South Korea Requires 16% Return on US Investments for Principal Recovery
The Korean government needs a 16% return on its US$200 billion investment package in the US, primarily focused on energy infrastructure like the Encinal power plant in Texas. This investment is driven by the rapid increase in US electricity demand from AI data centers, especially in Texas. While the return target is challenging, experts believe it is achievable depending on the investment management structure and Korean corporate participation.
The South Korean government has provisionally calculated that a minimum 16% return is required to recoup the principal and interest on its US$200 billion investment package in the United States, as confirmed by the Hankyoreh. This investment framework, detailed in a report from the Ministry of Trade, Industry and Resources to the National Assembly, assumes a 5% deemed interest rate over 20 years for a US$20 billion project, necessitating a 16.68% annual internal rate of return to generate US$61 billion.
The investment strategy, initially involving a "risk pooling" approach, was revised at the US's request to a project-by-project calculation of profits and losses. Critics argue this removes a safety net for Korea, though some analysts see potential opportunities. This initiative is heavily influenced by the soaring electricity demand in the US, particularly in Texas, driven by the rapid proliferation of AI data centers. Currently, 45% of the world's data centers are in the US, and projections indicate that US data center-related electricity demand could reach 74 GW under conservative estimates by 2030, significantly increasing natural gas power generation.
The South Korean government plans to invest in projects like the US$22.3 billion, 6.3 GW Encinal combined-cycle gas-fired power plant in Texas. US energy companies like Vistra and NRG Energy in Texas have already seen substantial increases in operating profits from their gas combined-cycle power generation, attributed to data center demand. While Texas offers shale gas cost competitiveness, concerns exist regarding potential construction delays due to environmental issues, resident objections over power and water shortages, and fluctuating raw material prices, which could impact project costs and overall returns. International trade experts emphasize that the structure of the investment fund's management, including the involvement of Korean vendors and project managers, will be crucial for the investment's success.