"LNG Purchase Price to Increase"... A Sudden Blow to Power Companies

KOGAS Revises 'Natural Gas Supply Regulations'... LNG Excess Demand Purchase Price Increased
Government Policy Raised LNG Power Generation, Fuel Cost Burden Grows for Power Companies
Power Industry Voices Complaints Over Inconsistent 'Energy Policy'
KOGAS: "Intended to Reduce National Burden of City Gas Usage"

[Asia Economy Reporter Joo Sang-don] Korea Gas Corporation's decision to raise the cost of purchasing liquefied natural gas (LNG) necessary for power generation from five domestic thermal power companies starting January next year has stirred the power generation industry. Gas Corporation supplies LNG to power companies under long-term contracts, but in cases of excess demand, it has instructed power companies to bear increased costs for spot purchases, which are relatively more expensive. Considering the decision to freeze electricity rates in the first quarter of next year amid soaring international natural gas prices, the performance of power companies is expected to worsen further. There are also complaints that the burden is unfairly placed on power companies that are increasing LNG power generation in line with the government's eco-friendly energy policy.

According to the power generation industry on the 24th, Gas Corporation recently revised the natural gas supply regulations with this as the main point. The regulations include guidelines for implementing a raw material cost linkage system for power generation tariffs (average tariff system), and Gas Corporation inserted a clause stating that "when calculating the unit raw material cost, the import amount and volume required for power generation supply shall be applied based on appropriate allocation criteria according to the causal relationship such as natural gas supply and demand."

An official from the corporation explained, "This means that from January 1 next year, a separate tariff system for LNG imports exceeding long-term contracts will be implemented."

Until now, the unit price for excess imports was calculated on average linked to the long-term contract price, and fees were settled based on usage. From next year, however, fees will be charged considering only the excess imports. Given that the long-term contract price is cheaper than the market price, this means an increased fuel purchase cost burden for power companies.

Gas Corporation imports LNG through long-term contracts based on a long-term natural gas supply and demand plan, which includes the government's natural gas demand forecast and supply facility plans. It also establishes an annual supply and demand plan (from April to the following April) and purchases the difference from long-term contract volumes on the spot market. Especially this year, although the initial plan was to purchase 4.4 million tons on the spot market, increased power demand has made it necessary to buy an additional 4 million tons. According to the LNG industry, the unit price of long-term contract volumes is about $13 per MMBtu (one million British thermal units), but the spot price is over $40, more than three times higher. Under the new regulations, additional volumes purchased at the high 20-dollar range per MMBtu will have to be bought at the $40 range.

Gas Corporation states that the existing settlement structure has intensified cost pressures even on the city gas sector due to the sharp rise in LNG prices, and this revision was made as an improvement measure. Most of the increased LNG demand is for power generation, which also causes city gas rates to rise. An official said, "As LNG spot prices rise, the burden on city gas users, i.e., the public, ultimately increases," adding, "This is inconsistent with cost causation by usage, so the party causing the excess purchase costs should bear the burden."

The power generation industry opposes the sudden demand for increased burden amid soaring spot prices, saying the timing is inappropriate. According to the Ministry of Trade, Industry and Energy's raw material price information, the spot import price of LNG rose from $312.07 per ton in November last year to $799.32 per ton as of November this year. In particular, it increased by $130.5 (19.5%) in just the past month.

The industry also views this decision as contrary to the government's eco-friendly energy policy. According to the Korea Power Exchange, the volume of electricity traded generated by LNG power from January to November this year was 149,310 GWh, already surpassing last year's total volume of 141,162 GWh. Conversely, coal (bituminous coal) power generation decreased from 215,282 GWh in 2019 to 169,798 GWh this year (January to November). According to the 9th Basic Plan for Electricity Supply and Demand (2020?2034), LNG facility capacity is expected to increase to 58.1 GW by 2034, but fuel cost burdens have only increased.

If LNG import costs rise, the profitability of power generation public enterprises is expected to worsen. According to Rep. Han Mu-kyung of the People Power Party, the five power companies recorded a total loss of 235.4 billion won in the LNG power generation sector last year. Considering the strong natural gas prices this year and the fact that annual electricity rates have not increased at all, the performance of power companies is expected to continue deteriorating.

Gas Corporation recently held briefing sessions for the power generation industry regarding the regulation revision to quell opposition. However, the power generation industry is demanding a delay in the implementation period and has joined forces with Korea Electric Power Corporation (KEPCO) for a joint response.

A power company official said, "Expanding LNG power generation as a stepping stone toward carbon neutrality by 2050 while bearing the burden of soaring LNG prices goes against government policy," adding, "At the very least, the implementation should be postponed until LNG prices stabilize."

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