Introduction of Electricity Market Price Cap... Preventing Korea Electric Power Corporation Deficit

Top 10% of High SMP Power Producers
Temporary Price Ceiling Applied
Ministry of Industry Announces Related Amendment
Estimated 133.9 KRW per 1 kWh
KEPCO Purchase Cost Burden Eased

Among power generation companies selling electricity to Korea Electric Power Corporation (KEPCO), those with excessively high System Marginal Price (SMP) will be temporarily capped on their settlement prices. This measure is interpreted as an effort to reduce the burden on electricity consumers caused by the rise in domestic SMP due to the surge in international fuel prices such as oil, coal, and liquefied natural gas (LNG), while alleviating KEPCO's purchasing cost burden after recording the largest deficit in history in the first quarter of this year.

The Ministry of Trade, Industry and Energy announced on the 24th that it will publicly notify for 20 days from today until July 13th a partial amendment including the establishment of the "Emergency Settlement Price Cap for the Electricity Market" system and the "Notice on the Cap of Electricity Trading Prices."

Specifically, power generation companies whose average SMP over the previous three months falls within the top 10% of the monthly SMP averages over the past 10 years will receive SMP at a normal settlement price level for one month. The normal settlement price level is set at 1.25 times the 10-year weighted average SMP.

In summary, among the power generation companies selling electricity to KEPCO, those whose average SMP over the past three months ranks in the top 10% above the 10-year SMP average are estimated to receive a settlement price of approximately 133.9 KRW per kWh (1.25 times the 10-year weighted average SMP). Compared to the SMP price of 202.11 KRW per kWh recorded last month for the first time since the electricity market opened in 2001, this represents a decrease of 68.21 KRW.

However, power generators whose actual fuel costs exceed the capped price will be compensated. This means that if the generation cost, including raw material prices for electricity production, is higher than the settlement cap, fuel costs will be reimbursed. Other capacity charges and additional settlements will be paid without limitation to ensure that operators do not bear excessive burdens.

The Ministry of Trade, Industry and Energy explained that this measure is intended to prepare for situations where SMP rises sharply due to surges in international fuel prices, causing a rapid increase in the amount electricity consumers must pay. As of the 20th, the price of thermal coal was $436.07 per ton, up 214% compared to one year ago and 622% compared to two years ago. Oil prices rose 56% compared to one year ago and 156% compared to two years ago, while LNG prices increased 18% compared to one year ago and 398% compared to two years ago. SMP rises in tandem with international fuel prices.

Until now, power generators have been settled based on SMP, which is calculated in the electricity market operated by the Korea Power Exchange according to the cost of the most expensive generator needed to meet hourly electricity demand. Since the settlement payments are ultimately borne by KEPCO and recovered through electricity rates, increases in settlement payments translate into increased burdens on electricity consumers.

The Ministry stated, "During the public notice period, we plan to collect opinions from electricity consumers and related businesses and introduce a system that adequately protects consumers in the domestic electricity market."

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