Strategy for Grid Innovation in the UK to Realize a Renewable Energy-Centric System

EXECUTIVE SUMMARY • This issue brief aims to draw policy implications for the power grid of Korea by examining the case of grid innovation in the United Kingdom (UK hereafter), which has successfully achieved decarbonization in the power sector by establishing a renewable energy-centric power grid despite the constraints of being an island nation. • As the role of conventional power plants in ensuring power system stability decreases with the decarbonization of the power sector, additional means of ensuring power system stability are necessary. In the UK, the required amount of system stability control resources is analyzed based on future scenarios. These resources are secured cost-effectively through a control resource auction system. • Additionally, the UK develops optimal grid construction plans that respond to future uncertainty by conducting annual economic evaluations based on scenarios. Most decision-making processes are transparently disclosed through reports, publicly discussed, and creative solutions are presented based on the disclosed information. On the other hand, Korea formulates basic power supply plans and transmission and transformation equipment plans based on a deterministic method that considers only one scenario, and related information is not disclosed. It is desirable to avoid deterministic planning to deal with future uncertainty and to consider a wide range of alternatives through transparent information disclosure. • The UK transmits surplus renewable energy over long distances to demand sites through offshore HVDC, despite the high cost of large-scale offshore HVDC construction. This approach enables the UK to avoid grid constraint costs and social conflicts associated with onshore transmission line construction while achieving decarbonization of the power sector. Korea should also actively consider the implementation of offshore HVDC.

If you ask about the future of South Korea, “Look up at the roof”

HIGHLIGHTS • NEXT Group's own analysis of rooftop solar potential totaled 42.2 GW, providing more than 8% of the 2030 electricity generation (621.8 TWh) in the 10th Basic Plan for Electricity Supply and Demand, resulting in a greenhouse gas reduction of 15.2 MtCO2. • Geographic Information System (GIS) estimates the combined rooftop solar potential of residential and industrial buildings is at least 42.2 GW, but given that the analysis in this issue brief is based on conservative assumptions, the actual potential could be more than double that. • Due to the recent decrease in the installation cost of solar power generation facilities and the increase in electricity prices, it is possible to recover the investment cost in as little as 3 years, depending on whether the subsidy is based on housing support (30kW) or building support (200kW). 

Revisiting Two Myths about Carbon Pricing

EXECUTIVE SUMMARY  • The two most common misunderstandings about carbon pricing are that it hinders economic growth and kills jobs. • However, if firms’ green-technology adoption and endogenous firm entry are included in an economic model, a rise in carbon prices is only accompanied by a     gradual increase in GDP and consumption and a negligible increase in the unemployment rate in the short run. In the long run, the adjustment to higher carbon   prices generates mild positive effects on consumption and GDP, a marginal increase in unemployment and labor force participation rates, and an expansion in   the proportion of firms that use green technologies.  • Firms’ ability to change production technologies in response to increasing carbon prices plays a fundamental role in shaping the positive macroeconomic   effects of the prices on GDP and consumption. Therefore, to achieve the positive macroeconomic effect of carbon prices while operating carbon pricing   instruments (CPIs), 1) CPIs should be designed properly so that carbon prices serve as a clear signal for the technology adoption of firms, and 2) governments   should come up with policy and financial supports to recycle the carbon-related revenues for expediting firms’ green technology adoption.  • To this end, the current emission trading systems (ETSs) should be improved and supplemented to establish actual carbon prices and provide a precise price   signal throughout the economy. In addition, the Korean government should create a virtuous circle by recycling the revenues collected from the ETS to promote   effective carbon-neutral projects of the participating firms, which in turn promotes the firm’s participation in the ETS.※ Acknowledgement: This research was supported by the British Embassy Seoul. 

How to Improve Domestic Offshore Wind Local Content Requirement (LCR) Scheme

HIGHLIGHTS • The current Local Content Requirement (LCR) scheme for offshore wind exists within the REC weighting and tendering auction systems for wind fixed-price contracts.   • The LCR scheme under the REC weighting system is complicated but ineffective in incentivizing core technology development and investment, and the LCR scheme under the tendering auction system for wind power fixed price contracts has no specific criteria.  • The current system needs to be refined to incentivize development and investment in core offshore wind technologies, including increasing the threshold for awarding additional LCR-related RECs, adjusting the threshold for each component of the LCR calculation, and quantifying the domestic economic and supply chain contribution effects of tendering auction for wind fixed-price contracts based on the LCR ratio or fundraising contribution.  • Increasing the share of offshore wind in national renewable energy targets and addressing permitting and community acceptance issues should be done simultaneously to ensure that the LCR scheme is a step forward in the offshore wind supply chain.    

