Introduction of Fuel Cost Linkage System for Electricity Rates in January Next Year... Additional Reduction Cost for Coal Power Generation

Ministry of Industry and KEPCO Finalize and Announce Electricity Tariff Reform Plan
Quarterly Fuel Cost Fluctuations Reflected in Electricity Rates
Separate Climate and Environmental Charges for Renewable Obligations, GHG Emissions Trading, and Coal Reduction Costs
Establish Limits on Tariff Adjustment Range, Criteria for No Adjustment, and Government Adjustment Suspension Clauses
Triple Protection Mechanism to Prevent Sharp Electricity Price Surges Amid Oil Price Spikes

[Asia Economy Reporter Moon Chaeseok] The government and Korea Electric Power Corporation (KEPCO) have finalized and announced a reform plan for the electricity tariff system that reflects cost fluctuations such as international oil prices in electricity rates. Climate and environmental charges will be separately announced to transparently disclose them to consumers. A new cost for reducing coal power generation will be added to the climate and environmental charges. Three consumer protection measures have been put in place, including allowing the government to defer tariff adjustments to prevent sudden spikes in electricity rates during oil price surges.

The 'Essential Usage Deduction Discount System' that provides a monthly discount of 4,000 KRW to households using 200 kWh or less per month will be adjusted. From July next year, the discount rate for general households will be reduced by 50%, and the system will be abolished in July 2022. There had been considerable criticism that the essential deduction benefits were going to middle-class households who use less electricity due to reasons such as being single- or two-person households or having short residence times, rather than low-income households who cannot afford electricity.

On the 17th, the Ministry of Trade, Industry and Energy and KEPCO announced this electricity tariff system reform plan. The plan was initially scheduled to be announced by the first half of this year but was postponed to the second half due to weakened justification caused by reduced energy demand from COVID-19 and the windfall effect of falling oil prices (fuel cost decrease → cost reduction).

Although there were concerns that the announcement might not happen within the year because the related agenda was not adopted at KEPCO’s regular board meeting on the 11th, an extraordinary board meeting was held on the 16th, and the draft amendment to the electricity supply terms was submitted to the Ministry of Trade, Industry and Energy. After deliberation by the Electricity Committee on the same day, the Ministry approved the plan, finalizing and announcing it.

Reflecting Fuel Cost Fluctuations in Tariffs... Improving Financial Distortion

Jong-gap Kim, President of Korea Electric Power Corporation. Since the beginning of his tenure in 2018, he has consistently argued that "the price of tofu (electricity) is cheaper than the price of soybeans (raw material cost)," emphasizing the need for electricity rate reform. (Photo by Korea Electric Power Corporation)

The core of the reform is the addition of a new item called 'Fuel Cost Adjustment Charge' within the tariff. The fuel cost fluctuations (standard fuel cost - actual fuel cost) will be periodically reflected in electricity rates every quarter.

KEPCO President Kim Jong-gap remarked that the system was so distorted that "tofu (electricity) is cheaper than soybeans (raw material)," and it is expected that KEPCO’s financial structure will stabilize as this system is improved.

The standard fuel cost refers to the average fuel cost over the previous year (December this year = reflecting from last December to the previous month). The actual fuel cost refers to the average fuel cost of liquefied natural gas (LNG), coal, oil, etc., over the previous three months.

To prepare for cases where fuel costs such as oil prices surge, three layers of protection measures have been established: ▲limiting the range of tariff adjustments ▲setting criteria for no adjustment ▲establishing a government deferral clause for adjustments.

First, assuming the standard fuel cost is maintained, the adjustment charge can only be changed within a range of 5 KRW per kWh. For example, based on the average monthly usage of a four-person household (350 kWh, 55,000 KRW per month), the tariff can be adjusted by up to 1,750 KRW per month starting April next year.

From January to March next year, adjustments will be limited to 3 KRW per kWh, with a maximum monthly adjustment of 1,050 KRW. For industrial and general users with an average monthly usage of 9,240 kWh (1.19 million KRW per month), the maximum monthly tariff adjustment will be 46,000 KRW (28,000 KRW for January to March).

A criterion has been set that if the fuel cost fluctuates by less than 1 KRW per kWh per quarter, electricity rates will not be adjusted. This is to avoid unnecessary confusion caused by too frequent tariff adjustments.

Government Can Defer Tariff Adjustments During Oil Price Surges

Facilities related to strategic oil reserves of Korea National Oil Corporation. (Photo by Korea National Oil Corporation)

In the event of a short-term oil price surge, the government has established a system allowing it to defer electricity tariff adjustments in consultation with price authorities.

