Korea Electric Power Corporation, Will the Tariff System Reform Gain Momentum?

Thanks to low oil prices, surplus rises 8.5% this month... Expectation of resolving fare uncertainty

[Asia Economy Reporter Eunmo Koo] Korea Electric Power Corporation (KEPCO) is showing a recovery in its stock price as its earnings improve due to the low oil price trend caused by the novel coronavirus disease (COVID-19). Going forward, KEPCO’s stock price is expected to be determined by the direction of the electricity tariff system reform.

According to the Korea Exchange on the 18th, KEPCO’s stock price closed at 21,650 KRW, up 2.61% (550 KRW) from the previous trading day. Since the beginning of this month, institutional investors have net purchased 21.7 billion KRW worth of KEPCO shares, resulting in an 8.5% increase. Considering the recent KOSPI rally, this is not a remarkable return, but it is a meaningful movement given that the stock price had been stagnant for several months.

With operating profits exceeding 2 trillion KRW in the third quarter alone this year and a continued profit trend expected for the time being, the anticipation of electricity tariff system reform, which could reduce earnings volatility within the year, is interpreted as driving the stock price recovery. KEPCO recorded an accumulated operating profit of 3.2 trillion KRW this year, including 2.3 trillion KRW in the third quarter, as the low oil price trend continued due to COVID-19.

Due to the decline in oil prices, KEPCO saved as much as 3.9 trillion KRW compared to last year on fuel costs for its power generation subsidiaries and electricity purchased from private power producers. Although electricity sales revenue decreased by 400 billion KRW due to COVID-19 and depreciation and repair costs increased by 500 billion KRW due to expanded preventive maintenance of nuclear power plants, the impact of the oil price decline more than offset these. KEPCO’s performance clearly correlates with international fuel prices. Since most raw materials are imported from overseas, earnings volatility inevitably expands depending on oil prices.

The effect of low oil prices is expected to continue through the fourth quarter. The time lag for the decline in oil prices to be reflected in the wholesale electricity price, known as the System Marginal Price (SMP), which KEPCO pays to purchase electricity, is 5 to 7 months. The sharp drop in oil prices from the beginning of the year to April due to COVID-19 will be reflected in the fourth quarter’s performance. According to financial information provider FnGuide, KEPCO’s operating profit for the fourth quarter is estimated at 547.9 billion KRW, turning profitable compared to the same period last year.

However, since oil prices rebounded from May and coal prices also reversed to an upward trend from September, concerns about profitability weakening from the first quarter of next year exist. Therefore, whether the fuel cost pass-through system will be introduced within the year is expected to determine the future stock price direction. Jonghyung Lee, a researcher at Kiwoom Securities, said, “To reduce earnings volatility caused by external variables such as oil prices and to establish a structural profit base, the introduction of a fuel cost pass-through system is necessary. If implemented, concerns about electricity tariff uncertainty will be alleviated, and the stock price will be revalued.”

Hyejung Jung, a researcher at KB Securities, also said, “As the government is strongly promoting the transition to eco-friendly energy, KEPCO will inevitably face increased costs and cash flow deterioration in various areas such as environmental-related expenses, investments in renewable power generation and transmission and distribution facilities, and reduction of base load power generation. KEPCO’s stock price will depend on whether the tariff reform plan is set in a way that can offset these cash outflows to some extent.”

The fuel cost pass-through system is a mechanism that directly reflects changes in fuel prices used for electricity production in electricity tariffs. If introduced during a low oil price period, consumers can benefit from tariff reductions. The fuel cost pass-through system was introduced in 2011 but was abolished in May 2014 due to growing concerns about inflation.

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