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Korean energy demand in the new millenium: outlook and policy implications, 2000–2005
Energy Policy 29 (2001) 899}910
Korean energy demand in the new millenium: outlook and policy implications, 2000}2005 Sung Hyun Kim , Tae Heon Kim, Youngduk Kim *, In-Gang Na Korea Information Society Development Institute, 1-1 Juam-dong, Kwachun, Kyunggi-do, South Korea Korea Energy Economics Institute, 665-1 Naeson-dong, Euiwang-si, Kyunggi-do, South Korea Received 13 November 2000
Abstract This paper examines dynamic conditions surrounding South Korean energy demand upon entering the new millenium. Korean energy consumption grew very rapidly during the 1990s, but was hit severely by "nancial crisis of 1997 and is again rapidly recovering. Our aim in this paper is to review the recent trends and make projections for the near future. After reviewing the 1990s, we present forecasts on energy demand for 2000}2005. We also present scenario analysis where the best and the worst case scenarios are discussed. 2001 Published by Elsevier Science Ltd. Keywords: Energy demand forecast; South Korea; Econometric model
1. Introduction Upon entering the new millenium, Korea faces a dynamic situation both in energy market and in overall economy. It appears that the remarkable economic growth led by active government intervention since the 1960s may have "nally exhausted its potentials in the 1990s. This possibility was painfully brought into national attention when Korea joined several other Asian nations to experience a "nancial and foreign debt crisis in 1997. There may be many explanations for the crisis, but one thing seems to be clear: A new model for economic development is warranted for a new era. This is especially true for the case of energy industry, where government regulation has been particularly strong and state-owned companies have dominated the market. Accordingly, oil industry in Korea has already gone through a series of liberalization measures since the early 1990s, while electricity and natural gas industries now wait for their privatization processes to begin.
* Corresponding author. Tel.: #82-31-420-2223; fax: #82-31-4202164. E-mail address: [email protected] (Y. Kim). For convenience in exposition, &Korea' actually refers to South Korea throughout this paper unless explicitly stated otherwise.
Korea's position in the world energy market makes this all the more interesting. Korea is a non-negligible player in the world energy market because of its exportdriven economy, relatively large domestic energy market and heavy dependence on imported energy. In the world, Korea ranks 25th in population, 11th in total production (GDP), 12th in export amount, and 12th in import amount. In comparison, Korea is the 10th in primary energy consumption, the sixth in oil consumption, the "fth in energy import and the third in oil import (Fig. 1). Korea's dependency on imported energy amounts to a dazzling 97% (83% when excluding nuclear energy). Considering such signi"cance of Korean energy demand in the world market and the dynamic conditions sketched above, it would be a worthwhile exercise to examine the recent trends in energy consumption and try to derive its future outlooks. Our aim in this paper is precisely to do that. In the next section, we review Korean energy consumption in the past decade. We present key statistics and remark on notable trends. In Section 3, we explain All rankings are based on 1999 "gures except for GDP. South Korea's GDP ranked the 11th in 1997 but fell to the 14th in 1998 due to the crisis. In recovery, Korea's GDP grew by 10.7% in 1999 and by 9.0% (estimate) in 2000 (Sources: Korea National Statistical O$ce, 2000; Korea Energy Economics Institute, 2000a).
0301-4215/01/$ - see front matter 2001 Published by Elsevier Science Ltd. PII: S 0 3 0 1 - 4 2 1 5 ( 0 1 ) 0 0 0 1 8 - 0
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Fig. 1. Korea's position in the world.
Table 1 Korea's primary energy consumption in the 1990s
Coal (million ton) Oil (million bbl) LNG (million ton) Total (million TOE)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
43.4 (!1.7) 356.3 (24.1) 2.3 (14.8)
42.4 (!2.3) 424.7 (19.2) 2.7 (15.7)
39.8 (!6.1) 514.2 (21.1) 3.5 (30.8)
42.4 (6.5) 564.6 (9.8) 4.4 (24.9)
42.7 (0.6) 621.5 (10.1) 5.9 (33.1)
44.3 (4.0) 677.2 (9.0) 7.1 (20.9)
50.3 (13.4) 721.1 (6.5) 9.4 (32.1)
53.9 (7.3) 793.9 (10.1) 11.4 (21.5)
55.9 (3.6) 670.3 (!15.6) 10.6 (!6.5)
59.1 (5.8) 719.7 (7.4) 13.0 (21.8)
93.2 (14.1)
103.6 (11.2)
116.0 (12.0)
126.9 (9.4)
137.2 (8.2)
150.4 (9.6)
165.2 (9.8)
180.6 (9.3)
165.9 (!8.1)
181.4 (9.3)
Note: In parentheses are the percentage growth rates year-on-year. (source: Korea Energy Economics Institute, 2000b).
our methodology for making forecasts, which is basically a system of econometric models. Section 4 summarizes the outlook on Korean energy demand for "ve-year period up to the year 2005 and also presents the best and the worst case scenarios. Section 5 concludes the paper with remarks on several policy issues. They represent signi"cant qualifying factors that are likely to a!ect energy demand (hence, our future revision of forecasts) as well as important policy issues that require assessment on future energy demand patterns for successful policy implementation. This paper does not attempt to present a long run perspective on Korean energy market. Our aim is more modest in the sense that we limit our discussion to a relatively short period (up to 2005). For a longer period projection, we will need to examine supply side of the market more carefully. Also, our forecasting model was developed for a short run analysis. We believe that because this is a critical moment in the evolution of Korean energy demand it is important to acknowledge the vast uncertainty surrounding Korea and to try a short, but focused projection. It is hoped that readers will gain useful insights into Korean energy demand situation from our discussion of trends, outlook and key policy issues.
2. Overview of Korean energy consumption in the 1990s This section presents an overview of energy consumption during the past decade. We will "rst look at primary energy consumption in the 1990s focusing on major energy sources (oil, coal and natural gas). Then we will examine "nal energy consumption with sectoral emphasis. 2.1. Primary energy consumption South Korea's total energy consumption almost doubled during the 1990s, from 93.2 million TOE in 1990 to 181.4 million TOE in 1999. This amounts to a 7.7% annual average growth in energy consumption during the 1990s. For the same period, the gross domestic product (GDP) of Korea grew by 5.8% per annum (see Table 1). Energy consumption growth rates exceeded 10% in early 1990s and remained at 8}10% until the year 1998, when it drastically fell to !8.1% due to the "nancial crisis that hit Asian region at the end of 1997 and exerted its impact throughout 1998. In the year 1998, Korea's GDP fell almost by 6%. If we leave out the crisis period, the average growth in energy demand up to 1997 was an impressive 9.9%.
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Fig. 2. Composition of primary energy consumption by sources (1990}1999).
The impact of 1998 fall is believed to be of a temporary nature, as witnessed in the complete recovery of the precrisis level in 1999. However, the composition of energy consumption is showing some changes since the "nancial crisis (Fig. 2). Since 1999, while electricity and gas demand is strikingly strong, oil demand is relatively weak, probably due to high crude oil prices and other industrial factors. The share of oil products in total energy consumption is the largest in Korean energy consumption, ranging from 63% (in 1994) to 54% (in 1990 and 1999). The shock of the oil crisis in the early 1980s had alerted the government and consumers to lessen oil dependence (down to 43.7% in 1987). But stable income growth in the 1990s pushed up the share beyond 60%, before the "nancial crisis lowered it to near 50%. In fact, oil demand was most severely a!ected by the 1997 crisis: the decline of !15.6% in 1998 is almost double of the total energy demand decline (!8.1%). Over the past decade, oil products consumption was "rst sustained by industrial sector, then backed up increasingly by transport sector since the mid-1990s. On the other hand, oil consumption in transformation (mostly power generation) and residential and commercial sectors was more vulnerable to short term changes and was conspicuously a!ected by the 1997 crisis. In 2000, high crude oil prices and relative setback of oil-intensive industries suppressed oil demand recovery, while other energy sources, notably gas and electricity, are rapidly gaining their pre-crisis forms. Natural gas consumption has been, at least in terms of growth rates, the leader during the 1990s. It grew by more than 20% almost every year (except for a decline in 1998). This is a result of active government policy initiatives in encouraging LNG consumption.
More focused short-run trends are analyzed in Korea Energy Economics Institute, various issues.
Another interesting change in Korean primary energy demand is found in coal consumption. Anthracite coal is practically the only energy resource available in the Korean territory and used to be the major energy source before oil products replaced it in the 1970s. Coal demand in total has grown at an average 3.4% rate during the 1990s. But a signi"cant change in the composition of coal demand lies hidden in the "gures: anthracite coal has been e!ectively faded out by imported bituminous coal: anthracite's share in coal consumption fell from over 40% in early 1990s to less than 10% in 1999. The share of anthracite coal in total energy consumption fell from 10% in 1990 to 1% in 1999. The recent "nancial crisis somewhat boosted anthracite coal consumption in 1998, but this is only a temporary phenomenon during a recession. Such a rapid growth of energy consumption raises much concern over energy supply and security problems. Growing dependence on imported oil and gas poses even more serious threats to Korean economy. As was already mentioned, Korea's dependence on oil products for its energy consumption had been lowered signi"cantly in the 1980s. But the 1990s saw a reversal of such &conservation' e!orts with strong economic growth. On the other hand, the government introduced LNG as an important alternative to oil products. Table 2 shows some changes in Korean energy consumption and import from the mid-1980s to 1990s. Oil share in energy consumption is higher in the 1990s than in the 1980s (oil share in 1997 was 60.4% but the "nancial crisis lowered it signi"cantly). Energy import (in dollars) almost doubled during the 1990s. Import dependence rose signi"cantly to reach 97.2%. While oil share in energy import is slowly falling, LNG import now takes
A symbolic change in the government organization re#ects relaxed attitude towards energy issues during the 1990s. Ministry of Energy and Resources, created in 1977 in reaction to oil shocks, was restructured and is now only a part of Ministry of Commerce, Industry and Energy.
