Energy Trends

Total Primary Energy Supply (“TPES”) dropped by 1.7% to 150.0Mtoe in the 1st half of 2019 on a year-on-year basis.

The growth of TPES was much slower than the economic growth rate, which was affected by weak industrial and service production amid the economic downturn, increased maintenance at petrochemical facilities and weather conditions.

Especially, warmer winter than the previous year and the maintenance work at major petrochemical facilities resulted in much slower energy consumption growth, as compared to the economic growth rate. TPES, except the feedstock energy, fell by 1.3% on a year-on-year basis.

The use of all energy sources decreased, except nuclear and renewable energy that are hardly affected by prices or the economic situation.

Petroleum (-2.5%) Industrial petroleum use declined, mainly naphtha, as the industrial production slowed down, and some naphtha cracking centers underwent maintenance or ceased operation due to safety issues, although the transport sector consumed more petroleum (1.1%) amid falling global oil prices (-3.7%) and with a temporary fuel tax credit.

Coal (-8.5%) Industrial coal use fell slightly partly due to the sluggish production, and the consumption fell more sharply in the power generation sector owing to the increased planned preventive maintenance at coal-fired power plants, the temporary shutdown of some power plants following accidents, the government’s limit on the maximum output of thermal power plants as a means of fine dust mitigation.

Nuclear (+33.0%) The use of nuclear energy surged, as the capacity factors rapidely increased (over 22%p yoy) after several reactors completed maintenance work that took over a year under more stringent safety regulations.

Gas (-6.9%) Gas consumption rapidly decreased in the power generation sector due to falling power demand, base effect of the surge during the same period last year (32.1%), increased nuclear generation, and the consumption fell in the city gas production sector as well amid the sharply decreased number of heating degree days(Jan-Feb), and as city gas was replaced by other energy sources due to increased price.

Electricity (-0.7%) Industrial and buildings’ electricity use declined, as temperatures returned to normal and the service production index grew at slower pace; electricity consumption grew more slowly in the fabricated metals and petrochemical sectos, while it declined more rapily in the primary metals sector.

Total Final Consumption (“TFC”) went down by 1.2% to 116.4Mtoe in the 1st half of 2019 compared to the corresponding period last year.

Industry(-1.3%) Industrial energy use declined as a result of weak production and decreased naphtha use due to the increased maintenance at naphtha cracking centers.

Transport (+1.0%) Transport energy use increased, which was attributed to the increased number of registered cars, falling oil prices overseas and the fuel tax cut.

Buildings (-2.8%) Energy use in builings decreased, which was affected by weather conditions and increased energy rates.

Energy Outlook

TPES is expected to decline by 1.6% to 301.2Mtoe in 2019 but to increase by 2.1% to 307.5Mtoe in 2020( on a year-on-year basis).

TPES and TFC are set to decline in 2019 amid the economic downturn, facility maintenance in large energy consuming industries and a return to the average temperatures. In 2020, however, they are expected to rebound along with a rapid economic growth and base effect.

Petroleum and gas demands are projected to recover from the downward trend, and coal demand is to drop more slowly, while nuclear demand is to grow at slower pace.

Petroleum demand is forecast to decrease in 2019 partly because of the maintenance at some petrochemical facilities, but it will recover in 2020 with the completion of the work.

Coal demand is projected to fall in 2019 and 2020 as well on a year-on-year basis. The pace of decline, however, is to be slower, as the sharp fall in demeand will likely decelerate in the power generations sector.

The nuclear generation is expected to grow by 12% in 2019 and 6% in 2020 following the commissioning of a new reactor. However, the growth will be slower, as stronger safety inspections at nuclear power plants continue.

Gas demand is expected to drop sharply in 2019 in both the power generation and city gas production sectors, while the demand will likely increase in 2020, as electricity demand rebounds and the number of heating degree days increases.

Electricity demand is forecast to decline in the industrial and buidilngs sectors in 2019 but expected to bounce back in 2020 along with a faster economic growth.

In 2019, the energy consumption growth is forecast to be flat in the industrial sector compared to the previous year, rebound in the transport sector and start to decline in the buildings sector.

Industrial energy demand is set to decline by 0.8% in 2019 from the previous year, owing to the sluggish industrial production amid the economic downturn at home and abroad and massive maintenance in the large energy consuming industries. In 2020, however, the demand is expected to rebound by around 2% backed by increased exports, faster economic growth and base effect.

Transport energy demand is projected to be up 0.6% in 2019 than the previous year as a result of the oil price decline and temporary fuel tax cut. In 2020, the demand growth will likely slow down (0.3%), owing to a slower decline in oil prices and the tax cut expiration.

Energy demand in buidilngs is expected to fall by 2.7% year-on-year in 2019 partly due to the sharp drop in the number of cooling & heating degree days. In 2020, around 2% demand growth is expected owing to the base effect and increased production activities in the service sector.

Key Features and Implications

Energy use fell more sharply in the 1st half of 2019 compared to the pace of economic slowdown, which was attributed to the increased maintenance at some petrochemical facilities and weather conditions.

The growth of the economy and energy use showed different trends in the 1st half of 2019, as the economy grew by 1.9% year-on-year while TFC fell by 1.2%.

Industrial energy use dropped by 1.3% year-on-year as a result of the sharply decreased naphtha use during the maintenance at naphtha cracking centers, leading the downward trend in the nation-wide energy use.

Electricity demand is forecast to decrease in 2019 due to the massive maintenance work in large power consuming businesses and weather conditions.

Industrial electricity consumption is expected to decrease on a year-on-year basis, as the consumption grows much slower in the fabricated metals and petrochemical sectors than the previous year and decrease faster in the primary metals(iron & steel) sector.

Buildings’ electricity demand is forecast to decrease in 2019 on a year-on-year basis, as temperatures return to seasonal norms, leading to a sharp drop in the number of cooling & heating degree days which surged last year due to extreme heatwave and cold spell. If the temperature effect remains at the average level, the electricity demand in buildings will likely increase.

Energy demand is set to rebound in 2020, as several factors that are driving down the demand in 2019 will have no more or less impact.

As for TPES by energy sources, petroleum and gas demand that is set to decline in 2019 is expected to rebound in 2020, and the rapid decline in coal demand is forecast to much slow down.

In terms of TFC by end-use sectors, the industrial and buildings’ energy demand will likely rebound in 2020 after a decline in 2019 as a result of a faster economic growth, the completion of facility maintenance and base effect.

Energy Trends

TPES in 2018 increased to 307.3 Mtoe, up 1.7% year-on-year.

Despite cold winter and the worst heat wave ever, TPES growth decreased by more than 1%p on a year-on-year basis due to declining economic growth, rising oil prices, increased maintenance of petrochemical facilities, etc.

Feedstock energy use (non-energy oil and bituminous coal for steelmaking) reduced, led by naphtha consumption in the petrochemical industry, which caused sluggish energy consumption. Excluding the feedstock energy use, TPES in 2018 went up by 2.7% on a year-on-year basis.

Petroleum and nuclear energy use showed a year-on-year decrease while coal and gas consumption increased.

Petroleum (↓0.8%) Rising oil prices decreased petroleum consumption in the transport and buildings sectors and that in the industrial sector also went down due to increased maintenance of naphtha cracking centers (NCC) and unplanned outage triggered by accidents.

Coal (↑2.5%) Coal use for generation plummeted due to diminishing effect of introduction of new coal-fired power plants, government restrictions on coal-fired generation, etc., and coal consumption growth in the industrial sector also showed a dramatic year-on-year decrease (5.6%p) driven by the sluggish key iron & steel industries, etc.

Nuclear energy (↓10.1%) While the preventive maintenance period of multiple nuclear power plants were extended due to strengthened safety regulations, nuclear energy use maintained its sharp downward movement led by the shutdown effect of Gori Unit 1(June 2017) and Wolsong Unit 1(June 2018).

Gas (↑12.4%) Gas use for generation surged as gas generation replaced the most part of plummeting nuclear power generation, and that for city gas production also marked a rapid increase thanks to its improved price competitiveness driven by cold winter, rising oil prices, etc.

Electricity (↑3.6%) Electricity use increased as that for the industrial sector grew driven by the power-intensive fabricated metal product manufacturing industry, and that for the buildings sector also soared due to temperature effect, temporary reduction of residential progressive electricity tariffs, etc.

TFC in 2018, led by the buildings sector, increased to 237.9 Mtoe by 1.7% on a year-on-year basis.

Industry (↑1.4%) Energy consumption for the industrial use marked a modest 1%-range increase due to the sluggish manufacturing industry, expanded facilities of petrochemical plants, etc.

Transport (↓0.5%) Despite the increased number of vehicles and amount of goods transported, energy consumption in the transport sector reduced (-0.5%) due to rising oil prices.

Buildings (↑4.8%) Energy use in the buildings sector showed a rapid growth thanks to temperature effect, reduced energy tariffs, etc., and consequently drove TFC.

Energy Outlook

TPED will increase by 1.2% to 311.1 Mtoe and TFD is expected to be up by 1.2% to 240.8 Mtoe in 2019.

TPED and TFD will show a significant year-on-year decrease as economic growth is slowing down and the temperature will return to the annual average level.

In 2019, energy intensity is expected to recover (decrease) further and energy consumption per capita is projected to continue its upward trend.

In 2019, demand for petroleum and nuclear energy is forecasted to rise and that for coal and gas are expected to switch to move downwards.

Petroleum demand will rebound from its declining trend in the previous year thanks to falling international oil prices, decreased fuel tax and expanded petrochemical facilities.

With the continued sluggish coal demand for industrial use, that for power generation is expected to start showing a sharp descending movement, which will drive down the overall coal demand.

Despite strengthened safety requirements, demand for nuclear power is anticipated to rebound thanks to the introduction of new nuclear power plants and base effect.

Gas demand for both power generation and city gas production are projected to reduce due to the decreasing number of heating degree-days driven by sluggish electricity demand growth, increasing base-load generation and temperature recovery to annual average level.

Amid the decreasing economic growth rate, the growth rate of electricity demand is anticipated to decline as energy use for the buildings sector is expected to go down dramatically due to base effect.

Energy demand growth rates by major energy source

In 2019, the growth of energy demand in the industrial sector will remain similar to the previous year level while that for the transport and buildings sectors are expected to rebound and reduce, respectively.

Despite the decreasing economic growth rate, the growth of energy demand in the industrial sector is expected to remain at a similar level to the previous year due to recovery of naphtha demand.

Energy demand in the transport sector will rebound driven by declining oil prices, temporary reduction of fuel tax, etc.

The growth of energy demand in the buildings sector is forecasted to plummet as the temperature is expected to return to the annual average level and the effect of energy tariffs reduction is anticipated to diminish, which will lead TFD to slow down.

Key Features and Implications

Electricity demand growth in the buildings sector is estimated to have doubled in 2018 due to cold waves and the worst heat waves.

Electricity demand growth in the buildings sector increased by 3.2%p compared to the previous year in which electricity demand for air-conditioning and heating are estimated to account for 1.6%p and 0.8%p, respectively.

Electricity demand growth will increase by 0.6%p to 1.4%p if the temperature in 2019 summer is as high as the previous year or even higher.

Taking into account frequent abnormal heat waves recently, two scenarios have been developed for potential hot waves in 2019 summer.

Electricity demand growth and TPED growth in 2019 will increase by up to 1.4%p and 0.4%p or higher compared to growth forecasted at 1.6% and 1.2%, respectively, given that electricity demand for air-conditioning is considered only.

Even if another record-breaking heat wave is seen in 2019, gas demand will show a year-on-year decrease this year, and the temperature effect only is unlikely to increase the demand.

Coal and gas generation is expected to decline while nuclear generation will rebound and account for greater share than gas generation in energy mix.

Coal generation in 2019 is projected to shrink dramatically due to decreasing capacity of generation facilities, the government’s fine dust countmeasures, suspension caused by safety accidents, etc.

Despite the lower capacity factor of nuclear power plants compared to the past, nuclear generation will rebound from its sharp decreasing trend which continued for the past three years thanks to the introduction of two new nuclear power plants.

Gas generation will switch from its sharp upward movement in 2018 to downward movement in 2019 as the growth of electricity demand is expected to show a significant slowdown while nuclear generation is anticipated to rebound.

Accordingly, the share of coal generation is forecasted to reduce for three consecutive years while that of nuclear generation will rise for the first time since 2015, which will result in greater share of nuclear generation that exceeds gas generation in energy mix.

The improving trend of energy intensity which has remained sluggish is expected to accelerate for two consecutive years provided that the temperature returns to its annual average level.

