Electricity is an unusual commodity in that it is produced and consumed at the same moment. That makes the physical limits of the transmission grid linking production and consumption decisive in balancing supply and demand. No matter how cheaply a power plant generates electricity, if the grid is congested, expensive nearby generators must be run at the point of demand. That is why a shortage of transmission capacity inevitably leads to differences in electricity prices by region.
The imbalance in Korea's power system keeps worsening. Between 2010 and 2024, domestic generation capacity rose 101%, while transmission lines grew only 17%. Over the same period, power demand in the Seoul metropolitan area rose 39.6%, but generation capacity there increased just 26%. Capacity outside the metropolitan area, by contrast, surged 134.8%, deepening both the transmission bottleneck and the supply-demand mismatch between the two regions. That is the backdrop for arguments that the current system — which has effectively applied a single price nationwide except for Jeju Special Self-Governing Province — has reached its limits.
Citing the need to address the regional imbalance, the government is pushing a system of differentiated electricity rates by region, dividing the wholesale market into two zones, the metropolitan area and the rest of the country, and the retail market into 11 regions. If the system is introduced, wholesale prices in the metropolitan area are unlikely to change much, but prices outside it could fall by around 20 won per kilowatt-hour. The economic purpose of regional pricing is clear: to draw power plants to the metropolitan area, where electricity is short, and new demand such as data centers and large factories to non-metropolitan regions, where power is in surplus, thereby easing the regional mismatch. For investors weighing where to site a new plant or data center, a regional price gap can serve as an effective signal. A price becomes a signal that changes behavior only when it is known before the choice is made.
The problem lies with existing power plants that have already completed investments worth trillions of won and are in operation. For incumbent generators, whose location and fuel are already fixed, there is no real way to respond when they are suddenly told to sell at a lower price simply because they sit in a region with surplus power. For them, this is less a "price signal" that alters future choices than something closer to an "after-the-fact penalty" imposed on past ones.
Generators outside the metropolitan area have reason to feel aggrieved. Much of the current transmission congestion stems from delays in building the grid and the rapid expansion of renewable energy. The government granted generation licenses and encouraged investment, then failed to build transmission lines on time — and now the resulting congestion costs are being passed on to the generators. It is a textbook case of what industrial organization theory calls regulatory hold-up. The economic structure is identical to the abuse of power in which a large company requires a supplier to invest in dedicated equipment, then slashes the unit price once the investment is complete.
Conflict with the existing settlement system is another issue to resolve. Korea's power market has settlement mechanisms that recover generators' excess revenue and compensate for shortfalls, based on total cost and a reasonable return on investment. If the revenue of non-metropolitan generators falls sharply under regional pricing and is then made whole through settlement, the siting signal from regional prices is neutralized. If it is not made whole, the arrangement conflicts with the existing settlement principle grounded in total-cost regulation. If one system tries to widen regional price gaps while another tries to pull revenues back to a set level, the result is a patchwork of systems built on different philosophies stacked inside a single market. If market prices are differentiated while after-the-fact settlement levels them out, it also becomes unclear which price investors should trust in making decisions.
A good market system is not one that simply attaches a different price tag to each region. Those prices must actually change behavior and allocate costs and responsibility reasonably. Treating new entrants, which can choose location, scale and fuel, the same as incumbents, whose choices are all behind them, cannot produce the intended effect.
Aristotle's view of justice — treating like cases alike and unlike cases differently — can be applied to market systems as well. Fairness calls for fully reflecting regional prices for new entrants, to give them a siting signal, while providing transition measures for incumbents for a set period. For regional electricity pricing to succeed, the first step is not to split price tags by region but to set right the justice of a market in which price signals work fairly.