Greenhouse Gas Emission Certification Criteria for the Introduction of a Clean Hydrogen Certification System

  HIGHLIGHTS A certification rating system for clean hydrogen will be implemented starting in 2024; therefore, it is necessary to prepare the certification criteria. A clean   hydrogen certification system is crucial not only to achieve carbon neutrality, but also to establish an economic ecosystem centered on clean hydrogen and   contribute to the development of the national economy by fostering the hydrogen industry. In order to achieve the goal of a clean hydrogen certification system,   this issue brief proposes the following certification criteria:  1. Like the Renewable Portfolio Standard, the clean hydrogen certification system should be adjusted every 3 years and consider the emission factors of certified   clean hydrogen (i.e., the level of clean hydrogen technology) and national greenhouse gas (GHG).   2. The certification criterion for 2024, the first year of the clean hydrogen certification system, should be set to 41.5 g MJ-1 (5.0kg CO2-e kgH2-1), which is the   expected national GHG emission factor in 2026.  3. The clean hydrogen certification system boundary should be set to “cradle to gate” or “well to gate,” analogous to international cases including the European   Union, Japan, and China.   4. Certification criteria should be established for international trade to include imported hydrogen in the clean hydrogen certification system.  1. BackgroundThe clean hydrogen certification rating system (hereinafter referred to as clean hydrogen certification system) specified in the Hydrogen Economy Promotion and Hydrogen Safety Management Act (hereinafter referred to as the Hydrogen Act) , amended in June 2022, is linked to the mandatory sales and use of clean hydrogen. It is expected to have a significant impact on key national industries that seek to use hydrogen to achieve carbon neutrality in the future, such as electricity and steel, as well as on hydrogen-related industries. In South Korea, progress on the clean hydrogen certification system was shared at the Clean Hydrogen Trade Initiative Forum in 2022 . Countries and polities that have disclosed clean hydrogen certification systems, including the European Union (EU), have considered the social and economic importance of such systems, and they have gone through the process of encouraging stakeholder participation and accepting their opinions from the start. Hence, to promote discussion among stakeholders, this issue brief presents directions for establishing clean hydrogen certification criteria, which are the core of the clean hydrogen certification system, from the perspective of carbon neutrality. 2. Purposes of the Clean Hydrogen Certification System Based on the reasons for the enactment and amendment of the Hydrogen Act, the purposes of the clean hydrogen certification system are to contribute to carbon neutrality using clean hydrogen and to build an economic ecosystem centered on clean hydrogen. Therefore, the emission criteria and system boundary of the clean hydrogen certification system should satisfy all three of the following criteria:  1.Contribution to carbon neutrality using clean hydrogen. 2.Contribution to building an economic ecosystem centered on clean hydrogen. 3.Implementation of a hydrogen economy and promotion of national economic development by fostering the hydrogen industry.    3. Emission Criteria for Clean Hydrogen CertificationIn order for the clean hydrogen certification system to contribute to a primary goal of carbon neutrality, the following conditions must be satisfied. First, the clean hydrogen certification criteria must be lower than the national greenhouse gas (GHG) emission factor , and the criteria must be strengthened according to a decrease in total national GHG emissions. In addition, if a certain percentage (e.g., 90%) of the upper portion of the emission factor is set as the minimum certification criterion for clean hydrogen certified within the last certification period, competition among clean hydrogen technologies may encourage technology development and rapid emission reduction. To satisfy the abovementioned conditions, the clean hydrogen certification system should minimize policy uncertainty by sharing step-by-step reinforcement criteria and long-term plans and should be designed in a technology-neutral way to encourage the introduction of new technologies. Therefore, we propose to adjust the clean hydrogen certification criteria every 3 years, as the Renewable Portfolio Standard does, and decide by considering the emission factor of certified clean hydrogen (i.e., level of clean hydrogen technology) and the national GHG emission factor. The emission factor criterion of the clean hydrogen certification system would be 56.5g MJ-1, the quotient of the total GHG emission (727.7Mt CO2e) in 2018, the base year of carbon neutrality goal, divided by the total energy supply (307Mtoe) in the same year. The GHG emission factor criterion