South Korea's government is raising taxes on thermal coal use for power generation by around 25pc, but may not confirm final revisions for the lowest and highest grades of coal until next month.
Starting in April, the consumption tax on coal with a calorific value (CV) of NAR 5,000-5,500 kcal/kg will increase to 30,000 won/t ($25/t) from a current W24,000/t, according to South Korea's strategy and finance ministry.
The government is considering similar tax hikes for other grades of coal — to W27,000/t from W21,000/t for coal with heat content below NAR 5,000 kcal/kg, and to W33,000/t from W27,000/t for fuel with heat content above NAR 5,500 kcal/kg. But these proposals are still under review, with the government set to determine final revisions by early February, the ministry said.
Seoul is building flexibility into the revised taxes. Rates will be adjustable by decree, based on fluctuations in demand for the various grades of coal.
The tax is now being adjusted for the third time in three years, after being introduced in 2014 on claims it would discourage coal-fired power generation and help drive down greenhouse gas emissions.
But rather than reducing coal consumption, which has risen in recent years amid growth in coal-fired power capacity, the tax has instead changed the grades of coal that utilities buy. At the introduction of a three-tier taxation system in February last year, landed costs for the lowest grades — which received a W1,000/t tax cut — increased in competitiveness. On an energy-adjusted basis, the latest additions look set to increase the competitiveness of the highest-heat coals, since an additional W6,000/t across the board will make lower-CV coals more costly per unit of heat.
The W27,000/t tax for lowest-heat coals means that Indonesian GAR 4,200 kcal/kg coal will attract a tax of W7.1/mn calories. By contrast, the W33,000/t tax for high-heat coals will impose a W5.5/mn calorie charge on NAR 6,000 kcal/kg Russian, Australian, South African or Colombian fuel.
Utilities stock up
At current prices, these differing tiers have little impact on the relative competitiveness of different grades against one another — although this is largely because of the wide price gaps between different grades of coal at present.
The higher taxes also have limited effect on the competitiveness of coal against gas-fired generation in South Korea. On an energy-content basis, even the most expensive coal delivered to the Korean peninsula — spot Colombian coal, accounting for taxes and an estimate of freight would currently cost in excess of $120/t — is some 40pc cheaper than the Argus des Northeast Asia LNG price without accounting for a W42,000/t tax on LNG imports.
But in the short term, the tax increase could encourage South Korean utilities to stock up before 1 April to avoid the higher tax rate. Cold weather in northeast Asia has pushed power plant usage at the country's utilities higher, potentially creating space in coal stockyards. Operating capacity yesterday exceeded 95GW for the first time since a particularly harsh cold spell in January 2016, according to the Korea Power Exchange.
Space permitting, and assuming the additional tax cost exceeds stocking charges, utilities are likely to look to bulk up their inventories. Since the beginning of January, utilities Kospo and Komipo have issued orders for almost 1mn t to be delivered before 31 March — four times more than all five coal-burning South Korean utilities issued in the same period a year earlier.
Any reduction in coal use stemming from the latest tax increase appears a distant prospect. South Korea's thermal coal imports remained flat on the year at just under 110mn t in 2016, up from 105mn t in 2013 before the introduction of the tax.
The government has sought to reduce reliance on coal-fired power, announcing plans last month to shut down 10 of the country's oldest coal units amounting to some 3.35GW. But 20 new coal plants that were already approved remain under development, and are set to add 18.1GW. Accounting for delayed projects that were set to come on line last year and others that are set for this year, the country could add as much as 5.47GW in 2017 alone. Only 125MW will be taken off line during the same period.
To meet its commitments under the 2015 Paris climate accord, Seoul plans to cut the country's overall greenhouse gas emissions by 37pc, or 3.15mn t CO2e, from so-called business-as-usual levels by 2030.
