In the Midst of Mountains, 'HanJeon' Faces Double Hardship with Soaring SMP and Corporate Bonds

[Asia Economy Sejong=Reporter Dongwoo Lee] Korea Electric Power Corporation (KEPCO) is facing increasing management burdens due to the dual challenges of rising electricity purchase costs and higher corporate bond interest rates. As the deficit structure, where electricity is bought at high prices and sold cheaply, deepens, it is becoming difficult to raise funds because the corporate bonds issued as an alternative to secure operating capital are also rising sharply. If winter heating demand increases and investor sentiment in the bond market continues to weaken, KEPCO's deficit could exceed market forecasts and surpass 30 trillion won.

Electricity Purchase Prices Break Ceiling... Deficit Worsens the More They Sell

According to the Korea Power Exchange on the 23rd, the average monthly wholesale electricity price (SMP) for this month (1st to 21st) was 252.41 won per kWh on the mainland, up 8.4% from last month (232.82 won), marking the highest price of the year. The daily average SMP exceeded 270 won per kWh on the 13th of this month, and at one point, SMP soared to 295.51 won per kWh (as of 10 a.m. on the 18th). SMP is the standard applied when KEPCO purchases electricity from power producers, indicating that the burden for electricity supply is increasing.

In contrast, the price at which KEPCO sells electricity to consumers remains around an average of 140 won per kWh. Although residential electricity rates were raised by 7.4 won per kWh in the fourth quarter of this year, the price generally does not exceed 150 won per kWh. According to the Monthly Electricity Statistics Report, KEPCO purchased electricity from power plants at an average of 144.9 won per kWh from January to August this year and sold it at 116.4 won per kWh. This means KEPCO sold electricity at a loss of 28.5 won per kWh.

The continuous rise in SMP is due to the sharp increase 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) for natural gas prices, the LNG spot price reached $44.55 per MMBtu (million British thermal units) at the end of last month, up 68.3% from $26.46 in January this year. Korea Gas Corporation's LNG calorific unit price also surged to 141,699.09 won per Gcal (gigacalorie) last month, more than double the 58,944.85 won recorded in the same period last year.

The problem is that SMP could rise further if heating demand increases significantly during the winter. Experts warn that if energy raw material prices surge further, the daily average SMP could exceed 300 won per kWh by the end of this year.

President Jeong Seung-il of KEPCO answering questions
(Naju=Yonhap News) Reporter Jo Namsu = Jeong Seung-il, President of Korea Electric Power Corporation, is answering questions at the National Assembly inspection by the Industry, Trade, Energy, Small and Medium Business Committee held at KEPCO headquarters in Naju, Jeollanam-do on the morning of the 11th. 2022.10.11 Photo by Jo Namsu

Rising Interest Rates Add Burden to Debt Management

To make matters worse, the bond market, KEPCO's main channel for raising funds, is freezing up. According to the Korea Financial Investment Association, the issuance yield on 3-year KEPCO bonds reached a record high of 5.814% as of the morning of the 21st, marking the seventh increase this month alone. The KEPCO bond yield has risen approximately 2.7 times compared to 2.092% during the same period last year. The amount of bonds issued by KEPCO this year reached 22.9 trillion won, a 121.9% increase from 10.32 trillion won last year. KEPCO has already issued corporate bonds four times this month, raising about 1.4 trillion won. As of last month, KEPCO's cumulative corporate bond issuance stood at 52.4 trillion won, up 37.5% from 38.1 trillion won at the end of last year, and new issuances this year reached 21.8 trillion won, soaring 109.0%.

As KEPCO bond yields skyrocket, the burden of raising funds is also increasing. In March, KEPCO planned to issue 30-year bonds for the first time in four years since 2018, with a record high coupon rate of 3.3%, aiming to raise 200 billion won, but 70 billion won fell short of the target. This is why KEPCO raised rates to the 4% range in June and to the 5% range last month.

Industry experts point out that if global interest rate hikes continue, KEPCO's corporate bond yields could enter the 6% range by the end of the year. This means the amount of bonds KEPCO must repay in the future will increase exponentially.

The rise in KEPCO bond yields is also raising concerns about tightening funding conditions for domestic general companies. As KEPCO issues bonds with yields in the 5% range, comparable to government bonds, domestic companies with lower credit ratings must issue bonds at even higher rates to attract investors. KEPCO is currently pushing for a legal amendment to expand its issuance limit, as it faces the risk of being unable to issue corporate bonds from next year, but the prevailing opinion is that this is merely a temporary fix that only increases the deficit. KEPCO recorded a record operating loss of 14.3 trillion won in the first half of this year, and the industry forecasts that losses will increase to 30.1 trillion won by the end of this year.

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