Korea’s first US investment hinges on long-term power buyers

As Korea confirmed a natural gas-fired combined-cycle power plant in Encinal, Texas, will be the first project under its $200 billion strategic investment commitment to the United States, power purchase agreements (PPAs) with potential power buyers are emerging as a key factor in determining the project’s commercial viability.

In a National Assembly briefing on Tuesday, Industry Minister Kim Jung-kwan said the project will be worth $22.3 billion, with planned generating capacity reaching 6.3 gigawatts. The project will initially build a 1.4-gigawatt gas turbine power plant to assess actual demand and economic viability, before gradually expanding it with 4.9 gigawatts of more efficient combined-cycle generation capacity.

The project will be funded entirely by Korea, while ownership will be split equally between Seoul and Washington. Electricity generated from the plant is expected to power artificial intelligence (AI) data centers in the region.

In selecting the gas plant as the first project, the government considered “commercial reasonableness,” stipulated as a key condition in the official Korea-U.S. investment agreement, as a priority. The government told the Assembly that it deemed the project commercially viable because its returns will likely reach up to $45.4 billion over 20 years under the current terms.

The government has not disclosed how it calculated the figure, but its assessment appears to have been based in electricity demand forecast.

In April, the Electric Reliability Council of Texas (ERCOT), the region’s grid operator, projected that electricity demand in its service area could reach about 367.8 gigawatts by 2032, up from the previous peak of 85.5 gigawatts in August 2023. The project’s return estimates appear to be based on this growing demand, as selling electricity at fixed prices to AI data centers planned in the region will generate stable returns.

According to lawmakers who attended the briefing, however, local companies or other power buyers that would sign PPAs for the project have yet to be determined. A note reading “PPA refusal” was also found in documents submitted to the Assembly.

A PPA is a long-term contract between a power generator and a customer, typically lasting 10 to 25 years, under which electricity is traded on predetermined terms and prices.

Without PPAs, electricity prices that the plant will sell can fluctuate over the long term, meaning Korea’s actual returns from the project will vary depending on market environments, general electricity prices and the plant’s utilization rate.

There are also concerns that projected electricity demand may overstate actual future consumption. Power plants typically operate for at least 20 years, while the information technology industry tends to experience much shorter business cycles.

“Even though market observers and experts expect that current AI-driven demand will likely continue for the time being, there are concerns that securing Big Tech companies that are willing to commit to power purchases for 20 years may not be easy,” an industry official said.

ERCOT CEO Pablo Vegas also said in a press release for the April estimate that “we believe this forecast to be higher than expected future load growth,” adding that it is not “a prediction of what will be built.”

The government said delaying PPAs could be advantageous given rising electricity demand and power prices in Texas, implying that PPAs will likely come next year. Some lawmakers, however, raised concerns that investment risks remain unresolved.

“Verification seems unclear over questions on whether there are clear buyer of the electricity and whether the companies planning the data centers had adequate capabilities,” Rep. Bae June-young of the People Power Party said.

Rep. Oh Gi-hyoung of the Democratic Party of Korea said: “As the project is still in its early stages, continued monitoring is necessary.”