Korea's photovoltaic system industry 'suffocates small players'

South Korean President Moon Jae-in visits a floating photovoltaic system plant in Gunsan, North Jeolla Province, in October 2018. The plant is part of the country's plan to turn the Saemangeum estuarine tidal flat into a renewable energy complex. Yonhap

By Ko Dong-hwan

Small- and medium-sized players in Korea's photovoltaic system (solar power) industry are experiencing hard times in the face of competition from large firms and plummeting profitability, leaving their outlook grim.

The problem affects over 43,000 small photovoltaic system operators with capacity under 100kW (kilowatts) and registered under the country's Renewable Portfolio Standards (RPS).

Introduced in 2012, the RPS mandates power distributors with capacity over 500MW (megawatts) to provide a minimum proportion of their power using renewable energy resources.

Under the regulation, the country's 22 major power distributors this year must provide 7 percent of their output from these resources ― which is equivalent to 31,402,000 RECs (renewable energy certificates). The distributors must purchase their mandatory RPS certificates from power producers that use renewable resources.

The industry's ecology has kept working against small players despite their significant share of the infrastructure in Korea. They account for 81 percent of the country's entire RPS-registered photovoltaic system units and 35 percent of the industry's overall power output ― 3,264MW.

Despite their significance, only large private firms and state enterprises are being embraced in the expansion of system projects. Examples include those planned in Yeongam and Saemangeum in the Jeolla provinces ― with a capacity of 1.13GW (gigawatts) and 1.64GW, respectively ― as part of the Ministry of Trade, Industry and Energy's 4.7 trillion won ($3.9 billion) project announced earlier this year.

The problem has raised concerns among many small players and the Korea Solar Energy Development Association (KOSEDA) that advocates for their rights.

"We are not sure whether the central government wants to involve just large firms in realizing their plan to have 20 percent of the national energy pool based on renewable resources by 2030 [known as "Plan 3020"], or also include small- to medium-size companies for mutual growth," KOSEDA President Hong Ki-woong told The Korea Times.

"I asked officials from the energy ministry to clarify the government's position and they acknowledged our grassroots firms' pioneering roles in the industry's early days. But although they said the ministry is considering mutual growth, we haven't seen any change yet. The government must promise that a large-scale photovoltaic system expansion project guarantees 30 percent of its workload to minor operators and developers."

An 8MW photovoltaic system (solar power) farm over a 69,000-square-meter site was completed in Jeongseon County, Gangwon Province, in June. The 28.7 billion won ($23.9 million) project included E1, S-Energy, LS Electric and Samsung SDI. Korea Times file

Yoon In-taek, who analyzed the country's photovoltaic system industry and forecast an REC price in his book, said that as businesses get bigger, monopolization of the market by large and state firms is becoming "more visible" and minor firms' market share is expected to be "extremely limited."

The government's 2019 plan for the Saemangeum land photovoltaic system construction project practically accepted only large firms and public enterprises as participants, according to its eligibility conditions.

"We need a new business model where minor photovoltaic system developers, local residents, large firms and public firms can mutually participate," Yoon said.

He proposed that minor players receive a certain share of the work, alongside larger participants in a project, instead of becoming subcontractors.

The activities of small developers also hit a snag with the country's licensing policies as they lack coherence and often do not get passed by regional authorities.

"Even with city governments' licensing approval, in many cases development activities have been blocked by district offices," Lee Kyu, president of a solar power cooperative for Seoul residents, told The Korea Times.

The group owns three photovoltaic power plants in the city and, from 2014, has built 14,500 small photovoltaic system units on the roofs of public offices, schools and households in Seoul.

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In 2019, the cooperative received a 10-year power generation business license from the Seoul city government for a solar panel installation project that utilizes a public parking zone next to Suseo subway station in Gangnam District.

But the Gangnam office, according to Lee, "deliberately delayed approving the project" because of "reported complaints" from local residents. The cooperative filed an administrative litigation suit against the authorities of Gangnam ― the largest energy consumer of Seoul's 25 districts in 2018 with 4,669GWh (gigawatt hours).