for 2030 is 34g MJ-1, which is 60% of the 2018 value, according to the GHG reduction goal (40% reduction by 2030 compared to 2018). In 2050, by setting 0g MJ-1, each year’s emission factor criterion may be obtained by connecting each value with a straight line in order. Based on this, the certification criterion at the time of the clean hydrogen certification system’s introduction in 2024 can be set as 41.5g MJ-1 (5.0kg CO2-e kgH2-1), which is the expected national GHG emission factor in 2026. This value is about 27% lower than the emission factor of the base year (2018) and about 57% lower than the GHG emission factor of off-site hydrogen extraction . Although the certification criterion at the time of introduction is high compared to the EU’s CertifHy GO , the clean hydrogen certification criterion adjustment in 2027, three years later, will be 35.8 g MJ-1 or lower based on the national GHG emission factor in 2029, the last year of the certification validity period. A lower certification criterion may be determined depending on the level of clean hydrogen production technology.  If the certification criteria are set as in Figure 1, position ①, the clean hydrogen certification criteria become higher than the national GHG emission factor after a certain point, such that the use of clean hydrogen increases GHG emissions. In contrast, if the certification criteria are strengthened as in position ②, there is an advantage in terms of reducing GHG emissions, but policy flexibility may be reduced.  4. System Boundary for Clean Hydrogen CertificationThe clean hydrogen certification system takes the form of a “guarantee of origin”, which is proposed to promote the sales and use of clean hydrogen by hydrogen fuel supply facility operators based on GHG emission information at the production and import stages. Therefore, we propose that the system boundary of clean hydrogen certification system should be “cradle to gate” or “well to gate ” (Figure 2). This system boundary not only meets the goal of a guarantee of origin but is advantageous for securing compatibility in international trade, since polities such as the EU, Japan, and China have adopted it (Korea Energy Economics Institute, 2021). Moreover, since the production and distribution of hydrogen are normally separated in South Korea, calculating emissions within the decision-making range of producers would satisfy the goal of a guarantee of origin. Since South Korea is expected to be highly dependent on imported hydrogen, certification criteria for emissions should be prepared in accordance with the criteria for hydrogen produced abroad. Unlike domestically produced hydrogen, whose system boundary is distribution from production plants, the system boundary of imported hydrogen should be the stage immediately before import into the domestic distribution network, assuming that the importers are producers. In order to expand the system boundary to imported hydrogen, international certification criteria for emissions are a prerequisite to trading clean hydrogen internationally. Currently, both the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE, 2022), in which about 20 polities including the EU, USA, Australia, and Japan as well as South Korea participate, and the Clean Hydrogen Supply Chain Initiative centered on South Korea are discussing this issue. Therefore, by establishing a domesqyU6bbDsWwotic hydrogen certification rating system that includes imported hydrogen, efforts are necessary to lead discussions that reflect international trade standards and to secure an advantageous position in the global supply chain in the future. Until the international agreement is prepared, the emission certification criteria can be calculated based on the 2019 Refinement to the 2006 IPCC Guidelines for National Greenhouse Gas Inventories (IPCC, 2019) or the National Inventory Submissions (UNFCCC, 2022).  5. Conclusion: Clean Hydrogen Certification Criteria Should Aim for Carbon NeutralityA properly designed clean hydrogen certification system will contribute to carbon neutrality, as well as the growth of a hydrogen economy by establishing an economic ecosystem based on clean hydrogen. In particular, since the certification criteria of the clean hydrogen certification system inevitably influence how the hydrogen-related industry directs its facility investment and business, encouraging discussions among stakeholders on this topic is important. Therefore, based on the major goal of carbon neutrality using clean hydrogen and the goal of establishing a hydrogen-economy ecosystem centered on clean hydrogen, this issue brief has suggested initial clean hydrogen certification criteria (41.5g MJ-1), a long-term plan to strengthen certification criteria, and a way to establish the system boundary. We hope that this issue brief will help promote sound discussions among stakeholders about the clean hydrogen certification system and ensure the direction of a carbon-neutral hydrogen economy using clean hydrogen in the long run. 

