Will Electricity Rates Rise This Second Half of the Year? Korea Electric Power Corporation on the Brink, a Chance for Revival

Transition Team Officializes 'Electricity Cost-Price Principle'... Expecting to Resolve KEPCO's Financial Crisis
Fuel Cost Linkage System Ineffective... Stagnant for Over a Year Since Introduction
KEPCO Drowning in Deficit... Corporate Bonds Issued This Year Exceed 12 Trillion Won
Attention on Electricity Rates in Q3 This Year... Steep Inflation Trend a Variable

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Lee Jun-hyung] The Presidential Transition Committee has officially announced a policy of ‘cost-based electricity pricing,’ raising expectations that Korea Electric Power Corporation’s (KEPCO) financial difficulties may improve. Given that the committee pointed out the seriousness of KEPCO’s ballooning deficit, electricity rates may rise as early as the third quarter. If the fuel cost linkage system, which has become ineffective, is normalized, KEPCO’s deficit this year could be significantly lower than expected.

According to related ministries on the 30th, the transition committee decided to set electricity rates based on costs during the next government’s term. This means adjusting electricity rates upward or downward in line with the power purchase price KEPCO pays to power generation companies. It is interpreted as accepting criticism that electricity rates have been politically influenced and have not properly reflected generation costs. In fact, the System Marginal Price (SMP), which is the price KEPCO pays to purchase electricity from power plants, soared to 192.75 KRW per kWh last month, while the electricity sales price remained in the 110 KRW range. From KEPCO’s perspective, the more electricity it sells, the more losses it accumulates.

The cost-based electricity pricing policy set by the transition committee is already stipulated under current law. According to Article 6 of the Enforcement Decree of the Act on Price Stabilization, the government must set public utility rates, including electricity rates, to compensate for appropriate costs as well as reasonable investment returns.

The problem is that this cost-based principle has not been properly observed. In particular, the Moon administration postponed electricity rate hikes repeatedly citing ‘livelihood stability.’ The reason was that amid increased burdens on the public due to COVID-19, electricity rates, which are directly linked to the livelihood of ordinary people, could not be raised hastily.

The Fuel Cost Linkage System Became Ineffective

Ultimately, the fuel cost linkage system also failed to fulfill its role. Previously, the government introduced the fuel cost linkage system in January last year to adjust electricity rates quarterly according to the import prices of fuel such as crude oil and natural gas. However, electricity rates were raised in line with the system’s intent only once in the fourth quarter of last year. Even that was merely a restoration of the fuel cost adjustment rate, which the government had lowered by 3 KRW per kWh in the first quarter of last year for the sake of public livelihood stabilization. Although the fuel cost linkage system was introduced to reduce KEPCO’s burden, the fuel cost adjustment rate has remained stagnant for over a year since its introduction.

KEPCO has consistently argued that the fuel cost adjustment rate should be raised. KEPCO’s position was that the fuel cost adjustment rate for the second quarter of this year should be increased by 33.8 KRW per kWh to reflect fuel cost fluctuations. This is because the Ukraine crisis caused a sharp rise in international prices of imported energy such as crude oil and liquefied natural gas (LNG). In fact, as of last month, prices of the three major energy sources?crude oil (72%), gas (200%), and coal (441%)?have risen significantly compared to a year ago. However, the government froze the fuel cost adjustment rate at 0 KRW per kWh for the second quarter of this year.

Meanwhile, KEPCO fell into a ‘deficit swamp.’ Last year, KEPCO posted an operating loss of 5.8601 trillion KRW, the largest ever. The securities industry estimates that KEPCO incurred a deficit of around 6 trillion KRW in the first quarter alone, nearly matching last year’s total deficit. Some even speculate that KEPCO’s deficit this year could reach up to 30 trillion KRW due to the prolonged high oil price situation, including the Ukraine crisis.

Corporate bonds are also increasing uncontrollably. KEPCO has recently borrowed over 12 trillion KRW by issuing corporate bonds this year. The amount of corporate bonds issued in the first four months of this year has already surpassed the total corporate bonds issued throughout last year (10.43 trillion KRW). KEPCO’s interest burden on corporate bonds this year is expected to exceed 2.3 trillion KRW.

Will Electricity Rates Rise from the Second Half of the Year?

Given this situation, attention is focused on whether electricity rates will rise in the third quarter, right after the inauguration of the Yoon Suk-yeol administration. If the transition committee maintains the ‘cost-based’ policy, an increase in electricity rates is inevitable. The committee recently stated in a briefing that electricity rates in the second half of this year will be determined according to trends in the international energy market. Considering that major energy prices such as international oil prices continue to soar, there is analysis that an electricity rate hike in the second half of this year is practically supported.

However, the inflation rate is a variable. Since the recent inflation trend is not insignificant, public resistance to the government’s electricity rate hike policy may increase. Domestic inflation is expected to continue rising in the second half of this year. The International Monetary Fund (IMF) forecasted that South Korea’s consumer price inflation rate (4%) will be the second highest in Asia this year. According to the Bank of Korea, the expected inflation rate this month reached 3.1%, the highest in nine years since April 2013. The expected inflation rate is a forecast of consumer price inflation over the next year.

The transition committee also holds the view that inflation should be considered when deciding electricity rates. Park Joo-won, a specialist member of the committee’s Economic Subcommittee 2 and a professor of economics at Dongduk Women’s University, said in a recent briefing, “Although wholesale energy prices have risen sharply in the international energy market, retail prices have not followed suit. When electricity rates are raised abruptly, inflationary pressure cannot be ignored.”

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