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Table 2 Changes in Korean energy consumption and import Year
1985
1990
1999
Energy consumption (million TOE) Oil consumption (million TOE) Oil share in energy consumption (%) Energy import (million US$) Import dependence in energy (%) Oil share in Energy import (%) LNG share in Energy import (%) Middle East dependence in crude oil import (%)
56,296 27,142 48.2 7290 76.2 (68.8) 83.8 N/A 57.2
93,192 50,175 53.8 10,926 87.9 (73.7) 82.5 4.4 73.4
181,363 97,270 53.6 22,674 97.2 (83.0) 81.3 9.1 73.1
Excluding nuclear energy. Dollar-base. LNG import began in 1986. (source: Korea Energy Economics Institute, 2000b).
Table 3 Korea's "nal energy consumption in the 1990s 1990 Industry
1991
1992
1993
1994
1995
1996
1997
1998
1999
Residential} commercial
36.2 (17.1) 14.2 (15.5) 24.9 (9.0)
42.9 (18.7) 16.2 (14.0) 24.7 (!0.2)
50.8 (18.4) 18.5 (14.7) 25.3 (2.2)
55.6 (9.4) 21.1 (14.0) 27.3 (8.2)
59.9 (7.8) 23.9 (13.0) 28.4 (4.0)
62.9 (5.1) 27.1 (13.8) 31.9 (12.1)
67.9 (7.8) 29.8 (9.7) 34.4 (7.9)
77.9 (14.8) 32.1 (7.7) 35.8 (4.1)
76.0 (!2.4) 26.2 (!18.4) 29.9 (!16.4)
79.9 (5.0) 28.6 (9.3) 34.6 (15.6)
Final Total (million TOE)
75.1 (14.0)
83.8 (11.6)
94.6 (12.9)
104.0 (10.0)
112.2 (7.8)
122.0 (8.7)
132.0 (8.3)
145.8 (10.4)
132.1 (!9.4)
143.1 (8.3)
324.0 (22.7) 19.5 (!7.9) 16.2 (6.0) 94.4 (14.8) 963 (63.2)
378.6 (16.8) 15.5 (!20.8) 19.1 (18.0) 104.4 (10.6) 1467 (52.3)
455.5 (20.3) 11.7 (!24.8) 19.9 (4.4) 115.2 (10.4) 2088 (42.4)
506.3 (11.1) 8.6 (!26.2) 22.5 (13.3) 127.7 (10.8) 2858 (36.9)
554.9 (9.6) 5.4 (!37.7) 22.7 (0.8) 146.5 (14.7) 3840 (34.4)
601.5 (8.4) 3.8 (!28.3) 23.9 (4.9) 163.3 (11.4) 5193 (35.2)
644.7 (7.2) 2.9 (!25.7) 26.0 (8.8) 182.5 (11.8) 6592 (26.9)
727.8 (12.9) 1.9 (!32.6) 27.0 (4.0) 200.8 (10.0) 7708 (16.9)
642.8 (!12.7) 2.2 (13.2) 25.6 (!5.3) 193.5 (!3.6) 8024 (4.1)
Transport
Oil (million bbl) Anthracite (million ton) Bituminous (million ton) Electricity (TWh) Citygas (million m)
689.4 (7.3) 2.4 (11.9) 25.8 (1.0) 214.2 (10.7) 10.012 (24.8)
Note: In parentheses are the percentage growth rates year-on-year. Residential}commercial includes public sector. (source: Korea Energy Economics Institute, various issues).
up a signi"cant share. In addition, Korea is more dependent on Middle East for crude oil than in the 1980s. 2.2. Final energy consumption Final energy consumption has also shown an impressive growth during the 1990s. Industrial sector led the growth at "rst, then transport sector took the lead during the mid-1990s. Residential and commercial sector showed somewhat of a #uctuation (see Table 3 and Fig. 3). Of course, there was a decline in 1998, mostly in transport (!18.4%) and residential and commercial sector (!16.4%). Industrial consumption was a!ected relatively mildly, because of strong demand for pet-
rochemical feedstock (i.e. naphtha), which in turn was caused in part by the currency depreciation and export boom. The share of industrial sector is the largest in "nal energy consumption*but this is somewhat misleading because non-energy demand (i.e. petrochemical feedstock demand) has grown signi"cantly during the 1990s and now takes up almost two-thirds of total industrial oil consumption compared to about 40% in 1990. Petrochemical industry is an important contributor in export-driven Korean economy. Naphtha is now the most demanded oil product in Korea*in 1999, the share of naphtha in oil consumption was 30.4%. Because domestic re"ning cannot ful"ll naphtha demand, Korea imported 101 million bbl (46.2% of total naphtha
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3. Methodology and assumptions for projection
Fig. 3. Composition of "nal energy consumption by sectors (1990}1999).
consumption) in 1999. Therefore, actual energy consumption in industrial sector is more modest than shown in table, but still solid. Transport sector, although the smallest in share, has become more visible over the decade due to explosion of vehicle ownership and transport volumes. For example, private and commercial passenger cars grew in number signi"cantly, from 2 million in 1990 to 7.8 million 1999. Number of all motor vehicles grew from 3.4 million in 1990 to 11.2 million in 1999. However, transport sector consumption was a!ected very badly by the "nancial crisis. We can give two reasons. First, transport demand is more sensitive to income and price shocks because economic depression leads to less leisurely travel and less commercial and industrial transport. Second, Korean energy tax system is heavily focused on transport fuels (motor gasoline and motor diesel), and this became worse during the "nancial crisis. While in 1997, about 50% of the retail gasoline price was tax, this rose almost to 80% in 1998 as the government wanted to send a &conservation' signal to consumers and at the same time secure revenue base. Residential and commercial sector consumption showed much #uctuation during the 1990s. Examining the consumption levels since the mid-1990s, one can almost conclude that energy demand in residential and commercial sector has reached some sort of a saturation point. Residential demand appears to be very stable, while commercial demand is somewhat stronger. Oil consumption in this sector actually shows signs of decline, but electricity and citygas consumption is stronger. An interesting pattern is that electricity consumption is particularly strong in residential sector while citygas consumption is stronger in commercial sector. Looking at "nal consumption by major energy products, citygas and electricity consumption recorded the highest growth rates, while oil products consumption showed a solid growth. It is obvious that as income grows, consumers prefer more convenient and more &quality' fuels such as gas and electricity.
The methodology we employ for "ve-year projections is econometric, using energy consumption as dependent variable and macroeconomic and other explanatory factors as independent variables. The basic framework is modular, consisting of four independent modules for major energy sources (oil products, citygas, electricity and coal). Each module then subdivides into "nal consumption sectors (industry, transport, residential and commercial) (see Table 4). Summing up forecasts from four modules by sectors, we obtain sectoral xnal energy demand. Demand in transformation sector (power generation and citygas production) is derived from the "nal demand forecast for electricity and citygas. This procedure is not econometric, but re#ects various supply plans of transformation sector companies and the government. Resulting "nal energy demand and transformation energy demand together produces total primary energy demand (see Fig. 4). Important independent variables in forecasting equations are GDP (gross domestic product), energy prices (by sectors, if applicable), and temperature-related variables. For industrial sector, industrial production index (IP) is used instead of GDP. The model speci"cation is based on ADL (Autoregressive Distributed Lag) model. One merit of ADL models is the robustness. Robustness of forecasts was an important consideration in our forecasting. Basic model speci"cation that we use is as follows. The number of lags was determined by the Hendry's (1991) general-to-speci"c method. Actual equations di!er in details for each sector and each energy source. I K ln D " # ln D # ln > R G R\G G R\G G G L # ln P # HDD# CDD G R\G G #AX, where D is the demand for energy, > the income variable (GDP or IP), P the energy price (in real terms), HDD the heating degree-days, CDD the cooling degree-days, X the dummy and other miscellaneous variables, and k, m, n are the number of lags (0)k, m, n)4). We estimated these equations on quarterly data, from the "rst quarter of 1981 up to the second quarter of 2000. This model is documented by Kim et al. (1999). See Greene (1997) for more on ADL models. See Pesaran et al. (1998). Kim (1999) has more information on oil model. Kim (1998) explains natural gas model. Na (1999) discusses electricity model.
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Table 4 Modules of "nal energy demand model Sectors Oil products Electricity Citygas Coal
Industrial, Industrial, Industrial, Industrial,
transport, residential and commercial residential, commercial residential, commercial residential, commercial
No. of sub-sectors
No. of equations
13 * * 10
13 3 3 10
Fig. 4. Overall structure of forecasting model.
The data set was compiled at KEEI based on monthly energy balance tables.
3.1. Assumptions Assumptions for forecast are made regarding major explanatory variables, namely GDP (IP for industrial sector), energy prices, general price indices (CPI and WPI), and temperature variables. For GDP, we use mixture of Bank of Korea(BOK)'s short-term forecast (for 2000), Korea Development Institute(KDI)'s mid-term forecast (for 2001 and 2002) and KDI's long-term forecast (for 2003 and after). We assume IP would grow at the same rate as GDP. Energy prices in real terms are assumed to remain at or to rise mildly from the latest actual prices depending on the energy sources, incorporating our judgement. In scenario analysis later in the paper, we employ other assumptions on GDP and energy prices. Temperature, HDD (heating degree-days) and CDD (cooling degreedays) are also important variables. We take quarterly averages since 1981. See Table 8 in the Appendix A for more detail on assumptions.
4. Energy demand outlook, 2000}2005 This section presents our forecasts for the period 2000}2005, obtained from the econometric model based on quarterly data since the "rst quarter of 1981 up to the second quarter 2000, as explained in the previous section. As in Section 2, we explain "rst the outlook on primary energy demand focusing on major energy sources (oil, coal and natural gas) and then look at "nal energy demand with sectoral emphasis.