Reasonable Separation Distance Regulations: A First Step Toward Achieving RE100

 HIGHLIGHTS • Despite the Ministry of Trade, Industry and Energy’s announcement of Guidelines for Location of Solar Power Generation Facilities, 57% of all basic local   governments have introduced separation distance regulations, and 83% of them have set a separation distance exceeding 100 m.     • An analysis of solar potential  resulting from changes by basic local governments nationwide to the separation distance of roads and residential areas has   shown that the current separation distance regulations limit nearly 80% of solar potential.   • In securing solar potential, separation distance regulations are a more significant constraint for roads than for residential areas.  • A detailed policy design suitable for each region is necessary because industry location, power plant site possession level, and urban density vary by region.  • Considering the current situation, in which the number of photovoltaic licenses is decreasing due to a lack of power plant sites, while many companies declare   RE100, improvements to solar power separation distance regulations should be implemented more quickly.   1. IntroductionAs solar power generation facilities have rapidly expanded in recent years, conflicts between residents and power generation companies in regions where power generation facilities are located have also increased. Hence, the administrative authority with jurisdiction has introduced solar power separation distance regulations into local governments’ ordinances for the purpose of preventing or resolving civil complaints from residents (Korea Energy Agency, 2022). In principle, the Guidelines for Location of Solar Power Generation Facilities (‘the guidelines’) announced by the Ministry of Trade, Industry and Energy (MOTIE) would prevent heads of local government from setting and applying separation distance standards for solar power generation facilities (Ministry of Trade, Industry and Energy, 2017). However, the guidelines are limited by being a non-legally binding recommendation. Since 2017, there has been a steady increase in basic local governments’ introduction of separation distance regulations, and currently, 129 (57%) of 226 total basic local governments implement such regulations. Among them, 105 basic local governments (82.0%) have separation distance regulations exceeding 100 m, which is suggested in the guidelines, 102 with 200 m or more, and 46 exceeding 400m, respectively. A few local governments, including Uljin-gun, Wando-gun¬, and Jangheung-gun, have road separation distance regulations reaching 1,000m.     Through the guidelines, MOTIE has already clarified that concerns about the harmful effects of solar power generation facilities, such as light reflection, electromagnetic waves, and harmful substances, are groundless. Nonetheless, it is often pointed out that land utilization is limited by an excessively conservative separation distance to accommodate citizens’ complaints. Meanwhile, as more companies join RE100, a global initiative to replace all power consumption with renewable energy, the demand for expanding renewable energy supply is increasing. For example, major global companies including Apple require the de-carbonization of their supply chains by 2030 , and this trend is expected to intensify. Therefore, now is the most important time to satisfy industry demand for renewable energy and strengthen international competitiveness through reasonable improvements in separation distance regulations. 2. Current Status of Solar Potential According to Separation Distance RegulationsThis issue brief analyzed solar potential according to separation distance regulations of roads and residential areas in basic local governments nationwide. For the analysis, global horizontal irradiation data was obtained from Global Solar Atlas . Using geographic information system (GIS) data, the analysis was conducted by applying regulations in the superior laws (Korea Energy Agency, 2020; Solutions for Our Climate, 2020) (Appendix 1) to each of the 226 basic local governments (Appendix 2). First, two cases were compared: 1) when applying each basic local government’s respective separation distance regulations for roads and residential areas and 2) when separation distance regulations were standardized to 0 m, 100 m (the distance suggested by the guidelines), and 300 m (the distance in 50% or more basic local governments’ separation distance regulations)  (Figure 2).  As shown in Figure 2, areas where solar power generation facilities may be installed are gradually increasing as the separation distance regulation is relaxed compared to current regulations. Compared to when there is no separation distance regulation, under current regulations only 22.7% of the installable area may be used, and the potential is less than half (Table 1). Lowering the current separation distance regulation to 100 m, as recommended by the guidelines, would secure an additional potential of 798 TWh. This figure exceeds the total power generation (602 TWh ) in 2021 and reaches 438 GW as installation capacity.   3. Securing Solar Potential through Relaxation of Separation Distance RegulationsNext, we investigated the change in solar potential that would be achieved by relaxing separation distance regulations for roads and residential areas, respectively. As shown in Figure 3, if the road separation distance regulation is relaxed to 0 m while maintaining the current residential area separation distance regulation, 524 TWh (approximately twice the current level) of additional solar potential may be secured (Figure 3, left). In contrast, in the opposite case (the residential area separation distance regulation is relaxed while maintaining the current road separation distance regulation), the additional solar potential that may be secured is only about 18% (104 TWh) of the current level (Figure 3, right). The reason is that residential buildings are often located near roads, while roads could be distant from residential areas. Accordingly, compared to when there is no regulation on separation distance, only 43% and 27% of solar potential may be utilized with the current residential area separation distance regulations and road separation distance regulations, respectively (Table 2). Therefore, if separation distances for both road and residential area cannot be lifted completely, the road separation distance regulation should be reduced to at least 100 m to expect meaningful changes.   Table 3 shows the division of the above results by regional local governments (Table 3). Compared to when there is no regulation of separation distance, the regional local government with the largest loss in potential under current separation distance regulations is Chungcheongnam-do, which may only utilize 25.6 TWh (8%) of the total 311.2 TWh. The separation distance regulations significantly limit land utilization, as less than 10% of the technically feasible area may be utilized. The technically feasible area is defined as the total land area that excludes areas where solar panels cannot be installed due to geographical and social considerations, such as agricultural development regions, ecological landscape preservation areas, and tidal flats (Appendix 1). In addition, regional local governments such as Jeju, Gyeongsangbuk-do, and Jeollanam-do may utilize less than 20% of solar potential due to separation distance regulations. Because many companies are located in Gyeongsangbuk-do, such as Pohang and Gumi National Industrial Complex, it is necessary to actively consider improving separation distance regulations in order to achieve RE100 for industries, minimize transmission costs, and prevent system congestion. Meanwhile, changes in potential by adjusting separation distance regulations would be insignificant at 0% for metropolitan governments such as Seoul, Busan, Gwangju, Daejeon, Ulsan, and Sejong, due to the high population density. As a result, in these regions, it would be more effective to design policies to install solar power generation facilities on building rooftops and parking lots.     Figure 4 shows solar potential that may be additionally secured under the current separation distance regulations, relaxation of regulations to 300 m, relaxation to 100 m, and no regulation, respectively, by each regional local government (Figure 4). If the separation distance regulation is relaxed to 100 m, which is defined as the maximum separation distance in the MOTIE guidelines, all regional local governments may secure potential beyond what is available under current regulations. One noticeable point is that since the current separation distance regulation of Gyeongsangbuk-do is too high, relaxing the regulation to 300 m makes it possible to secure 74% of the current potential. Therefore, these regions should review the relaxation of separation distance regulations more proactively.   4. Conclusion In the analysis of photovoltaic power potential according to current separation distance regulations in South Korea, it was determined that 1) only 22% of solar potential may be utilized compared to the baseline case of no regulation and 2) in securing solar potential, separation distance regulation is a more significant constraint for roads than for residential areas. Furthermore, because industry location, power plant site possession level, and urban density vary by region, it is necessary to design detailed policies suitable for each region. Considering the current situation in which the number of photovoltaics licenses is decreasing due to a lack of power plant sites while many companies declare RE100, improvements to solar power separation distance regulations should be implemented more quickly. There have been discussions for some time about improving solar power separation distance regulations, and a social consensus seems to have been reached. Since this brief has confirmed the solar potential that could be secured additionally after regulatory improvements, we hope that there is an immediate policy change.  

