Wholesale Electricity Prices Hit Record High... Industry Concerns Over Rising Production Costs

SMP Nearly Tripled Since Early Last Year
KEPCO to Raise Electricity Rates in April and October

If War Prolongs, Temporary Relief Measures Needed for High Energy-Emission Sectors Like Steel Due to Rate Hikes

[Image source=Yonhap News]

[Asia Economy Reporter Moon Chaeseok] As international oil prices surge due to Russia's invasion of Ukraine and other factors, the industrial sector is on high alert over the possibility of electricity rate hikes. If the war prolongs, there are opinions that extraordinary measures, such as temporarily easing the rate increase for certain high energy-consuming industries like steel, should be considered.

According to the Korea Power Exchange on the 7th, the electricity wholesale price (SMP) that Korea Electric Power Corporation (KEPCO) pays to power producers reached a record high of 197.32 KRW per kWh (integrated for mainland and Jeju) as of last month. This is nearly three times higher compared to 70.65 KRW at the beginning of last year. With the Ukraine crisis and strengthened international sanctions against Russia causing a surge in global oil prices, the prevailing forecast is that the upward trend will continue for the time being. According to Bloomberg and others, on the 6th (local time), Brent crude oil prices jumped to $139.13 per barrel during the day, and West Texas Intermediate (WTI) crude oil rose to $130.50, marking the highest levels in 13 years and 8 months since July 2008.

Since the government and KEPCO operate a 'fuel cost linkage system' that reflects fuel cost increases in electricity rates, electricity prices inevitably rise when oil prices soar. Considering KEPCO's financial status, which recorded an operating loss of 5.8061 trillion KRW on a consolidated basis last year, it is not easy to freeze public utility rates again as the inflation authorities did at the beginning of last year. For this reason, the government and KEPCO have announced plans to raise electricity rates by 4.9 KRW per kWh each in April and October, totaling 9.8 KRW.

From a corporate perspective, the rise in SMP directly translates to increased production costs. When production costs rise, producer prices also surge, which can pose challenges to business management. According to the Bank of Korea, the Producer Price Index in January was 114.24 (2015=100), up 8.7% year-on-year. Increases in energy prices, including coal and petroleum products (up 5.2% from the previous month), chemical products (1.0%), and electricity, gas, water, and waste (2.4%), drove the overall index upward.

A bigger concern is that since industrial use, especially manufacturing, accounts for the largest share of Korea's total electricity sales, this can negatively impact not only companies but also the Korean economy. The rise in SMP could trigger a vicious cycle of 'increased production costs → higher producer prices → increased finished product prices → higher consumer prices.' According to the contract-type electricity sales data in KEPCO's monthly 'Electricity Statistics Report,' industrial electricity sales in December last year amounted to 25,509 GWh, accounting for 54% of the total 47,521 GWh. By sector, manufacturing accounted for 23,069 GWh, or 48.5% of the total.

Experts point out that even in this situation, hastily implementing corporate support for industrial electricity rate increases is unrealistic. There could be backlash against supporting large corporations amid rising inflation. However, if the war prolongs and SMP continues to rise, it is necessary to consider temporarily adjusting the rate increase flexibly for certain high energy-consuming companies such as those in the steel industry. Professor Jeong Dongwook of the Department of Energy Systems Engineering at Chung-Ang University said, "If SMP prices continue to rise due to the prolonged war, it may be possible to consider temporarily applying differentiated rate increases selectively to some companies."

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