What’s the Point of Raising Electricity Rates...Soaring Wholesale Power Price Nears 270 Won per kWh

An electricity meter is installed in a residential area in Dobong-gu, Seoul, on the 30th, ahead of Korea Electric Power Corporation's announcement of the fuel cost adjustment unit price for electricity rates in the fourth quarter. Photo by Jinhyung Kang aymsdream@

Korea Electric Power Corporation (KEPCO) raised electricity rates by 7.4 KRW per kWh in the fourth quarter of this year to resolve its massive deficit, but concerns are growing that the measure will be ineffective. This is because the System Marginal Price (SMP), the wholesale electricity price applied when KEPCO purchases electricity from power producers, has been hitting record highs daily, offsetting the rate increase. If heating demand intensifies during the winter season, KEPCO's deficit could rapidly increase due to the rise in electricity consumption.

According to the Korea Power Exchange on the 8th, the SMP on the mainland on the 6th reached 268.17 KRW per kilowatt-hour (kWh), setting a new daily record high. This surpassed the previous all-time high of 265.47 KRW recorded just two days earlier on the 4th of this month. The monthly average SMP for this month (from the 1st to the 7th) also hit a record high at 250.54 KRW, up 7.6% from the previous month (232.82 KRW).

In the first half of this year, KEPCO purchased electricity at 169 KRW per kWh and sold it at an average of 110 KRW, resulting in a deficit of 59 KRW per kWh. This was due to the sharp rise in liquefied natural gas (LNG) prices, a major energy source for power generation, caused by the prolonged Russia-Ukraine war. Based on the Japan-Korea Marker (JKM) natural gas price index, the spot LNG price reached 44.55 USD per MMBtu at the end of last month, up 68.3% from January this year (26.46 USD).

If this situation continues until the end of the year, KEPCO’s costs for purchasing electricity could rise faster despite the fourth-quarter electricity rate hike. Earlier, KEPCO reported to the Ministry of Trade, Industry and Energy that the fuel cost adjustment rate should be raised by 50 KRW per kWh to break even in the fourth quarter, but the actual additional increase was limited to 2.5 KRW per kWh.

The company bonds issued to sustain deficit management are also reaching their limit. As of the end of last month, KEPCO’s accumulated corporate bond amount stood at 60.5 trillion KRW. Due to the massive deficit, the capital and reserves, which serve as the basis for next year’s bond issuance limit, have been drastically reduced, making further bond issuance impossible. KEPCO posted an operating loss of 14 trillion KRW in the first half of this year alone, and an annual deficit exceeding 30 trillion KRW is feared due to rising fuel costs.

As an alternative, the government plans to lower electricity costs by maximizing the operation rate of nuclear power plants, which have lower generation costs, and to launch a large-scale energy-saving campaign centered on public institutions. On the previous day, Lee Chang-yang, Minister of Trade, Industry and Energy, warned at the 'Public Institution Energy Diet 10 Practice Resolution' event that "In an unprecedented energy emergency, energy dieting is not simply about reducing energy consumption but a task that determines the survival of our economy."

Professor Yoo Seung-hoon of the Department of Energy Policy at Seoul National University of Science and Technology said, "Despite the recent electricity rate hike by KEPCO, the deficit is expected to continue until next year due to persistently high LNG prices."

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