Carbon Contract for Difference (CCfD): A First Step for Domestic Discussions

HIGHLIGHTS • Studies have pointed out that low carbon prices and high price volatility in the emissions trading system (ETS) market may explain why commercialization remains challenging despite active research and development of low-carbon production methods. • In order to encourage companies to adopt low-carbon technologies, several European countries, including the Netherlands and Germany, have introduced or  are planning to introduce the carbon contract for difference (CCfD) • The CCfD is a long-term contract in which the government and companies agree on a strike price for a single project. If the carbon price in the market falls  below the strike price, the government will pay the difference. If the carbon price exceeds the strike price, companies will pay the difference to the government.  This creates a stable revenue flow structure that reduces uncertainty and lowers total and project funding costs. • To effectively introduce and operate the CCfD in Korea, the following elements should be considered in the system design: - Selection of candidate technologies to be supported and recruited - Determination of the CCfD strike price and fund allocation methods  - Determination of the CCfD support scale and budget procurement methods  0. Introduction National greenhouse gas (GHG) emissions in 2021 were tentatively counted at 680 million tons, a 3.0% decrease (21 million tons) compared to 2019[1]. The conversion sector contributed significantly to this decrease. Despite an increase in total power generation, GHG emissions from power and heat generation decreased by 27 million tons compared to 2019 due to a reduction in coal-fired power generation. However, the efforts of industries have not yet been statistically confirmed. GHG emissions related to energy in the steel and petrochemical industries increased by 1.1 million tons and 6.3 million tons, respectively, compared to 2019 due to product demand recovery and the expansion of domestic facilities. As the industrial sector is responsible for around 35% or more of national GHG emissions, Korean industries play a crucial role in achieving the Nationally Determined Contributions (NDC) and implementing carbon neutrality. In addition, political and economic risks, such as the introduction of the EU’s Carbon Border Adjustment Tax, could potentially harm the competitiveness of domestic carbon emission industries, which are heavily reliant on exports. Therefore, it is important for industries to start implementing low-carbonization as soon as possible. However, low-carbonization is accompanied by the development of low-carbon technology and large-scale investments, which present some challenges that cannot be overcome solely by companies' efforts.  Hence, to encourage companies to adopt low-carbon technologies, several European countries, including the Netherlands and Germany, have introduced or are planning to introduce the carbon contract for difference (CCfD). The Korean government also mentioned plans to review the introduction of carbon price incentives like CCfD in Germany in the “Vision and Strategy for a Large-Scale Conversion to Carbon-Neutral Industry” in December 2021. This issue brief summarizes discussions, operation status, and plans for the CCfD in Europe in order to enhance the understanding of the CCfD in the Korean context and provide insights into factors that need to be considered regarding its application to domestic industries 1. Concept and Background of CCfD As the urgency of the climate crisis becomes more widely recognized, research and development of low-carbon production methods is being actively pursued, but these efforts often do not lead to commercialization. This is due in part to the difficulty of getting projects beyond the pilot stage to overcome the “valley of death”[2], as well as low carbon prices and high price volatility in the emissions trading system (ETS) market. Additionally, reliability issues with the government and the fact that the investment period extends beyond the emission allocation period make it challenging to promote investment in low-carbon technology (Helm and Hepburn, 2005).To address these limitations and increase incentives for investing in low-carbon innovative technologies, the concepts of the carbon contract and the carbon contract for difference (CCfD) have been proposed. The carbon contract compensates for the cost of reducing carbon emissions, and was first proposed by Helm and Hepburn (2005). The CCfD, which was developed from the initial discussion by Richstein (2017) (Agora Industrie et al., 2022), is similar to the carbon contract in that it aims to increase incentives for companies to adopt innovative low-carbon technologies by compensating for the cost of emission reductions, but it is different in that it is directly linked to the ETS market[3].. The detailed mechanism of the CCfD is described in Box 1[4]. The CCfD is a long-term contract in which the government and companies agree on a strike price. If the carbon price in the market falls below the strike price, the government will pay the difference. If the carbon price exceeds the strike price, companies will pay the difference to the government. This creates a stable revenue flow structure that reduces uncertainty and lowers total and project funding costs. In addition, a decrease in funding costs lowers the required CO2 price level that the project requires (Richstein and Neuhoff, 2019).   2. International Operation Cases and PlansThe CCfD has been the subject of active discussion in Europe, as it is believed that it is difficult to achieve climate goals and induce a transition to low-carbon production methods through the current ETS alone. Therefore, there is a general consensus on the need to improve the ETS and provide additional support. As of July 2022, the Netherlands is the only country operating a CCfD-type system, called SDE++, which expands upon the existing CfD, SDE+, by adding low-carbon production technology items. In 2020, Germany announced plans to pilot a CCfD program for the steel and chemical industries in its National Hydrogen Strategy report[5]. In addition, the European Commission has suggested the possibility of operating an EU-level CCfD system by including it in the ETS amendment bill[6]. 2.1. SDE++ of the Netherlands[7]  2.1.1. System OverviewThe Netherlands has been operating the CfD-type SDE+ for renewable energy-based electricity generation technologies and expanded it to include various qualified technology items in the second half of 2020 through SDE++. As shown in Table 1, in addition to renewable energy-based electricity and heat generation, technologies such as industrial heat pumps, electric boilers, hybrid glass furnaces, carbon capture, utilization, and storage (CCUS), and hydrogen electrolysis were included. The requirements for each technology are also disclosed in brochures every year.   2.1.2. Method of Selecting CCfD Support: Strike Price Competitive Bidding and a First-Come-First-Served Basis SDE++ is operated through a competitive bidding process based on subsidy intensity and a strike price. The calculation formula for subsidy intensity is described in Box 2. Here, the long-term price refers to the price prediction for energy (electricity, heat) or emission rights. In other words, SDE++ is a technology-neutral system that supports technologies that are expected to receive a small amount of payment per unit.   