'600만명 학살 지휘' 잔인한 인물의 뒷얘기 공개
