Funding Shortages and Nuclear Phase-Out... KEPCO's 'End of Crisis' Not in Sight

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The reason KEPCO sharply increased its corporate bond issuance volume from the second half of last year is due to the ballooning deficit caused by the cost burden of power purchases. As of February this year, KEPCO sold electricity at a loss of 89.22 KRW per 1 kWh. The structure inevitably leads to accumulating deficits as management continues. There is growing concern that without a substantial increase in electricity rates and fundamental changes in power supply and demand plans, KEPCO's very existence could be threatened.

According to the securities industry on the 13th, the amount of borrowings KEPCO must repay within this year reaches about 9.3 trillion KRW. The scale of borrowings has surged as corporate bond issuance has rapidly increased this year. In January, KEPCO's combined short- and long-term corporate bonds first entered the 3 trillion KRW range, and last month, it rose to 3.94 trillion KRW, approaching 4 trillion KRW. This means an increase of nearly 840 billion KRW in just two months. With borrowings expected to reach 9.9 trillion KRW next year, the industry estimates that if this trend continues, borrowings will balloon to about 21.7 trillion KRW by 2028.

The distorted structure of borrowing money to sustain deficit management has also reached its limit. The total amount of corporate bonds KEPCO can issue is about 91 trillion KRW. According to the Korea Electric Power Corporation Act, the issuance amount of bonds cannot exceed twice the sum of capital stock and reserves (about 45.89 trillion KRW last year). Last year, KEPCO's total borrowings, including corporate bonds, reached about 75 trillion KRW. Without drastic measures such as a real increase in electricity rates, maintaining management through corporate bond issuance may become increasingly difficult. As KEPCO's issuance of public and corporate bonds grows, interest rates also rise. The increased interest costs ultimately become a burden borne by the public. Experts have expressed concerns that if KEPCO maintains current rates amid energy prices, it could face capital erosion and even international litigation possibilities within three years.

The main reason KEPCO is in such a precarious situation is the sharp rise in the System Marginal Price (SMP) caused by the increase in international oil prices. KEPCO purchases electricity from public power generation companies and private power producers and sells it, with the SMP soaring from 93.91 KRW per kilowatt-hour (kWh) last year to an average of 173.88 KRW in the first quarter of this year. Hwang Seong-hyun, a researcher at Eugene Investment & Securities, said, "The SMP exceeded 200 KRW/kWh in the first quarter and is expected to remain at a high level compared to the average until the second half, negatively impacting performance," emphasizing that the shortfall must be compensated through financing.

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Another background factor creating KEPCO's fundamental deficit structure is criticism that the Moon Jae-in administration's ‘nuclear phase-out’ carbon neutrality policy played a role. According to the Presidential Transition Committee, KEPCO's power purchase costs increased by 13 trillion KRW over the past five years due to the Moon administration's nuclear phase-out energy policy. Over the past five years, nuclear power generation decreased by 3 percentage points, and the average utilization rate of existing facilities also dropped by 10.1 percentage points, resulting in increased power purchases from higher-cost LNG (liquefied natural gas) and renewable energy generation.

KEPCO's debt increased from 49.9 trillion KRW in 2016 to 68.5 trillion KRW last year, a rise of 18.6 trillion KRW. The Transition Committee judged that if nuclear power generation had been increased to avoid additional power purchase costs, debt could have been reduced by nearly 70%. As of the end of last year, KEPCO's total liabilities stood at 145.797 trillion KRW. Considering that KEPCO's debt was 132.475 trillion KRW at the end of 2020, it increased by more than 13 trillion KRW in just one year.

According to Yuanta Securities, the 10-year interest rate on AAA-rated corporate bonds like KEPCO's is 3.32%. If this year's operating deficit reaches about 20 trillion KRW, the annual interest burden is expected to exceed 2 trillion KRW. Prolonged high oil prices due to the Russia-Ukraine conflict will increase fuel costs and thus the interest burden.

An industry insider said, "KEPCO has continued a deficit structure for years due to the nuclear phase-out policy, reaching a point where it is practically difficult to continue management. Even if external conditions stabilize and fuel costs decrease, if KEPCO cannot sufficiently lower electricity rates due to interest burdens, the risk will increase."

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