At this time, a bidding process is conducted with upper limit sections for subsidy intensity (refer to Table 2), and projects are selected based on the bidding within the same section for each required upper limit for each technology on a first-come-first-served basis[8]. Additionally, since the budget is limited, only projects that fall within the total budget range are supported. Selected projects receive actual subsidies every year by multiplying the amount of energy generation or carbon dioxide reduction by the difference between the individual strike price and the market price. In other words, the actual subsidy for each year is determined by correcting sales at the price that the actual energy generation or carbon dioxide reduction is multiplied by the strike price. Here, sales include revenue from actual energy sales and emission rights sales, and the reduction in the amount of emission rights purchased.    An example is presented below (refer to Box 3). According to the SDE++ 2022 brochure, the maximum bidding amount in Phase 1 for a project that installs post-combustion equipment in an existing waste incineration plant and transports carbon dioxide in gas form is 114.7464 €/tCO2. In 2022, the corrected amount was determined to be 52.2510 €/tCO2. Therefore, if a company is selected for the maximum bidding amount for project A in this category, project A will receive a payment of 52.2510 €/tCO2 multiplied by the actual collection in 2022.   2.1.3. Operational Status In 2022, the total budget for the Netherlands’ SDE++ program was 13 billion euros, a significant increase from the 5 billion euros in 2021. In 2021, there were a total of 4,109 applications (totaling 12.1 billion euros) for the bidding process. Of these, solar power-related projects accounted for 3,915 cases (around 2.2 billion euros based on the application amount). Meanwhile, CCS projects accounted for the largest share of applications, at 6.1 billion euros. Based on this, Aurora Energy Research (2022) predicted that the entire budget for SDE++ in 2021 would be settled at 75 euros per ton. Since 2020, the SDE++ budget in the Netherlands has mainly been allocated to photovoltaics and CCS projects.    In July 2021, the European Commission suggested the possibility of operating an EU-level CCfD system by including it in the ETS amendment bill. This amendment bill was partially revised and passed by the European Parliament on June 22, 2022. Additionally, in May 2022, REPowerEU, a plan to reduce dependence on Russian fossil fuels, announced that existing hydrogen production methods using natural gas would be fully converted to renewable energy, and CCfD would be introduced in industries such as steel to convert to hydrogen-based production processes[10]. As of July 2022, a detailed operation plan has not been announced, so this issue brief summarizes the content mentioned in the bill and Impact Assessment Report of the European Commission, as well as the partially amended bill passed by the European Parliament[11].   2.2.1. European Commission (Draft) The amendment bill proposed by the European Commission emphasizes that CCfD is an important element for reducing emissions in industries by guaranteeing investors in climate-friendly innovative technologies a price that exceeds the amount derived from the current EU-ETS price level. It also suggests expanding the support scope of the Innovation Fund[12] to support projects through price-competitive bidding processes such as CCfD. If this is implemented, contracts will be concluded between producers and public institutions at the individual country or EU level, and the contracts will follow the formula described in Box 4.     2.2.2. European Parliament (Draft)The European Parliament specifies more detailed conditions for the introduction of CCfD than the European Commission. In addition to the draft proposed by the European Commission, the draft proposed by the European Parliament emphasizes that CCfD is an element that triggers GHG emission reduction in industries by scaling up new technologies. It also states that CCfD bidding should consider the principles of technology neutrality and geographic balance, as well as price competition. The existing Innovation Fund that supports CCfD has also been changed to the Climate Investment Fund. This fund supports innovation in technologies and processes that significantly contribute to the goals of decarbonization, zero pollution, and circularity in sectors covered by the EU-ETS bill. It aims to scale up technologies and processes that are no longer innovative but can contribute to achieving the 2030 climate goal because they have significant GHG reduction potential.    3. Design Options for Domestic Introduction3.1. Selection of Candidate Technologies to be Supported and RecruitedTo systematize and implement CCfD in Korea, it is first necessary to determine which technology groups to support. This is because, even though a technology-neutral system is pursued, technology items in a large frame are decided in advance and recruited, as seen in the case of Europe. The Netherlands’ SDE++ program started with CfD in the electricity industry, supported the dissemination of innovative technology in the electricity and heat generation sectors, and expanded to include CCUS. This is in line with the Dutch government's goal of early commercialization of CCS technology based on oil fields in the North Sea. Meanwhile, Germany sees CCfD as a strategy to expand hydrogen demand in the national hydrogen strategy and focuses on supporting the steel and chemical sectors. Therefore, the policy goals and context of CCfD introduction should be clear in order to set the technology candidates to be supported.  In Korea, no discussions on CCfD are being held beyond “supporting companies to induce decarbonization.” Ultimately, to effectively implement CCfD in Korea, it is important to set clear goals for the program and determine which technology groups to support. If the goal is to establish a domestic hydrogen economy like in Germany, technologies such as hydrogen reduction ironmaking, fuel cells, water electrolysis, and cement kilns using hydrogen may be suitable candidates for support. On the other hand, if the goal is to maintain international export competitiveness in the face of strengthening global carbon trade barriers, industries to be supported may be chosen based on their carbon intensity and export dependence.   It is also important to consider that the ultimate goal of CCfD operation is to achieve carbon neutrality by 2050, and therefore the program should support projects that contribute to this goal. McWilliams and Zachmann (2021) suggested that incremental emission reduction technologies through improvement of energy efficiency should be excluded from CCfD support, and technologies that can lead to production cost reduction due to a steep learning curve should be preferred first. Meanwhile, Climate Strategies et al. (2021) argued that the maximum emission criteria of each technology should be determined, and only projects that satisfy the criteria should be allowed to participate in the competition.   3.2. Determination of CCfD Strike Price and Fund Allocation Methods 3.2.1. Competitive BiddingThe main issues currently being discussed in the context of Europe are determining the strike price through an auction and selecting projects. The SDE++ system is a cost-effectiveness-oriented auction system, and the European Parliament’s ETS amendment bill also mentions that CCfD is a technology-neutral and price-competitive bidding system. However, the maturity of low-carbon technologies varies across industries, so it may not be efficient to have a single auction market for all areas covered by ETS. This is because, if the focus is only on cost-effectiveness, technologies with high reduction potential but relatively high costs may be excluded, which could ultimately delay the spread of innovative technologies with large expected ripple effects. In fact, it has been pointed out that after the inclusion of CCUS in SDE++, a large budget was allocated to CCS, which means that large-scale photovoltaics and wind power generation cannot secure enough SDE++ budget.    