Fuel Cost Surge Causes Wave of Bankruptcies Among UK and Japanese Power Companies... What Will Hanjin Do as Its Power Purchase Costs Triple?

Despite Sharp Rise in Fuel Costs like LNG and Crude Oil, Government Expects to Freeze Electricity Rates in Q1
Tax Injection Inevitable to Manage Collapsed Financial Situation

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Kwon Haeyoung] Due to the surge in fuel costs, the price Korea Electric Power Corporation (KEPCO) pays to power producers for electricity has reached its highest level in 7 years and 4 months. However, with the possibility high that electricity rates for the first quarter of next year, to be decided on the 20th, will be frozen again, KEPCO’s burden, already weighed down by a debt pile of 142 trillion won, is expected to increase further. There is growing concern that KEPCO’s deficit, estimated at around 4 trillion won this year, will expand next year.

◆ Soaring purchase costs due to fuel price surge ＝ According to the Korea Power Exchange on the 17th, the price (SMP) KEPCO pays to purchase electricity from power producers rose from 49.8 won per kWh in November last year to 148.67 won as of December 1 this year. It tripled in just over a year, marking the highest level in 7 years and 4 months since July 18, 2014 (148.85 won).

This is due to the sharp rise in fuel costs such as crude oil and LNG. The LNG price (JKM) imported by Korea and Japan surged more than 16 times from $2.13 per million BTU in April last year, when it hit its lowest point, to $35.07 in October this year. Dubai crude oil jumped 3.5 times from $23.38 per barrel to $81.22 during the same period.

Although KEPCO’s electricity purchase price increased, the retail price sold to end consumers such as households and businesses remains frozen. The government introduced a 'fuel cost linkage system' this year to reflect fuel cost fluctuations in electricity rates, but electricity fees remain at last year’s level. The electricity rate was raised by 3 won per kWh in the fourth quarter, but this only restored the 3 won cut made in the first quarter.

Ultimately, KEPCO is bearing the losses from selling 'tofu (electricity)' cheaper than 'beans (fuel)'. KEPCO recorded a cumulative operating loss of 1.1298 trillion won through the third quarter. The operating loss for this year is expected to be 3.8492 trillion won, and KEPCO’s deficit excluding the performance of power generation subsidiaries is projected at 4.3845 trillion won.

◆ UK and Japan power companies filing for bankruptcy... Daily interest alone 5.7 billion won, KEPCO’s financial situation deteriorates ＝ Some express concerns that if the government does not raise electricity rates despite rising fuel costs, KEPCO’s financial condition will worsen further, potentially requiring the injection of taxpayers’ money.

There have been bankruptcy cases among overseas power companies. Due to a shortage of natural gas supply in Europe causing prices to soar, more than half of about 50 UK power companies?27 in total?have gone bankrupt this year. The UK government’s introduction of a 'price cap' on electricity rates prevented companies from reflecting rising fuel costs, severely worsening their business environment. In Japan, 11 small-scale power retailers went bankrupt due to deteriorating management. Unlike Korea, which did not raise electricity rates by even 1 won, retail electricity prices in the UK and Japan rose by 11.8% (February to September) and 14.6% (January to October) respectively this year, yet they could not avoid bankruptcy. Spain raised electricity rates by 35.7%, and Italy by 14.4% (January to October).

If the government continues to suppress electricity rate hikes, it is expected that taxpayer money will inevitably be injected to manage KEPCO’s bankrupt financial situation. KEPCO’s debt this year is estimated at 142 trillion won, with interest expenses of 2 trillion won. Interest expenses alone amount to 5.7 billion won per day. There are also claims that freezing electricity rates could infringe on KEPCO’s shareholder interests.

An industry official said, "If the government delays the normalization of electricity rates and places the burden solely on KEPCO, it will ultimately be passing the bomb to the next government and future generations."

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