Possibility of Electricity Price Increase Due to Record High Wholesale Power Prices... Concerns Over Rising Production Costs (Comprehensive)

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

If the 'Ukraine Invasion' War Prolongs
Temporary Relief Measures for High Energy-Emission Sectors Like Steel Should Be Considered

Firefighters extinguishing a fire in a city building destroyed by a Russian airstrike in Chernihiv, a city northeast of Kyiv, the capital of Ukraine, on the 3rd (local time). (Image source=Yonhap News)

[Asia Economy Reporter Moon Chaeseok] The industrial sector is on high alert over the possibility of electricity rate hikes as international oil prices soar due to Russia's invasion of Ukraine. There are opinions that if the war prolongs, extraordinary measures such as temporarily easing the rate increase for certain energy-intensive 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 international 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 surged to $139.13 per barrel and West Texas Intermediate (WTI) 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 jump. 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 means an increase in production costs. When production costs rise, producer prices also soar, 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. The rise 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%), pushed the overall index higher.

A bigger concern is that since industrial use, especially manufacturing, accounts for the largest share of Korea's total electricity sales volume, this could 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 volume data in KEPCO's monthly 'Electricity Statistics Report,' industrial electricity sales reached 25,509 GWh in December last year, accounting for 54% of the total 47,521 GWh. By industry, manufacturing accounted for 23,069 GWh, or 48.5% of the total.

Experts point out that it is unrealistic to hastily implement corporate support for the increase in industrial electricity rates under these circumstances. 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 energy-intensive companies such as steel. Professor Jeong Dongwook of Chung-Ang University's Department of Energy Systems Engineering 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.