Energy intensity (TPES/GDP) improved (declined) rapidly for the first time since 2013 thanks to decreased capacity factor of petrochemical facilities and rising oil prices.

If the temperature returns to its annual average level in 2019, energy consumption in the buildings sector which soared in 2018 will go down dramatically and the improving trend of energy intensity will accelerate.

Energy Trends

TPES in Q3 2018 increased to 75.6Mtoe, up 2.1% year-on-year

Despite the stagnant energy consumption growth in the industrial sector due to declining economic growth rate, that for the buildings sector grew sharply thanks to temperature effect which drove a rise in TPES.

In particular, naphtha consumption decreased as maintenance of petrochemical facilities increased on a year-on-year basis which resulted in the sluggish energy consumption growth.

Petroleum consumption in Q3 showed a slight year-on-year decrease while coal and nuclear energy use escalated, and gas consumption grew rapidly.

Petroleum (↓1.1%) Petroleum consumption marked a year-on-year decline due to the increased maintenance of naphtha cracking centers (NCC) and rising oil prices.

Coal (↑2.2%) Coal consumption growth for steel making slowed down due to the sluggish key iron & steel industries, however, despite the increased preventive maintenance of coal-fired power plants, coal use for generation rose due to the introduction of new bituminous coal-fired power plants.

Nuclear energy (↑1.1%) While the preventive maintenance period of multiple nuclear power plants were extended due to strengthened safety regulations, nuclear energy use posted a slight year-on-year increase due to base effect.

Gas (↑9.9%) Amid sharp rise in electricity consumption, gas use for power generation increased rapidly due to stagnant base load power generation(nuclear + coal), and that for city gas production also marked a steep upward movement thanks to recovery of city gas prices led by rising oil prices.

Electricity (↑4.9%) Electricity use for the industrial sector grew driven by the power-intensive fabricated metal product manufacturing industry, and that for the buildings sector also soared due to temperature effect, temporary reduction of residential progressive electricity tariffs, etc.

TFC in 3Q 2018 marked 56.9Mtoe, 1.3% up on a year-on-year basis.

Industry (↑1.1%) Energy consumption for the industrial use only showed a slight increase due to the sluggish manufacturing industry and expanded facilities of petrochemical plants.

Transport (↓1.1%) Despite the increased number of vehicles and amount of goods transported, energy consumption in the transport sector reduced due to rising oil prices.

Buildings (↑5.2%) Along with rapidly increasing energy consumption for air-conditioning prompted by the worst heat wave and falling energy prices, energy use in the buildings sector has driven TFC

Energy Outlook

TPED will increase by 1.6% to 313.3Mtoe and TFD is expected to be up by 1.6% to 242.6Mtoe in 2019.

TPED and TFD growth will slow down due to declining economic growth rate and temperature effect.

In 2019, energy intensity is expected to recover (decrease) further and energy consumption per capita is projected to continue its upward trend.

In 2019, demand for petroleum and nuclear energy are forecasted to rebound and that for gas is expected to remain unchanged while the use of coal will start showing a downward movement.

Petroleum demand will rebound from its declining trend in the previous year thanks to falling international oil prices, decreased fuel tax and expanded petrochemical facilities.

With the continued sluggish coal demand for industrial use, that for power generation is expected to start showing a descending movement which will drive down the overall call demand.

Despite strengthened safety requirements, demand for nuclear power is anticipated to rise thanks to the introduction of new nuclear power plants and base effect.

Gas demand will remain unchanged as that for power generation and city gas production are projected to reduce and slow down, respectively, taking into account that factors that drove gas demand in 2018, including soaring electricity demand, increasing number of heating degree days, lower tariffs, etc., are expected to be no longer valid.

Amid the decreasing economic growth rate, the growth rate of electricity demand is anticipated to decline as energy use for the buildings sector, which hiked due to abnormal heat wave in 2018, is expected to go down dramatically due to base effect.

Energy demand growth rates by major energy source

In 2019, the growth of energy demand in the industrial sector will mark a year-on-year increase while that for the transport and buildings sectors are expected to rebound and plunge, respectively.

Despite the decreasing economic growth rate, the growth of energy demand in the industrial sector is expected to mark a year-on-year increase due to recovery of naphtha demand.

Energy demand in the transport sector will rebound in 2019, driven by declining oil prices and temporary reduction of fuel tax.

The growth of energy demand in the buildings sector is forecasted to plummet as the temperature is expected to return to the average level, leading TFD to slow down.

Key Features and Implications

Energy consumption outlook has shown remarkable changes due to drastic changes in petroleum consumption and updated consumption plan for feedstock use in the petrochemical industry.

The petroleum consumption outlook in 2018 has been adjusted downward dramatically compared to the previous outlook (Fall 2018) as petroleum use in the industrial and transport sectors showed significant changes in October and November 2018.

Petroleum consumption outlook in 2019 is down by 0.7%p compared to the previous outlook due to lower-than-expected performance and updated consumption plan for feedstock use in the petrochemical industry.

Coal and gas generation will switch from its upward movement in 2018 to downward movement in 2019 while nuclear generation is expected to rebound from its plummeting trend.

Coal generation in 2019 is projected to shrink due to the diminishing effects of expanded capacity of generation facilities and the government’s fine dust countermeasures.

Although the capacity factor of nuclear power plants is expected to be continuously low, nuclear generation will rebound from its sharp decreasing trend from 2016 to 2018 thanks to the introduction of two new nuclear power plants.

Gas generation will switch from its sharp upward movement in 2018 to downward movement in 2019 as the growth of electricity demand is expected to show a significant slowdown while nuclear generation is anticipated to rebound.

Accordingly, the share of coal generation is forecasted to reduce for three consecutive years, however, that of nuclear generation will rise for the first time since 2015.

TPED and TFD will increase in 2019, led by nuclear energy and the industrial sector, respectively.

The driving force (contribution level) of individual energy sources, gas and nuclear energy in particular, are expected to be quite different from the previous year.

Despite the declining economic growth rate, TFC will increase in 2019 thanks to increasing naphtha demand along with expansion of petrochemical facilities in the industrial sector.

Energy Trends

TPES in 1H 2018 increased to 153.0Mtoe, up 3.1% year-on-year.

The recovery of energy consumption in the industrial sector remained sluggish due to the stagnant industrial production, however, the rapid consumption growth in the buildings sector driven by temperature effect, price effect and growing wholesale and retail businesses drove TPES growth.

Excluding the feedstock energy use (non-energy oil and bituminous coal for steelmaking), TPES in 1H 2018 went up by 3.7% on a year-on-year basis.

Gas consumption in 1H 2018 soared on a year-on-year basis and coal and gas consumption marked a modest increase while the use of nuclear energy continued its sharp downward trend.

Petroleum (↑2.0%) Despite the sluggish naphtha consumption due to the increased maintenance of naphtha cracking centers (NCC), the overall growth rate of petroleum showed a modest increase driven by the rising LPG consumption for industrial use as LPG prices remained low.

Coal (↑5.1%) Coal consumption for steelmaking remained stagnant as the key iron & steel industries that had driven demand weakened and furnace improvements increased the furnace efficiency. However, the overall coal consumption posted a rapid growth, prompted by soaring coal use for generation along with the introduction of new large-scale bituminous coal power plants.

Nuclear energy (↓23.3%) A number of nuclear power plants extended the preventive maintenance period due to strengthened safety requirements and their capacity factor hit record low which led to a dramatic year-on-year decrease in nuclear energy consumption.

Gas (↑18.9%) Gas consumption for power generation showed a sharp increase driven by the increased electricity consumption and plunged nuclear power generation, and that for city gas production also grew rapidly as its price competitiveness recovered thanks to temperature effect and rising oil prices.

Electricity (↑4.1%) Despite the sluggish manufacturing industry, electricity consumption growth for industrial use increased driven by the power-intensive fabricated metal product manufacturing industry and that for buildings rose rapidly due to temperature effect.

TFC in 1H 2018 marked 119.6Mtoe, 3.0% up on a year-on-year basis.

Industry (↑2.9%) Despite the stagnant growth rate of feedstock energy use, energy consumption for industrial use went up by nearly 3%, led by the increased LPG and electricity consumption.

Transport (↑0.9%) Despite rising oil prices, the growth rate of energy consumption in the transport sector maintained its upward trend thanks to the surge in aviation energy use.

Buildings (↑5.4%) Energy consumption in the buildings sector expanded rapidly and drove TFC, driven by falling energy prices and lower temperatures compared to the previous year.

Energy Outlook

In 2019, TPED will increase by 2.0% to 316.2Mtoe and TFD is expected to be up by 2.1% to 243.1Mtoe.

TPED is forecasted to grow further in 2018, driven by increasing energy input for power generation, however, such upward trend will slow down in 2019 along with the declining economic growth rate.

Demand for petroleum increased modestly while that of coal and gas plummeted significantly, and the use of nuclear energy is expected to grow and rebound.

The growth rate of coal demand, driven by feedstock energy, is anticipated to elevate due to stagnant international oil prices, fuel tax reduction, expansion of petrochemical facilities, etc.

With the diminishing effect of the expanded capacity of coal-fired power plants, the growth rate of coal demand is projected to slow down dramatically, led by decreasing demand for generation due to increased preventative maintenance.

In 2018, nuclear energy demand is expected to maintain its sharp downward movement as it did in the previous year until it will rebound in 2019, prompted by base effect and the likelihood of introducing new nuclear power plants.

The growth rate of gas demand for both generation and city gas use will plunge as surging electricity demand, increased number of heating degree days, and reduced gas rates that drove gas demand in 2018 will no longer be applicable.

The growth of electricity demand will slow down, taking into account the sluggish exports and private consumption and the base effect of the surge in 2018.

The growth of energy demand in the industrial sector will show a modest year-on-year increase while that for buildings is predicted to mark a sharp decrease.

The growth rate of energy demand in the industrial sector, despite the declining economic growth rate, is anticipated to show a slight year-on-year increase (0.1%p), thanks to the expansion of naphtha demand in the petrochemical industry.

Energy demand in the transport sector is projected to rise further due to stagnant oil prices, temporary fuel tax reduction, etc.

The growth rate of energy demand in the buildings sector is expected to jump due to the heat and cold waves in 2018 but show a sharp decline in 2019 as the temperature will return to the average level.

Key Features and Implications

In 2018, triggered by a more rapid increase in electricity demand compared to other energy sources, TPED is expected to mark a more sharp elevation than TFD.

In 2018, electricity demand is projected to show the most rapid growth since 2010, driven by heat and cold waves and the growth of the highly-electricity intensive fabricated metal product manufacturing industry, which will lead the declining share of electricity in TFC to rebound in five years.

Increasing electricity consumption is anticipated to drive a rapid rise in energy input for generation and conversion loss.

With the soaring conversion loss, the growth rate of TPED is expected to exceed that of TFD for the first time in 2018 since 2010.

Energy intensity will deteriorate in 2018 but make a turnaround and continue its recovery trend in 2019.

In 2018, along with rapidly rising input for power generation, energy intensity is predicted to show a year-on-year increase (deterioration) for the first time since 2011, however, it will return to its declining trend (improvement) in 2019.

Fuel tax reduction is expected to increase the growth rate of petroleum demand by nearly 0.5%p.

Assuming that the fuel tax reduction announced by the government is applied, petroleum consumption for the transport sector, driven by the reduced fuel tax, will go up by 0.2%p and 0.4%p in 2018 and 2019, respectively.

TPED and TFD will increase in 2019, led by petroleum and nuclear energy, and the industrial sector, respectively.

As the driving force (contribution level) of coal and gas are expected to show a dramatic year-on-year decrease, the contribution of respective energy sources will be more balanced than any other years in the past.

The driving force of the industrial sector is expected to remain similar to the previous year whereas that of the buildings sector will decline significantly.

Energy Trends

TPES in 1Q 2018 increased to 81.2Mtoe, up 2.6% on a year-on-year basis.

Energy consumption in the industrial sector remained sluggish as industrial production slowed down due to the stagnant manufacturing industry, however, the rapid consumption growth in the buildings sector triggered by temperature effect, price effect and growing wholesale and retail businesses drove TPES growth.

Excluding the feedstock energy use (non-energy oil and bituminous coal for steelmaking), TPES in 1Q 2018 increased by 4.1% on a year-on-year basis.

Gas and coal consumption increased rapidly while petroleum consumption remained stagnant and nuclear energy use plunged.

Petroleum (↑0.6%) With LPG prices remaining low, LPG consumption for industrial use moved upward, however, the overall growth rate of petroleum slowed down as naphtha consumption declined due to the increased maintenance of naphtha cracking centers (NCC).