4.1. Primary energy demand South Korea's primary energy demand is projected to grow 4.8% annually between 2000 and 2005 (Table 5). Primary energy consumption fully recovered 1997 levels in 1999, and we expect 8.0% growth in 2000. Projected demand in 2005 is 247.0 million TOE, which is about 136% of 1999 consumption. Such a rate of growth is quite mild compared to the annual growth rate of 7.7% between 1990 and 1999. Anthracite coal consumption exhibited a short-term increase during the "nancial crisis, but is starting to decline again. Consumption of bituminous coal is
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Table 5 Primary energy demand forecast (2000}2005) 2000
2001
2002
2003
2004
2005
Coal (million ton) Oil (million bbl) LNG (million ton)
65.4 (10.6) 760.2 (5.6) 15.6 (20.5)
67.1 (2.6) 812.7 (6.9) 18.4 (17.8)
70.7 (5.3) 848.7 (4.4) 19.7 (7.1)
71.9 (1.7) 882.8 (4.0) 20.5 (4.4)
73.7 (2.5) 915.5 (3.7) 22.6 (10.2)
76.1 (3.3) 942.6 (2.9) 24.6 (8.8)
Total (million TOE)
195.9 (8.0)
207.5 (5.9)
218.1 (5.3)
228.1 (4.4)
237.9 (4.3)
247.0 (3.8)
Note: Numbers in parentheses are percentage growth rates year-on-year. 2000 "gures are part actual, part forecast.
Fig. 5. Actual composition of primary energy in 1999.
expected to grow solidly. In total, coal demand is projected to show an annual average growth of 3.1%. Oil products consumption is very slow in recovery from impact of the crisis. High crude prices since 1999 are a big barrier. Oil demand is expected to stabilize down over time. Average 4.4% growth is projected for the "ve-year period. While heavy fuel oil use is expected to decline in long run, signi"cant demand growth may be observed temporarily in power generation and industrial sectors rebounding from the 1997 crisis impact. Natural gas consumption is expected to grow continually, with projected 9.6% annual growth on average. Citygas demand, especially in industrial sector, is substantially growing, while natural gas demand in power generation is stable. Composition of total energy demand by energy sources exhibits an increasing share of LNG (13% in 2005 from 9% in 1999), while the oil share is expected to continually decline to approach the 1980s levels (52% in 2005). Substitution of LNG for oil is one of the most prominent features in the forecast. Figs. 5 and 6 below show the changes in primary energy composition between 1999 and 2005.
Fig. 6. Projected composition of primary energy in 2005.
4.2. Final energy demand Final energy demand is projected to grow steadily, reaching 193.1 million TOE in 2005, an 34.9% increase over 1999 levels. Average annual growth rate is 4.8%, again a mild "gure compared to 7.4% during 1990 through 1999. Projected demand growth is more or less stable, with transport sector leading others (see Table 6). Industrial sector demand is expected to show a 5.2% growth in 2000, followed by a stable growth rates around 3}5%. Overall average annual growth rate is 4.2%, signi"cantly smaller than that of total "nal energy demand. Such a stable growth path can be attributed to changes in industrial structure, especially stabilization of growth in energy-intensive industries such as steel, cement and petrochemical industries. There is a general consensus that while industrial growth will continue, there will be signi"cant changes in the industrial structure in Korea. We expect gradual transition of emphasis in Korean industrial sector from high cost, energy-intensive industries to high technology, less-energy-intensive industries. Transport sector demand is expected to grow solidly at around 5}7%. Financial crisis has hit the sector severely,
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Table 6 Final energy demand forecast (2000}2005) 2000
2001
2002
2003
2004
2005
Industry (million TOE) Transport (million TOE) Res/Com/Pub (million TOE)
84.0 (5.2) 30.6 (7.0) 37.8 (9.5)
88.3 (5.1) 33.9 (10.7) 39.9 (5.4)
92.3 (4.6) 36.2 (6.8) 41.7 (4.5)
96.1 (4.1) 38.5 (6.2) 43.4 (4.2)
99.8 (3.8) 40.7 (5.7) 45.2 (4.1)
103.4 (3.6) 42.8 (5.1) 47.0 (3.9)
Final Total (million TOE)
152.5 (6.6)
162.1 (6.3)
170.2 (5.1)
178.1 (4.6)
185.7 (4.3)
193.1 (4.0)
Oil (million bbl) Anthracite (million ton) Bituminous (million ton) Electricity (TWh) Citygas (million m)
718.2 (4.2) 2.56 (5.0) 26.83 (3.8) 241.6 (12.8) 12,320 (23.1)
760.0 (5.8) 2.51 (!2.2) 27.51 (2.5) 257.9 (6.8) 13,829 (12.2)
795.3 (4.6) 2.49 (!0.7) 27.93 (1.5) 275.1 (6.7) 15,001 (8.5)
828.3 (4.1) 2.44 (!1.9) 28.33 (1.4) 291.0 (5.8) 16,182 (7.9)
859.6 (3.8) 2.41 (!1.3) 28.73 (1.4) 306.6 (5.3) 17,431 (7.7)
889.0 (3.4) 2.37 (!1.5) 29.12 (1.4) 321.4 (4.8) 18,725 (7.4)
Note: Numbers in parentheses are percentage growth rates year-on-year. 2000 "gures are part actual, part forecast.
and the recovery is coming somewhat slowly. The 1997 level is expected to be recovered by 2001, followed by strong growth from then on. Transport demand appears to be relatively more sensitive to economic #uctuations. Although the sector has been su!ering from impact of "nancial crisis and high crude prices, it is projected to be the leading sector in the longer run. In the composition of "nal energy demand by sectors, the share of industrial sector is expected to decline (from 55.8% in 1999 to 53.5% in 2005), while the share of transport sector is expected to increase (from 20.0% to 22.1%) and the share of residential}commercial}public sector is expected to remain stable (24.2% in 1999 and 24.3% in 2005). In the composition of "nal energy demand by energy products, the shares of oil and bituminous coal is expected to decline, matched by increases in the shares of citygas and electricity. 4.3. Scenario analysis Because our projections crucially depend on assumptions on GDP and energy prices, we additionally consider a best scenario and a worst scenario. This exercise has obvious merits in that both Korean economy and world energy markets do face much uncertainty even into the "ve-year period. We choose to vary assumptions on GDP and world crude oil prices. The best case scenario re#ects an optimistic view that Korean economy will continue strong growth and that the world oil prices would signi"cantly fall from the recent high levels. The worst case scenario, on the other
hand, presents a pessimistic/conservative view that Korean economic growth would be moderate and that the world oil prices would remain at high levels (Fig. 7). See the Appendix A for more detail on scenario assumptions. While an average 4.7% growth was projected in baseline, the best case scenario forecasts 6.0% and the worst case scenario forecasts 2.8%. The baseline case projects 2005 total demand at 136% of 1999 level; the best case puts it at 145% while the worst case puts it at 124%. The baseline case expects a steadily declining rate of growth. The best case does not alter this picture and lifts demand growth while keeping such a pattern. The worst scenario, however, shows a signi"cantly subdued energy demand growth. In the best case, the shares of oil and natural gas rise by 1% point from the baseline case, respectively. In the worst scenario, oil share falls signi"cantly to 49% while the share of nuclear and bituminous coal rises. This suggests that oil and LNG are more sensitive to assumptions on GDP growth and world oil prices, especially more so in the worst case scenario. On the other hand,
The best case scenario's GDP assumptions are the maximum level among Korean government's announced positions for future economic growth. Assumptions on crude oil prices are that, in the long run, they would return to and remain around the 1996}1997 levels. On the other hand, the worst case scenario was drawn from UBS Warburg's forecast of 3.9% growth for 2001 and extended thereafter. The worst scenario on crude prices re#ects OPEC's upper level position on desirable crude prices. OPEC has recommended $22 to $28 per barrel as desirable oil price range.
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907
Fig. 7. Primary energy demand by scenarios.
Fig. 8. Projected composition of primary energy in 2005*best case scenario.
Fig. 9. Projected composition of primary energy in 2005*worst case scenario.
bituminous coal and nuclear energy remain relatively stable, probably because their major usage is in power generation sector. See Figs. 8 and 9 in comparison with Fig. 6 in previous subsection. Fig. 10 shows the projected "nal energy demand for each scenario. Overall pattern is similar to what is observed for primary demand, in that the worst case shows more departure from the baseline. Di!erences in sectoral composition across scenarios are as follows. In the best case scenario, the share of industrial sector declines while the share of transport sector rises in comparison with the baseline. For the worst case scenario, the opposite happens, with higher share for industrial sector and lower share for transport sector. This shows that transport sector would be more vulnerable to income and price shocks, which has been already con"rmed during the recent "nancial crisis.
