Yoon Administration Faces Inevitable 'Electricity Rate Increase'... How to Manage Corporate Burden?

Transition Team Emphasizes 'Cost-Price Principle' for Electricity Rates
Electricity Rate Hike Inevitable Due to KEPCO's Growing Deficit
Businesses and Low-Income Households Expected to Suffer Economic Impact

According to a survey conducted by the Korea Federation of Small and Medium Business from September 17 to 27, 2021, targeting 312 manufacturing SMEs, 9 out of 10 manufacturing SMEs felt burdened by industrial electricity charges. [Image source=Yonhap News]

[Asia Economy Intern Reporter Lee Seohee] On the 10th, as President Yoon Suk-yeol officially took office, attention is focused on the new government's policy to raise electricity rates. The Presidential Transition Committee (hereinafter referred to as the Transition Committee) announced last month the 'Five Major Policy Directions for Energy Policy,' stating that it will strengthen the 'cost-based principle' that reflects fuel cost prices in electricity rates. If this policy materializes, it is expected to have a negative impact not only on inflation but also on corporate productivity.

Countries around the world are raising electricity rates one after another. This is due to the prolonged Russia-Ukraine war and the surge in international energy prices caused by sanctions on Russian crude oil imports. According to Korea Electric Power Corporation (KEPCO), electricity rates in Spain (51.7%), Italy (31.6%), and the United Kingdom (18.8%) surged by an average of 34% compared to last year. The European Union (EU) saw electricity rates rise in all member countries except two.

On the other hand, South Korea's electricity rates only increased by 3 won per kWh in the fourth quarter of last year. The Moon Jae-in administration introduced the 'fuel cost linkage system' in December 2020, which reflects fuel cost prices in electricity rates, but froze the fuel cost adjustment unit price to stabilize prices and ease the burden on the public. Even when oil prices rose sharply last year, the Moon administration delayed raising electricity rates, only increasing the fuel cost adjustment unit price by 3 won in the fourth quarter of last year and freezing it again in the first quarter of this year.

Accordingly, an additional increase in electricity rates under the new government seems inevitable. There is no other way to cover KEPCO's record-high deficit. KEPCO posted an operating loss of 5.86 trillion won last year, the largest ever. Its current accumulated debt amounts to 146 trillion won.

The increase in electricity rates is also expected to have a significant impact on the manufacturing industry. The rise in industrial electricity charges may act as a factor that suppresses business activities and increases price burdens.
[Image source=Yonhap News]

If the fuel cost linkage system, which reflects fuel cost prices directly in electricity rates as announced by the new government, is implemented, electricity rates will rise significantly in the second half of this year. Since early last month, electricity rates have been adjusted upward by 6.9 won per kWh due to the standard fuel cost and climate and environmental issues. As a result, the average monthly electricity bill for a four-person household (average monthly usage of 304 kWh in 2017) increased by 2,097.6 won last month, reaching about 37,000 won. Additionally, KEPCO announced that it will implement an additional electricity rate increase of 4.9 won per kWh in October.

If electricity rates rise, the impact on prices and businesses is expected to be significant. Industrial electricity accounts for more than half (55%) of total electricity sales, which is more than the combined general use (22%) and residential use (15%). An increase in industrial electricity rates could lead to reduced corporate activity, higher product prices, and inflationary pressures, placing a burden on the ordinary economy. A representative of a manufacturing SME said, "I understand that market logic should be reflected in principle, but a sudden increase in electricity rates is burdensome," adding, "It seems that the overall impact on the business community should be comprehensively reviewed."

Meanwhile, Lee Chang-yang, the nominee for Minister of Trade, Industry and Energy, clearly stated at the parliamentary confirmation hearing held on the 9th that a mid- to long-term increase in electricity rates is inevitable. Lee said, "The basic principle in the mid- to long-term is price determination reflecting costs," adding, "Due to the recent Russia-Ukraine conflict, international energy prices have risen sharply, which will significantly affect KEPCO's cost increase factors."

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