Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

Through the power industry restructuring in Korea, we witness various kinds of risks in the electricity market, and the need of risk management is emphasized. Government as a regulatory body should recognize the importance and usefulness of risk management market in the context of correcting a market failure. As shown in the empirical results, we could expect that the introduction of risk management market leads to price stabilization and market power alleviation in the electricity pool, resulting in the improvement of overall social welfare. The lessons from the California Crisis would be that the market-based approach using hedging contracts is more effective than the government's direct control such as the price cap regulation. There exist various tools for price stabilization and risk management, and the vesting contract in the form of CfDs (contract for differences) would be an appropriate option for Korea's situation considering the early stage of restructuring and the privatization of generating sector. In addition, if the domestic electricity spot market develops into a more competitive structure, we could consider the opening of electricity futures market, and the feasibility test of electricity futures contract proves to be reasonable in general. The government's role in risk management sector would be to induce more participants and competition into spot market. After vitalizing the spot market, the government could introduce the OTC (over-the-counter) contracts first, monitor its progress, and then open the exchange-trade contracts later. In this stage, the government should minimize market intervention, and perform the function of market monitoring in a minimum sense.