Because transport sector demand relies exclusively on oil products and also because transport sector is becoming more important in oil demand, we can draw similar implications for future oil demand. In other words, if Korean economy grows solidly and world oil prices stabilize, we would expect a strong growth of oil demand (especially in industrial sector) for a while. If Korean economy faces more di$culties and world oil prices remain or rise high in the future, oil demand in Korea would be severely a!ected. 5. Concluding remarks In our forecast, energy demand growth is projected to be slower than assumed economic growth. We expect industrial restructuring in Korea leading to less dependence on energy-intensive industries, which were
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908
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
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Fig. 10. Final energy demand by scenarios.
the important engine of growth for Korea in the past. This re#ects our belief that Korean energy market is entering a mature phase. The impact of crisis factor appears to be temporary, as shown by the complete recovery of 1997 levels in 1999. But the extent of recovery is di!erent across energy sources and sectors, which is probably due to domestic energy price structure and high crude oil prices. For example, industrial energy prices are kept very low while transport fuels (especially motor gasoline) are taxed heavily. Therefore, transport sector demand can be more severely a!ected by price movements. Oil demand growth will be moderate as we expect structural changes in Korean industry. This was manifested clearly in the "rst half of 2000, when Korean economy continued strong growth after regaining pre-crisis form in 1999 and energy demand also grew strongly in accordance with strong economy. Signi"cant growth of electricity and LNG demand played a main role in increasing overall energy demand while oil demand was surprisingly weak. In the "rst half of 2000, Korean economy was led by less-oil-intensive industries such as semiconductor, automobile, and iron and steel industries. Therefore, we expect continual decline of oil share in total energy demand, which will be replaced by gas demand. But on the other hand, transport sector will be a leader in demand growth, providing much of future oil demand growth. Our projection is subject to much uncertainty arising from many signi"cant factors. Some of the important factors that are likely to have impact upon future Korean energy demand can be identi"ed as follows: (1) world oil prices, (2) domestic energy price reform, (3) privatization and restructuring of public utilities and (4) progress in North and South Korean relations.
5.1. World oil prices Like any oil-importing country, Korean energy market and economy are greatly a!ected by movements in world oil prices. We attempted to encompass all possibilities by considering the best and the worst case scenarios. High oil prices will obviously accelerate fuel substitution and industrial restructuring in Korea. On the other hand, Korean energy market does not currently have much impact on the world oil market. This is a discomforting situation at least for Korean policy makers because of the position Korea takes in the world oil market (Korea is the third largest oil importer in the world). There are some barriers against Korean in#uence in the world oil market. Korean oil industry currently su!ers from remains of past regulation, excess capacity and heavy taxes on oil products. Korea is also heavily dependent on Middle East for oil supply. Some argue for formation of an oil importer coalition in Northeast Asian region (Chang, 2000), but more time would be needed for actualization of the idea. 5.2. Domestic energy price reform Also important is the on-going domestic energy price reform. Energy prices in Korea have been subject to heavy regulation and taxation, so believed to be seriously distorted. After years of study and advice by economists, the government has recently taken steps towards reforming the pricing and taxing practices. In order to introduce the reform measures smoothly, the government is going to implement reform plans in a step-wise manner over 6 years (Cho et al., 2000). Our forecasts do not fully account for such price reform plans because although plans have been announced,
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909
Table 7 Comparison of South and North Korea in energy consumption (1998)
South Korea North Korea
Coal
Oil products
LNG
Nuclear
Hydro
Others
Total
36,039 (21.7) 9300 (66.3)
90,582 (54.6) 1400 (10.0)
13,838 (8.3) *
22,422 (13.5) *
1525 (0.9) 2550 (18.2)
1526 (0.9) 780 (5.5)
165,932 (100.0) 14,030 (100.0)
Note: In parentheses are percentage shares (sources: Korean National Statistical O$ce, 2000; Korea Energy Economics Institute, various issues).
they are still subject to much debate. If the plans are fully carried out, industrial sector would face higher prices than now and oil products would share their current high burden of taxes with other fuels. However, high taxation on transport fuels (motor gasoline, diesel, LPG) would continue with some burden on gasoline shifting to diesel and LPG. Our analysis indicates that industrial sector is less sensitive to price shocks at least for the short run. So as a rough estimate of the impact of price reform, we could expect some negative impact on industrial energy demand with more positive impact on residential and commercial sector (commercial demand can increase signi"cantly with price reform). Also LNG demand could face some setback and substitution of oil products for LNG could be somewhat slowed down. But our belief is that the impact would not fundamentally a!ect the current outlook, with mostly bene"cial long run e!ects to Korean economy and energy market from increases in market e$ciency. Taxes on transport fuels remain as an important policy issue. Because transport demand is expected to be solid and strong, unless economy slows down and/or world oil prices remain high, the government would be reluctant to lower taxes.
able to meet the challenge in a #exible manner. On the other hand, privatization may pose a short-term threat to supply stability because of the burden of investment in generation facilities. It is obvious that a reliable forecast of demand is crucial for successful implementation of privatization. Privatization of gas industry, planned to be implemented somewhat later than in electricity sector, also raises interesting issues. Natural gas is an important component of fuel mix for electricity generation. Because natural gas transactions are made in terms of relatively long-term contracts (say, 3 years) and the transaction is currently handled between the state-owned monopolies (KEPCO and KOGAS), there have been some delicate tensions and controversies, especially when there are signi"cant shocks to demand. For example, when the "nancial crisis caused the power demand to fall signi"cantly (for the "rst time in Korean modern history), KEPCO and KOGAS had to engage in di$cult negotiations because of already contracted gas supply amount. Discussion of these issues goes well beyond the scope of the current paper. We shall be content with only pointing out the importance of demand forecasting in such policy discussions. 5.4. Progress in North and South Korean relations
5.3. Privatization and restructuring of public utilities A bigger issue is the privatization and restructuring of public utilities, most notably the two state-owned energy suppliers, KEPCO (Korea Electric Power Corporation, electricity) and KOGAS (Korea Gas Corporation, natural gas). Long-term plans for privatization and restructuring processes have been formed and recently passed by the Congress (for KEPCO). However, there is still much controversy*many people either resist the process itself or question the validity of the current plan. The current plans would "rst privatize electricity generation part, and then retail distribution part of electricity industry. Transmission part would remain public monopoly. Privatization of electricity industry is expected to provide a stable solution for electricity supply issue*demand for electricity is projected to grow very fast as demonstrated in our forecast but current pricing regulation and "nancial structure of KEPCO may not be
Finally, a recent surge of inter-Korean talks is raising many interesting possibilities for energy market. Because North Korea and South Korea are in very di!erent shape in energy sector and in overall economy, a dramatic change in inter-Korean relations can a!ect energy demand and supply fundamentally. As Table 7 shows, South Korea and North Korea have very di!erent energy consumption structures. Coal is the most important fuel in North Korea, while oil is the dominant energy source in South Korea, with importance of natural gas and electricity rising. Hence, some supply excesses are expected for fuels such as coal and heavy oil products. On the other hand, peak/o!peak demand di!erential is becoming an important issue for electricity and gas demand. Energy problems facing North Korea are di!erent, the most urgent one being the absolute shortage of supply capacity. Because demand patterns are so di!erent,
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910
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
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Table 8 Year
2000 2001 2002 2003 2004 2005
GDP growth (%)
Crude oil price (Dubai, $/bbl)
Best
Baseline
Worst
Best
Baseline
Worst
9.0 6.5 6.5 6.5 6.0 6.0
9.0 5.9 5.7 5.4 5.3 5.0
9.0 3.9 3.5 3.3 3.1 3.0
24.9 20.0 19.0 18.0 18.0 18.0
25.6 22.8 22.0 22.0 22.0 22.0
26.6 28.0 27.0 25.0 25.0 25.0
Table 9 Primary energy demand forecasts by scenarios Best 2000 2001 2002 2003 2004 2005
196.1 209.5 222.9 235.8 249.2 262.5
AAGR (1990}1999) AAGR (2000}2005)
7.7 6.0
(8.1) (6.9) (6.4) (5.8) (5.7) (5.3)
Table 10 Final energy demand forecasts by scenarios
Baseline
Worst
195.9 207.5 218.4 228.1 237.9 247.0
195.8 204.7 211.8 216.8 221.3 224.7
7.7 4.7
(8.0) (5.9) (5.3) (4.4) (4.3) (3.8)
(8.0) (4.6) (3.4) (2.4) (2.1) (1.6)
7.7 2.8
mutually bene"cial exchanges could occur, if the political relations continue to improve. South Korea could provide excess coal and electricity directly to North Korea. South could also assist North in importing coal and oil products abroad. On the other hand, energy cooperation can provide South Korea ways to reach Northeast Asia's rich energy resources such as natural gas and oil. Just like other economic cooperation programs, the realization of such energy cooperation depends on whether North Korea has the intention of opening and marketizing its economy. Cooperation measures, if carried out, will fundamentally a!ect both countries' energy consumption structures.
Acknowledgements The authors are most grateful to an anonymous referee whose helpful advice on amendments greatly improved the paper.
Appendix A Assumptions for baseline and scenario analysis are given in Table 8. Primary and "nal energy demand forecasts by scenarious are presented in Tables 9 and 10, respectively.
Best 2000 2001 2002 2003 2004 2005 AAGR (1990}1999) AAGR (2000}2005)
152.7 164.0 174.4 185.2 196.1 207.3 7.4 6.3
(6.7) (7.4) (6.3) (6.2) (5.9) (5.7)
Baseline
Worst
152.5 162.1 170.2 178.1 185.7 193.1
152.4 159.6 164.3 168.1 171.2 173.8
7.4 4.8
(6.6) (6.3) (5.1) (4.6) (4.3) (4.0)
(6.5) (4.7) (3.0) (2.3) (1.9) (1.5)
7.4 2.7
References Chang, H.J., 2000. Prospects of energy coalition in Northeast Asia. Paper presented at the 21st USAEE/IAEE Annual North American Conference, Philadelphia, September 24}27, 2000. Cho, G.L., et al., 2000. A Study for Oil Price Structure Reform. Korea Energy Economics Institute (in Korean). Greene, W.H., 1997. Econometric Analysis, 3rd Edition. Simon and Schuster, New Jersey. Hendry, D., 1991. Econometric modelling with cointegrated variables: an overview. In: Engle, R.F., Granger, C.W.J. (Eds.), Long-Run Economic Relationships: Readings in Cointegration. Oxford University Press, New York, pp. 267}276. Kim, S.H., 1999. Development of Model for Mid- and Short-term Petroleum Demand Analysis. Korea Energy Economics Institute (in Korean). Kim, Y., 1998. Estimation of Natural Gas Demand Function in Korea. Korea Energy Economics Institute (in Korean). Kim, Y., Na, I.G., Kim, S.H., Kim, T.H., 1999. Mid- and Short-term Energy Demand Forecasting Model. Korea Energy Economics Institute (in Korean). Korea Energy Economics Institute, 2000a. Energy Info Korea. Korea Energy Economics Institute, 2000b. Yearbook of Energy Statistics 2000. Korea Energy Economics Institute, various issues. KEEI Quarterly Energy Outlook, (available at http://www.keei.re.kr/index}us.html). Korea National Statistical O$ce, 2000. International Statistics Yearbook 2000. Na, I.G., 1999. Long-term demand elasticity of electricity using dynamic factor model. Environmental and Resource Economics Review. 9 (1), 48}68 (in Korean). Pesaran, M.H., et al., 1998. Energy demand in Asian developing economies. A World Bank Study.
