What does South Korea’s ‘green fuel’ LNG move signal?

South Korea recently and controversially included LNG in the energy transition sector of its Korean Green Taxonomy.

South Korea’s controversial decision to include liquefied natural gas (LNG) in the energy transition sector of its Korean Green Taxonomy has led many to question what this will mean both for its energy sector and for its emissions reductions targets.

Significantly, the latest ruling will support the continued flow of private and public funding into LNG-to-power projects that will be able to qualify for green financing or tax incentives. And the news offers a positive signal for investors in LNG supply projects as South Korea remains one of the world’s largest LNG importers.

South Korea’s 2050 planned net zero target signals a significant transition to hydrogen and ammonia in the power mix, however analysts do not expect much commercial progress in these areas over the coming decade or so.

Xi Nan, vice president and gas markets analyst at the consultancy Rystad Energy, told Gas Outlook that “given the goal of eliminating coal-fired power by 2050 and the limited potential of renewables, we think LNG will continue playing a key role.”

Still, the decision to include LNG as a ‘green fuel’, announced in late December, sparked some controversy, especially as it came just after President Moon Jae-In pledged to reduce South Korea’s greenhouse gas emissions by 40% by 2030, from 2018 levels.

Nevertheless, the decision reflects more a reiteration of what the current administration has been advocating over the past several years, Daine Loh, Asia-focused infrastructure, power, and renewables analyst at Fitch Solutions, told Gas Outlook.

Loh views this as progress for the energy transition as the shift away from coal – and even towards gas – will cut total carbon emissions from the power sector.

Environmentalists have criticized the move, as they said that beyond the carbon emitted from final consumption, LNG also releases significant amounts of greenhouse gases during processes, such as extraction, processing, and transportation. However, “South Korea also faces near-term practical challenges without coal and gas, such as ensuring continued energy security amid the transition process,” cautioned Loh.

South Korea was the eighth-largest carbon emitter in the world in 2020 and received only 5% of its electricity from renewable sources that year. Therefore, it’s no surprise that policymakers believe LNG is a crucial transition fuel for the South Korea economy, which is heavily-dependent on coal.

Transitioning from coal to gas

The inclusion of gas in the green taxonomy will lead to a build-out of many new gas-fired power plants, particularly as many ageing coal-fired power plants are expected to retire and be replaced with gas over the coming decade.

Fitch Solutions forecasts that coal and gas will make up 30.1% and 30.0% of the power mix respectively by 2031, from an estimated 36.7% and 26.7% in 2021.

The consultancy stressed that “while we also forecast relatively strong growth for South Korea’s non-hydro renewables sector, with both capacity and generation more than doubling by 2031, alongside new energy types such as hydrogen/ammonia, these will be largely insufficient to offset its existing thermal and nuclear dependence.”

South Korea’s main strategy to transition away from coal focuses on boosting the use of LNG as the current Moon administration remains anti-nuclear.

This strategy has proved controversial and politically-divisive as many groups believe that nuclear power is also necessary to help South Korea hit its net zero goal, said Loh.

Loh expects nuclear power to play a key role alongside gas in the energy transition, but its role will be determined by the next administration, due to be elected next month, and their attitude towards nuclear.

A key risk to note is that South Korea’s energy policies and targets have differed materially each time a new administration comes to power, warned Fitch Solutions. Leading candidates running for the upcoming presidential election also differ on their energy-related pledges at present.

Crucially, energy analysts believe gas will remain the main fuel of choice to decarbonise South Korea’s economy over the coming years – whoever wins the elections.

“South Korea’s energy policy direction will likely remain in flux, particularly around the nuclear question, which continues to be politically-divided across South Korea. At present, President Moon’s focus is to reduce reliance on coal and nuclear in favour of gas and renewables, but we have remained cautious over the long-term viability of Moon’s energy plan, given South Korea’s exposure to global energy price fluctuations, alongside the burden of rising import costs and energy security concerns,” said Loh.

“As such, we are seeing increasing pressure around the continued need for nuclear, which might be reintroduced in a new administration,” she added.

South Korea unveiled its 9th Basic Plan for Long-term Electricity Supply in December 2020. The plan is released every two to four years by the Ministry of Trade, Industry and Energy and serves as the roadmap for South Korea’s power industry.

The plan forecasts a rise in the share of new and renewable energy generation – from 7.4% now then rising to 20% in 2030 and 30-35% in 2040. As the nation plans to boost its share of renewables, it expects to cut its reliance on nuclear and has banned new coal-fired power development.

The plan also eventually envisages converting LNG-fired power plants to carbon-free plants fuelled by hydrogen. But the idea is still in the very early stages and is not likely to happen in the next decade, said Loh.

Crucially, the non-hydro renewables sector, particularly for offshore wind, will generate the largest number of opportunities within the South Korean power sector, given a strong focus and ambitious targets set by the government, added Loh.

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