SMP Price Cap D-4... Continued Opposition from Private Power Producers with Record High Surplus

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Dongwoo Lee] As the implementation of the electricity wholesale price (SMP) cap system approaches next month, friction between the government and the private power generation industry is intensifying. The government insists that the SMP cap system is inevitable to correct the distorted electricity sales market and reduce Korea Electric Power Corporation’s (KEPCO) deficit. Private power generators counter that it only worsens their electricity sales revenue and is a stopgap measure that shifts KEPCO’s deficit responsibility onto the power generators.

According to the Ministry of Trade, Industry and Energy on the 27th, the SMP cap system passed the review by the Office for Government Policy Coordination on the 25th and is scheduled to be submitted and approved by the Electricity Committee under the Ministry of Trade, Industry and Energy by the end of this month, with implementation planned from next month. The SMP cap system sets an upper limit on the SMP price, which KEPCO uses as the basis when purchasing electricity from power generators.

The SMP cap system is implemented for one month if the average SMP over the previous three months exceeds the top 10% of the average SMP over the preceding 10 years (120 months). The cap applies only to power generators with a capacity of 100 kW or more, excluding small-scale solar power projects. When the system is implemented, the SMP will be limited to about 160 KRW per kWh. Considering that last month’s SMP was in the 250 KRW per kWh range, this represents a reduction of about 90 KRW. With the system in place, KEPCO is expected to reduce its monthly electricity purchase costs by 300 billion to 400 billion KRW on average.

KEPCO’s Record Deficit and Debt Management Limits... Cap System Inevitable

The government’s reason for implementing the SMP cap system next month is that KEPCO’s costs for purchasing electricity from power generators have surged significantly due to the recent spike in international energy prices. The problem is that although electricity purchase costs have increased, KEPCO has restrained sales price hikes considering consumer burden, pushing its deficit management to the limit. KEPCO’s cumulative operating loss for the third quarter this year reached 21.8342 trillion KRW, more than three times last year’s annual deficit of 5.8542 trillion KRW. According to the Monthly Electricity Statistics Report, in September KEPCO purchased electricity at an average of 179.2 KRW per kWh but sold it at 116.5 KRW, incurring a monthly average loss of 62.7 KRW per kWh, the highest monthly loss. KEPCO’s monthly deficit from electricity sales amounts to about 2.5 trillion KRW.

Given this situation, the Ministry of Trade, Industry and Energy believes that the temporary implementation of the SMP cap system is unavoidable. They judge that delaying the cap system would directly lead to an increase in electricity rates due to KEPCO’s burden. Europe has already implemented policies such as setting profit caps for power generators or imposing so-called ‘windfall taxes’ on energy companies that have gained from soaring energy prices. Portugal and Spain introduced a gas price cap for power generation from June this year until May next year. Italy decided in March to impose windfall taxes on power, oil, and gas production companies, and the UK decided in May to impose windfall taxes on oil and gas production companies.

The government has decided to separately compensate fuel costs if the fuel cost required for power generation by power producers exceeds the capped settlement price. The actual amendment draft of the emergency settlement price cap system specifies that if a power generator’s fuel cost exceeds the emergency settlement price cap, the fuel cost will be compensated. Small-scale combined heat and power or renewable energy generators such as fuel cells, which do not have fuel costs evaluated in the existing electricity market, will also have their fuel costs separately reviewed and losses compensated. A Ministry of Trade, Industry and Energy official said, "There is a consensus that the cap system should buffer electricity rate increases and minimize consumer burden."

Private Power Generators with Record Profits... "Emptying Private Pockets to Cover KEPCO’s Deficit"

Although KEPCO recorded its largest-ever annual deficit, large private power generation companies affiliated with conglomerates that sell electricity to KEPCO posted record-high profits this year. The operating profits of six private power companies affiliated with four major conglomerates?SK E&S, Paju Energy, GS EPS, GS Power, POSCO Energy, and Samchully S-Power?amounted to 1.5233 trillion KRW through the third quarter of this year. This is 1.9 times the operating profit of 810.1 billion KRW for the same period last year, marking an all-time high. By company, GS EPS recorded the highest operating profit of 496.6 billion KRW through the third quarter, followed by GS Power (250.2 billion KRW), Paju Energy (249.9 billion KRW), SK E&S (228.6 billion KRW), POSCO Energy (206.3 billion KRW), and S-Power (46.5 billion KRW). Notably, SK E&S’s operating profit more than tripled compared to last year’s 74 billion KRW.

The record profits of private power generators affiliated with major energy conglomerates are mainly due to the surge in liquefied natural gas (LNG) prices caused by the Russia-Ukraine war this year. KEPCO’s wholesale purchase prices from these generators also soared. These companies import natural gas directly at low prices and receive high settlement payments for power generation.

However, private power generators argue that implementing the SMP cap system will inevitably cause huge losses. The ‘SMP Cap Joint Countermeasures Committee,’ composed of the Renewable Energy Industry Development Council and the National Solar Power Association, claims that the system will severely damage renewable energy and combined heat and power generation businesses, destroy the industrial ecosystem, hinder carbon neutrality achievement, and undermine national competitiveness. They also add that private power generators contribute to lowering SMP by importing natural gas at relatively low prices.

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