Increased ESS Adoption Raises Long-Term Cost Concerns for Power Buyers

The expansion of renewable energy and the increasing adoption of energy storage systems (ESS) are expected to accumulate long-term settlement burdens for power buyers, including Korea Electric Power Corporation (KEPCO). As the contract capacity settlement fund paid to ESS operators over 15 years is reflected in the purchase power cost, experts argue that government support and market revenue expansion are necessary to alleviate consumer burdens.

On September 8, data submitted by the office of lawmaker Koo Ja-geun from the National Assembly's Industry, Trade, and Energy Committee revealed that a total of 1196 megawatts (MW) of ESS has been selected through the central contract market. In 2023, 68 MW was selected in the Jeju region, followed by an additional 563 MW and 565 MW from the first and second bids in 2025, respectively. The total storage capacity amounts to 7040 megawatt-hours (MWh).

The central contract market for ESS operates by selecting operators through competitive bidding conducted by the power exchange. Once selected, operators receive contract capacity settlement funds based on the contract price for 15 years after commencing commercial operations. This system supports ESS operators in recovering their initial large investments, which are difficult to secure stable profits from the existing power market alone.

All 68 MW of ESS selected in Jeju in 2023 have begun commercial operations. The Jeju Hallim BESS 10 MW started operating on December 12, 2022, while the Bukchon BESS 35 MW and Namjeju BESS 23 MW commenced operations on January 22 and March 20 of this year, respectively. Consequently, the payment of contract capacity settlement funds for these projects has begun sequentially.

ESS stores electricity during periods of low demand or high renewable energy generation and discharges it during peak demand times. As the share of solar and wind energy, which varies with weather conditions, increases, the role of ESS in stabilizing power supply and grid operations becomes more critical.

As a result, the volume of ESS adoption is expected to continue rising. The 11th Basic Plan for Power Supply and Demand forecasts a need for a total of 2288 MW of storage systems by 2029, including 2100 MW on the mainland and 188 MW in Jeju.

The challenge is that each time a new ESS is added, the settlement funds that power buyers must bear for 15 years also increase. New settlements for additional projects begin before existing ones are completed, leading to a prolonged overlap in cost burdens.

The contract capacity settlement fund is shared among power buyers, including KEPCO, in proportion to the amount of electricity purchased. The settlement funds paid by KEPCO are included in the purchase power cost. Concerns are growing that the increased costs associated with the expansion of ESS could raise electricity supply costs, leading to upward pressure on electricity rates in the medium to long term.

Experts suggest that while maintaining the principle of cost burden on power buyers, government support should be implemented alongside market revenue expansion to reduce costs passed on to consumers. Since the benefits of grid stabilization ultimately accrue to end consumers, some cost burden on power buyers and consumers is unavoidable. However, given the high initial costs of ESS, it is necessary for the government to share some of the expenses.

Park Jong-bae, a professor at Konkuk University’s Department of Electrical and Electronic Engineering, stated, "Ultimately, it is correct for power buyers to bear the costs since consumers benefit from ESS. However, since ESS prices are still high, government financial support can help reduce the burden on consumers' electricity bills."

There are also discussions about improving the power market system to allow ESS operators to secure revenue beyond long-term contracts. If price differential trading becomes active, where electricity is stored when prices are low and sold when prices are high, ESS operators could secure revenue in the market, thereby reducing costs passed on to consumers.

Professor Park noted, "In countries like the United States, ESS operators secure revenue by charging when prices are low and selling when prices are high. This way, as the income of ESS operators increases, not all costs are additionally passed on to consumers' electricity bills."

In the long term, there are calls to expand private participation and competition rather than relying solely on the central contract market to encourage cost reduction and technological development.

Professor Kang Cheon-gu from Inha University’s Graduate School of Manufacturing Innovation emphasized, "As the expansion of renewable energy continues, the adoption of ESS will inevitably increase. Instead of concentrating costs on power buyers like KEPCO, the market should be broadly opened to the private sector to promote competition and technological development."