KEPCO, Possibility of Introducing Fuel Cost Linkage System (Comprehensive)

Earnings Fluctuate with International Oil Prices... Moves to Reflect Fuel Cost Changes in Rates
Electricity Sales Decline and Operating Costs Rise... Q2 Profit Thanks to Low Oil Prices
Strengthening Price Signal Function... Focus on Inclusion in Electricity Rate Reform Plan

[Asia Economy Reporter Moon Chaeseok] Korea Electric Power Corporation (KEPCO) attracted attention by stating, "We will strive to reform a reasonable electricity tariff system" during its Q2 earnings announcement. There is keen interest in whether the fuel cost linkage system will be included in the electricity tariff reform plan, which is likely to be unveiled this year.

On the 13th, KEPCO announced that its consolidated operating profit for Q2 this year was 389.8 billion KRW, turning profitable compared to the same period last year. This marks two consecutive quarters of profit following Q1. Looking at Q2 results alone, KEPCO succeeded in returning to profitability for the first time in three years. In 2018, it recorded a loss of -687.1 billion KRW, and last year it remained at -298.7 billion KRW.

The consolidated operating profit for the first half of the year was 820.4 billion KRW, contrasting sharply with last year's operating loss of 928.5 billion KRW. Sales revenue was 28.1657 trillion KRW, a 0.5% decrease compared to the same period last year.

According to KEPCO and the energy industry, the biggest reason KEPCO was able to post profits for two consecutive quarters was the decline in international fuel prices. It was able to reduce subsidiary fuel costs and private power producer electricity purchase costs by as much as 2.5637 trillion KRW in the first half of the year.

There are also claims that without the unexpected benefit of low oil prices, a Q2 deficit would have been unavoidable. The basis for this is that electricity sales volume decreased by 2.9% due to the impact of the novel coronavirus disease (COVID-19), resulting in a 200 billion KRW reduction in electricity sales revenue. Industrial use dropped by 4.9%, and educational (-16.2%) and general use (-1.8%) also decreased. Residential use increased by 5.2% as remote work expanded.

Conversely, costs increased. Essential operating costs related to power supply, such as depreciation, repair expenses, and greenhouse gas emission costs, rose by 700 billion KRW compared to the same period last year. Excluding the oil price variable, this supports the argument that KEPCO's fundamental financial growth drivers were not very clear. KEPCO President Kim Jong-gap once said, "As the price of soybeans (fuel costs) rose, we did not raise the price of tofu (electricity rates), so the price of tofu became cheaper than soybeans."

For these reasons, there is speculation that KEPCO might include the fuel cost linkage system in its electricity tariff reform plan. The fuel cost linkage system adjusts electricity rates up or down depending on fuel cost fluctuations and is a long-standing wish of KEPCO. If this system is introduced, changes in international fuel prices will be reflected in electricity rates, and variable rates for the following month can be announced in advance. KEPCO believes this will encourage reasonable electricity consumption and energy conservation.

From KEPCO's perspective, this system has the advantage of reducing earnings volatility even if international oil prices fluctuate wildly. Businesses and households can also benefit from lower electricity rates during low oil price periods. During high oil price periods, consumption can be adjusted to reduce energy waste and overcome crises.

Previously, KEPCO and the Ministry of Trade, Industry and Energy, the relevant government department, aimed to announce the electricity tariff reform plan in the first half of the year but postponed it to the second half. This decision was made because the economic shock from COVID-19 has prolonged, and thanks to the drop in international oil prices, KEPCO's performance has improved for the time being, so there is no immediate need to readjust electricity rates.

The Korea Energy Economics Institute, a government-funded research institute, recently raised the necessity of introducing the fuel cost linkage system in its "Diagnosis of the Current Status of Domestic Energy Sector Tariff Systems and Policy Direction Study" submitted to the Economic and Social Research Council under the Prime Minister's Office. KEPCO's affiliated KEPCO Management Institute also recently released a report titled "Review of Overseas Energy Transition Cost Recovery Status and Regulations," recommending, "The fuel cost linkage system should automatically reflect fuel cost changes in tariffs to strengthen the price signaling function of tariffs."

The Ministry of Trade, Industry and Energy also included wording in the third Basic Energy Plan announced in June last year to consider "timely reflection of supply costs and external costs in energy prices." This is the highest-level national energy plan formulated every five years. However, the ministry's position is to analyze the impact on manufacturing industries and prepare alternatives to buffer side effects caused by excessive tariff adjustment ranges, considering the timing of introduction and making decisions accordingly.

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