An official from the Ministry of Trade, Industry and Energy explained, "When oil prices surge and raw material costs rise, KEPCO will request the government to calculate the fluctuation and reflect it in the tariff. At this time, the ministry has established a basis for deciding whether to reflect KEPCO’s request through consultation with price authorities."

He added, "In other words, the deferral authority means 'the government’s authority to judge the necessity of electricity tariff adjustments due to fuel cost surges.'"

The government expects the recent low oil price trend to act as a factor for electricity tariff reductions. It anticipates that strengthening the price signal function and increasing consumers’ predictability of tariff adjustments will encourage consumers to use electricity rationally.

Separate Announcement of New and Renewable Energy, Greenhouse Gas Emission Rights, and Coal Power Generation Costs

[Image source=Yonhap News]

Another notable point is the establishment of a system to separately announce climate and environmental charges. These charges include costs for Renewable Portfolio Standards (RPS), greenhouse gas emission trading costs (ETS), and coal power generation reduction costs, accounting for about 4.9% of the total electricity tariff. Based on the average monthly usage of a four-person household, this is expected to cost 1,850 KRW per month, and for industrial and general users, about 48,000 KRW per month.

In this reform, RPS (4.5 KRW per kWh) and ETS (0.5 KRW per kWh) costs are only separated from the electricity volume charge, while the coal power generation reduction cost (0.3 KRW per kWh) is newly reflected.

The ministry explained that since RPS has been implemented since 2012 and ETS since 2015, these are not new factors for tariff increases. They also stated that these cannot be interpreted as 'energy transition costs' of the Moon Jae-in administration. The coal power generation reduction cost is a factor increasing climate and environmental charges and may act as a cause for electricity tariff increases.

An official from the ministry said, "The inclusion of coal power generation reduction costs is due to the implementation of the fine dust seasonal management system since November last year. In a survey of about 2,000 citizens conducted at the time of introducing the fine dust seasonal management system, about 60% responded that they could accept electricity tariff increases, so we believe some social consensus has been reached."

Reducing 'Essential Deduction' for Middle Class from July Next Year

Air conditioner installation for vulnerable groups. (Photo by Asia Economy DB)

The essential deduction system, which had been criticized for benefiting middle-class households that use less electricity rather than low-income households, will be revised. According to the Ministry of Trade, Industry and Energy, 81% of households receiving essential deduction benefits belong to the upper-middle income class, and 78% are single- or two-person households. According to KEPCO, as of last year, the essential usage deduction discount system applied to 9.91 million households (408.2 billion KRW).

From July next year, the discount amount for general households will be reduced from 4,000 KRW to 2,000 KRW per month, and the discount for general households will be abolished in July 2022. The current system will be maintained for about 810,000 vulnerable households (13.9 billion KRW annually). Approximately 550,000 to 800,000 vulnerable households who have not yet applied will be identified and provided welfare discounts ranging from 8,000 to 16,000 KRW per month, totaling about 88.2 billion KRW annually.

Additionally, about 50 billion KRW of the funds accumulated from reducing the essential deduction will be used from next year for projects such as the 'High-Efficiency Home Appliance Purchase Rebate Support Program.' The target beneficiaries are vulnerable households eligible for KEPCO’s welfare discounts.

The seasonal and time-of-use optional tariff system (time-of-use tariff), which had been applied to industrial and general electricity, will be introduced for residential use as well. Unlike the progressive tariff system, where the basic charge is paid according to usage, the time-of-use tariff system charges different rates depending on the season and time when electricity is used, with higher basic charges.

The time-of-use tariff will be first implemented in Jeju from July next year, followed by consideration of expanding the applicable areas. To implement the time-of-use tariff, smart meters (AMI) capable of measuring electricity usage by time are required, and since Jeju has the highest AMI penetration rate, it will be the first region to apply the system.

Furthermore, the ministry and KEPCO announced that from January next year, the special discount for self-use new and renewable energy facilities exceeding 10 kW will be abolished. The special discount for facilities of 10 kW or less, which account for 88.7% of all special discount consumers, will be extended for three years.

Moreover, the government will strengthen management and supervision of cost control for KEPCO and its power group companies. The increase rate of power supply costs will be capped at 3% for the next five years, aiming to save about 7 to 8 trillion KRW. The comprehensive cost verification of electricity tariffs, currently conducted once a year, will be made continuous.

KEPCO had fallen into a deficit trap after posting operating losses for two consecutive years since 2018.

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