LNG Eases KEPCO Deficit... Power Sales Loss Reduced

LNG Import Price $916.2 per Ton in March... Lowest Since July Last Year
Electricity Sales Loss Declines for 3 Consecutive Months
Impact of Rate Hike and SMP Cap System

As the government deliberates on whether to raise electricity rates in the second quarter, some argue that the justification for an increase has weakened this year due to a reduction in Korea Electric Power Corporation's (KEPCO) electricity sales losses. This assessment is based on the combined effect of the first quarter's electricity rate hike and the stabilization of liquefied natural gas (LNG) prices, the main fuel for power generation, which have visibly reduced the deficit. However, the energy industry maintains that external uncertainties such as rising international oil prices persist, and that a price increase in the second quarter is inevitable due to KEPCO's seasonal 'electricity volume charges' adjustments in spring and autumn.

According to KEPCO on the 20th, as of February, the difference between the electricity purchase price (167.21 won) and the sales price (152.68 won) was minus (-) 14.53 won per kWh (kilowatt-hour). This means KEPCO sold electricity at a loss of about 14.5 won per kWh. However, the reduction of the electricity sales deficit to below 15.0 won per kWh is the first time in seven months since July last year (-6.64 won). Although KEPCO remains in a 'the more it sells, the more it loses' state, the actual scale of electricity sales losses has somewhat decreased. The total electricity sales loss for February was 385.8 billion won, marking the first time in half a year that the average monthly loss fell below 1 trillion won. The loss amount has been on a declining trend for three consecutive months since November last year (3.578 trillion won).

[Image source=Yonhap News]

Stabilization of International LNG Prices...Reduction in KEPCO's Sales Losses

The direct reason for the reduction in KEPCO's electricity sales deficit is the record quarterly electricity rate increase of 13.1 won per kWh in the first quarter of this year. Since the sales price rose more than the purchase price, the deficit decreased. According to the February Electricity Statistics Monthly Report, KEPCO's electricity purchase price increased by 2.7 won (2.9%) per kWh compared to the same period last year, while the sales price rose by 37.5 won (32.5%). The rate hike effectively offset KEPCO's deficit. The electricity wholesale price (SMP) cap system, which sets an upper limit on the purchase price, is also cited as a major factor in reducing sales losses. The SMP cap system, implemented from December last year to February this year, applies when the weighted average SMP over the past three months exceeds the top 10% of the previous 120 months' SMP. During this period, KEPCO's average electricity purchase price was 169.7 won per kWh, about 80 won cheaper per kWh than it would have been without the cap. It is estimated that the SMP cap system reduced KEPCO's monthly electricity purchase costs by 680 billion to 800 billion won. The cap system ended in February but has been reinstated from this month.

The stabilization of LNG prices, the main energy source for electricity production, also contributed to reducing the scale of electricity sales losses. According to the Ministry of Trade, Industry and Energy's raw material price information, the LNG import price was $916.2 per ton last month, the lowest point since July last year. It has decreased by 29.3% ($379.4) this year. The SMP is determined based on the cost of the most expensive fuel used by generators at the point where electricity supply and demand balance. Considering that generation costs rank in order of nuclear, coal, and LNG, a decline in LNG prices effectively reduces overall electricity purchase costs in the long term.

In summary, the ruling party and government’s reluctance to raise electricity rates in the second quarter becomes clear. With LNG prices stabilizing and electricity purchase prices gradually decreasing, it is analyzed that KEPCO’s deficit can be improved through gradual rate hikes in the future. The government and ruling party’s argument that KEPCO must first undertake painful structural reforms before any rate increase is for the same reason. A government official said, "If the second quarter electricity rate hike proceeds as requested by the Ministry of Trade, Industry and Energy to eliminate all deficits by 2026, it is worth considering whether the large surplus that would follow is proper management," adding, "If large fluctuations in rates occur to resolve KEPCO’s deficit, the resulting inflation and other damages will ultimately burden the public."

Electricity Sales Deficit Reduction Temporary...Separate from Operational Deficit

Meanwhile, the power industry insists that a second-quarter electricity rate hike is essential to resolve KEPCO’s large-scale deficit. The recent reduction in KEPCO’s electricity sales deficit is a temporary phenomenon and excludes costs such as renewable energy certificate (REC) expenses from the purchase amount. KEPCO clarified that even if the difference between purchase and sales prices turns positive in electricity statistics, it does not mean an immediate financial operating surplus. A KEPCO official analyzed, "To achieve an operating surplus solely from electricity sales revenue, a simple calculation based on last year’s data shows that the sales price needs to increase by about 15.5 won per kWh."

Due to reduced 'electricity volume charges' in spring and autumn, KEPCO’s sales price in the second quarter is also expected to decrease. The electricity volume charge is one of the four components that make up electricity rates (basic charge, electricity volume charge, climate environment charge, and fuel cost adjustment charge), and rates are lowered in spring (March to May) and autumn (September to October) when electricity demand decreases. This functions to reduce electricity demand by setting higher volume charges in summer and winter when demand rises, and conversely lowering charges in spring and autumn to regulate usage. For example, KEPCO’s electricity rate for the 'General Power (Type A) 1' category this year shows that the volume charge set for spring and autumn is 83.9 won per kWh for low voltage, which is 40.5 won lower than the summer rate (June to August, 124.4 won). The problem arises if electricity demand increases significantly from the second quarter due to early heat waves. If demand rises, KEPCO could face a larger deficit due to lower sales prices.

The reinstated SMP cap system this month also burdens private power producers, whose losses have increased. The losses of private power producers due to the cap system over the past three months amount to about 2 trillion won. There are concerns that if KEPCO’s deficit is offset by private power producers’ profits for a prolonged period, it could lead to mutual insolvency. In fact, a private power producers’ association complained that 30% of companies are continuing to operate at a loss. Yuseung Hoon, Dean of the College of Creative Convergence at Seoul National University of Science and Technology, said, "The average SMP cap price is 165 won, and KEPCO’s electricity supply cost including generation costs is about 185 won. Without an electricity rate increase, the structure where losses increase the more electricity is sold cannot be changed. An increase at least to a level KEPCO can endure is urgently needed."

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