Is it the cost of living or electricity bills... Yoon's economic team caught in a dilemma

KEPCO Submits Q3 Electricity Rate Proposal Requesting Maximum Increase
Losses Mount with Increased Electricity Sales... Electricity Rate Hikes Suppressed
'Rolling Over' Debt Reaches Limit... Corporate Bond Issuance Nears 16 Trillion Won This Year
Ministry of Trade, Industry Supports KEPCO... Considering KEPCO Act Amendments
Government Struggles with High Inflation... Yoon Economic Team Faces First Major Test

KEPCO Reports Q1 Operating Loss of 7.8 Trillion Won, Record High... "Impact of High Oil Prices and Frozen Rates"
(Seoul=Yonhap News) Reporter Ryu Hyorim = Korea Electric Power Corporation (KEPCO) announced on the 13th that its consolidated operating loss for the first quarter of this year was tentatively estimated at 7.7869 trillion won, marking a turnaround from an operating profit of 565.6 billion won in the same period last year. Sales increased by 9.1% year-on-year to 16.4641 trillion won. Net loss also turned to a deficit of 5.9259 trillion won. The photo shows KEPCO’s Seoul headquarters in Jung-gu, Seoul, on May 13 last year. 2022.5.13
ryousanta@yna.co.kr
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[Asia Economy Sejong=Reporter Lee Jun-hyung] The government is caught in a dilemma between high inflation and electricity rates. Korea Electric Power Corporation (KEPCO) has requested the government to raise electricity rates by the maximum margin for the third quarter. KEPCO argues that with soaring fuel costs such as international oil prices, delaying the electricity rate hike could lead to uncontrollable deficits. The Ministry of Trade, Industry and Energy, the main overseeing body, has repeatedly emphasized the necessity of raising electricity rates and has come out in support.

According to related ministries on the 16th, KEPCO sent an official letter to the Ministry of Industry and the Ministry of Economy and Finance in the afternoon regarding the electricity rate increase. The main point of the letter is that the fuel cost adjustment unit price, one of the components of electricity rates, should be raised by 3 KRW per kWh. Considering that the quarterly adjustment range for the fuel cost adjustment unit price is up to 3 KRW per kWh, KEPCO is effectively requesting the government to approve the maximum increase. It is also reported that KEPCO conveyed an opinion through the letter that the upper limit of the increase should be raised from the existing 3 KRW to 5 KRW.

KEPCO Selling Electricity at a Loss... 'Rolling Over' Also Reaching Its Limit

KEPCO requested the maximum electricity rate hike because it has been selling electricity at a loss. Since the Ukraine crisis, energy prices such as international oil prices have soared, but electricity rates have not kept pace with the increase in fuel costs. This has created a distorted structure where the more electricity KEPCO sells, the greater the losses become. According to the Korea Power Exchange, in the first quarter, KEPCO’s electricity purchase price was 181 KRW per kWh, while the electricity selling price was only 110 KRW per kWh.

Because KEPCO has been selling electricity at a loss, its deficit has already ballooned like a snowball. In the first quarter alone, it recorded a deficit of about 7.8 trillion KRW. This figure exceeds last year’s total deficit (approximately 5.9 trillion KRW), which was the largest operating loss on record, by about 2 trillion KRW.

Issuing corporate bonds has also reached its limit. KEPCO has issued corporate bonds worth 15.7 trillion KRW from the beginning of this year until the 15th, far exceeding last year’s total issuance of 11.77 trillion KRW. The power industry expects KEPCO’s corporate bond issuance this year to exceed 30 trillion KRW. Since KEPCO’s corporate bond issuance limit is restricted to less than twice its capital and reserves, there are concerns that the ‘rolling over’ of operating funds through debt will soon reach a critical point.

The government is also aware of the seriousness of KEPCO’s financial structure. That is why the Ministry of Industry decided to introduce the ‘SMP cap system,’ which sets an upper limit on the System Marginal Price (SMP), the wholesale electricity price KEPCO pays to power producers. The Ministry plans to review all available measures to resolve KEPCO’s deficit beyond just raising electricity rates. Park Il-jun, the second vice minister of the Ministry of Industry, said at a press briefing held the day before, “This is not a situation that can be resolved by raising electricity rates by 1 to 3 KRW per kWh as we have been doing. We believe it is difficult to solve the problem with just one or two measures.”

High Inflation as a Variable... KEPCO Accelerates Self-Help Measures

The problem is high inflation. Last month, the consumer price inflation rate was 5.4%, the highest in 14 years since the 2008 financial crisis. Since high inflation is expected to continue in the second half of this year, the government cannot easily raise electricity rates, which are directly linked to inflationary pressure.

The government is deliberating intensely ahead of the announcement of the third-quarter electricity rates on the 21st of this month. This is because the economic philosophy of respecting market logic conflicts with the national policy goal of prioritizing inflation control. Analysts say this is effectively the first test for President Yoon Suk-yeol’s economic team.

Meanwhile, KEPCO announced on the same day that it will accelerate its self-help measures by establishing an ‘Emergency Management Promotion Office.’ Earlier, after starting financial structure improvement efforts last month, KEPCO disposed of real estate and equity stakes worth about 130 billion KRW. KEPCO also plans to sell its Cebu power plant in the Philippines within this year as part of overseas business restructuring. A KEPCO official said, “We will push for high-intensity cost reductions amounting to 1.5 trillion KRW by the end of this year,” adding, “We will actively discuss with the government the possibility of revising the KEPCO Act within this year to increase the corporate bond issuance limit.”

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