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Korean energy demand in the new millenium: outlook and policy implications, 2000}2005 Sung Hyun Kim , Tae Heon Kim, Youngduk Kim *, In-Gang Na Korea Information Society Development Institute, 1-1 Juam-dong, Kwachun, Kyunggi-do, South Korea Korea Energy Economics Institute, 665-1 Naeson-dong, Euiwang-si, Kyunggi-do, South Korea Received 13 November 2000
Abstract This paper examines dynamic conditions surrounding South Korean energy demand upon entering the new millenium. Korean energy consumption grew very rapidly during the 1990s, but was hit severely by "nancial crisis of 1997 and is again rapidly recovering. Our aim in this paper is to review the recent trends and make projections for the near future. After reviewing the 1990s, we present forecasts on energy demand for 2000}2005. We also present scenario analysis where the best and the worst case scenarios are discussed. 2001 Published by Elsevier Science Ltd. Keywords: Energy demand forecast; South Korea; Econometric model
1. Introduction Upon entering the new millenium, Korea faces a dynamic situation both in energy market and in overall economy. It appears that the remarkable economic growth led by active government intervention since the 1960s may have "nally exhausted its potentials in the 1990s. This possibility was painfully brought into national attention when Korea joined several other Asian nations to experience a "nancial and foreign debt crisis in 1997. There may be many explanations for the crisis, but one thing seems to be clear: A new model for economic development is warranted for a new era. This is especially true for the case of energy industry, where government regulation has been particularly strong and state-owned companies have dominated the market. Accordingly, oil industry in Korea has already gone through a series of liberalization measures since the early 1990s, while electricity and natural gas industries now wait for their privatization processes to begin.
* Corresponding author. Tel.: #82-31-420-2223; fax: #82-31-4202164. E-mail address: [email protected] (Y. Kim). For convenience in exposition, &Korea' actually refers to South Korea throughout this paper unless explicitly stated otherwise.
Korea's position in the world energy market makes this all the more interesting. Korea is a non-negligible player in the world energy market because of its exportdriven economy, relatively large domestic energy market and heavy dependence on imported energy. In the world, Korea ranks 25th in population, 11th in total production (GDP), 12th in export amount, and 12th in import amount. In comparison, Korea is the 10th in primary energy consumption, the sixth in oil consumption, the "fth in energy import and the third in oil import (Fig. 1). Korea's dependency on imported energy amounts to a dazzling 97% (83% when excluding nuclear energy). Considering such signi"cance of Korean energy demand in the world market and the dynamic conditions sketched above, it would be a worthwhile exercise to examine the recent trends in energy consumption and try to derive its future outlooks. Our aim in this paper is precisely to do that. In the next section, we review Korean energy consumption in the past decade. We present key statistics and remark on notable trends. In Section 3, we explain All rankings are based on 1999 "gures except for GDP. South Korea's GDP ranked the 11th in 1997 but fell to the 14th in 1998 due to the crisis. In recovery, Korea's GDP grew by 10.7% in 1999 and by 9.0% (estimate) in 2000 (Sources: Korea National Statistical O$ce, 2000; Korea Energy Economics Institute, 2000a).
0301-4215/01/$ - see front matter 2001 Published by Elsevier Science Ltd. PII: S 0 3 0 1 - 4 2 1 5 ( 0 1 ) 0 0 0 1 8 - 0
900
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Fig. 1. Korea's position in the world.
Table 1 Korea's primary energy consumption in the 1990s
Coal (million ton) Oil (million bbl) LNG (million ton) Total (million TOE)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
43.4 (!1.7) 356.3 (24.1) 2.3 (14.8)
42.4 (!2.3) 424.7 (19.2) 2.7 (15.7)
39.8 (!6.1) 514.2 (21.1) 3.5 (30.8)
42.4 (6.5) 564.6 (9.8) 4.4 (24.9)
42.7 (0.6) 621.5 (10.1) 5.9 (33.1)
44.3 (4.0) 677.2 (9.0) 7.1 (20.9)
50.3 (13.4) 721.1 (6.5) 9.4 (32.1)
53.9 (7.3) 793.9 (10.1) 11.4 (21.5)
55.9 (3.6) 670.3 (!15.6) 10.6 (!6.5)
59.1 (5.8) 719.7 (7.4) 13.0 (21.8)
93.2 (14.1)
103.6 (11.2)
116.0 (12.0)
126.9 (9.4)
137.2 (8.2)
150.4 (9.6)
165.2 (9.8)
180.6 (9.3)
165.9 (!8.1)
181.4 (9.3)
Note: In parentheses are the percentage growth rates year-on-year. (source: Korea Energy Economics Institute, 2000b).
our methodology for making forecasts, which is basically a system of econometric models. Section 4 summarizes the outlook on Korean energy demand for "ve-year period up to the year 2005 and also presents the best and the worst case scenarios. Section 5 concludes the paper with remarks on several policy issues. They represent signi"cant qualifying factors that are likely to a!ect energy demand (hence, our future revision of forecasts) as well as important policy issues that require assessment on future energy demand patterns for successful policy implementation. This paper does not attempt to present a long run perspective on Korean energy market. Our aim is more modest in the sense that we limit our discussion to a relatively short period (up to 2005). For a longer period projection, we will need to examine supply side of the market more carefully. Also, our forecasting model was developed for a short run analysis. We believe that because this is a critical moment in the evolution of Korean energy demand it is important to acknowledge the vast uncertainty surrounding Korea and to try a short, but focused projection. It is hoped that readers will gain useful insights into Korean energy demand situation from our discussion of trends, outlook and key policy issues.
2. Overview of Korean energy consumption in the 1990s This section presents an overview of energy consumption during the past decade. We will "rst look at primary energy consumption in the 1990s focusing on major energy sources (oil, coal and natural gas). Then we will examine "nal energy consumption with sectoral emphasis. 2.1. Primary energy consumption South Korea's total energy consumption almost doubled during the 1990s, from 93.2 million TOE in 1990 to 181.4 million TOE in 1999. This amounts to a 7.7% annual average growth in energy consumption during the 1990s. For the same period, the gross domestic product (GDP) of Korea grew by 5.8% per annum (see Table 1). Energy consumption growth rates exceeded 10% in early 1990s and remained at 8}10% until the year 1998, when it drastically fell to !8.1% due to the "nancial crisis that hit Asian region at the end of 1997 and exerted its impact throughout 1998. In the year 1998, Korea's GDP fell almost by 6%. If we leave out the crisis period, the average growth in energy demand up to 1997 was an impressive 9.9%.
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
901
Fig. 2. Composition of primary energy consumption by sources (1990}1999).
The impact of 1998 fall is believed to be of a temporary nature, as witnessed in the complete recovery of the precrisis level in 1999. However, the composition of energy consumption is showing some changes since the "nancial crisis (Fig. 2). Since 1999, while electricity and gas demand is strikingly strong, oil demand is relatively weak, probably due to high crude oil prices and other industrial factors. The share of oil products in total energy consumption is the largest in Korean energy consumption, ranging from 63% (in 1994) to 54% (in 1990 and 1999). The shock of the oil crisis in the early 1980s had alerted the government and consumers to lessen oil dependence (down to 43.7% in 1987). But stable income growth in the 1990s pushed up the share beyond 60%, before the "nancial crisis lowered it to near 50%. In fact, oil demand was most severely a!ected by the 1997 crisis: the decline of !15.6% in 1998 is almost double of the total energy demand decline (!8.1%). Over the past decade, oil products consumption was "rst sustained by industrial sector, then backed up increasingly by transport sector since the mid-1990s. On the other hand, oil consumption in transformation (mostly power generation) and residential and commercial sectors was more vulnerable to short term changes and was conspicuously a!ected by the 1997 crisis. In 2000, high crude oil prices and relative setback of oil-intensive industries suppressed oil demand recovery, while other energy sources, notably gas and electricity, are rapidly gaining their pre-crisis forms. Natural gas consumption has been, at least in terms of growth rates, the leader during the 1990s. It grew by more than 20% almost every year (except for a decline in 1998). This is a result of active government policy initiatives in encouraging LNG consumption.
More focused short-run trends are analyzed in Korea Energy Economics Institute, various issues.
