Pact changes okayed for hefty costs of anti-dust project at coal power plants

Hadong thermal power plant in South Gyeongsang Province. [Courtesy of Sea-A STX Entech]

A project to make a cover to prevent flying dust from coal yards at thermal power plants has stalled amid soaring commodity costs and the South Korean government is saying it is possible to revise project contracts between power companies and private construction firms to prevent further losses. This would give some breathing room to the construction companies, which are facing hundreds of billions of won in losses as they continue construction.

The project, initiated four years ago, was mandated by the Ministry of Environment to address environmental damage caused by coal dust from thermal power plant coal yards. Five public power generators and four constructors (Hyundai Samho Heavy Industries, POSCO E&C, HJ Heavy Industries, and Sea-A STX Entech) signed individual contracts and began the project in 2020, a year after the obligation was imposed.

The contract model employed for this project was a conditional purchase on installation, different from the conventional construction approach.

The problem lies in the significant price increase in steel and other raw materials for construction after the pandemic and the Russo-Ukrainian War. While general construction contracts allow for the inclusion of increased raw material costs in the construction payments, conditional purchase contracts only partially account for the price surges, leaving construction companies to bear substantial losses.

According to data, the cumulative losses of the four contractors are estimated at 365.8 billion won ($287 million). The contractors repeatedly requested the Ministry of Economy and Finance to change the contract to a construction contract, but the public power generators took the position that they could not change their contractual arrangements without an authoritative interpretation from the ministry under the National Contract Act.

With the recent authoritative interpretation from the finance ministry affirming the possibility of contract modifications, construction companies now feel relieved. Going forward, power generation companies are likely to engage in further discussions with the constructors to decide whether to adjust the contract model.

However, the ministry emphasized that specific changes to the contract conditions should be mutually decided by the parties involved and stated that retroactively applying the contract changes would not be appropriate.

Once the dust covering facilities are completed, they are expected to be dismantled after five to six years to align with the power plant’s operational schedule. To mitigate fine dust pollution during the relatively short operation period, construction companies are contemplating installing low-cost devices such as sprinkler systems, dust suction devices, and windbreak walls instead of undertaking remaining costly construction.

The project’s future is now in the hands of the Ministry of Environment, which holds authority over the remaining construction. Currently, the environment ministry is internally reviewing the possibility of discontinuing the covering facility project.