Coal (↑6.3%) Coal consumption for steelmaking remained stagnant as the key iron & steel industries that had driven demand weakened and furnace improvements increased the furnace efficiency. However, the overall coal consumption posted a rapid growth, prompted by soaring coal use for generation along with the introduction of new large-scale bituminous coal power plants.

Nuclear energy (↓27.9%) A number of nuclear power plants extended the preventive maintenance period due to strengthened safety requirements which led to a record-low capacity factor at the 50%-range, driving nuclear energy consumption down by nearly 30% on a year-on-year basis.

Gas (↑15.7%) Gas consumption for power generation showed a sharp increase driven by the increased electricity consumption and plunged nuclear power generation and that for city gas production also grew rapidly as its price competitiveness recovered thanks to temperature effect and rising oil prices.

Electricity (↑4.4%) Electricity consumption growth for industrial use slowed down due to the sluggish manufacturing industry except for the semiconductor sector, but that for buildings rose rapidly due to temperature effect, which resulted in the 4%-range electricity consumption growth.

TFC in 1Q 2018 marked 63.2Mtoe, 2.4% up on a year-on-year basis, led by the buildings sector.

Industry (↑0.4%) Energy consumption for industrial use remained unchanged as gas and electricity consumption increased while feedstock energy use decreased.

Transport (↑1.2%) Despite rising oil prices, energy use in the transport sector went up thanks to road transport and aviation energy consumption.

Buildings (↑7.7%) Energy consumption in the buildings sector expanded rapidly, due to falling energy prices and lower temperatures compared to the previous year.

Energy Outlook

In 2018, TPED will increase by 2.6% to 308.8Mtoe and TFD is expected to be up by 2.8% to 238.9Mtoe.

TFD growth is expected to show a slight year-on-year decrease due to declining economic growth rate, however, TPED is forecasted to grow further thanks to the increased conversion loss driven by expanded energy input for power generation.

Demand for petroleum, coal, gas and nuclear energy will continue to grow, slow down, increase significantly and maintain its sharp downward trend, respectively.

Although naphtha consumption growth will show a steep year-on-year decrease, petroleum demand is anticipated to maintain its upward movement due to growing demand in the industrial and transport sectors.

Coal demand, especially for power generation, is expected to decline significantly, driven by the extended shut-down period of old power plants during spring and increased preventative maintenance, with no change to installed capacity of coal-fired power generation plants.

Demand for nuclear energy is projected to mark a rapid decrease by 9% or more due to the shutdown decision of Wolsong Unit 1, strengthened safety inspection requirements of nuclear power plants, delayed introduction of new power plants, etc.

The growth of gas demand is predicted to post a significant increase thanks to surging demand for generation use.

Electricity demand for both industrial and buildings sectors will mark a rapid growth spurred by increased exports and private consumption, temperature effect, etc.

The growth of energy demand in the industrial sector will show a year-on-year decrease while that for buildings is predicted to mark a sharp increase.

The growth of energy demand in the industrial sector is anticipated to show a year-on-year decrease due to sluggish demand for feedstock energy (naphtha, coking coal, etc.)

Energy demand in the transport sector, despite rising oil prices, will maintain its growth rate similar to the previous year thanks to the increased number of travelers and cargo volume.

Energy demand in the buildings sector will show a dramatic escalation as private consumption increased and energy prices decreased amid the sweltering heatwave with record temperatures.

Key Features and Implications

In 1Q 2018, naphtha consumption has decreased for the first time since Q4 2013 (-2.2%), due to the increased maintenance of petrochemical facilities.

Despite new additions of facilities, the six basic petrochemicals (ethylene, propylene, butadiene, benzene, toluene, xylene) and para-xylene (PX) production reduced by 0.2% owing to the increasing production loss and diminishing base effect.

In addition to the decreased production of basic petrochemicals, an increase in the relative price of naphtha against LPG has contributed to the reduction of naphtha consumption (-2.2%).

In 2018, the contribution of gas and the buildings sector to energy demand growth will rise significantly.

The driving force (contribution level) of coal that leads TPED will plunge compared to the previous year, whereas that of gas is expected to rise sharply thanks to soaring demand for power generation.

By sector, the contribution of the industrial sector to TFD is projected to show a year-on-year decrease due to declining economic growth while that for buildings is expected to escalate thanks to temperature effect.

The growth of electricity demand for buildings in 2018 is anticipated to record a dramatic year-on-year increase (3.2%p) owing to the record-breaking heatwave.

Electricity demand growth for buildings in 2018 is expected to rise by around 5.0% on a year-on-year basis, due to the temperature effect which is considered even more extreme than that in 2016.

Taking into account the higher temperatures and lower residential electricity tariffs in 2018 compared to 2016, electricity demand for air-conditioning is projected to increase electricity demand for buildings by 2%p or more.

The growth of the total electricity demand is expected to exceed the economic growth rate for the first time since 2012, led by a sharp increase in demand for buildings.

In 2018, capacity factor of nuclear power plants will drop to record low due to strengthened safety inspection requirements.

Capacity factor of nuclear power plants will decline for three consecutive years to the 60%-range due to strengthened safety inspection requirements and the shutdown decision of Wolsong Unit 1.

The share of gas generation is set to outpace that of nuclear power generation, driven by the decreasing base load power proportion and increasing electricity demand.

Base load power (coal & nuclear power) decreased by 3.6% on a year-on-year basis due to increased preventative maintenance, reducing the base load power proportion in the total generation to around 65%, down by more than 4%p compared to the previous year.

As the share of gas generation is projected to exceed that of nuclear power in 2018, gas will become the second largest energy source for power generation following coal.

Energy Trends

TPES in 2017 increased to 301.1Mtoe, up 2.2% on a year-on-year basis.

Energy consumption in the industrial sector recovered thanks to a modest increase of economic growth, however, sluggish consumption in the transport and buildings sectors due to rising oil prices and temperature effect restrained national energy consumption growth.

Despite the increased economic growth, TPES growth decreased by 0.6%p from 2.8% (based on the previous energy conversion factors), due to revised energy conversion factors.

Excluding the feedstock energy use (non-energy oil and bituminous coal for steelmaking), TPES in 2017 is estimated to have increased by 0.8% on a year-on-year basis.

Petroleum and coal consumption grew at a slower pace and rebounded respectively, while nuclear energy use plunged and gas consumption maintained its upward trend.

Petroleum (↑1.5%) Despite soaring naphtha consumption along with the expanded petrochemical facilities, the growth rate of petroleum consumption showed dramatic slowdown, driven by stagnant consumption growth in the transport sector and negative consumption growth in the power generation sector.

Coal (↑7.9%) Coal consumption in the generation sector soared thanks to the introduction of new large-scale bituminous coal power plants and that for steelmaking also rebounded driven by the base effect of a sharp year-on-year decrease and increased iron & steel exports.

Nuclear energy (↓8.4%) Despite the commissioning of Shinkori Unit 3 (2016.12), nuclear generation maintained its steep downward trend since 2H 2016, due to extended preventive maintenance period of several nuclear power plants along with strengthened safety requirements after the outbreak of an earthquake in Gyeongju.

Gas (↑3.5%) Gas consumption for power generation use remained unchanged thanks to growing coal-fired power generation and sluggish electricity consumption but that for city gas production rapidly increased due to the effect of winter temperature.

Electricity (↑2.2%) Electricity for the industrial use showed a modest recovery while that for buildings slowed down due to the base effect of a surge in 2016 (4.0%) and the effect of summer temperatures.

TFC in 2017 marked 232.5Mtoe, 3.1% up on a year-on-year basis, led by the industrial sector.

Industry (↑4.0%) The growth of the energy consumption in the industrial sector marked a year-on-year increase as feedstock energy use grew rapidly, led by naphtha and bituminous coal consumption for steelmaking, due to expanded petrochemical facilities and base effect, and electricity consumption showed a modest recovery driven by increased semi-conductor exports.

Transport (↑0.7%) The growth of the energy use in the transport sector showed a dramatic year-on-year decrease due to the base effect of a surge in the previous year (6.0%) and the increased domestic prices of diesel (8.5%) and gasoline (6.3%) in the transport sector compared to the previous year.

Buildings (↑2.6%) Energy consumption for heating including city gas and thermal energy showed a relatively rapid increase due to the cold winter weather in the previous year, however, the energy consumption for buildings slowed down owing to sluggish electricity consumption driven by decreased summer temperatures.

Energy Outlook

In 2018, TPES will increase by 2.6% to 309.0Mtoe and TFC is expected to be up by 2.8% to 239.1Mtoe.

TFC growth is predicted to slow down as the economic growth rate declines slightly, however, TPES is forecasted to grow further due to increased conversion loss driven by expanded energy input for power generation.

Most energy sources except coal will show a year-on-year increase in 2018.

Despite stagnant demand in the industrial sector, petroleum demand is expected to post a rapid growth thanks to recovering demand in the transport sector.

The growth of coal demand, particularly that for power generation, will slow down greatly as the effect of newly introduced large-scale bituminous coal power plants is reduced dramatically and the temporary shutdown period of old power plants is extended during spring.

Nuclear energy demand, which showed a sharp decline in 2017, is predicted to show a modest recovery, however, the demand will decrease rapidly by 6% or more in 2018, due to strengthened safety inspection requirements of nuclear power plants and the shutdown decision of Wolsong Unit 1.

Gas demand growth is expected to rise significantly thanks to growing demand for power generation use driven by decreased base load and increased electricity demand.

Electricity demand is forecasted to grow further due to base effect, increased exports, expanded private consumption, cold waves during January and February, etc.

The growth of energy demand in the industrial and buildings sectors will slow down slightly compared to the previous year while that for the transport is expected to grow further.

Energy demand in the industrial sector, despite growing demand for fuel, is predicted to show a year-on-year decrease due to sluggish demand for feedstock energy (naphtha, coking coal, etc.)

The growth of energy demand in the transport sector will show a modest recovery thanks to stagnant growth of oil prices and increased number of travelers and cargo volume.

Although energy demand in the buildings sector will continue to rise due to expanded privation consumption and reduced energy prices, the demand growth will show a slight year-on-year decrease as the number of cooling degree days plunges.[1]

Key Features and Implication

The growth rate of TPES in 2017, led by reduced coal consumption (toe), has been decreased by 0.6%p due to revision of energy conversion factors.

Coal, gas and nuclear energy consumption increased in 2017 due to revision of energy conversion factors, however, TPES declined as coal consumption fell dramatically.

Changes in energy consumption growth after the 7th revision are relatively less significant compared to previous revisions.

Uncertainty regarding the prospect of power generation sector, particularly nuclear energy, has been expanded due to strengthened preventive maintenance programs for power plants.

Although new power plants were introduced in 2H 2017, nuclear generation is expected to decline by 6% or more on a year-on-year basis due to the shutdown decision of Wolsong Unit 1, etc., however, uncertainty regarding the power generation sector still remains high.

Assuming that nuclear generation plunges and electricity demand recovers, in 2018, the share of gas generation will increase dramatically to similar levels to that of nuclear generation.

In 2018, TFC is anticipated to grow at a slower pace while TPES growth will move upward due to increased power generation losses.

The total energy input for generation, led by gas generation, will increase further in 2018 as the gross power generation expands due to rising electricity demand and the share of base load (coal and nuclear energy) reduces.

Conversion loss will go up as energy input for generation increases and this will result in a year-on-year increase of TPES growth rate.

TPES and TFC will increase in 2018, driven by demand for gas and the industrial sector, respectively.

The driving force (contribution level) of gas which leads TPES will show a remarkable increase while that of coal which drove energy demand in 2017 is expected to reduce greatly.

TFC, led by the industrial sector, will continue to rise in 2018, however, the demand driving force is predicted to show a slight year-on-year decrease due to sluggish demand for feedstock energy.

Rising international energy prices and soaring gas generation may increase power generation costs in 2018.

Electricity unit price (purchase price) showed a year-on-year increase in 2017 due to changes in power generation costs along with increased coal and natural gas prices. If international energy prices continue to move upward, electricity unit price (purchase price) and power generation costs may elevate in 2018.

Energy Trends

TPES in Q3 2017 increased to 73.9Mtoe, up 2.6% year-on-year.

Despite the stagnant energy consumption growth in the transport sector due to rising oil prices, TPES increased as energy consumption in the industrial sector escalated along with the recovery of manufacturing production activities led by base effect and expanded facilities. The industrial energy consumption moved upward as exports expanded, the number of working days increased (2.5 days) and feedstock energy consumption went up by more than 4% due to expanded petrochemical facilities and the base effect of the iron and steel industry.

