A regulatory void is undermining South Korea’s renewable energy industry due to the government’s failure to lay down ground rules for the burgeoning industry.

A lack of oversight has led to an increase in fraud and loopholes in safety, resulting in businesses calling for more regulations.

According to a recent press release from the Korea Energy Agency, unlicensed solar power contractors are damaging the country’s renewable energy by impersonating government agencies such as the Korea Energy Agency, NongHyup and the Korea Electric Power Corp., as a way to lure customers.

To stop unlicensed contractors, the Ministry of Trade, Industry and Energy said March 19 that it would introduce a “standardized contract format” for the construction of solar power generation facilities starting in April. The new recommended contracts will state the contractors’ business license numbers.

However, the new guidelines are not legally binding and contractors can still opt not to use the standardized contracts. “Currently, we are unable to keep track of unlicensed contractors,” a KEA official said.

“Construction of solar power facilities requires a complex approval process, leading to more opting for simplified versions of contracts to sign. As such cases later lead to disputes, a standardized contract aims to specify the basic information on paper,” another KEA official said.

From 2015 to October 2019, the Korea Consumer Agency reported 2,404 requests for consultations and 116 for victim assistance regarding solar power generation facilities.

Of the cases where victim assistance was needed, 77 involved fraudulent contracts -- contractors falsely promised government solar power subsidies to clients or offered free installation, only to claim later that they had installed equipment on credit and charge fees plus interest.

Seventy-two of the 116 victims were over 50, and 57 were over 60.

For consultations, among 2,098 cases from 2015 to May 2019, 53.1 percent, or 1,116 cases, were related to contractual issues.

Government subsidies for solar power increased 45 percent from 665.8 billion won ($545.5 million) in 2016 to 965 billion won in 2018. At the same time, the solar power industry lacked a standardized contract format to guide consumers away from unlicensed contractors.

ESS also hurting

The energy storage systems industry is also experiencing a regulatory void.

Last June, the government announced that it would generate 30-35 percent of the country’s electricity with renewable energy by 2040. The current level is 7-8 percent.

To reach the goal, the government has since provided stronger incentives for installing energy storage systems -- battery systems that can store electricity generated by renewable energy sources such as solar and wind power when demand is low and discharge it when demand is high.

One of the incentives includes giving weighted value to electricity generated with ESS. For example, 1 megawatt-hour of electricity generated by solar power is given a renewable energy certificate worth 5 MWh if it is linked to an ESS -- five times the normal amount. As the certificates can be traded between electricity providers, renewable electricity generation is more profitable if it is linked to an ESS.

Thanks to incentives like this, the number of ESS facilities spiked to 1,490 in 2019 from 274 in 2016, according to Rep. Yoon Han-hong of the Liberty Korea Party, which is now the United Future Party, last year.

However, 28 fires broke out at ESS facilities from 2017 to October 2019, according to government data.

The series of fires prompted the Trade Ministry to introduce a set of ESS safety requirements in late March, called the Korea Industrial Standard.

The ministry took further action in October, expanding the requirement for safety inspections to ESS facilities with capacities lower than 300 kilowatt-hours. New ESS projects that fail to get certification cannot proceed.

Though the government came up with the standardized safety requirements for ESS, the belated efforts have been eclipsed by the failure to address the management responsibilities of ESS operators.

“The government’s current safety measures for ESS management are merely guidelines, so ESS operators aren’t required to install electric protection devices or alert systems,” a Korea Electrical Safety Corp. official said.

Above all, the regulatory void is not only undermining the sustainability of the ESS industry but is also putting domestic battery makers at a disadvantage in the global competition against Chinese manufacturers.

Beginning in 2016, the Chinese government excluded electric vehicles loaded with Korean batteries from its whitelist for subsidies.

It was only in December that the Chinese government allowed electric vehicles with Korean batteries onto the subsidy list for the first time, including the Tesla Model 3 and Mercedes-Benz E-Class plug-in hybrid, powered by batteries from LG Chem and SK Innovation, respectively.

In contrast to China’s apparent protectionism, the Korean government kept its doors wide open, allowing Chinese battery makers to make their way into the Korean ESS industry.

Last May, Korean general trading firm STX signed an exclusive distribution agreement with Chinese battery maker BYD. In accordance with the contract, ESS provided by STX in Korea should be equipped exclusively with BYD batteries.

Also, domestic venture firm Smartguru said in the same month that it had installed and supplied lithium iron phosphate batteries manufactured by Chinese battery giant CATL for ESS used at the Songjeong solar power plant in North Chungcheong Province.

On top of competition from China, leading domestic battery makers LG Chem and Samsung SDI face yet another challenge from Tesla.

According to industry sources, Tesla has entered a certification process of the Korea Battery Industry Association to enable the sales of its ESS in the country in October. Tesla is expected to introduce ESS to be linked with solar power and wind power facilities.

In the face of mounting competition from foreign battery makers, domestic battery makers expressed concerns over the tilted playing field in ESS trade.

“What we need is not less, but more regulations in the ESS industry. While China is restricting Korean batteries, Chinese battery makers are doing business freely in Korea, benefiting from the country’s policy that incentivizes renewable energy,” said an industry source.

(kbw@heraldcorp.com)