Another interesting change in Korean primary energy demand is found in coal consumption. Anthracite coal is practically the only energy resource available in the Korean territory and used to be the major energy source before oil products replaced it in the 1970s. Coal demand in total has grown at an average 3.4% rate during the 1990s. But a signi"cant change in the composition of coal demand lies hidden in the "gures: anthracite coal has been e!ectively faded out by imported bituminous coal: anthracite's share in coal consumption fell from over 40% in early 1990s to less than 10% in 1999. The share of anthracite coal in total energy consumption fell from 10% in 1990 to 1% in 1999. The recent "nancial crisis somewhat boosted anthracite coal consumption in 1998, but this is only a temporary phenomenon during a recession. Such a rapid growth of energy consumption raises much concern over energy supply and security problems. Growing dependence on imported oil and gas poses even more serious threats to Korean economy. As was already mentioned, Korea's dependence on oil products for its energy consumption had been lowered signi"cantly in the 1980s. But the 1990s saw a reversal of such &conservation' e!orts with strong economic growth. On the other hand, the government introduced LNG as an important alternative to oil products. Table 2 shows some changes in Korean energy consumption and import from the mid-1980s to 1990s. Oil share in energy consumption is higher in the 1990s than in the 1980s (oil share in 1997 was 60.4% but the "nancial crisis lowered it signi"cantly). Energy import (in dollars) almost doubled during the 1990s. Import dependence rose signi"cantly to reach 97.2%. While oil share in energy import is slowly falling, LNG import now takes
A symbolic change in the government organization re#ects relaxed attitude towards energy issues during the 1990s. Ministry of Energy and Resources, created in 1977 in reaction to oil shocks, was restructured and is now only a part of Ministry of Commerce, Industry and Energy.
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902
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Table 2 Changes in Korean energy consumption and import Year
1985
1990
1999
Energy consumption (million TOE) Oil consumption (million TOE) Oil share in energy consumption (%) Energy import (million US$) Import dependence in energy (%) Oil share in Energy import (%) LNG share in Energy import (%) Middle East dependence in crude oil import (%)
56,296 27,142 48.2 7290 76.2 (68.8) 83.8 N/A 57.2
93,192 50,175 53.8 10,926 87.9 (73.7) 82.5 4.4 73.4
181,363 97,270 53.6 22,674 97.2 (83.0) 81.3 9.1 73.1
Excluding nuclear energy. Dollar-base. LNG import began in 1986. (source: Korea Energy Economics Institute, 2000b).
Table 3 Korea's "nal energy consumption in the 1990s 1990 Industry
1991
1992
1993
1994
1995
1996
1997
1998
1999
Residential} commercial
36.2 (17.1) 14.2 (15.5) 24.9 (9.0)
42.9 (18.7) 16.2 (14.0) 24.7 (!0.2)
50.8 (18.4) 18.5 (14.7) 25.3 (2.2)
55.6 (9.4) 21.1 (14.0) 27.3 (8.2)
59.9 (7.8) 23.9 (13.0) 28.4 (4.0)
62.9 (5.1) 27.1 (13.8) 31.9 (12.1)
67.9 (7.8) 29.8 (9.7) 34.4 (7.9)
77.9 (14.8) 32.1 (7.7) 35.8 (4.1)
76.0 (!2.4) 26.2 (!18.4) 29.9 (!16.4)
79.9 (5.0) 28.6 (9.3) 34.6 (15.6)
Final Total (million TOE)
75.1 (14.0)
83.8 (11.6)
94.6 (12.9)
104.0 (10.0)
112.2 (7.8)
122.0 (8.7)
132.0 (8.3)
145.8 (10.4)
132.1 (!9.4)
143.1 (8.3)
324.0 (22.7) 19.5 (!7.9) 16.2 (6.0) 94.4 (14.8) 963 (63.2)
378.6 (16.8) 15.5 (!20.8) 19.1 (18.0) 104.4 (10.6) 1467 (52.3)
455.5 (20.3) 11.7 (!24.8) 19.9 (4.4) 115.2 (10.4) 2088 (42.4)
506.3 (11.1) 8.6 (!26.2) 22.5 (13.3) 127.7 (10.8) 2858 (36.9)
554.9 (9.6) 5.4 (!37.7) 22.7 (0.8) 146.5 (14.7) 3840 (34.4)
601.5 (8.4) 3.8 (!28.3) 23.9 (4.9) 163.3 (11.4) 5193 (35.2)
644.7 (7.2) 2.9 (!25.7) 26.0 (8.8) 182.5 (11.8) 6592 (26.9)
727.8 (12.9) 1.9 (!32.6) 27.0 (4.0) 200.8 (10.0) 7708 (16.9)
642.8 (!12.7) 2.2 (13.2) 25.6 (!5.3) 193.5 (!3.6) 8024 (4.1)
Transport
Oil (million bbl) Anthracite (million ton) Bituminous (million ton) Electricity (TWh) Citygas (million m)
689.4 (7.3) 2.4 (11.9) 25.8 (1.0) 214.2 (10.7) 10.012 (24.8)
Note: In parentheses are the percentage growth rates year-on-year. Residential}commercial includes public sector. (source: Korea Energy Economics Institute, various issues).
up a signi"cant share. In addition, Korea is more dependent on Middle East for crude oil than in the 1980s. 2.2. Final energy consumption Final energy consumption has also shown an impressive growth during the 1990s. Industrial sector led the growth at "rst, then transport sector took the lead during the mid-1990s. Residential and commercial sector showed somewhat of a #uctuation (see Table 3 and Fig. 3). Of course, there was a decline in 1998, mostly in transport (!18.4%) and residential and commercial sector (!16.4%). Industrial consumption was a!ected relatively mildly, because of strong demand for pet-
rochemical feedstock (i.e. naphtha), which in turn was caused in part by the currency depreciation and export boom. The share of industrial sector is the largest in "nal energy consumption*but this is somewhat misleading because non-energy demand (i.e. petrochemical feedstock demand) has grown signi"cantly during the 1990s and now takes up almost two-thirds of total industrial oil consumption compared to about 40% in 1990. Petrochemical industry is an important contributor in export-driven Korean economy. Naphtha is now the most demanded oil product in Korea*in 1999, the share of naphtha in oil consumption was 30.4%. Because domestic re"ning cannot ful"ll naphtha demand, Korea imported 101 million bbl (46.2% of total naphtha
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903
3. Methodology and assumptions for projection
Fig. 3. Composition of "nal energy consumption by sectors (1990}1999).
consumption) in 1999. Therefore, actual energy consumption in industrial sector is more modest than shown in table, but still solid. Transport sector, although the smallest in share, has become more visible over the decade due to explosion of vehicle ownership and transport volumes. For example, private and commercial passenger cars grew in number signi"cantly, from 2 million in 1990 to 7.8 million 1999. Number of all motor vehicles grew from 3.4 million in 1990 to 11.2 million in 1999. However, transport sector consumption was a!ected very badly by the "nancial crisis. We can give two reasons. First, transport demand is more sensitive to income and price shocks because economic depression leads to less leisurely travel and less commercial and industrial transport. Second, Korean energy tax system is heavily focused on transport fuels (motor gasoline and motor diesel), and this became worse during the "nancial crisis. While in 1997, about 50% of the retail gasoline price was tax, this rose almost to 80% in 1998 as the government wanted to send a &conservation' signal to consumers and at the same time secure revenue base. Residential and commercial sector consumption showed much #uctuation during the 1990s. Examining the consumption levels since the mid-1990s, one can almost conclude that energy demand in residential and commercial sector has reached some sort of a saturation point. Residential demand appears to be very stable, while commercial demand is somewhat stronger. Oil consumption in this sector actually shows signs of decline, but electricity and citygas consumption is stronger. An interesting pattern is that electricity consumption is particularly strong in residential sector while citygas consumption is stronger in commercial sector. Looking at "nal consumption by major energy products, citygas and electricity consumption recorded the highest growth rates, while oil products consumption showed a solid growth. It is obvious that as income grows, consumers prefer more convenient and more &quality' fuels such as gas and electricity.
The methodology we employ for "ve-year projections is econometric, using energy consumption as dependent variable and macroeconomic and other explanatory factors as independent variables. The basic framework is modular, consisting of four independent modules for major energy sources (oil products, citygas, electricity and coal). Each module then subdivides into "nal consumption sectors (industry, transport, residential and commercial) (see Table 4). Summing up forecasts from four modules by sectors, we obtain sectoral xnal energy demand. Demand in transformation sector (power generation and citygas production) is derived from the "nal demand forecast for electricity and citygas. This procedure is not econometric, but re#ects various supply plans of transformation sector companies and the government. Resulting "nal energy demand and transformation energy demand together produces total primary energy demand (see Fig. 4). Important independent variables in forecasting equations are GDP (gross domestic product), energy prices (by sectors, if applicable), and temperature-related variables. For industrial sector, industrial production index (IP) is used instead of GDP. The model speci"cation is based on ADL (Autoregressive Distributed Lag) model. One merit of ADL models is the robustness. Robustness of forecasts was an important consideration in our forecasting. Basic model speci"cation that we use is as follows. The number of lags was determined by the Hendry's (1991) general-to-speci"c method. Actual equations di!er in details for each sector and each energy source. I K ln D " # ln D # ln > R G R\G G R\G G G L # ln P # HDD# CDD G R\G G #AX, where D is the demand for energy, > the income variable (GDP or IP), P the energy price (in real terms), HDD the heating degree-days, CDD the cooling degree-days, X the dummy and other miscellaneous variables, and k, m, n are the number of lags (0)k, m, n)4). We estimated these equations on quarterly data, from the "rst quarter of 1981 up to the second quarter of 2000. This model is documented by Kim et al. (1999). See Greene (1997) for more on ADL models. See Pesaran et al. (1998). Kim (1999) has more information on oil model. Kim (1998) explains natural gas model. Na (1999) discusses electricity model.
57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111
904
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
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Table 4 Modules of "nal energy demand model Sectors Oil products Electricity Citygas Coal
Industrial, Industrial, Industrial, Industrial,
transport, residential and commercial residential, commercial residential, commercial residential, commercial
No. of sub-sectors
No. of equations
13 * * 10
13 3 3 10
Fig. 4. Overall structure of forecasting model.
The data set was compiled at KEEI based on monthly energy balance tables.