By energy source, petroleum and gas consumption grew at a slower pace while coal consumption rebounded, and nuclear energy use maintained its sharp downward trend.

Petroleum (↑2.3%) Despite soaring naphtha consumption driven by expanded petrochemical facilities, petroleum consumption growth rate slowed down to the 2%-range due to a stagnant consumption growth in the transport sector and a negative consumption growth in the power generation sector.

Coal (↑11.0%) Coal consumption showed a year-on-year surge as the consumption in the generation sector soared thanks to newly introduced bituminous coal power plants,[1] and that for steelmaking rebounded due to base effect of a year-on-year plunge.

Nuclear energy (↓10.8%) Despite the commissioning of Shinkori Unit 3 (2016.12), nuclear generation maintained its steep downward trend since 2H 2016 and reduced by nearly 10%, due to extended preventive maintenance period of several nuclear power plants along with strengthened safety requirements after the outbreak of an earthquake in Gyeongju.

Gas (↓1.0%) Although gas consumption for city gas production rose (5.3%), gas consumption showed a year-on-year decrease as that for power generation went down (-4.3%) due to increased coal-fired power generation.

Electricity (↑3.7%) Electricity consumption showed a nearly 4% year-on-year increase as industrial and commercial uses rapidly grew due to the increased number of working days and industrial production activities.

TFC in 2017 marked 116.3Mtoe, 2.8% up on a year-on-year basis, led by the industrial sector.

Industry (↑2.1%) The industrial energy consumption maintained its upward movement thanks to the recovery of bituminous coal consumption for steelmaking and increased naphtha consumption driven by expanded facilities.

Transport (↑2.6%) The energy consumption in the transport sector which had increased rapidly since 2015 slowed down dramatically due to rising oil prices and the base effect of a year-on-year surge.

Buildings (↑3.9%) Despite the increased oil, city gas and heat energy prices, electricity rates for residential use rapidly went up by nearly 4% due to reduced progressive electricity rate tariffs (2016.12) and temperature effect.

Energy Outlook

In 2018, TPED will increase by 2.3% to 308.3Mtoe and TFD is expected to be up by 2.4% to 236.8Mtoe.

Assuming that the economic growth rate remains similar at the 3%-range in 2017 and 2018, the growth rate of TPED and TFD in 2018 will remain similar to that of the previous year.

Demand for most energy sources except coal will increase compared to 2017.

Non-fuel oil demand will grow slower in 2018, however, despite rising oil prices, demand for petroleum will rise faster thanks to the recovery of fuel oil demand mainly driven by the transport sector.

The growth of coal demand will greatly slow down, led by the diminishing effect of newly introduced bituminous power plants.

Nuclear power demand will rapidly drop in 2017 but rebound in 2018, driven by base effect and new power plants to be commissioned.

Gas demand will grow further along with the modest increase of city gas growth rate and the recovery of gas demand for power generation.

Electricity demand will rebound to the mid 2%-range as the demand growth rate of the buildings and industrial sectors are expected to rise.

Energy demand in the industrial and transport sectors will continue to grow in 2018 while that for the buildings is expected to decline slightly.

Although feedstock energy (naphtha, coking coal, etc.) demand is predicted to show a year-on-year decrease, energy demand in the industrial sector will rise at a similar level to the previous year as demand for fuel is expected to grow further.

Despite rising oil prices, energy demand in the transport sector will maintain its growth rate at a similar level to the previous year thanks to the recovery of travel and cargo transport demand.

Energy demand in the buildings sector will show an increase of the 2%-range, driven by lower energy prices and private consumption expansion along with the introduction of income-led growth policy. However, the growth rate will show a slight year-on-year decrease as the number of cooling degree days plunged[2] while that of heating degree days remained unchanged.

Key Features and Implications

Although TPES in 2017 has been adjusted downward due to revision of energy conversion factors, the revision effects are less relevant compared to the past.

Energy consumption records have been adjusted as new energy conversion factors were applied in 2017.

The volume (toe) of both TPES and TFC changed dramatically in the year in which energy conversion factors were revised, however, energy consumption, especially TPES, showed a relatively slight decrease after the 7th revision.

Due to the government’s coal phase-out policy, the share of coal-fired power generation is predicted to decline after marking the highest record in 2017.

Taking into account the government’s policy to control coal-fired power generation and increased gas, renewable and nuclear power generation, the share of coal-fired power generation in the gross generation is expected to fall after reaching the highest point in 2017.

The growth rate of TPED and TFD will become similar in 2018 as energy input for generation is expected to increase further.

The total energy input for generation will grow further as the gross generation increases due to rising electricity demand, and the increase will be led by coal-fired generation in 2017 and gas and nuclear power generation in 2018.

Conversion loss will increase for two consecutive years due to the growing total energy input for generation, narrowing down the gap between TPED and TFD growth rates.

Uncertainty regarding heating energy demand in the buildings sector is expected to increase due to the cold wave that hit the country at the end of 2017.

Due to abnormally low temperature that continued in 2017, energy demand in the buildings sector, mainly led by the increasing heating energy, will continue to rise in 2017 and 2018. However, the likelihood of extraordinary cold wave raises uncertainty about the prospect.

Energy Trends[1]

TPES in 1H 2017 increased to 149.4 Mtoe, up 1.9% year-on-year.

Despite the sluggish energy consumption growth in the transport and buildings sectors due to rising oil prices and temperature effect, TFC increased as energy consumption in the industrial sector went up along with the recovery of the manufacturing industry thanks to base effects and expanded facilities. The mining and manufacturing production index growth remained at 2.1%, showing a slight increase of 1.8%p year-on-year, due to the base effect of plunging exports (which recorded a year-on-year decrease of -10.2%) and stagnant production activities. The industrial energy consumption has shown a moderate increase in year-on-year 1H thanks to the base effect of the sluggish performance in 1H 2016 and expanded petrochemical production facilities, however, a stagnant recovery of the manufacturing industry except the semiconductor sector restrained energy consumption growth. The growth of service industry performance index slowed down (-0.7%p) but still showed a modest growth compared to that of the manufacturing industry (2.5%).

Excluding the feedstock energy use (non-energy oil and bituminous coal for steelmaking), TPES is estimated to have increased by 1.0% on a year-on-year basis. Taking into account that naphtha consumption went up by nearly 6% thanks to expansion of mixed-xylene production facilities in the petrochemical industry and the base effect of coking coal consumption for steelmaking which posted a sharp year-on-year decrease (-10.2%), feedstock energy rebounded (2.5%) to 4.1%. The feedstock energy share in TPES marked 27.7%, up by 0.6%p, due to the relative increase of feedstock energy use.

By energy source, petroleum and gas consumption grew at a slower pace while coal consumption rebounded, and nuclear energy use maintained its sharp downward trend.

Despite soaring naphtha consumption thanks to the expanded petrochemical facilities, the growth rate of petroleum consumption in 1H 2017 slowed down to the mid-1% range, driven by a stagnant consumption growth in the transport sector and a negative consumption growth in the power generation sector.

Coal consumption rapidly increased due to the diminishing effects of the lower maximum output at coal-fired power plants (2016.1) and newly introduced bituminous coal power plants[2], and coal use for steelmaking also rebounded by more than 5% thanks to a recovery of the iron & steel industry at home and abroad.

Despite the commissioning of Shinkori Unit 3 (2016.12), nuclear generation maintained its steep downward trend since 2H 2016 and reduced by nearly 10%, due to extended preventive maintenance period of several nuclear power plants along with strengthened safety requirements after the outbreak of an earthquake in Gyeongju.

Gas consumption, particularly the power generation use, rose by 3% mid-way on a year-on-year basis, as decreased nuclear generation was partially replaced by gas generation, however, the growth slowed down compared to 2H 2016 (11.7%), driven by the increased coal-based generation.

TFC in 1H 2017 marked 116.3 Mtoe, 2.8% up on a year-on-year basis, led by the industrial sector.

The industrial energy consumption was up 4.2%, maintaining its recovery trend since 2H 2016, due to the rebound of bituminous coal consumption for steelmaking and increased consumption of naphtha and LPG. Bituminous coal consumption for steelmaking rose by 2.5%, driven by the base effect of a sharp year-on-year decline (-10.2%) and the recovery of the global iron & steel industry in 2Q 2017. Naphtha consumption maintained its rapid growth in 1H 2017 thanks to expansion of mixed-xylene production facilities in the petrochemical industry, however, the growth in 2Q 2017 slowed down compared to the previous quarter due to sluggish para-xylene exports to China and increased production facilities maintenance. Industrial LPG consumption soared by more than 60% in 2H 2016, led by expanded propane dehydrogenation (PDH) production facilities, however, the growth slowed down to the mid-10% range in 1H 2017 as the facilities expansion effects faded away. Electricity consumption in the industrial sector grew slower compared to 2H 2016, led by the decreased production of major petrochemical products such as synthetic resins and synthetic rubber, and it restrained energy consumption in the industrial sector in 1H 2017.

The growth of the energy consumption in the transport sector which rapidly increased since 2015 along with rising oil prices slowed down and increased by mere 0.8%. The growth declined dramatically due to the base effect of a steep increase in 1H 2016 (6.6%) along with falling oil prices, and rising oil prices (40.0%). Global oil prices moderately recovered to USD 51.5/bbl on average in 1H 2017 after hitting bottom (USD 36.8/bbl) in 1H 2016.

Despite falling energy and electricity prices and increased production in the service industry (2.6%), energy consumption in the buildings remained unchanged due to the base effect of the fast consumption growth[3] during the same period last year, rising oil and city gas prices and decreased heating degree days (-1.7%). City gas rates in the buildings sector showed a slight year-on-year increase, affected by rising natural gas prices, while heat energy rates decreased by 6.4%. Also, electricity rates for residential use went down due to the reform of the progressive electricity rate system (2016.12). Although gas, electricity and heat energy consumption increased by 1.6%, 0.1% and 1.7% in the buildings sector, respectively, the overall energy consumption growth in buildings was restrained as petroleum consumption decreased by 2.9%.

Meanwhile, despite the industrial electricity use maintained its modest recovery driven by increasing semiconductor exports, the use of electricity as final energy only rose by 1.2% along with the use in buildings remained stagnant due to the base effect of a sharp year-on-year increase.

Outlook of TPES and TFC

In 2018, TPES will increase by 2.7% to 310.6 Mtoe and TFC is expected to be up by 2.8% to 240.1 Mtoe.

TPES growth is anticipated to show a slight increase while that of TFD is forecasted to decline. The growth of TPES is projected to increase slightly, led by increasing electricity demand growth which is expected to cause a more rapid increase of power generation energy demand compared to 2017. However, the growth of TFD will slow down, taking into account a slight decrease in economic growth (0.1%p) due to sluggish export growth amid the recovery of private consumption, and the diminishing effect of petrochemical facilities expansion compared to 2017.

In 2018, energy intensity and energy consumption per capita are forecasted to continue its recovery (downward) trend and upward trend, respectively.

Energy intensity (toe/KRW mil), an energy efficiency index, will decrease slightly due to the relative recovery of TPES compared to stagnant economic growth but maintain its recovery (downward) trend.

Energy consumption per capita will continue to go up and reach 6.0 toe in 2018, driven by relatively fast energy demand growth compared to population growth.

Demand for petroleum, coal, nuclear energy and gas will further increase, slow down, rebound and continue to decline, respectively.

Despite rising oil prices, petroleum demand is anticipated to rise rapidly in 2018 driven by increasing demand in the transport sector. In 2018, petroleum demand for industrial uses will continue to show its rapid upward trend as it did in 2017, led by increasing naphtha demand due to expanded petrochemical production facilities, however, the growth will slow down on a year-on-year basis as most facilities expansion plans are set for 2H 2018. Although the average annual global oil price in 2018 is forecasted to be up by about 2% year-on-year, the demand for the transport sector is expected to grow rapidly as the Chinese government’s ban on group tours to Korea has been partially lifted.

The growth of coal demand will greatly slow down, led by the diminishing effect of the introduction of new bituminous power plants. As of the end of 2017, thanks to newly introduced facilities including BukPyeong Units 1 & 2, Taean Unit 10, Samcheok Green Unit 2 and Shinboryeong Units 1 & 2 and capacity expansion of Dangjin Units 9 & 10, the total installed capacity of coal-fired power plants increased by about 21% (6.5 GW) year-on-year to 37.9 GW and it will remain the same in 2018. Thus, coal demand for power generation in 2017 is expected show a sharp increase by more than 10% compared to the previous year, however, the growth rate will plunge to around 1% in 2018. The sluggish coal demand for power generation is attributable to the extension of temporary shutdown period of old coal-fired power plants from one month in 2017 to four months in 2018[4], and improved overall coal-fired power generation efficiency along with the introduction of high-efficient new power plants. Meanwhile, demand for coal for steelmaking, which takes up most of industrial coal demand, is projected to go up for two consecutive years, however, the growth will not be brisk due to a modest recovery of the iron & steel industry at home and abroad.