To address these issues, McWilliams and Zachmann (2020) suggest classifying bidding rounds according to technology maturity. Fewer bidding rounds can support the most efficient technologies at the time of bidding, while more bidding rounds can support a wider range of technologies. However, policymakers may not have complete prior information on technologies, so the classification of bidding rounds can be adjusted based on collected information on marginal abatement costs in the future. Meanwhile, Fabra and Montero (2020) propose an auction that provides minimum quotas for certain desired technologies, rather than classifying technologies in advance.  3.2.2. NegotiationIn general, auctions are a suitable way to induce price competition for standardized products and services. However, it is important to reduce re-negotiation risks for projects that have insufficient prior information due to technical, legal, and financial complexity. This is especially true if there are fewer expected bidders, as the advantage of competitive bidding is further diluted.Climate Strategies et al. (2021) warn that bidders’ opportunistic behaviors may violate the purpose of GHG emission reduction. One such behavior is the low-balling strategy, in which a bidder submits a very low price, but then incurs additional costs related to new technology performance (e.g., maintenance and failure rates) after being selected for support. This strategy is common in actual national infrastructure construction projects and can lead to significant extra costs and pressure on providers to deliver, due to the difficulty of re-bidding. The procurer (e.g., government) may then tolerate cost overruns and delays. Therefore, if this uncertainty cannot be reduced in advance, it may be reasonable to have detailed negotiations between the two parties beforehand, including determining an upper price limit. However, even with negotiations, there will still be inefficiency due to information asymmetry between contractors. One way to address this issue is to properly combine negotiation and competitive bidding, such as by determining candidates through negotiation first and then proceeding to bidding. Additionally, by using multiple contracts, the government can learn about low-carbon technology innovation and innovative technology providers can increase their experience. This may allow for a gradual reduction in the proportion of negotiation and an increase in the proportion of competitive bidding.  3.3. Determination of CCfD Support Scale and Budget Procurement PlanOnce technology candidates or industry candidates have been selected, it is necessary to determine the goal of GHG emission reduction through CCfD operation, which is linked to the budget scale. It is also necessary to determine where the budget will be procured, which is linked to the detailed goals and governance of CCfD operation. While SDE++ in the Netherlands is funded by the budget of the Ministry of Economic Affairs and Climate Policy, the EU plans to support CCfD with the ETS revenue fund from emission rights (currently known as the Innovation Fund and set to be renamed the Climate Investment Fund in the future) as outlined in the ETS amendment bill.As a result, when introducing CCfD in Korea, the budget of competent authorities such as the Ministry of Trade, Industry and Energy, the Ministry of Economy and Finance, and the Ministry of Environment, or revenue from emission rights could be used. However, if revenue from emission rights is used for the CCfD budget, it should be linked with K-ETS, as is the case in Europe. This is ultimately linked to the plan for free/paid allocations of emission rights, and there will be a need to gradually reduce free allocations and expand paid allocations in order to operate CCfD on a sufficient scale.   4. Conclusion: Discussions on the CCfD Introduction Suitable for Domestic Situations is NecessaryCCfD can serve as an effective policy basis for industrial efforts to decarbonize because it helps to improve the feasibility and expand the dissemination of new technologies by providing a stable revenue stream. However, because a large number of projects will need to be funded for at least 10 years or longer once introduced and implemented, it is necessary to design a detailed system that is suitable for the domestic situation. As previously mentioned, similar systems are already being operated or discussed in Europe, including in the Netherlands, and the European Commission and European Parliament are preparing a legal basis for CCfD operation. The legal basis and content related to the introduction of CCfD in Germany have not been disclosed, so this issue brief could not cover it. The Next Group will summarize and update this information as soon as it becomes available. The Next Group hopes that this issue brief will be the start of detailed discussions about the introduction of CCfD in Korea.      [1] This was a 3.5% increase compared to 2020. However, considering that 2020 was a year when the global economy was depressed and industrial activities were slowed due to the COVID-19 pandemic, it is reasonable to compare national GHG emissions with 2019.[2] This term refers to a situation where, despite the success of technological development at the initial stage of innovation, continuing development is hindered due to the lack of funding and support, such that commercialization eventually fails (Ellwood et al., 2022). [3] A carbon contract can also be indirectly linked to the emission trading system in that the government sells it to the carbon market.  [4] In fact, the operating principle of the CCfD is very similar to the contract for difference (CfD). However, the trading target of CfD is renewable energy-based electricity and trading target of CCfD is carbon dioxide.[5] Federal Ministry for Economic Affairs and Energy (2020)[6] European Commission (2021)[7] Stimulering Duurzame Energieproductie en Klimaattransitie; Stimulation of sustainable energy production and climate transition[8] The bidding is conducted on a first-come-first-served basis according to bidding dates, and there is no difference in bidding time. For example, if company A bids 55 €/t CO2 at 11 a.m. on June 28, company B bids 53 €/t CO2 at 2 p.m. on the same day, and company C bids 50 €/t CO2 at 11 a.m. on June 29, respectively, the budget is allocated in the order of B-A-C.  [9] Although the amendment bill refers to “Carbon Contracts for Difference (CCDs),” the meaning is identical to that of CCfD, so this issue brief indicated as CCfD.[10] European Commission (2022)[11] In June 2022, the European Parliament confirmed its position on the EU ETS, and now it remains for the Council of the European Union to confirm its position and negotiate a final compromise. Many media sources expect that these processes will all be completed by the end of 2022.[12] As a fund raised from revenue from emission right auctions, it is mainly used to develop technologies such as innovative low-carbon technologies and processes within energy-intensive industries, CCUS, renewable energy innovative technologies, and energy storage. 

