[Click eStock] "Korea Electric Power, 3Q Operating Profit Deterioration Inevitable Due to Electricity Rate Freeze"

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] KB Securities stated on the 22nd that due to the electricity rate freeze in the third quarter this year, a deterioration in annual operating profit and loss for Korea Electric Power Corporation (KEPCO) is inevitable, and it is expected that investment sentiment will remain subdued for the time being.

KEPCO announced the day before that the fuel cost adjustment unit price for the third quarter will be applied at -3.0 KRW per kWh, the same as in the second quarter. The government decided to maintain the adjustment unit price of -3.0 KRW per kWh in the third quarter, citing the prolonged COVID-19 pandemic and high inflation as the main reasons. Although the electricity rate fuel cost linkage system was applied from this year through the electricity rate reform plan at the end of 2020, quarterly fuel cost adjustment unit price changes under this system were not made in the third quarter following the second quarter. However, the government stated that if high fuel costs persist in the second half of the year, it will consider reflecting fuel cost fluctuations in the adjustment unit price in the fourth quarter.

It is the opinion that the electricity rate freeze in the third quarter will inevitably worsen KEPCO's annual operating profit and loss. KB Securities researcher Jung Hyejeong said, "Due to the electricity rate freeze in the third quarter, the electricity sales unit price in the third quarter is expected to fall by 2.7% compared to the same period last year," adding, "Accordingly, the estimated reduction in KEPCO's third-quarter sales is 412.4 billion KRW."

The fuel costs reflected in KEPCO are expected to increase from the third quarter compared to the same period last year, acting as a cost-increasing factor. KEPCO's coal fuel cost unit price reflects international coal prices with a six-month lag, and LNG fuel cost unit price reflects Dubai oil prices with a 3-4 month lag. The Newcastle coal price in Australia has risen compared to the same period last year since December 2020, and Dubai oil prices have risen since February 2021. Researcher Jung analyzed, "With increasing fuel costs and electricity rates frozen, KEPCO's annual operating profit and loss deterioration is inevitable," and "It is estimated that a 1% change in electricity sales unit price results in a 564 billion KRW change in KEPCO's annual operating profit and loss."

This electricity rate freeze is expected to act as a factor worsening investment sentiment toward KEPCO for the time being. Researcher Jung said, "Electricity rates are a major factor determining KEPCO's valuation," adding, "Considering the ongoing rise in energy prices and increasing environmental-related costs, for KEPCO's valuation to improve, there must first be a recovery in expectations that costs can gradually be passed on to electricity rates."

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