Nuclear power demand will rapidly decline in 2017 but rebound in 2018, driven by base effects and new power plants to be commissioned. Despite the introduction of Shinkori Unit 3 (2016.12), nuclear power generation is expected to show a sharp decrease of around 6% due to permanent shutdown (2017.6) of Kori Unit 1 (587.0 MW) and increased preventive maintenance along with strengthened safety inspection requirements. In particular, in 4Q 2017, nuclear power generation will rebound due to the base effect of a sharp year-on-year decrease[5], indicating that, from an annual perspective, the rapid downward trend (-9.7%) which continued until 1H 2017 will be mostly offset. Nuclear power generation is expected to rebound in 2018, driven by the base effect of the preventive maintenance dramatically increased in the previous year and introduction of new power plant (2018.9) Shinkori Unit 4 (1,400 MW).

Despite increasing city gas demand driven by its improved price competitiveness, gas demand is predicted to decrease for two consecutive years due to decreasing demand for power generation. City gas demand will maintain the 2%-range growth which continued since 2017, taking into account the moderate increase of global oil prices and that city gas rates are to drop significantly from November 2017 as Korea Gas Corporation completes collection of accounts receivable. However, due to a recovery of nuclear power generation since 4Q 2017, gas demand for power generation is expected to maintain negative growth that continued since 2017, taking into account that two sources may replace each other.

Meanwhile, electricity demand as final energy will increase to the mid-2% range as the demand growth in the industrial sector is expected to show a slight decrease but that for buildings is projected to rise. Electricity demand in the industrial sector is forecasted to go up by nearly 3% in 2018, thanks to the petrochemical industry which maintains the strong demand since 2017, however, sluggish consumption in the iron & steel industry and automobile manufacturing industry will restrain the growth. Electricity demand in the buildings sector is expected to remain unchanged in 2017 due to the base effect of a steep year-on-year increase and sharply decreased cooling degree days. However, the growth will recover in 2018 as the service industry maintains a moderate growth and the lowered residential progressive electricity rates take effect[6].

Energy demand in the industrial sector is anticipated to grow slower while that in the transport and buildings will grow further.

Thanks to export recovery and expansion of petrochemical facilities, energy demand in the industrial sector will increase by 3% year-on-year and drive TFC demand in 2018, but the growth will slow down compared to 2017 due to sluggish feedstock energy demand. Naphtha demand will rapidly increase in 2018, driven by increasing exports of major petrochemical products to China and expansion of NCC and mixed-xylene production facilities, however, the growth will slow down compared to 2017 as most facilities are to be expanded in 2H 2018. The demand for bituminous coal for steelmaking will grow at a slower pace due to stagnant in-demand industries and steel import regulations of major countries.

Energy demand in the transport sector is expected to grow faster thanks to a partial recovery of the travel and cargo transport demand and much slower rise in oil prices compared to the previous year. In 2017, the annual average global oil price (based on Dubai Crude prices) is expected to jump by more than 20% year-on-year and restrain energy demand growth, however, the price will increase by less than 2% and have a limited influence on energy demand in 2018. In particular, jet oil demand is projected to rise rapidly taking into account that the number of Chinese tourists that plunged due to China’s THAAD retaliation in 2017 is anticipated to recover as the Chinese government lifts a ban on group tour to Korea.

Energy demand in the buildings sector is expected to slow down greatly in 2017, due to a sharply increased consumption in the previous year along with the temperature effect, but will recover to a certain extent due to falling energy rates in 2018. Although the residential progressive electricity rates were reduced in December 2016, the energy demand growth in the buildings sector is expected to go down to the early-1% range due to base effects and sharply decreased cooling degree days (-21.5%). However, energy demand is projected to increase by nearly 2% taking into account that the reduced residential progressive electricity rates will take effect[7] and city gas prices will also go down significantly in 2018.

Key Features and Implications

2017 TPES and TFD outlook have been raised slightly from the previous forecast, reflecting the actual records and changes in outlook assumptions.

TPES and TFD growth are predicted to increase by 0.1%p respectively in 2017, taking into account that economic growth outlook has been adjusted upward by 0.2%p from the previous outlook (2017 Summer) and actual energy consumption has been updated. 2017 petroleum demand outlook has been adjusted downward as petroleum consumption in the transport sector slowed down more rapidly than expected while that of electricity has been upgraded thanks to a strong recovery of energy consumption in the industrial sector.

Outlook for gas input for power generation greatly varies from the actual records until 2Q 2017, as nuclear power generation is forecasted to recover.

As nuclear power generation plunged by nearly 10% in 1H 2017, gas input for power generation increased by about 6%. Nuclear power generation decreased sharply as strengthened safety inspection requirements extended the preventive maintenance period while gas input for power generation partially replaced the decreased nuclear power generation and increased dramatically until 1H 2017.

However, from an annual perspective, the steep downward trend of nuclear power generation will become rather moderate due to a recovery in 4Q 2017 and gas input for power generation is anticipated to decline compared to the previous year. Capacity factor of nuclear power plants in 4Q 2016 showed a sharp year-on-year decrease (-21.9%p) as four power plants (Wolsung Units 1-4) were shut down due to safety inspections after the outbreak of an earthquake in Gyeongju in September 2016. However, due to the base effect of such decrease, the capacity factor will recover dramatically in 4Q 2017 and the steep downward trend of annual nuclear power generation is projected to recover significantly. Thus, gas input for power generation in 4Q 2017 is forecasted to plunge and from an annual perspective, it will switch to negative growth on a year-on-year basis.

TPES and TFD are forecasted to increase, led by nuclear power and petroleum demand, and industrial uses, respectively.

By energy source, coal will drive TPES in 2017 while nuclear power and petroleum will lead TPES growth in 2018. The level of contribution that coal makes to the 2018 TPES growth is projected to decline due to the diminishing effect of the introduction of new bituminous coal power plants while that of nuclear power is expected to recover thanks to the diminishing effect of preventive maintenance along with strengthened safety inspection requirements and the introduction of Shinkori Unit 4. Meanwhile, the contribution of petroleum to TPES growth is forecasted to increase taking into account that naphtha demand in the petrochemical sector is rapidly increasing and the demand for transport fuel is growing faster than the previous year.

By sector, TFD is forecasted to grow in 2017 and 2018, led by the industrial sector, however, the growth of TFD will go down slightly as the level of contribution of the industrial sector is expected to decrease on a year-on-year basis. Energy demand in the industrial sector has driven TFD in 2017 and will do so in 2018 thanks to the expansion of petrochemical facilities, however, most facilities are to be installed in 2H 2018, thus, the level of contribution of the industrial sector to TFD growth will decrease compared to the previous year. Energy demand for the transport sector is projected to show a year-on-year increase as oil prices are expected to rise slower and the Chinese government reduced THAAD retaliation. The level of contribution of the buildings sector is anticipated to drop dramatically in 2017 due to the base effect of a surge in the previous year, but increase in 2018 thanks to falling electricity and gas rates.

Due to expansion of petrochemical facilities, energy consumption in the petrochemical sector will drive TFC in 2017 and 2018.

PX, NCC (naphtha cracking center) and PDH facilities have been expanded from 2016 to 2017 due to increased para-xylene (PX) exports to China, falling oil prices, diversification of raw materials of petrochemical products, etc. As of June 2017, the total capacity of petrochemical facilities increased to approximately 393.2 Mtoe (4.9% up from 2015) and that of basic petrochemicals and PX facilities rose to 286.9 Mtoe (9.9%) and 42.7 Mtoe (4.2%), respectively. Energy consumption in the petrochemical industry went up by 4.9% in 1H 2017 as expanded petrochemical facilities increased production of petrochemical product which resulted in more use of naphtha, LPG and electricity. Energy consumption in the petrochemical industry increased by 1.6 Mtoe in 1H 2017 which accounts for 56.7% of the TPES increase (2.7 Mtoe). The share of the petrochemical industry in TPES declined to 21.0% in 1H 2015 when production of petrochemical products was stagnant but since then about 22% range has been maintained.

The petrochemical industry will drive TPES in the industrial sector in 2018, but the level of its contribution is expected to go down. Naphtha demand is anticipated to grow slower than 2017 as the effects of facilities expansion in 2017 will be mostly diminished in 2H 2018 and most facilities are planned to be installed in 2H 2018. As LPG is used for PDH facilities, LPG consumption increased dramatically in 2016 and 1H 2017 but is expected to be stagnant due to the diminishing effects of introduction of new PDH facilities. Although the petrochemical industry is expected to drive TPES in the industrial sector, along with an increase in naphtha and electricity consumption to accommodate increased production of petrochemical products, the level of its contribution to energy consumption in the industrial sector will decrease due to sluggish growth of naphtha consumption and stagnant LPG consumption.

City gas demand which has plunged since 2014 is expected to recover in 2017 and 2018 due to the improved price competitiveness against petroleum.

City gas demand for the industrial sector had declined rapidly at an average annual rate of 8.9% from 2013 to 2016 as Korea Gas Corporation (KOGAS)’s collection of accounts receivable further increased city gas prices and global oil prices dropped. City gas rates are determined by global oil prices and foreign exchange rates according to the raw material cost pass-through scheme. The accounts receivable were accrued as the government postponed the raw material cost pass-through scheme (2008.3-2013.2) for price stabilization during the period (2008-2012) in which global oil prices were over USD 100/bbl. KOGAS started collecting the accounts receivable from September 2010 and city gas rates further went up accordingly. According to KOGAS, such accounts receivable take up 5-8% and 11-21% of city gas bills in 2014 and from 2015 to 2017, respectively.

However, KOGAS completed accounts receivable collection, and from November 2017, city gas rates decreased by 9.3% on average in Seoul. In this sense, city gas demand for industrial uses is projected to recover gradually in 2017 and 2018. In 2017, the growth will mark mid-4% range on a year-on-year basis, taking into account the mixed effects of the base effects of decreased city gas consumption in the industrial sector until 2016, improved economic recovery, rising global oil prices, etc. Although the reduction in city gas rates will become more visible in 2018, the growth of city gas demand for industrial uses will remain at the early-3% range as other effects will fade away. Among city gas demands for different uses, the share of the industrial sector has become bigger, and taking into account that city gas used in the industrial sector may easily replace energy and thus show high volatility, uncertainty regarding city gas demand outlook will expand.

Energy (especially electricity) demand management framework utilizing market mechanisms should be established for more effective energy transition.

Demand for coal and nuclear power will show a steady growth in the transformation sector as electricity consumption is expected to rise by 2.6% in 2018. The combined energy consumption of coal and nuclear power in the transformation sector is forecasted to rise to 89.5 Mtoe in 2018, up 3.5% year-on-year, and its share will account for 62.9%, up 0.8%p from 2017. Despite the implementation of energy transition policy, reducing coal and nuclear demand will have limits if electricity consumption continues to increase steadily.

Inappropriate electricity rates will cause negative effects in electricity demand management and irrational structure of energy consumption. Despite rising power generation fuel prices, the reduced residential progressive electricity rates brought down electricity unit rates by 1.3% on a year-on-year basis as of September 2017, while fossil fuel prices such as petroleum and gas increased. Low electricity rates and consequent distorted relative prices have brought electrification, serving as an obstacle to electricity demand management.

Tax reform plan for power generation fuels and rational electricity pricing should be promptly promoted to better accommodate price signals in electricity rates. By realizing external costs for power generation fuels, changes of the competition structure of individual power generation sources should be promoted, and also other costs yet to be reflected or realized must be included in electricity rates. In particular, cost prices should be reflected when determining tariffs (e.g. electricity rates by voltage, the electricity cost pass-through scheme) to strengthen price signals and promote rational electricity consumption.

Energy Trends[1]

TPES increased by 1.6% to 79.5Mtoe in Q1 2017 on a year-on-year basis

The growth of TPES slowed down along with decreasing energy consumption in the buildings and transport sectors, which was caused by rising oil price and temperature effect, even though the industrial energy consumption grew quite fast amid the recovery of the manufacturing sector partly due to base effect. The manufacturing industry showed a moderate recovery backed by the 4% increase in the production index of mining and manufacturing industry due to the base effect of plunged export (-13.7%) and decreased output during the same period last year. With growing export figures (14.7%), the production index of ICT—semi-conductors in particular—moved upward and that of basic chemical materials also grew decently. The economic growth rate stayed at the same level on a year-on-year basis despite the recovery in the manufacturing sector due to a slower growth in private spending. Meanwhile, TFC fell by 1.7%p because of diminished effect of plunged oil price and higher heating degree days[2] which were the main driver of the energy consumption growth in Q1 2016.

