Complex Calculations as Electricity Rates Increase in Q3

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Dongwoo Lee] The Ministry of Trade, Industry and Energy is set to decide the fuel cost adjustment unit price for the third quarter of this year within this month, amid a fierce debate between proposals to raise electricity rates to normalize the operations of Korea Electric Power Corporation (KEPCO), which is suffering from a record deficit, and arguments to freeze rates due to the burden of inflation exceeding 5%.

Structural Deficit Must Be Resolved Through Rate Normalization

According to related ministries on the 11th, the Ministry of Trade, Industry and Energy will announce the finalized fuel cost adjustment unit price for the third quarter around the 20th. The fuel cost linkage system is a mechanism that raises or lowers electricity rates according to the costs spent on purchasing fuels such as oil, coal, and liquefied natural gas (LNG).

KEPCO is likely to request the Ministry of Trade, Industry and Energy to raise the rate by up to 3 KRW per kWh compared to the previous quarter through the fuel cost linkage system. This is because KEPCO recorded a record operating loss of 7.7869 trillion KRW in the first quarter of this year, making the normalization of electricity rates urgent.

The prolonged Russia-Ukraine conflict has also increased concerns about the expansion of the deficit due to rising raw material prices necessary for electricity production. According to the Ministry’s raw material price information, as of the 10th of this month, the spot price of Dubai crude oil was $118.94 per barrel, up 54.7% from the beginning of the year ($76.88 as of January 3), and the spot price of Australian Newcastle thermal coal for power generation was $398 per ton as of the 10th, up 97.4% from the beginning of the year ($201.54 as of January 7).

There are also concerns that if the annual corporate bond issuance limit is exceeded, the management deterioration could become more severe. KEPCO’s accumulated corporate bond scale was about 51.5 trillion KRW as of last month (separate basis). As of the end of March this year, KEPCO’s debt stood at 156.5352 trillion KRW, an increase of 23.0316 trillion KRW (17.3%) compared to one year earlier (133.5036 trillion KRW).

Inflation Rate Over 5%... Burden of Electricity Rate Increase

However, some argue that with the consumer price index entering the 5% range in May (5.4%) for the first time in 13 years and 8 months since September 2008 (5.1%), it is a significant burden to raise electricity rates immediately. Adjusting rates ahead of periods of high power consumption such as the summer heatwave could increase the energy cost burden felt by vulnerable groups.

There are also opinions that KEPCO’s 6 trillion KRW scale self-help measures and the electricity wholesale price (SMP) cap system could improve management structure instead of raising rates. SMP is the cost KEPCO pays when purchasing electricity from power producers, and the government is promoting an SMP cap system to alleviate KEPCO’s deepening deficit. The core of the system is that when the average SMP of the previous three months exceeds the top 10% of monthly SMPs over the past 10 years, the SMP for the following month is capped at 1.25 times the average monthly SMP over the past 10 years.

According to a report by Eugene Investment & Securities, applying an SMP cap price of 133 KRW per kWh could reduce costs by more than 30 KRW per kWh in the first quarter, and if fuel costs remain strong until next year due to geopolitical issues such as the Russia-Ukraine war, it is estimated that more than 5 trillion KRW in costs could be saved.

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