The government's lowering of the weighting for photovoltaic system units built in forest lands from 1.2-0.7 to 0.7 in 2018 aroused the ire of small system operators and developers who took the brunt of the measure through plunging REC prices. Courtesy of Naver blog

REC's downfall

But the biggest problem behind the small players' predicament is the ravaged market value of the RECs that has smashed their profitability.

When the country's spot market for RECs kicked off in 2017, the initial value started at 118,874 won. But as the market's supply-and-demand balance went out of control early the following year, the value kept plunging. In March this year, the average REC trade value was 29,956 won, down 75 percent over three years.

The main reason behind the crash was oversupply. During 2012-19, annual demand increased by 1,057,846 RECs but supply was 2.73 times this. The gap kept widening, reducing the certificates' value. In November 2018, the accumulated supply of RECs surpassed that of demand.

Because of the reduced value, more people rushed to sell RECs. In November 2017, there were 130 times more certificates sold than purchased.

"The broken chain of supply and demand clearly derived from the country's erroneous policies," Hong said. He explained that in the current REC market at the Korea Power Exchange, the certificates' value can be influenced to fall by how the country's major power distributors purchase and trade them. He said it was urgent for the market be made more transparent.

"So many small photovoltaic system operators and developers have grown suspicious and wondered whether the central government has a shady deal with the power distributors to manipulate the REC value in their favor," Hong said. "They mistrust and condemn the government because they think the administration victimized its citizens who had believed in Plan 3020 and invested in it."

The value plunge particularly affected minor players because many took out mortgages to prepare seed money for their photovoltaic system units and are now under pressure to repay the interest.

The problem looms larger for those who were left out of government subsidy programs that cushion low REC values, such as the Korea Energy Agency's long-term fixed-price contract bidding (held twice a year) and the Seoul-type feed-in tariff.

"The recent long-term fixed-price contract bidding for first half of this year (for the pool of 1,200MW) had a one-to-4.89 competition rate and for those who dropped out of the bidding and were left with the only option to trade at the spot market with a low REC value, it takes at least 14 years to pay back their seed money," Hong said.

"Is this really the business the government had originally recommended to all? For now, the contract bidding pool must be expanded to 2,000MW for the second half of this year."

Yoon said: "The REC value plunge delivered a stronger blow to minor players than to larger players with 1MW-plus photovoltaic systems, because the former took heavier investment burdens. They now want to stop selling the certificates and wait for the value to rebound. But there has seldom been an upward momentum in this market."

Korea Solar Energy Development Association president Hong Ki-woong speaks at the National Assembly, Feb. 13, to raise awareness of how the country's photovoltaic system industry is putting small operators and developers at risk. Courtesy of Korea Solar Energy Development Association

The REC value also plunged in 2018 after the government lowered the weighting for photovoltaic system units built on forest land from 1.2-0.7 to 0.7. The adjustment was to minimize side effects such as excessive development and clashes with local interests.

But the measure hurt the REC value and directly affected profitability, which took the biggest toll on small players.

Yoon said the reduced REC value slashed the average annual profit for operators of 100kW photovoltaic systems by 37 percent; 27 percent for 500kW systems; and 22 percent for 1MW systems. Return on investment dropped the most for 100kW systems by 17 percent compared to 11 percent for 500kW systems and 9 percent for 1MW systems.

"As a result of the weighting adjustment, building a photovoltaic system unit on a small scale became realistically meaningless," Yoon said.

To stabilize the REC value, the ministry, among others, promised to lower the weighting of certificates from power plants burning a coal-biomass mix from 1.0 to 0.5, according to Hong.

Amid the oversupply in the REC market, most of the certificates purchased by the major power distributors were from power producers using bio-energy (35 percent), followed by photovoltaic systems (26 percent). Among the bio-energy resources, 53 percent came from burning environmentally harmful coal and wooden pallets.

"While small players are suffering from the plunged REC value, major power distributors are taking advantage of biomass plants to fulfill more than half of their RPS quotas because of the resource's economic efficiency," Yoon said. "It's truly regretful."