Excluding feedstock energy (non-energy oil and bituminous coal for steelmaking), TPES is estimated to have increased by 0.7% (in Q1 2017) compared to the same period last year. The growth rate of feedstock energy consumption rose by more than 3%p (in Q1 2017) on a year-on-year basis (4.1%) due to a sudden increase in naphtha use (7.0%) and a recovery of bituminous coal consumption almost to the previous year’s level (-0.2%) in the steelmaking sector, which had sharply declined year-on-year in Q1 2016 (-7.6%). The share of feedstock energy in TPES increased by 0.6%p to 26.6% on a year-on-year basis.

The share of feedstock energy in TPES increased by 0.6%p to 26.6% on a year-on-year basis

By energy sources, petroleum and gas consumption grew at slower pace while coal consumption rebounded, and the use of nuclear energy continued to decline sharply (in Q1 2017, on a year-on-year basis).h3>

The growth rate of petroleum consumption fell to around 1% in Q1 2017, affected by much slower growth of consumption in the transport sector because of rising oil price and decreased consumption in the power generation sector, although naphtha consumption grew rapidly due to the expansion of petrochemical facilities.

Coal consumption increased by near 7% (in Q1 2017 on a year-on-year basis), led by the power generation and steelmaking sectors; coal use for power generation grew fast due to the diminished effect of lower maximum output at coal fired power plants (2016.1) and the commissioning of new bituminous coal power plants[3] ; coal use for steelmaking was recovered and reached almost the same level as in the same period last year thanks to the reviving iron and steel industry at home and abroad.

Nuclear generation has continuously plunged by over 10% since H2 2016 despite the commissioning of Shinkori unit 3 (2016.12), due partly to the strengthened licensing regulation after an earthquake in Gyeongju district, and consequently extended preventive maintenance at a number of nuclear power plants.

Gas consumption rose by over 2% year-on-year (in Q1 2017) mostly for power generation as decreased nuclear generation was partially replaced with gas generation. On a quarter-on-quarter basis, however, gas consumption grew more slowly due to the increased coal-based generation.

As for the share of TPES by energy sources in Q1 2017 on a year-on-year basis, petroleum accounted for the largest share of 37.7%(↓0.4%p) and was followed by coal (↑1.3%p, 27.2%), gas (↑0.2%p, 19.1%), nuclear energy (↓1.7%p, 10.3%) and renewable & other energy (0.6%p, 5.8%).

TFC was up 2.0% to 61.4Mtoe in Q1 2017 on a year-on-year basis, led by the industrial sector.

Industrial energy consumption rose by 3.9% along with growing use of naphtha and LPG, although bituminous coal consumption for steelmaking declined. Bituminous coal consumption for steelmaking rebounded and was almost the same (-0.2%) as in the same period last year due to the base effect of a sharp year-on-year decline (-7.6%) and the recovery of the global iron and steel industry. Naphtha consumption recorded a faster growth of 7.0% (in Q1 2017) on a year-on-year basis according to the expansion of mixed xylene production facility and growing para-xylene export to China. Industrial LPG consumption went up by almost 30% in Q1 2017 on a year-on-year basis backed by the construction of new PDH facilities, although the growth rate declined as the effect of facility expansion in H2 2015 faded away.

The growth rate of energy consumption in the transport sector fell to 1.2% after years of the rapid growth since 2015, influenced by rising oil price. Global oil price reached the lowest level of $30.3/bbl on average in Q1 2016, and then, slowly rebounded to $53/bbl in Q1 2017. The slower growth of energy consumption in the transport sector is partly attributable to the base effect of the rapid growth during the same period last year (4.3%).

Energy consumption fell by 0.9% in the buildings sector, even amid falling energy prices and expanding production in the service industry (2.6%), affected by the base effect of the fast consumption increase[4] during the same period last year along with decreased heating degree days (-1.7%). City gas and heat energy rates went up in the buildings sector affected by higher global energy prices which have been rising since H2 2016. On a year-on-year basis, however, city gas and heat energy rates declined by over 4% and 11% respectively according to raw material and fuel cost pass-through system. Electricity rates for the residential use declined thanks to the reform of the progressive electricity rate system (2016.12). Energy consumption in the buildings sector declined in Q1 2017 on a year-on-year basis, as the use of petroleum and heat energy fell by 7.7% and 0.5% respectively, although gas and electricity consumption rose by 1.0% and 0.1%.

Meanwhile, the use of electricity as final energy rose by 1.3% year-on-year due to the over 2% increase in industrial electricity consumption amid the moderate recovery of the manufacturing industry, although the electricity consumption grew at slower pace in the buildings sector and stayed on almost the same level as in the same period last year.

Energy Outlook

Although the economic growth remains the same as in 2016, energy demand growth in 2017 will slow down due to rising oil prices.

TPED will increase by 2.3% to 302.5 Mtoe, 0.6%p down from the previous year. By energy source, bituminous coal for power generation and naphtha will drive the overall energy demand, driven by the introduction of new large-scale bituminous coal power plants and expansion of petrochemical facilities, respectively.

TFC will mark 233.5Mtoe, up 2.9% year-on-year, taking into account that the demand in the industrial sector is projected to show a partial recovery thanks to a modest export recovery and expansion of petrochemical facilities while the demand growth in the buildings is expected to slow down due to base effects and rising transport fuel prices.

Energy intensity is forecasted to improve and energy consumption per capita will continue to increase in 2017.

Although the economic growth remains the same as 2016, energy intensity (toe/KRW mil), an energy efficiency index, will improve (decrease) along with the sluggish TPED driven by rising oil prices and the temperature recovering back to seasonal average.

Energy consumption per capita is expected to reach 5.9 toe, 1.9% up year-on-year, as TPED grows higher compared to the population, continuing in an upward trend.

Demand for petroleum, coal, nuclear energy and gas will slow down, rebound, remain on downward and decline, respectively.

Petroleum demand is projected to be up by around 2% in 2017, driven by the expansion of petrochemical facilities but the growth rate will slow down considerably on a year-on-year basis due to rising oil prices. Naphtha demand is expected to rise by 5% year-on-year thanks to facilities expansion of mixed-xylene (2016.12), naphtha cracking centers (“NCC”, 2017.6), and para-xylene (2017.10, 2017.6), driving oil demand in the industrial sector. However, anticipating that the annual average international oil prices will soar to $51/barrel in 2017, up about 23% year-on-year, petroleum demand in the transport sector will be strongly down and that for buildings and power generation uses will start to decline.

Coal demand, despite a weak recovery in the industrial sector, is anticipated to rise nearly by 7% due to a surge in demand for power generation along with the introduction of new large-scale bituminous coal-fired power plants. Demand for coking coal, which constitutes the largest share of the demand for industrial uses, is expected to rebound from a sharp decline (-9.0%) in the previous year but the increase will be less than 1% due to the slow recovery of the domestic iron & steel industry. Meanwhile, despite the early shutdown of Seocheon Units 1 & 2 (2017. 7), the total installed capacity of coal-fired power plants will escalate to 36.9GW by the end of 2017, up about 18% (5.0GW) compared to the end of 2016, due to the introduction of new facilities including Bukpyeong Units 1 & 2, Taean Unit 10, Samcheok Green Unit 2 and Shinboryeong Units 1 & 2 and capacity expansion of Dangjin Units 9 & 10. Coal demand for power generation is predicted to skyrocket by more than 10% year-on-year, however, the growth will be less significant than that of power plants expansion due to the government’s decision to temporarily shut down old coal-fired power plants[5] and increased overall efficiency of coal-fired power generation along with the introduction of new power plants.

Despite the introduction of Shinkori Unit 3 (2016.12), demand for nuclear energy is expected to decline rapidly due to a sharp fall in nuclear power generation led by the increased preventive maintenance in H1 2017 and permanent shutdown (2017.6) of Kori Unit 1 (587.0MW). Nuclear power generation in H1 2017 is forecasted to decrease rapidly due to the base effect of surging nuclear power generation until Q3 2016[6] and extended preventive maintenance period due to strengthened safety inspection requirements in wake of the earthquake in Korea. The growth of nuclear power generation will rebound in H2 2017 along with the recovery of the capacity factor of nuclear power plants[7] which plummeted due to the earthquake last year. However, taking into account the sharp decline in H1 2017, nuclear power generation will reduce more rapidly over the year compared to the previous year.

Despite the increased demand for city gas, gas demand in the power generation sector will plunge again and show a negative growth. Gas demand in the power generation sector, despite a decrease in power generation, is predicted to mark the negative growth of around 10% from 5.3% positive growth in the previous year, driven by soaring bituminous coal-fired generation and sluggish electricity demand growth. City gas demand, particularly in the industrial sector, will increase thanks to base effects and enhanced price competitiveness along with rising oil prices, however, the sluggish demand in buildings driven by the number of HDD returning back to seasonal average will slow down the city gas demand growth compared to the previous year.

The share of coal and renewable energy will increase while that of other energy sources will decrease in 2017.

Although the share of coal in TPED is forecasted to rise due to surging demand in the power generation sector, it will remain less than the 29%-level as in the past from 2010 to 2014.

The slice of petroleum had steadily decreased until 2014 then increased for two consecutive years from 2015 to 2016 thanks to the plunge in oil prices. However, due to rising oil prices, it is expected to decline again in 2017.

The share of nuclear energy is predicted to hit the bottom since 2013 (10.5%).

Energy demand in the industrial sector is forecasted to rise in 2017, while that in the transport and buildings sectors will drop significantly.

Energy demand in the industrial sector will go up nearly by 4% due to export recovery and expansion of petrochemical facilities. Feedstock energy demand is expected to show a significant increase from the previous year taking into account that naphtha demand, along with its expanded facilities, has continued to grow rapidly since 2016 and bituminous coal demand for steelmaking which plummeted in 2016 rebounds slightly thanks to base effects. However, as LPG demand which soared in 2016 decreases owing to the diminishing effect of propylene facilities, fuel energy demand in the industrial sector is predicted to grow at slower pace compared to the previous year.

Although the increased number of vehicles and higher demand for travel and cargo transport will boost energy demand in the transport sector, the energy demand will grow much slower than the previous year and remain at the 1% range due to rising oil prices. With oil prices plunged by 18.8%, energy demand in the transport sector surged by more than 5% in 2016, however, oil prices are forecasted to increase at an annual rate of 20% or more in 2017, leading to a significant decrease in the energy demand growth.

The growth rate of energy demand in buildings, due to base effects, is forecasted to slow down considerably to about 1.0%. Although the progressive electricity rates were lowered, the growth rate of electricity demand, which makes up the majority of energy consumption, will slow down along with a sharp decrease in CDD (-22.9%), taking into account the base effect of the surging demand in the previous year, provided that the average temperature of the past 10 years is assumed.

Despite a recovery in the industrial sector, the electricity demand growth (TFC) will decline to the 1% range due to the sluggish demand for buildings. Electricity demand for industrial uses, thanks to an increase in exports along with the global economic recovery, expansion of petrochemical facilities and the base effect of the primary metal industry, is expected to go up by around 2% year-on-year, maintaining its modest recovery pace. Although the residential progressive electricity rates were reduced, decreasing energy demand for air-conditioning due to the temperature recovering back to seasonal average is expected to bring down the growth of electricity demand in buildings to the early- or mid-1% range.

Key Features and Implication

2017 TFC outlook has been raised from the previous forecast, reflecting the actual records and changes in outlook assumptions.

The energy consumption growth in 2016 recorded in the previous outlook (2017 Spring) has been adjusted upward by 0.2%p as oil consumption was revised. Naphtha and petroleum consumption in the transport sector in 2016 have been raised from 3.9% and 4.6% in the previous outlook to 4.7% and 5.7%, respectively, bringing up TPES and TFC growth by 0.2%p, respectively.

Furthermore, 2017 TFC outlook has been raised by 0.3%p due to changes in the economic growth, oil prices and temperature assumptions. The demand for oil, city gas and electricity have been adjusted upward, reflecting the improved economic growth rate, reduced oil price increases, changes in HDD and CDD, etc.

Energy demand, especially coal and petroleum, is expected to increase in the power generation and industrial sectors, leading the overall energy demand growth in 2017.