3.1. Assumptions Assumptions for forecast are made regarding major explanatory variables, namely GDP (IP for industrial sector), energy prices, general price indices (CPI and WPI), and temperature variables. For GDP, we use mixture of Bank of Korea(BOK)'s short-term forecast (for 2000), Korea Development Institute(KDI)'s mid-term forecast (for 2001 and 2002) and KDI's long-term forecast (for 2003 and after). We assume IP would grow at the same rate as GDP. Energy prices in real terms are assumed to remain at or to rise mildly from the latest actual prices depending on the energy sources, incorporating our judgement. In scenario analysis later in the paper, we employ other assumptions on GDP and energy prices. Temperature, HDD (heating degree-days) and CDD (cooling degreedays) are also important variables. We take quarterly averages since 1981. See Table 8 in the Appendix A for more detail on assumptions.
4. Energy demand outlook, 2000}2005 This section presents our forecasts for the period 2000}2005, obtained from the econometric model based on quarterly data since the "rst quarter of 1981 up to the second quarter 2000, as explained in the previous section. As in Section 2, we explain "rst the outlook on primary energy demand focusing on major energy sources (oil, coal and natural gas) and then look at "nal energy demand with sectoral emphasis.
4.1. Primary energy demand South Korea's primary energy demand is projected to grow 4.8% annually between 2000 and 2005 (Table 5). Primary energy consumption fully recovered 1997 levels in 1999, and we expect 8.0% growth in 2000. Projected demand in 2005 is 247.0 million TOE, which is about 136% of 1999 consumption. Such a rate of growth is quite mild compared to the annual growth rate of 7.7% between 1990 and 1999. Anthracite coal consumption exhibited a short-term increase during the "nancial crisis, but is starting to decline again. Consumption of bituminous coal is
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905
Table 5 Primary energy demand forecast (2000}2005) 2000
2001
2002
2003
2004
2005
Coal (million ton) Oil (million bbl) LNG (million ton)
65.4 (10.6) 760.2 (5.6) 15.6 (20.5)
67.1 (2.6) 812.7 (6.9) 18.4 (17.8)
70.7 (5.3) 848.7 (4.4) 19.7 (7.1)
71.9 (1.7) 882.8 (4.0) 20.5 (4.4)
73.7 (2.5) 915.5 (3.7) 22.6 (10.2)
76.1 (3.3) 942.6 (2.9) 24.6 (8.8)
Total (million TOE)
195.9 (8.0)
207.5 (5.9)
218.1 (5.3)
228.1 (4.4)
237.9 (4.3)
247.0 (3.8)
Note: Numbers in parentheses are percentage growth rates year-on-year. 2000 "gures are part actual, part forecast.
Fig. 5. Actual composition of primary energy in 1999.
expected to grow solidly. In total, coal demand is projected to show an annual average growth of 3.1%. Oil products consumption is very slow in recovery from impact of the crisis. High crude prices since 1999 are a big barrier. Oil demand is expected to stabilize down over time. Average 4.4% growth is projected for the "ve-year period. While heavy fuel oil use is expected to decline in long run, signi"cant demand growth may be observed temporarily in power generation and industrial sectors rebounding from the 1997 crisis impact. Natural gas consumption is expected to grow continually, with projected 9.6% annual growth on average. Citygas demand, especially in industrial sector, is substantially growing, while natural gas demand in power generation is stable. Composition of total energy demand by energy sources exhibits an increasing share of LNG (13% in 2005 from 9% in 1999), while the oil share is expected to continually decline to approach the 1980s levels (52% in 2005). Substitution of LNG for oil is one of the most prominent features in the forecast. Figs. 5 and 6 below show the changes in primary energy composition between 1999 and 2005.
Fig. 6. Projected composition of primary energy in 2005.
4.2. Final energy demand Final energy demand is projected to grow steadily, reaching 193.1 million TOE in 2005, an 34.9% increase over 1999 levels. Average annual growth rate is 4.8%, again a mild "gure compared to 7.4% during 1990 through 1999. Projected demand growth is more or less stable, with transport sector leading others (see Table 6). Industrial sector demand is expected to show a 5.2% growth in 2000, followed by a stable growth rates around 3}5%. Overall average annual growth rate is 4.2%, signi"cantly smaller than that of total "nal energy demand. Such a stable growth path can be attributed to changes in industrial structure, especially stabilization of growth in energy-intensive industries such as steel, cement and petrochemical industries. There is a general consensus that while industrial growth will continue, there will be signi"cant changes in the industrial structure in Korea. We expect gradual transition of emphasis in Korean industrial sector from high cost, energy-intensive industries to high technology, less-energy-intensive industries. Transport sector demand is expected to grow solidly at around 5}7%. Financial crisis has hit the sector severely,
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906
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
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Table 6 Final energy demand forecast (2000}2005) 2000
2001
2002
2003
2004
2005
Industry (million TOE) Transport (million TOE) Res/Com/Pub (million TOE)
84.0 (5.2) 30.6 (7.0) 37.8 (9.5)
88.3 (5.1) 33.9 (10.7) 39.9 (5.4)
92.3 (4.6) 36.2 (6.8) 41.7 (4.5)
96.1 (4.1) 38.5 (6.2) 43.4 (4.2)
99.8 (3.8) 40.7 (5.7) 45.2 (4.1)
103.4 (3.6) 42.8 (5.1) 47.0 (3.9)
Final Total (million TOE)
152.5 (6.6)
162.1 (6.3)
170.2 (5.1)
178.1 (4.6)
185.7 (4.3)
193.1 (4.0)
Oil (million bbl) Anthracite (million ton) Bituminous (million ton) Electricity (TWh) Citygas (million m)
718.2 (4.2) 2.56 (5.0) 26.83 (3.8) 241.6 (12.8) 12,320 (23.1)
760.0 (5.8) 2.51 (!2.2) 27.51 (2.5) 257.9 (6.8) 13,829 (12.2)
795.3 (4.6) 2.49 (!0.7) 27.93 (1.5) 275.1 (6.7) 15,001 (8.5)
828.3 (4.1) 2.44 (!1.9) 28.33 (1.4) 291.0 (5.8) 16,182 (7.9)
859.6 (3.8) 2.41 (!1.3) 28.73 (1.4) 306.6 (5.3) 17,431 (7.7)
889.0 (3.4) 2.37 (!1.5) 29.12 (1.4) 321.4 (4.8) 18,725 (7.4)
Note: Numbers in parentheses are percentage growth rates year-on-year. 2000 "gures are part actual, part forecast.
and the recovery is coming somewhat slowly. The 1997 level is expected to be recovered by 2001, followed by strong growth from then on. Transport demand appears to be relatively more sensitive to economic #uctuations. Although the sector has been su!ering from impact of "nancial crisis and high crude prices, it is projected to be the leading sector in the longer run. In the composition of "nal energy demand by sectors, the share of industrial sector is expected to decline (from 55.8% in 1999 to 53.5% in 2005), while the share of transport sector is expected to increase (from 20.0% to 22.1%) and the share of residential}commercial}public sector is expected to remain stable (24.2% in 1999 and 24.3% in 2005). In the composition of "nal energy demand by energy products, the shares of oil and bituminous coal is expected to decline, matched by increases in the shares of citygas and electricity. 4.3. Scenario analysis Because our projections crucially depend on assumptions on GDP and energy prices, we additionally consider a best scenario and a worst scenario. This exercise has obvious merits in that both Korean economy and world energy markets do face much uncertainty even into the "ve-year period. We choose to vary assumptions on GDP and world crude oil prices. The best case scenario re#ects an optimistic view that Korean economy will continue strong growth and that the world oil prices would signi"cantly fall from the recent high levels. The worst case scenario, on the other
hand, presents a pessimistic/conservative view that Korean economic growth would be moderate and that the world oil prices would remain at high levels (Fig. 7). See the Appendix A for more detail on scenario assumptions. While an average 4.7% growth was projected in baseline, the best case scenario forecasts 6.0% and the worst case scenario forecasts 2.8%. The baseline case projects 2005 total demand at 136% of 1999 level; the best case puts it at 145% while the worst case puts it at 124%. The baseline case expects a steadily declining rate of growth. The best case does not alter this picture and lifts demand growth while keeping such a pattern. The worst scenario, however, shows a signi"cantly subdued energy demand growth. In the best case, the shares of oil and natural gas rise by 1% point from the baseline case, respectively. In the worst scenario, oil share falls signi"cantly to 49% while the share of nuclear and bituminous coal rises. This suggests that oil and LNG are more sensitive to assumptions on GDP growth and world oil prices, especially more so in the worst case scenario. On the other hand,
The best case scenario's GDP assumptions are the maximum level among Korean government's announced positions for future economic growth. Assumptions on crude oil prices are that, in the long run, they would return to and remain around the 1996}1997 levels. On the other hand, the worst case scenario was drawn from UBS Warburg's forecast of 3.9% growth for 2001 and extended thereafter. The worst scenario on crude prices re#ects OPEC's upper level position on desirable crude prices. OPEC has recommended $22 to $28 per barrel as desirable oil price range.
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907
Fig. 7. Primary energy demand by scenarios.
Fig. 8. Projected composition of primary energy in 2005*best case scenario.
Fig. 9. Projected composition of primary energy in 2005*worst case scenario.
bituminous coal and nuclear energy remain relatively stable, probably because their major usage is in power generation sector. See Figs. 8 and 9 in comparison with Fig. 6 in previous subsection. Fig. 10 shows the projected "nal energy demand for each scenario. Overall pattern is similar to what is observed for primary demand, in that the worst case shows more departure from the baseline. Di!erences in sectoral composition across scenarios are as follows. In the best case scenario, the share of industrial sector declines while the share of transport sector rises in comparison with the baseline. For the worst case scenario, the opposite happens, with higher share for industrial sector and lower share for transport sector. This shows that transport sector would be more vulnerable to income and price shocks, which has been already con"rmed during the recent "nancial crisis.
