Soaring SMP... Will KEPCO Face a '30 Trillion Won Bomb'?

SMP Rises 25% in One Month... Consecutive Record Highs
Key Profitability Indicator for KEPCO... 'Negative Margin Structure' Solidifies
Government Struggles with High Inflation... "May Incur 35 Trillion Won Deficit"

Korea Electric Power Corporation Seoul Headquarters located in Jung-gu, Seoul. [Photo by Yonhap News]

[Asia Economy Sejong=Reporter Lee Jun-hyung] Due to the surge in energy prices, the electricity wholesale price (SMP) continues to soar. If electricity rates remain the same, the higher the SMP rises, the worse the performance of Korea Electric Power Corporation (KEPCO) becomes. Concerns are growing that KEPCO, which has fallen into a 'reverse margin swamp' due to delayed electricity rate hikes, could incur losses exceeding 30 trillion won this year.

According to the Korea Power Exchange on the 17th, the SMP was recorded at 255.47 won per kWh as of the previous day (16th). This is about a 25.48% increase compared to the same period last month (203.59 won). The SMP has been breaking record highs every day since the beginning of this month. Additionally, the average SMP last month was 197.74 won per kWh, more than doubling over the past year.

The reason SMP is soaring is due to the sharp rise in international energy prices. SMP is the price KEPCO pays to purchase electricity from power plants, and it fluctuates according to fuel costs. According to the Ministry of Trade, Industry and Energy, last month the price of liquefied natural gas (LNG) was $39.08 per Mmbtu (a heat unit representing the amount of gas producing 250,000 kcal), nearly tripling compared to the same period last year ($12.97).

KEPCO Selling Electricity at a Loss... 'Reverse Margin' Becomes Entrenched

The problem is that as SMP rises, KEPCO's profitability inevitably worsens. The government has not raised electricity rates in line with the SMP increase, citing price stability as the reason. This has solidified KEPCO's 'reverse margin structure' of selling electricity at a loss. In fact, KEPCO's fuel costs for power generation subsidiaries and power purchase costs from private power producers in the first half of this year reached 16.5114 trillion won, a 95.9% increase over the past year, while electricity sales revenue rose only 9.3% to 2.5015 trillion won.

KEPCO's financial structure is also deteriorating rapidly. KEPCO posted a loss of 14.3033 trillion won in the first half of this year alone. This is 2.5 times the total operating loss of 5.8601 trillion won recorded last year, which was the largest annual loss in history. In the '2022-2026 Mid-to-Long-Term Financial Management Plan' submitted to the Ministry of Economy and Finance at the end of last month, KEPCO projected this year's deficit to reach 26.6009 trillion won.

The market outlook is even bleaker. According to financial information provider FnGuide, as of today, KEPCO's consensus operating loss forecast for this year is 28.8423 trillion won. There are also estimates that KEPCO could incur losses exceeding 30 trillion won this year. Hana Securities analyzed last month that KEPCO's losses could reach 35.4309 trillion won this year.

Government Struggles with High Inflation... Yoon's Approval Rating Also a Variable

However, the government is hesitant to raise electricity rates amid high inflation. President Yoon Seok-yeol's approval rating in the early part of his term is low, in the low 30% range, which adds to the government's dilemma. If electricity rates are sharply increased to reduce KEPCO's losses, inflationary pressures could intensify, leading to public backlash.

There is also a view that KEPCO's internal operating profit forecasts are overly optimistic. KEPCO expects to return to profitability starting next year and to record operating profits exceeding 5 trillion won annually through 2026. This expectation reflects confidence that the fuel cost linkage system, which adjusts electricity rates quarterly based on fuel cost fluctuations, will function properly from next year.

However, for KEPCO's internal forecast to materialize, electricity rates would need to nearly double next year compared to this year. Considering that since the fuel cost linkage system was implemented early last year, it has only operated as intended once in the third quarter, KEPCO's forecast is practically unrealistic.

The government maintains that price stability must be prioritized. Recently, Prime Minister Han Duck-soo stated at a press briefing, "If there were no inflation issues, it would be appropriate to quickly normalize KEPCO's finances," adding, "(However) the government must stabilize prices to protect the public, so there are limitations in taking sufficient action despite the urgency KEPCO faces."

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