Although the total generation growth remains sluggish, energy input for power generation is expected to move upward, led by the increased share of coal of which efficiency is relatively low.The total generation growth will slow down year-on-year due to the sluggish electricity demand particularly in the buildings sector. However, energy input for power generation is expected to grow faster taking into account that the share of coal, the least efficient energy source, shows a year-on-year increase of more than 4%p while that of gas, the most efficient energy source, declines by more than 3%p[8].

In terms of energy source and sector, coal and the industrial sector are anticipated to drive the overall energy demand in 2017. Along with the commissioning of large-scale bituminous coal-fired power plants, coal is expected to drive TPFD while the gas demand will make a reverse turn from positive growth in 2016 to negative growth in 2017, and the petroleum demand growth will slow down considerably. By sector, the industrial demand is expected to drive TFC thanks to the expansion of petrochemical facilities and improving economic growth whereas that for the buildings and transport sectors will grow much slower due to base effects of the surging demand in the previous year and rising oil prices.

In 2017, the capacity factor of nuclear and gas-fired power plants will decrease to the lowest level in recent years.

The capacity factor of nuclear power plants will be limited to around 80%, down by more than 3%p from the previous year, due to the increased capacity subject to preventive maintenance in 2017. In the past, the capacity factor of nuclear power plants had maintained the early- and mid-80% range except in 2013 during which a number of power plants were suspended due to cable issues of nuclear power plants, however, in wake of earthquake in Gyeongju in September 2016, Wolsong Units 1, 2, 3 & 4 were shut down for in-depth safety inspections, dragging down the rate to 70.6% in Q4 2016. The capacity factor of nuclear power plants recovered considerably from Q4 2016, recording 77.4% in Q1 2017, however, due to the increased capacity for preventive maintenance, it remains low nearly around 16%p on a year-on-year basis. Hanbit Units 1 & 2 and Hanul Unit 1 were shut down in Q1 2017 as the maintenance period of the plants were extended due to replacement of containment liner plates in the reactor containment buildings. Furthermore, the preventive maintenance period of Kori Unit 3 and Shinkori Unit 1 which were due in Q1 2017 have also been extended for additional 80 and 65 days, respectively. Wolsong Unit 3 of which preventive maintenance was planned from March to April 2017 is expected to be shut down until after August 2017, indicating that the capacity factor of nuclear power plants will show a year-on-year decrease until Q3 2017. However, the capacity factor is predicted to show a large year-on-year increase of 0.8%p along with the diminishing earthquake effects in Q4 2017, and thus, the annual capacity factor will recover from the late-70% range in H1 2017. Thanks to the recovery of the capacity factor, nuclear power generation will rebound in H2 2017 on a year-on-year basis, but it will be lower than the previous year due to the sharp decline of about 9% in H1 2017.

The capacity factor of gas-fired power plants is likely to decline from slightly over 40% in 2016 to the early-30% level in 2017, because of the decreased gas generation and expanded installed capacity (4.0GW) along with the commissioning of a new IGCC power plant. The capacity factor is lower than the 2015-level in which the mid-30% range was recorded due to low electricity demand (1.3%). Gas generation and input for power generation will show a year-on-year increase in H1 2017 due to a dramatic decrease in nuclear power generation, however, the movement will go downward along with an increase in nuclear power generation in H2 2017 and mark a negative growth annually.

The consumption growth of naphtha used as feedstock in the petrochemical industry is expected to grow for four consecutive years thanks to the expansion of petrochemical facilities.

The consumption growth of naphtha used as feedstock in the petrochemical industry is expected to grow for four consecutive years thanks to the expansion of petrochemical facilities.

The production capacity of basic petrochemicals including PX, is likely to continue its upward movement in 2017, as it did in the previous year. Petrochemical facilities continue to expand as the increased PX exports to China and declining oil prices have improved the price competitiveness of naphtha. In 2016, mixed-xylene (1Mtoe, 2016.11) and benzene (0.43Mtoe, 2016.11) production facilities of Hyundai Chemical, and PX plants (0.15Mtoe, 2016.10) of SK Incheon Petrochem were expanded, and in 2017, NCC production facilities (0.599Mtoe, 2017.6) of Petrochemical Ind. and PX plants (0.171Mtoe, 2017.6) of Hanwha Total have been newly added.

Naphtha demand is projected to grow by 5.1% in 2017 thanks to the expansion of petrochemical facilities, recording four consecutive years of the demand growth.Naphtha consumption, driven by continuous expansion of petrochemical facilities, has increased since 2014, and the growth will become more rapid in 2017 due to intense production facilities expansion in H2 2016. Along with the increasing naphtha consumption, the contribution of naphtha consumption to TPES is expected to go up from 0.5%p in 2014 (TPES growth of 1.0%) to 0.9%p in 2017 (2.3%).

Energy demand is not likely to be greatly affected by the shutdown of old coal-fired power plants in June and extreme heatwave in August.

Even though the country is hit by scorching heat again as in the previous year, the growth rate of electricity in 2017 is expected to increase by less than 0.2%p compared to the BAU (business-as-usual) scenario, and TPED growth will also be limited to less than 0.1%p. The temperature assumptions provided in the base-case scenario are based on actual temperatures recorded until July 2017 and the average temperatures over the last 10 years have been applied to the remaining period from August to December 2017. Assuming that scorching heat in August 2016 occurs again in 2017, the number of CDDs will change significantly, from a dramatic year-on-year decrease of 22.9% to an increase of 5.8%. Taking into account the electricity demand for air-conditioning only, the electricity demand for buildings is anticipated to increase merely by 0.3%p compared to the base-case scenario due to temperature effects and the reduced residential progressive electricity rates. Even though the industrial electricity demand increases due to heat wave, the total electricity demand will not increase significantly. Thus, TFC is forecasted to grow by around 0.02%p and TPED will go up by about 0.05%p compared to the base-case scenario, led by increasing gas-fired generation.

The increasing share of high-efficiency gas-fired power plants along with the temporary shutdown of old coal-fired power plants in June 2017 is expected to reduce energy input for power generation and TPED slightly. As an emergency response measure to fight fine dust, on 15 May 2017, the government temporarily shut down the old coal-fired power plants which had run for 30 years or longer. Thus, a total of eight aged coal power plants amounting to 2,845MW, including Yongdong Units 1 & 2, Boryeong Units 1 & 2, Seocheon Units 1 & 2 and Samcheonpo Units 1 & 2, were down for a month in June 2017. Assuming that the reduced coal-fired generation due to the shutdown of old power plants is filled by gas-fired generation, the total energy input for power generation and TPED growth are projected to go down by approximately 0.564Mtoe and 0.02%p, respectively.

Energy Trends [1]

TPES is estimated to be 295.3Mtoe in 2016, recording a year-on-year increase of 2.7%.

The growth rate of TPES was over 2% for the first time in five years, despite disappointing performance in the manufacturing sector, due to record-breaking heatwave and the construction of new petrochemical facilities. Lower energy prices and higher temperature drove up the energy demand in the transport and buildings sectors, and industrial energy consumption also increased by more than 1% affected due to expanded petrochemical facilities although the manufacturing industry was still struggling amid weak export demand.

The gap between the growth rates of TPES and the economy was over 1%p for several years affected by extended recession of manufacturing business and comparably better performance of the service sector prior to a downturn in 2015. The gap, however, was narrowed down in 2016 due to temperature effect and expanded installed capacity.

TPES rose by 3.8% in 2016 from a year ago, excluding feedstock energy (non-energy oil, bituminous coal for steelmaking). The share of feedstock energy in TPES dropped by 0.7%p year-on-year to 27.5% as feedstock energy consumption maintained the prior-year level due to weak consumption of bituminous coal for steelmaking.

TPES rebounded along with rising petroleum and gas consumption despite decreased use of coal and nuclear energy.

The growth of petroleum consumption exceeded 7% for the first time since 1999(7.3%) because of the increased petroleum use for transport amid low oil prices, bigger paraxylene export volume to China following an accident in a Chinese paraxylene factory (2015.4) and a surge in naphtha and LPG consumption due to the expansion of mixed xylene and PHD facilities.

Bituminous coal consumption declined despite a start-up of a new power plant due to lower maximum output of coal-fired power plants (2016.1) and increased preventive maintenance. Coking coal consumption for steelmaking plummeted as well, affected by the recession of iron & steel industry at home and abroad. Accordingly, coal consumption fell by more than 4%.

Nuclear power generation rapidly increased by more than 6% until August because of the resumed operation of Hanbit unit 3 and Wolsong unit 1 (2015.6)[2] along with the start-up of Shinwolsong unit 2(2015.7). Shinkori unit 3 also started operating from December. On an annual basis, however, nuclear generation declined by more than 1% as unit1-4 at Wolsong nuclear power plant were shut down for safety inspection after the outbreak of an earthquake in Gyeongju.

Gas consumption rebounded by more than 4% after years of steep drop as unusually hot weather raised electricity demand and decreased nuclear generation was partially replaced by gas-fired power generation.

As for the share of TPES by energy source in 2016, petroleum accounted for the largest share of 39.9% and was followed by coal (27.6%), gas (15.4%), nuclear (11.6%) and renewable energy (5.5%).

TFC recorded 226.6Mtoe in 2016, a year-on-year increase of 3.7%, with the transport and buildings sectors accounting for the largest part.

Energy consumption in the industrial sector rose by 2.9% due to rapid consumption growth naphtha as raw material and LPG for industrial use although bituminous coal consumption decreased in the steelmaking sector. Industrial LPG consumption made a sharp increase of over 70% as an effect of PHD facility expansion, leading the growth of industrial petroleum consumption. Meanwhile, the use of energy as raw material stayed at the previous year’s level despite over 4% rise in non-energy oil consumption, especially naphtha, because of a 9% decline in bituminous coal consumption for steelmaking due to weak demand in the domestic and global iron & steel industry.

Energy consumption in the transport sector continued rapid growth (5.1%) as steep decline in global oil prices stretched through 2016. In 2015, the transport sector consumed 7.1% more energy amid plummeting global oil prices (-47.5%). Meanwhile, the growth of energy use in the transport sector slowed down in 2016 compared to last year after the global oil prices started to increase moderately from the 2nd quarter, although the oil prices plunged on annual average (-18.8%). The consumption of most petroleum products sharply increased except LPG[3] as a result of heavier traffic and increased air conditioning due to low oil prices and record-breaking summer heat, the introduction of new short-distance air routes mainly by low cost airlines and the base effect of Middle East Respiratory Syndrome (MERS) in 2015.

Energy consumption in the buildings sector rose by 5.0%-the fastest growth since 2005(6.6%)-mostly for heating and cooling due to lower energy prices, record heat wave and colder winter than last year. City gas rates were lowered in January, March and May 2016 with the adoption of raw material cost pass-through system, and heat energy rates were also reduced reflecting the drop in the city gas rates. In addition, the progressive electricity rate system was relaxed during the summer and then reformed in December, alleviating consumers’ burden on electricity bills. Heating and cooling degree days increased by 56.9% and 4.5% respectively and energy rates declined in the buildings sector. Consequently, gas, electricity and heat energy consumption in buildings went up by 5.1%, 4.0% and 9.7% respectively on a year-on-year basis.

The consumption of electricity, a type of final energy, was up almost 3% as electricity consumption increased rapidly in buildings due to higher cooling and heating loads even though the growth of industrial electricity consumption made weak recovery because of less power use in the primary metals industry and stagnant consumption growth in the fabricated metals industry.

Energy Outlook

Energy demand is predicted to rise at a similar level with GDP growth rate of 2.6% in 2017.

Energy demand growth is to slow down compared to the previous year, due to oil price hikes and temperature moving back to seasonal average, however, the growth will be more modest compared to the period from 2012 to 2015 during which consumption remained low.

TPED will mark 202.2Mtoe, up 2.3% year-on-year, driven by the increased demand for coal and petroleum along with newly introduced large-scale bituminous coal plants and additional petrochemical facilities.

TFC is expected to recover and record 232.5Mtoe, up 2.6% year-on-year, thanks to the modest recovery of exports in the industrial sector and expansion of petrochemical facilities.

Energy efficiency is expected to show moderate improvement and energy consumption per capita will continue to rise

Energy intensity (toe/KRW mil), an energy efficiency index, will improve slightly as the growth rate of TPED decreased (0.4%p) more dramatically than the economic growth rate (0.2%p) compared to the previous year.

However, energy consumption per capita, despite its year-on-year decrease driven by declining TPED growth, is anticipated to go up by 1.9% to 5.9 toe.

