Korea Electric Power Corporation, Reason for Losses... "Due to High Fuel Costs?"

[Asia Economy Reporter Yoo Hyun-seok] When discussing Korea Electric Power Corporation's (KEPCO) performance, the issue of nuclear phase-out is always brought up. The government implemented the nuclear phase-out policy starting in 2017 under the Moon Jae-in administration, coinciding with a downturn in KEPCO's performance. However, KEPCO's results are influenced more by raw material prices and power purchase costs than by nuclear power itself.

KEPCO recorded a large-scale surplus in 2016. In contrast, it posted a significant deficit last year. The sales levels were similar. In 2016, KEPCO reported consolidated sales of 60.19 trillion KRW and operating profit of 1.202 trillion KRW. Last year, sales were 59.093 trillion KRW with an operating loss of 1.357 trillion KRW.

In 2016, when KEPCO posted strong results, the nuclear power generation division's sales amounted to 11.1685 trillion KRW, accounting for 18.5% of total sales. Subsequently, sales decreased to 9.4157 trillion KRW in 2017 and 8.8587 trillion KRW in 2018. This was due to a large-scale maintenance period that lowered the nuclear power plant utilization rate. The utilization rate, which was 79.9% in 2016, dropped to 71.2% in 2017 and 65.9% in 2018. It is difficult to attribute this solely to the so-called 'nuclear phase-out.' However, last year, the utilization rate rose again to 70.6%, reaching the 2017 level. At that time, the nuclear power division's sales and operating profit were 9.4157 trillion KRW and 1.3857 trillion KRW, respectively.

Rather, a more direct factor affecting KEPCO's operating profit is the rise in raw material prices such as coal. This is clearly shown when comparing 2016 and last year's performance. KEPCO's fuel costs, which were 14.067 trillion KRW in 2016, increased by more than 4 trillion KRW to 18.261 trillion KRW in 2019. Coal prices rose from 93,700 KRW per ton in 2016 to 137,800 KRW per ton in 2019; liquefied natural gas (LNG) increased from 594,800 KRW per ton to 723,700 KRW per ton; and oil prices went up from 361,000 KRW per liter to 639,200 KRW per liter, among other increases. In contrast, nuclear power costs remained at a similar level, from 11.94 trillion KRW in 2016 to 11.63 trillion KRW in 2019.

Additionally, power purchase costs rose from 10.756 trillion KRW to 18.27 trillion KRW, an increase of nearly 8 trillion KRW. Power purchase costs refer to the expenses incurred when buying electricity generated by power companies through the Korea Power Exchange. These costs are influenced by the System Marginal Price (SMP), which can be considered the wholesale electricity price and fluctuates significantly depending on international oil prices and other factors. SMP rose from 77.1 KRW per kWh in 2016 to 95.2 KRW in 2018, then fell to 90.7 KRW last year.

Moreover, last year saw increased costs related to carbon emission permits and one-time expenses such as labor costs. These included 600 billion KRW for carbon emission permits, 170 billion KRW for nuclear power plant decommissioning provisions, and 240 billion KRW for labor costs. KEPCO's performance is thus more heavily influenced by prices such as international oil prices.

Ultimately, the cause of KEPCO's performance issues is not the nuclear phase-out policy but the tariff system that does not reflect raw material price increases. Looking at KEPCO's 2016 electricity sales prices by category, industrial use was 107.1 KRW per kWh, general use 130.4 KRW, residential use 121.5 KRW, and others 85.9 KRW, averaging 111.2 KRW. Last year, the prices were 106.6 KRW for industrial, 130.3 KRW for general, 105.0 KRW for residential, and 69.9 KRW for others, averaging only 108.7 KRW, meaning tariffs remained unchanged despite rising raw material costs.

This year, there is a high possibility of performance improvement due to falling oil prices. On the 16th (local time), West Texas Intermediate (WTI) crude oil for April delivery on the New York Mercantile Exchange (NYMEX) closed at $28.70 per barrel, down 9.6% ($3.03) from the previous day. The $30 per barrel level was breached, marking the lowest level since 2016. For KEPCO, a drop in oil prices leads to a decrease in LNG prices from Korea Gas Corporation, which lowers the LNG raw material costs for its power generation subsidiaries. Additionally, a decline in SMP reduces power purchase costs, improving performance. Mirae Asset Daewoo raised its operating profit forecast for KEPCO this year from 1.431 trillion KRW to 2.651 trillion KRW.

However, KEPCO faces the need to reform its tariff system. The nuclear phase-out policy is likely to have a greater impact in the future. The share of coal-fired and nuclear power plants, which have low fuel costs, is gradually decreasing, while environmental costs such as carbon emission permits and the Renewable Portfolio Standard (RPS) are expected to increase over time. Particularly, financial restructuring is also necessary. KEPCO's net borrowings have steadily increased from 48.8474 trillion KRW in 2016 to 51.0938 trillion KRW in 2017, 57.7649 trillion KRW in 2018, and 65.2392 trillion KRW in the third quarter of last year. The debt dependency ratio also rose from 30.5% in 2016 to 36.6% in the third quarter of last year.

Ryu Je-hyun, a researcher at Mirae Asset Daewoo, stated, "Despite improvements in nuclear power plant utilization rates, the previously uncertain performance outlook has been significantly improved by the sharp decline in oil prices. While KEPCO's performance improvement is clearly positive news for its stock price, removing uncertainties regarding electricity tariffs must precede any long-term rise."

This content was produced with the assistance of AI translation services.