[Click eStock] "Electricity Bill Freeze... Korea Electric Power Corporation Expected to Remain Weak in 1Q Next Year"

Need for Investment Funds in Renewable Energy... Deficit Expected to Widen
Fuel Costs Surge... "Rate Increase Needed"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] With no increase in electricity rates in the first quarter of next year, Korea Electric Power Corporation's (KEPCO) earnings deterioration is expected to continue.

On the 21st, KB Securities analyzed KEPCO in this way. The day before, KEPCO and the Ministry of Trade, Industry and Energy decided to postpone the implementation of the fuel cost linkage system for the first quarter of next year and to freeze electricity rates. Accordingly, the fuel cost adjustment unit price will remain at 0 KRW per kilowatt-hour (kWh), as applied in the fourth quarter of this year. This decision was made based on the judgment that there is a need to ensure the stability of citizens' lives amid prolonged COVID-19 and high inflation rates.

KEPCO requested an increase of 3 KRW per kWh in the adjustment unit price, but it was not accepted. Due to rapidly rising international fuel prices, the adjustment unit price increase factor for the first quarter of next year was 29.1 KRW/kWh, but it was frozen. The fuel cost adjustment unit price, which could not be reflected in electricity rates due to the government's decision to postpone the fuel cost linkage system so far, will be included in the overall cost and reflected in future electricity rate adjustments.

Accordingly, the electricity sales unit price for the first quarter of next year is estimated to rise by 2.8% compared to the same period last year. This is a base effect resulting from the fuel cost adjustment unit price applied in the first quarter of this year being -3 KRW/kWh due to the decline in international energy prices last year. On the other hand, the increase in fuel costs during the same period is expected to far exceed the rise in electricity sales unit prices. The average international coal price in the second half of this year, which is estimated to affect fuel costs in 2022, is $171.4 per ton, 182.1% higher than the same period last year. The average Dubai crude oil price in the fourth quarter of this year also rose to $77.5 per barrel, up 76.6% during the same period.

While normalization of electricity rates is unlikely in the near term, some increase is necessary considering funding needs. Given the recent highest inflation rate since 2011 and next year's presidential election, it is difficult for the government to implement an increase, but as KEPCO's financial burden is growing, a rate hike is necessary.

Jung Hye-jung, a researcher at KB Securities, explained, "In addition to the fuel cost increase that will have a significant impact next year, considering the structurally increasing environmental costs and large-scale investment in renewable energy power plants, sufficient funding is needed, but the deficit is expected to expand. It is unrealistic to reflect all the various costs that KEPCO has not yet passed on to electricity rates at once, but partial cost pass-through is necessary to prevent excessive deterioration of financial soundness."

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