Revisiting Korean Green Public Procurement Policies to Promote Green Steel Demand

(Summary) Korea has been operating green public procurement policies (GPP) including the Mandatory Purchase of Green Products Program (MPG) of public institutions since 2005 and the Minimum Green Standard Product Purchase Program (MGS) since 2010, which have shown relatively successful outcomes in terms of the number of green products purchased. However, the measurement of the results is limited to procurement size (in financial terms), which does not provide information on other aspects of the environmental impact. Moreover, although projects to reduce industrial GHG emissions are becoming urgent, no study has been conducted on whether the public procurement policies in Korea significantly encourage the production of low-carbon steel in reality. Moreover, as stronger international regulations being imposed on traded products, a government must play a greater role in incentivizing the domestic industries to decarbonize and thereby maintain and strengthen their competitiveness. This brief aimed to analyze the effects of the current GPP programs in Korea on creating demand for low-carbon steel and to propose policy suggestions to enhance these effects. In addition, it proposes a new standard for low-carbon steel, which has not yet been defined clearly.※ The research was jointly conducted between NEXT Group and the Solutions for Our Climate. ※ The Policy Brief was updated on October 25, 2022, with new research methodologies.   - Revised pages: pp.18-20, pp.27-28.

Carbon Pricing Methods

Highlights •  The carbon pricing method may vary depending on its purpose and use. Currently, there are three types of carbon pricing methods adopted by some countries and international financial institutions: "social cost of carbon" converting damages to be caused by 1 tCO2 of greenhouse gases into monetary value, "marginal abatement cost" to reduce additional 1 tCO2 of greenhouse gases, and "potential carbon price" to incentivize economic actors to reduce greenhouse gas emissions to Nationally Determined Contributions (NDC).•  The carbon price outlook for different scenarios published by the Network for Greening the Financial System (NGFS) in 2021 provides the shadow price of carbon as a normative carbon price to be set to achieve reduction goals, which is referenced by many research institutes and financial institutions in Korea and abroad.•  The U.S., UK, and French governments define their carbon prices, taking into account their unique greenhouse gas reduction goals, reduction technology levels, and climate change damages, and reflect the prices in cost-benefit analysis when introducing public projects or policies.•  While the function of carbon pricing is expected to be reinforced to enhance the Korean economy's resilience to respond to climate change, it is time to examine carbon prices that reflect the level of Korea’s reduction technologies and the uniqueness of policy goals.

A Proposed Amendment to the Hydrogen Economy Promotion and Hydrogen Safety Management Act, the First Step towards Boosting the Clean Hydrogen Economy

Highlights  1.  Definition of clean hydrogen (Article 2.10): Hydrogen is divided into carbon-free hydrogen, low carbon hydrogen, and low carbon hydrogen compounds depending on greenhouse gas emissions produced during production and import. 2.  Certification of clean hydrogen (Article 25.2): It prepares the legal basis to certify clean hydrogen by grade for hydrogen or hydrogen compounds meeting certification criteria prescribed by Presidential Decree. 3.  Obligations to sell and use clean hydrogen (Article 25.5): With obligations to sell and use clean hydrogen in place, fuel suppliers and power generation business entities are obligated to sell and use clean hydrogen for most hydrogen facilities, such as hydrogen vehicles, construction machinery, military logistics, ships, aviation, and power generation. 4.  Obligations to purchase and supply power generated from hydrogen (Article 25.6): Power business entities are obligated to purchase or supply power generated from hydrogen above a certain percentage prescribed by Presidential Decree. 5.  Definition of the hydrogen industry (Article 2.7): The definitions of the hydrogen industry, hydrogen fuel supply facilities, and hydrogen fuel using facilities,    which are limited to hydrogen for fuel cells, are expanded to include the equipment that uses hydrogen, such as fuel cells and hydrogen gas turbines.