South Korea's renewable energy credit (REC) scheme revisions for biomass-fired power generation will boost private and state-run utilities' wood pellet imports in the short term, then curb them in the long run.
The South Korean government on 18 December announced a gradual reduction in RECs for biomass-fired generation. The new rules are set to bolster pellet imports in the short term, but the gradual reduction in RECs will result in lower overall imports and new market trends in the longer run.
The changes were designed differently for state-run producers and independent power producers (IPPs), so the impact on each group is different. RECs for state-run power generators will be reduced from 1.5 in 2025 to 0.5 for dedicated biomass utilities by 2027, and 0 for co-fired biomass generation producers. RECs for IPPs will be reduced to the same respective levels but over 20 years starting from 2026, after a one-year grace period. (see tables)
State-run utilities will see the largest impact in the near term, given the much shorter timeline for their credit reduction, with a stronger incentive for generators to increase output when REC credits are higher. This is set to bolster imports over the next three years as utilities secure most of their pellet needs from abroad.
This is in contrast to IPPs, which will see a more gradual REC reduction in the 20 years from 2026, and their demand for imports is expected to be broadly unaffected in the near term. IPPs also have an incentive to burn more in the coming few years because of the higher REC rates compared to later.
Biomass-fired generation at some utilities may rise by 10-15pc on the year in 2025, according to a South Korean buyer. Higher demand for spot wood pellet cargoes has already lent support to the spot fob Vietnam price to South Korea in recent weeks.
South Korean demand for imports may decline in the longer term, if the reduced state support leads to uneconomical margins for utilities. Vietnamese suppliers have already expressed concerns about South Korean demand spiking in the near term only to decline in subsequent years.
Some utilities are set to reach the end of their economic life in the mid-2030s, including the 100pc biomass-fired Yeong-Dong units 1 and 2 which are set to shut down in 2032 and 2035 respectively. This will cut overall demand for pellets unless new power plant projects are launched.
The reduction in RECs is also set to discourage new investment. Investment firm Glenwood Private Equity, which had signed a preliminary agreement to acquire South Korean IPP SGC Green Power, cancelled the deal after the government's announcement on the reduction of RECs in December.
Utilities may also start looking for alternative, cheaper feedstocks such as wood chips going forward. Expectations of a decline in overall South Korean demand for pellets may encourage southeast Asian producers to seek to sell more to other markets such as Japan or Europe, a Vietnamese pellet producer said.
| REC for state-owned utilities | /MW |
| Year | REC rate |
| 2024 | 1.50 |
| 2025 | 1.00 |
| 2026 | 0.75 |
| 2027 | 0.50 |
| Source: South Korea's Ministry of Trade, Industry and Energy | |
| REC for independent power producers | /MW |
| Year | REC rate |
| 2025 | 1.50 |
| 2026 | 1.49 |
| 2027 | 1.49 |
| 2028 | 1.48 |
| 2029 | 1.47 |
| 2030 | 1.46 |
| 2031 | 1.45 |
| 2032 | 1.44 |
| 2033 | 1.43 |
| 2034 | 1.41 |
| 2035 | 1.40 |
| 2036 | 1.37 |
| 2037 | 1.35 |
| 2038 | 1.32 |
| 2039 | 1.29 |
| 2040 | 1.24 |
| 2041 | 1.18 |
| 2042 | 1.10 |
| 2043 | 0.99 |
| 2044 | 0.81 |
| 2045 | 0.50 |
| Source: South Korea's Ministry of Trade, Industry and Energy | |