Because transport sector demand relies exclusively on oil products and also because transport sector is becoming more important in oil demand, we can draw similar implications for future oil demand. In other words, if Korean economy grows solidly and world oil prices stabilize, we would expect a strong growth of oil demand (especially in industrial sector) for a while. If Korean economy faces more di$culties and world oil prices remain or rise high in the future, oil demand in Korea would be severely a!ected. 5. Concluding remarks In our forecast, energy demand growth is projected to be slower than assumed economic growth. We expect industrial restructuring in Korea leading to less dependence on energy-intensive industries, which were
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908
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
S.H. Kim et al. / Energy Policy 29 (2001) 899}910
Fig. 10. Final energy demand by scenarios.
the important engine of growth for Korea in the past. This re#ects our belief that Korean energy market is entering a mature phase. The impact of crisis factor appears to be temporary, as shown by the complete recovery of 1997 levels in 1999. But the extent of recovery is di!erent across energy sources and sectors, which is probably due to domestic energy price structure and high crude oil prices. For example, industrial energy prices are kept very low while transport fuels (especially motor gasoline) are taxed heavily. Therefore, transport sector demand can be more severely a!ected by price movements. Oil demand growth will be moderate as we expect structural changes in Korean industry. This was manifested clearly in the "rst half of 2000, when Korean economy continued strong growth after regaining pre-crisis form in 1999 and energy demand also grew strongly in accordance with strong economy. Signi"cant growth of electricity and LNG demand played a main role in increasing overall energy demand while oil demand was surprisingly weak. In the "rst half of 2000, Korean economy was led by less-oil-intensive industries such as semiconductor, automobile, and iron and steel industries. Therefore, we expect continual decline of oil share in total energy demand, which will be replaced by gas demand. But on the other hand, transport sector will be a leader in demand growth, providing much of future oil demand growth. Our projection is subject to much uncertainty arising from many signi"cant factors. Some of the important factors that are likely to have impact upon future Korean energy demand can be identi"ed as follows: (1) world oil prices, (2) domestic energy price reform, (3) privatization and restructuring of public utilities and (4) progress in North and South Korean relations.
5.1. World oil prices Like any oil-importing country, Korean energy market and economy are greatly a!ected by movements in world oil prices. We attempted to encompass all possibilities by considering the best and the worst case scenarios. High oil prices will obviously accelerate fuel substitution and industrial restructuring in Korea. On the other hand, Korean energy market does not currently have much impact on the world oil market. This is a discomforting situation at least for Korean policy makers because of the position Korea takes in the world oil market (Korea is the third largest oil importer in the world). There are some barriers against Korean in#uence in the world oil market. Korean oil industry currently su!ers from remains of past regulation, excess capacity and heavy taxes on oil products. Korea is also heavily dependent on Middle East for oil supply. Some argue for formation of an oil importer coalition in Northeast Asian region (Chang, 2000), but more time would be needed for actualization of the idea. 5.2. Domestic energy price reform Also important is the on-going domestic energy price reform. Energy prices in Korea have been subject to heavy regulation and taxation, so believed to be seriously distorted. After years of study and advice by economists, the government has recently taken steps towards reforming the pricing and taxing practices. In order to introduce the reform measures smoothly, the government is going to implement reform plans in a step-wise manner over 6 years (Cho et al., 2000). Our forecasts do not fully account for such price reform plans because although plans have been announced,
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909
Table 7 Comparison of South and North Korea in energy consumption (1998)
South Korea North Korea
Coal
Oil products
LNG
Nuclear
Hydro
Others
Total
36,039 (21.7) 9300 (66.3)
90,582 (54.6) 1400 (10.0)
13,838 (8.3) *
22,422 (13.5) *
1525 (0.9) 2550 (18.2)
1526 (0.9) 780 (5.5)
165,932 (100.0) 14,030 (100.0)
Note: In parentheses are percentage shares (sources: Korean National Statistical O$ce, 2000; Korea Energy Economics Institute, various issues).
they are still subject to much debate. If the plans are fully carried out, industrial sector would face higher prices than now and oil products would share their current high burden of taxes with other fuels. However, high taxation on transport fuels (motor gasoline, diesel, LPG) would continue with some burden on gasoline shifting to diesel and LPG. Our analysis indicates that industrial sector is less sensitive to price shocks at least for the short run. So as a rough estimate of the impact of price reform, we could expect some negative impact on industrial energy demand with more positive impact on residential and commercial sector (commercial demand can increase signi"cantly with price reform). Also LNG demand could face some setback and substitution of oil products for LNG could be somewhat slowed down. But our belief is that the impact would not fundamentally a!ect the current outlook, with mostly bene"cial long run e!ects to Korean economy and energy market from increases in market e$ciency. Taxes on transport fuels remain as an important policy issue. Because transport demand is expected to be solid and strong, unless economy slows down and/or world oil prices remain high, the government would be reluctant to lower taxes.
able to meet the challenge in a #exible manner. On the other hand, privatization may pose a short-term threat to supply stability because of the burden of investment in generation facilities. It is obvious that a reliable forecast of demand is crucial for successful implementation of privatization. Privatization of gas industry, planned to be implemented somewhat later than in electricity sector, also raises interesting issues. Natural gas is an important component of fuel mix for electricity generation. Because natural gas transactions are made in terms of relatively long-term contracts (say, 3 years) and the transaction is currently handled between the state-owned monopolies (KEPCO and KOGAS), there have been some delicate tensions and controversies, especially when there are signi"cant shocks to demand. For example, when the "nancial crisis caused the power demand to fall signi"cantly (for the "rst time in Korean modern history), KEPCO and KOGAS had to engage in di$cult negotiations because of already contracted gas supply amount. Discussion of these issues goes well beyond the scope of the current paper. We shall be content with only pointing out the importance of demand forecasting in such policy discussions. 5.4. Progress in North and South Korean relations
5.3. Privatization and restructuring of public utilities A bigger issue is the privatization and restructuring of public utilities, most notably the two state-owned energy suppliers, KEPCO (Korea Electric Power Corporation, electricity) and KOGAS (Korea Gas Corporation, natural gas). Long-term plans for privatization and restructuring processes have been formed and recently passed by the Congress (for KEPCO). However, there is still much controversy*many people either resist the process itself or question the validity of the current plan. The current plans would "rst privatize electricity generation part, and then retail distribution part of electricity industry. Transmission part would remain public monopoly. Privatization of electricity industry is expected to provide a stable solution for electricity supply issue*demand for electricity is projected to grow very fast as demonstrated in our forecast but current pricing regulation and "nancial structure of KEPCO may not be
Finally, a recent surge of inter-Korean talks is raising many interesting possibilities for energy market. Because North Korea and South Korea are in very di!erent shape in energy sector and in overall economy, a dramatic change in inter-Korean relations can a!ect energy demand and supply fundamentally. As Table 7 shows, South Korea and North Korea have very di!erent energy consumption structures. Coal is the most important fuel in North Korea, while oil is the dominant energy source in South Korea, with importance of natural gas and electricity rising. Hence, some supply excesses are expected for fuels such as coal and heavy oil products. On the other hand, peak/o!peak demand di!erential is becoming an important issue for electricity and gas demand. Energy problems facing North Korea are di!erent, the most urgent one being the absolute shortage of supply capacity. Because demand patterns are so di!erent,
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910
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
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Table 8 Year
2000 2001 2002 2003 2004 2005
GDP growth (%)
Crude oil price (Dubai, $/bbl)
Best
Baseline
Worst
Best
Baseline
Worst
9.0 6.5 6.5 6.5 6.0 6.0
9.0 5.9 5.7 5.4 5.3 5.0
9.0 3.9 3.5 3.3 3.1 3.0
24.9 20.0 19.0 18.0 18.0 18.0
25.6 22.8 22.0 22.0 22.0 22.0
26.6 28.0 27.0 25.0 25.0 25.0
Table 9 Primary energy demand forecasts by scenarios Best 2000 2001 2002 2003 2004 2005
196.1 209.5 222.9 235.8 249.2 262.5
AAGR (1990}1999) AAGR (2000}2005)
7.7 6.0
(8.1) (6.9) (6.4) (5.8) (5.7) (5.3)
Table 10 Final energy demand forecasts by scenarios
Baseline
Worst
195.9 207.5 218.4 228.1 237.9 247.0
195.8 204.7 211.8 216.8 221.3 224.7
7.7 4.7
(8.0) (5.9) (5.3) (4.4) (4.3) (3.8)
(8.0) (4.6) (3.4) (2.4) (2.1) (1.6)
7.7 2.8
mutually bene"cial exchanges could occur, if the political relations continue to improve. South Korea could provide excess coal and electricity directly to North Korea. South could also assist North in importing coal and oil products abroad. On the other hand, energy cooperation can provide South Korea ways to reach Northeast Asia's rich energy resources such as natural gas and oil. Just like other economic cooperation programs, the realization of such energy cooperation depends on whether North Korea has the intention of opening and marketizing its economy. Cooperation measures, if carried out, will fundamentally a!ect both countries' energy consumption structures.
Acknowledgements The authors are most grateful to an anonymous referee whose helpful advice on amendments greatly improved the paper.
Appendix A Assumptions for baseline and scenario analysis are given in Table 8. Primary and "nal energy demand forecasts by scenarious are presented in Tables 9 and 10, respectively.
Best 2000 2001 2002 2003 2004 2005 AAGR (1990}1999) AAGR (2000}2005)
152.7 164.0 174.4 185.2 196.1 207.3 7.4 6.3
(6.7) (7.4) (6.3) (6.2) (5.9) (5.7)
Baseline
Worst
152.5 162.1 170.2 178.1 185.7 193.1
152.4 159.6 164.3 168.1 171.2 173.8
7.4 4.8
(6.6) (6.3) (5.1) (4.6) (4.3) (4.0)
(6.5) (4.7) (3.0) (2.3) (1.9) (1.5)
7.4 2.7
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