Coal and nuclear energy use will make a turnaround while the demand growth of petroleum and gas are predicted to slow down and tumble, respectively

In 2017, petroleum demand growth is set to record about 2.0%, showing a significant downward movement year-on-year, as increasing oil prices offset the growth stimulated by expanded petrochemical facilities. Naphtha demand is growing more rapidly than the previous year due to additional installation of mixed-xylene (1Mton as of December 2016) and naphtha cracker (0.599Mton in H2 2017) plants and expansion of para-xylene production (0.2Mton in 2017), and will drive up the petroleum demand for industrial uses. However, taking into account that global oil prices are expected to jump by 32.3% year-on-year in 2017, petroleum demand in the transport sector will be strongly down and that for buildings and power generation uses will start to decline.

Coal demand, despite the sluggish demand in the industrial sector, is expected to rise around 6% due to the surging demand for power generation along with the expansion of bituminous coal-fired power plants. Demand for coking coal, which takes up the largest share of the industrial demand, is expected to mark positive growth from a sharp decline (-9.0%) in the previous year while it will still remain stagnant due to slow recovery of exports dragged by global trade protectionism and sluggish demand from the domestic steel industry including shipbuilding, construction and automobile sectors. The total capacity of bituminous coal power plants, with 5.4GW of new installations including Bukpyeong Units 1 & 2, Shin Boryeong Units 1 & 2, Samcheok Green Unit 2 and Taean Unit 10, will increase to 36.3GW at the end of 2017, up about 17% year-on-year. Coal demand for power generation will not increase in proportion to new facilities built taking into account a possibility of constrained transmission due to delayed construction of transmission lines, the diminishing effect of lowered maximum output of coal plants (January 2016)[4] and newly introduced power plants that have improved the overall efficiency of coal-fired power generation.

Nuclear power generation is anticipated to make a turnaround from negative to positive growth but the growth will remain modest at the 1%-range due to restart of several nuclear power plants, the diminishing effect of newly introduced power plants and decreased capacity of nuclear power generation. Nuclear power generation growth will be limited in the first half of 2017 taking into account the resumption of Hanbit Unit 3 and Wolsong Unit 1 operations (June 2015)[5] which led a dramatic increase in power generation, and the diminishing effect of newly introduced Shinwolsong Unit 2 (July 2015). Meanwhile, the introduction of Shinkori Unit 4 (1,400MW) which was originally planned in 2017 has been postponed to the second half of 2018 and Kori Unit 1 (587MW) was shut down permanently (June 2017), which may lead to a decrease in nuclear power generation capacity.

Despite increasing city gas demand, gas demand is expected to decline by 6% or more as gas use for power generation plunged again. Gas demand for power generation will reverse from positive growth in 2016 to dramatic negative growth in 2017, due to the sluggish growth of electricity demand and considerable expansion of base load power plants (coal and nuclear power generation) which is mainly driven by bituminous coal-fired power generation. Decreasing gas power generation will further raise the share of new high-efficiency gas power plants in gas power generation and thus, the overall gas demand for power generation will decline more dramatically compared to power generation.

Renewable power generation is predicted to maintain the rapid growth thanks to the government’s renewable energy expansion policy and transition of Youngdong Units 1 and 2 to biomass which was implemented as part of the government’s countermeasure against fine dust.

The share of coal and renewable energy are expected to increase while that of other energy sources will be down in 2017.

The share of coal in the total primary energy demand had steadily decreased until 2014 then it rose for two consecutive years from 2015 to 2016 thanks to decreased oil prices. However, rising oil prices are expected to reverse the trend again in 2017.

Energy demand in the industrial sector is projected to further increase whereas the demand growth in the transport sector and buildings are expected to show a dramatic decrease in 2017

Energy demand in the industrial sector is forecasted to improve from the previous year’s 2% to the 3%-range, driven by a modest recovery in exports and expansion of petrochemical facilities. Feedstock energy is expected to show a strong rebound from the previous year taking into account that naphtha demand, with its expanded facilities, has maintained the steady growth since 2016, and coal demand for iron-making which plummeted in 2016 remains unchanged due to the base effect. However, due to increasing oil prices and LPG demand which soared in 2016 decreasing owing to the diminishing effect of propylene facilities, fuel energy demand in the industrial sector is predicted to grow at a slower pace compared the previous year.

Although the increased number of vehicles and higher demand for travel and cargo transport will boost energy demand in the transport sector, the energy demand will grow much slower than last year and remain at the 1%-range due to rising oil prices. With oil prices plunged by 18.8% year-on-year, energy demand in the transport sector surged by more than 5% in 2016, however, oil prices are forecasted to increase at an annual rate of 30% or more in 2017, decreasing the growth of energy demand significantly.

The growth rate of energy demand in buildings, with the temperature returning to usual levels, is forecasted to slow down considerably to about 1.0%. Assuming that the mean temperature for the last 10 years is applied, the growth rate of electricity, which makes up the majority of energy consumption, will slow down along with a sharp decrease in CDD (-50.3%). City gas demand in buildings will increase thanks to a rise in HDD (1.9%) and its improved price competitiveness against petroleum.

Despite a modest recovery in the industrial sector, a significant decrease in energy demand for buildings will drive down the electricity demand growth (TFC) to the 1%-range. Electricity demand for industrial uses, thanks to an increase in exports along with global economic recovery, expansion of petrochemical facilities and the base effect of the primary metal industry, is expected to go up by around 2% year-on-year, maintaining its modest recovery pace. Although the residential progressive electricity rates were lowered, decreasing energy demand for air-conditioning due to the temperature recovering back to seasonal average is expected to bring down the growth of electricity demand in buildings to early- or mid-1% range.

Key Features and Implication

Gas power generation and gas input for power generation made a turnaround from the recent rapid decline due to the reduction of nuclear power generation in 2016.

In 2016, the growth of base load (coal and nuclear energy) generation, despite the introduction of new generation facilities, decreased from the previous year due to the lowered maximum output of coal-fired power plants, earthquake effects, etc. As a result, the capacity factor of nuclear plants dropped dramatically. . The capacity of base load generation facilities increased to 53.5GW[6] as of the end of 2016, up by 9.3% year-on-year, driven by newly introduced coal-fired power plants including Dangjin Unit 9 (Jul. 2016), Yeosu Coal-fired Unit 1 (Aug. 2016), Dangjin Unit 10 (Sep. 2016), Taean Unit 9 (Oct. 2016), Samcheok Green Unit 1 (Dec. 2016) and nuclear power plant Shinkori Unit 3 (Dec. 2016). However, the growth of coal-fired power generation was limited due to downward revision to the maximum output of coal-fired plants (Jan. 2016) and more preventive maintenance on a daily average basis (12.3%), and nuclear power generation plunged by an annual rate of 1.7% since September 2016, led by increased preventive maintenance (16.9%) and safety inspections of four power plants (Wolsong Units 1 to 4) following the earthquake in Gyeongju. .As a result, the capacity factor of coal-fired and nuclear power plants went down by 8%p and more than 3%p year-on-year, to 78% and 83%[7] , respectively.

On the other hand, with gas taking a bigger role in power generation along with extreme heat wave and the reduced effect of plunging oil prices, gas power generation and gas input for power generation rebounded from the steep downward trend that continued from 2014 to 2015. The growth of electricity consumption increased to 2.8% in 2016, up 1.5%p year-on-year. In particular, the peak load, which is handled by gas and oil-fired power generation, soared due to the scorching heat wave during the summer, and the plunge of oil-fired power generation drove gas power generation to take a bigger role. Due to plummeting oil prices, oil-fired power generation skyrocketed by 58.4% and 27.2% in 2014 and 2015, respectively. Although the annual average oil price declined in 2016, the oil prices modestly rebounded from the first quarter, driving down oil-fired power generation by more than 55%. Against this backdrop, gas power generation and gas input for power generation recovered from the sharp downward trend at an average rate of the 11% and 9% range in 2014 and 2015, to 19.9% and 5.3% in 2016, respectively. Moreover, the capacity factor of gas power plants rebounded from the three consecutive years of decrease to 42% up 6%p year-on-year.

The abrupt drop of gas power generation was mitigated considerably due to a significant decrease in nuclear generation outlook compared to the forecast made in the previous issue.

Due to changes in generation capacity assumptions, the forecast for the nuclear power generation growth decreased by 5.6%p in 2017 compared to the forecast in the previous issue, whereas gas demand for power generation declined by the mid-10% range, indicating that the sharp decline forecasted in the previous issue was mitigated considerably. The growth of nuclear power generation in 2017 was revised down to less than 2% taking into account that the introduction of Shinkori Unit 4 (1,400MW), which was supposed to be commissioned in 2017, is postponed to the second half of 2018 and the capacity of nuclear power plants for preventive maintenance in the first quarter soared (182.5%). In this regard, the plunge in gas demand for power generation was revised to be mitigated considerably compared to the previous forecast, but the gas demand will continue to drop at a fast pace due to increasing coal-fired power generation.

In particular, the preventive maintenance period for nuclear power plants was extended due to safety inspection requirements strengthened in the first quarter of 2017, and the capacity factor of nuclear power plants which plummeted in the wake of the earthquake in Gyeongju has maintained the 70%-range since the last quarter of 2016. Following the earthquake in Gyeonju in September 2016, a total of 10 nuclear power plants were suspended simultaneously in October 2016, resulting in the capacity factor of the quarter down to 70.6%. The capacity factor of the first quarter of 2017 was 77.4%, showing a dramatic year-on-year decrease (15.8%p), as a number of nuclear power plants extended the preventive maintenance period from the original plan. Hanbit Units 1 and 2 and Hanul Unit 1 were shut down in the first quarter of 2017 as the maintenance period of the plants were extended due to replacement of containment liner plates in the reactor containment buildings. Furthermore, the preventive maintenance period of Kori Unit 3 and Shinkori Unit 1 which were due in the first quarter have also been extended for additional 80 and 65 days, respectively. The capacity factor of nuclear power plants is expected to remain low at around 83% for two consecutive years taking into account its dramatic downward movement in the first quarter of 2017.

While coal demand will rapidly rise and energy use in buildings is expected to decrease, uncertainty is likely to expand.

In terms of energy source, coal is predicted to drive energy demand and among different sectors, energy demand for buildings will go down dramatically in 2017. Coal demand, mainly led by newly introduced large-scale bituminous coal-fired power plants, will drive TPED in 2017, whereas gas demand is forecasted to reverse from the previous year and show a downward movement. Meanwhile, energy demand in buildings, which surged due to extreme heat wave in 2016, will drop sharply as the temperature returns to usual levels.

However, taking into account that this forecast is made in the beginning of May 2017[8], uncertainty regarding the energy demand outlook has increased due to a possibility of revision of energy policy and recurrence of heat wave. As one of emergency response measures to fight fine dust, on 15 May 2017, President Moon ordered a temporary shutdown of old coal-fired power plants which had run for 30 years or longer. Thus, a total of 8 aged coal power plants amounting to 2,845MW, including Yongdong Units 1 and 2, Boryeong Units 1 and 2, Seocheon Units 1 and 2 and Samcheonpo Units 1 and 2, will be down for a month since June 2017. Furthermore, given that the new government pledged to shut down Wolsong Unit 1[9] and increase the operating rate of gas power generation facilities from 40% to 60%[10] , gas and nuclear energy demand outlook may change dramatically once details on energy policy are determined. The extreme heat wave has been witnessed as early as in May since 2014 and if the sweltering heat prevails in 2017, energy demand in buildings is likely to continue its dramatic upward trend as in the previous year

[3] LPG consumption for transport maintained downward trend despite lower prices due to the falling number of LPG cars

[4] The maximum generating capacity of coal-fired power plants was changed from maximum continuous rating to nominal rating as a prevention measure to thermal power plant failure.

[5] Hanbit Reactor Unit 3, after the maintenance period since the unplanned nuclear reactor outage in October 2014, resumed production in mid-June 2015. Wolsong Reactor Unit 1 which was suspended due to the expiration of its operating license in November 2012 was granted a 10-year extension and restarted at the end of June 2015.

[6] The share of base load generation facilities in the total capacity of power generation facilities (104GW) increased to 51.4% in 2016, up by 1.2%p year-on-year.

[7] For annual capacity factor calculation, power generation facilities as of the end of year are used, thus, the actual capacity factor may be different.

[8] The forecast preparation started at the end of April 2017 and details were finalized at the beginning of May 2017.

[9] After the Nuclear Safety and Security Commission (NSSC) granted the continued operation of Wolsong Unit 1 (Feb. 2015), the Seoul Administrative Court canceled the permit (Feb. 2017) and NSSC lodged an appeal to extend the reactor’s lifespan.

[10] In this report, the gas plants capacity factor will decrease from 42.3% in 2016 to the early 30%-range in 2017.