Future of South Korea’s Energy Market on the Crossroads
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The subject of nuclear power in Northeast Asia evokes cataclysmic images of North Korea’s weapons program and, more recently, the meltdown at Fukushima - but there is another player in the region that is equally keen on effectively harnessing nuclear energy. Since activating its first reactor in 1977, South Korea has steadily increased its production and capabilities; today it relies on nuclear power for 35% of its electricity. Despite public concerns regarding the safety of nuclear power in the aftermath of the Fukushima disaster, there is a strong push from industry for Seoul to further enhance domestic production of nuclear energy. Indeed, if things go as planned, South Korea may soon breakout onto the world market as a major nuclear power.
Securing a ready source of power is critical for a highly industrialized economy like South Korea’s. With fuel imports from the Middle East constantly subject to price fluctuations or sanctions from the United States, the need for a reliable domestic source of energy has increasingly taken center stage in public discussions. In addition, the standing monetary policy of export-driven South Korea keeps the Won (KRW) cheap for exports but expensive for import of raw materials, underscoring an immediate economic incentive to reduce reliance on oil.
Nevertheless, South Korea is limited from making extreme advances in nuclear energy because of its inability to enrich uranium domestically. Not only is it costly to purchase 4000 tons of yellowcake annually, Korea pays handsomely for a handful of foreign corporations to enrich its uranium. According to some estimates, South Korea spends around $300 million annually on importing yellowcake, which is readily available from any country with uranium deposits (Australia, Canada, Kazakhstan, Niger, etc.), and another $600 million for foreign corporations, located in a mere six countries that have been permitted by international agreements to enrich uranium (US, Russia, UK, China, Japan and France), to deliver the core raw material for generating nuclear power. Korea’s key partners include UK based Urenco Group, France based Areva SA (NASDAQOTH: ARVCF.PK), United States Enrichment Corporation (NYSE: USU) and Russia’s Tekhsnabexport (TENEX), all of which work with Korean nuclear power plants on short-term, three to five year contracts.
A spokesperson from Korea Hydro & Nuclear Power Co., Ltd. (KHNP) noted that for long-term energy security, South Korea must find a diplomatic solution to acquiring domestic enrichment capabilities. In addition, according to Dr. Mu-hwan Kim of Pohang University of Science and Technology, not participating in the nuclear industry today may mean that South Korea could forever lose the opportunity to enter the uranium enrichment market, which is rapidly being transformed by innovation and new technology. Many nuclear experts in South Korea agree that while the start-up cost for uranium enrichment will be high, it will prove to be far more economical in the near future.
The emphasis on bolstering domestic nuclear capabilities has come to foreground in recent months because of three factors; one, concern that the nuclear accident in Fukushima and subsequent negative public opinion will inhibit public officials from making assertive moves towards energy security; two, decreased faith in the delivery of fuel from the Middle East, especially with oil imports from Iran facing international pressure; three, the opportunity in 2015 to revise the Agreement for Cooperation between the Government of the Republic of Korea and the Government of the United States of America concerning Civil Use of Atomic Energy, which contains clauses prohibiting uranium enrichment in South Korea and was last renewed in 1974.
If South Korea can successfully allay Washington’s concerns of nuclear weapons proliferation and revise the bilateral agreement by 2015, Seoul will most likely commit to major investment in research and development. This will have enormous implications for not just South Korea but also the rest of the Pacific Rim. South Korean industry, less inhibited by the cost of foreign sources of energy, will see increases in production and exports, affecting the many economies that are now intrinsically tied through recent free trade agreements. Furthermore, having acquired the unique entitlement to enrich uranium, Korean energy companies will expand their bid to export nuclear technology and material abroad, directly challenging major Japanese and French competitors in key markets like the Middle East.
This all comes down to a political solution to the impasse created by a decades-old treaty and the course of South Korean industry in the foreseeable future may well be decided in the next few years.
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