Fuel and Environmental Costs Traded at 'Fair Value'... Preventing Failures in the Power Industry

Heated Electricity Bills: Discussions on Introducing the 'Fuel Cost Linkage System'

Electricity rates frozen for 6 years and 10 months... Consumption distortion worsens with inflation

KEPCO’s financial stability, fluctuating with international oil prices, ultimately turns into a risk

Environmental costs from energy transition a hot issue... Most developed countries impose separate charges

[Asia Economy, Reporter Moon Chaeseok] Discussions on introducing a 'fuel cost linkage system' that adjusts electricity rates based on the price of electricity raw materials are gaining momentum. There are also calls for reforming the tariff system to separately impose environmental cost charges arising from the energy transition.

According to the energy industry on the 15th, among the top 30 countries by Gross Domestic Product (GDP), South Korea is the only resource-poor country that has not introduced the linkage system.

It is understood that five countries have not introduced the fuel cost linkage system. Among them, Mexico, Saudi Arabia, Argentina, and Iran are oil-producing countries that can control fuel costs, while Switzerland has a large share of hydropower and a low share of fossil fuels, so there is little incentive to link fuel costs.

The fuel cost linkage system is a system that reflects fuel cost fluctuations in the basic charge and electricity consumption charge. KEPCO and its power generation subsidiaries purchase raw materials such as liquefied natural gas (LNG) and coal from overseas, burn them to generate electricity, and sell it to domestic consumers to make a profit.

According to market principles, it is natural for the price of processed goods like electricity to fluctuate according to raw material prices. However, the government has restricted electricity rate adjustments for reasons such as price stability, income redistribution, and industrial activity support. Electricity rates have been frozen for 6 years and 10 months since November 2013.

According to Statistics Korea, the consumer price inflation rate has been between 0.7% and 1.9% since 2014. Since electricity rates remained unchanged during this period, consumption distortion occurred equivalent to the inflation rate.

Experts say that introducing the fuel cost linkage system can reduce consumption distortion. Trading electricity at its proper price can prevent unnecessary economic and environmental adverse effects. Continuing the current distorted electricity tariff system raises concerns about the deterioration of the domestic power industry.

◆ "Fuel cost linkage system prevents consumption distortion" = Introducing the linkage system makes it easier to predict tariff trends, which also reduces the risk of electricity rate surges during high oil prices.

Under the current low oil price trend, fuel costs sharply decrease, but under the current system, the decline in oil prices cannot be reflected in electricity rates, making it difficult for consumers to benefit from rate reductions. Conversely, if oil prices rise and KEPCO falls into deficit, even if oil prices later fall, it becomes difficult to lower electricity rates due to the deficit.

By applying the linkage system with a cap on the rate increase and a suspension mechanism for emergencies, the 'high oil price risk' can be addressed.

The government previously attempted to introduce the linkage system in 2011 but withdrew due to inflation concerns; however, even then, consumer protection measures such as rate adjustment caps and suspensions were included in the plan.

Developed countries also implement the linkage system with safety measures. Japan, which has implemented the fuel cost linkage system since 1996, introduced it after oil prices fell but electricity rates rose by more than 30%.

Japan calculates the average oil price over three months and applies it to electricity rates two months later. To prevent sudden rate fluctuations, it has established upper and lower adjustment limits and other safety measures. This allows consumers to anticipate electricity rate changes, reducing risks such as large-scale blackouts and encouraging rational energy consumption.

There are also claims that introducing the linkage system is necessary to improve KEPCO’s financial stability, which fluctuates wildly with international oil prices. International oil prices can rise or fall at any time due to political decisions by oil-producing countries, making it difficult for Korea to control prices.

KEPCO recorded a deficit of 1.277 trillion won last year but posted an operating profit of 820.4 billion won in the first half of this year. This surprise performance came despite no clear growth momentum other than the drop in oil prices.

There are concerns that the justification for introducing the linkage system will weaken significantly once the spread of COVID-19 subsides, as consumer resistance may increase under a high oil price trend. If electricity rate hikes coincide with domestic demand slumps due to economic recession, strong opposition may arise.

◆ Environmental cost imposition key amid energy transition = Whether to impose environmental costs is also a matter of interest. Since environmental costs would be added to the basic and consumption charges, there could be controversy over whether electricity rates are rising due to government energy transition policies.

KEPCO pays environmental costs such as those under the Renewable Portfolio Standard (RPS) and the Emissions Trading Scheme (ETS). It is known that KEPCO bore about 1.2 trillion won in RPS costs and about 90 billion won in ETS costs in the first half of this year.

Most developed countries incorporate environmental burden systems into their tariff structures. Some U.S. states, the U.K., Germany, Japan, France, and other developed countries calculate environmental costs and apply them to tariffs or impose them separately.

Since Korea is pursuing policies to reduce coal and nuclear power generation, opinions are emerging that it is no longer possible to hide the costs of eco-friendly energy from the public. Transparently disclosing environmental charges would allow consumers and investors to assess KEPCO’s management efficiency and demand responsible management.

Professor Yoo Seunghoon of Seoul National University of Science and Technology, chair of the working group advising the 9th Basic Plan for Electricity Supply and Demand (9th Electricity Plan), recently stated at the '2020 Policy Tasks Seminar for Transition to a Rational Electricity Tariff System' hosted by the Korea Energy Economics Institute, "If climate costs are not clearly revealed, the public will feel deceived, and the spread of renewable energy and climate change response could face tremendous backlash," adding, "Attention should be paid to the fact that Germany’s renewable energy-related surcharges account for about half of its electricity rates."

To reform electricity rates, approval must be obtained from KEPCO’s board of directors, followed by review and resolution by the government’s Electricity Committee, and finally authorization by the Minister of Trade, Industry and Energy.

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