[Reporter’s Notebook] The Sweet Freeze on Electricity Rates

"It seems we will be able to endure without raising electricity and gas prices in the second half of the year as well."

This was a statement made by Kim Gi-hyeon, leader of the People Power Party, at a forum shortly after the decision to freeze electricity rates for the third quarter (July to September) was made on the 21st. It implied that there are no plans to increase not only electricity but also gas prices this year.

Concerns remain. This is because, as Kim said, we have to endure while leaving the structure that has caused Korea Electric Power Corporation (KEPCO) to accumulate deficits unchanged. The fact that international energy prices are showing a downward stabilization trend can serve as an immediate excuse. However, considering KEPCO’s financial situation with accumulated deficits exceeding 44 trillion won, it is not a fundamental solution.

KEPCO recorded an operating loss of 32.6 trillion won last year. In the first quarter of this year, it added another deficit of 6.2 trillion won. Including the 2021 deficit (5.85 trillion won), the cumulative operating loss amounts to 38.45 trillion won. This is due to the ‘negative margin structure’ where the purchase price of electricity is higher than the selling price. Previously, the government estimated the necessary electricity rate increase this year at 51.6 won per kWh (kilowatt-hour), but the cumulative increase in the first and second quarters was only 21.1 won per kWh. Because the rate hikes do not cover the rise in costs, KEPCO has had to raise large amounts of external funds to cover operating expenses such as power purchase costs, resulting in interest expenses of 1.048 trillion won in the first quarter alone. That is about 11.6 billion won per day. As the rate adjustment is delayed, interest expenses continue to increase.

This abnormal situation will eventually require someone to bear a heavy burden to resolve it. Ultimately, the users who have used electricity at prices lower than cost and the users who bear the burden after rate adjustment will be different. This contradicts the beneficiary-pays principle, which is the foundation of a market economy.

There is another problem. The electricity rate freeze may send a ‘wrong signal’ to the public. Following the rate increase in May, the number of new participants in the ‘Residential Energy Cashback’ program, which refunds electricity charges based on the amount of electricity saved, surpassed 200,000 households within 11 days of application. However, this freeze could weaken the public’s motivation to participate in such campaigns encouraging electricity conservation.

It is clear that KEPCO’s massive deficit is not solely the fault of the current administration. However, criticism for neglecting this issue cannot be avoided. We must not forget that the boomerang effect of ‘politicized electricity rates’ will eventually come back around.

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