Increasing ESS Costs Raise Concerns Over Electricity Prices in South Korea

As the adoption of energy storage systems (ESS) increases alongside the expansion of renewable energy, the long-term settlement burden on power purchasers, including Korea Electric Power Corporation (KEPCO), is expected to accumulate. The portion of the contract capacity settlement fund paid to ESS operators over 15 years will be reflected in the purchase power cost, prompting calls for government support and market revenue expansion 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 Jeju, followed by 563 MW and 565 MW in the first and second rounds of bidding 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, with selected operators receiving contract capacity settlement funds based on contract prices 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, payments for the contract capacity settlement fund for these projects have 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 installations is expected to continue to rise. The 11th Basic Plan for Power Supply and Demand forecasts a need for a total of 2288 MW of storage systems, including 2100 MW on the mainland and 188 MW in Jeju, by 2029.

The challenge is that each time a new ESS is added, the settlement funds that power purchasers 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 purchasers, 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 prices in the medium to long term.

Experts suggest maintaining the principle of burden-sharing among power purchasers while also providing government support and expanding market revenues to reduce costs passed on to consumers. Since the benefits of grid stabilization ultimately accrue to end consumers, it is inevitable that power purchasers and consumers share the cost burden. However, given the high initial costs of ESS, there is a need for the government to subsidize part of these expenses to lessen the burden on consumers.

Professor Park Jong-bae from Konkuk University stated, "Ultimately, it is correct in principle for power purchasers to bear the costs since consumers benefit from ESS. However, since ESS prices are still high, government financial support can help reduce consumers' electricity bill burdens."

There are also discussions about improving the power market system to allow ESS operators to secure additional 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 ESS operators' income increases, not all costs are additionally passed on to consumer 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 emphasized, "As the expansion of renewable energy continues, the deployment of ESS will inevitably increase. Instead of concentrating costs on power purchasers like KEPCO, the market should be broadly opened to the private sector to promote competition and technological development."