Electricity Rates Likely to Rise Again Next Year... Ministry of Industry "Considering Increase Starting with Base Fuel Cost"

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@

[Asia Economy Reporter Myunghwan Lee] As Korea Electric Power Corporation's (KEPCO) deficit this year is expected to exceed the record high of 30 trillion won, the government has determined that an electricity rate hike next year is inevitable and has begun preparing countermeasures.

According to the Ministry of Trade, Industry and Energy on the 13th, the government is considering raising the standard fuel cost, one of the components that make up the electricity rate unit price, with a focus on increasing electricity rates next year.

Electricity rates consist of a basic charge, electricity consumption charge (standard fuel cost), climate environment charge, and fuel cost adjustment charge. Among these, the Ministry of Trade, Industry and Energy is reportedly reviewing a plan to raise the standard fuel cost to be applied next year.

The standard fuel cost is calculated based on fuel prices over the past year, and fuel costs have surged sharply this year compared to last year. The standard fuel cost, which was decided to increase by 9.8 won per kWh at the end of last year, was reflected twice this year in April and October by 4.9 won each time. The standard fuel cost is calculated by reflecting the average price over the previous year of trade customs prices for liquefied natural gas (LNG), coal, and oil announced by the Korea Customs Service. The LNG price averaged 1,325,600 won per ton from January to September this year, more than double the average price of 616,400 won per ton from January to September last year. During the same period, the price of thermal coal soared nearly threefold from 124 dollars per ton to 355 dollars.

With the announcement of the standard fuel cost increase plan at the end of next month, there is also a possibility that the fuel cost adjustment unit price increase will be announced simultaneously. Although KEPCO raised electricity rates three times this year (in April, July, and October), the deficit has steadily increased due to a reverse margin situation where electricity is purchased at high prices and sold cheaply.

KEPCO has recorded losses for six consecutive quarters from the second quarter of last year to the third quarter of this year. The cumulative deficit of KEPCO from the first to the third quarter this year, 21.8342 trillion won, is already 3.7 times the annual deficit of 5.8542 trillion won last year. As the fourth quarter, when heating demand increases in winter, approaches, the deficit is expected to widen further, with the cumulative deficit this year likely to exceed 30 trillion won. Financial and securities sectors estimate KEPCO's operating loss for the fourth quarter to be in the range of 8 to 9 trillion won.

KEPCO is covering the unprecedented large-scale deficit by issuing corporate bonds. The amount of KEPCO bonds issued so far this year is 25.45 trillion won, which is already 2.5 times the total issuance amount of 10.32 trillion won last year. Moreover, due to recent tightening in the capital market, even KEPCO bonds, which were classified as high-quality bonds, are facing difficulties in raising funds. Under current law, the issuance limit (twice the sum of capital and reserves) is also expected to be exhausted around early next year.

Accordingly, there is a strong prospect that the government will pilot the introduction of an upper price limit system for the System Marginal Price (SMP), which is the price KEPCO pays to power producers for electricity, within this year.

According to the Korea Power Exchange, the daily average SMP per 1 kWh reached a record high of 270.24 won (weighted average for the mainland) on the 13th of last month. This broke the previous record of 269.98 won set on the 11th just two days earlier. At certain times, the SMP exceeded 300 won per 1 kWh. As of 9 a.m. on the 20th of last month, the SMP soared to 359.50 won, and on the 3rd and 7th of this month at 7 p.m., it exceeded 300 won again, recording 300.22 won and 300.35 won respectively.

The Ministry of Trade, Industry and Energy prepared a draft revision of the notice on the upper limit of electricity trading prices, which temporarily sets a price ceiling if the SMP rises abnormally, and announced it for administrative notice in May, but the revision process is being delayed. The private power generation industry opposes the SMP ceiling system, arguing that it is a means to cover KEPCO's deficit by taking away profits from private power producers and undermines the free market economy order.

The Ministry of Trade, Industry and Energy said, "The SMP is excessively high, causing a shock to the market. We plan to pilot the SMP ceiling system within this year, addressing the concerns raised by the industry."

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