Korea caps wholesale electricity prices to support Kepco

Industry

Published: 05 Dec. 2022, 18:06

Korea caps wholesale electricity prices to support Kepco

Caps on the system marginal price (SMP) have been implemented starting this month, in which the cap will change monthly. The measure will be temporarily imposed for three months. Above shows an electricity meter affixed to a wall of a house in Seoul on Nov. 29. [YONHAP]

Rates for electricity sold wholesale to Korea Electric Power Corporation (Kepco) will be capped by the government in an effort to support the struggling utility.

The new measure will limit the system marginal price (SMP), or wholesale price, of electricity generated by private power suppliers, and it will be temporarily imposed for three months.

While the move is expected to reduce Kepco's losses, which have been accumulating, private power generation companies argue the system will harm their businesses.

The SMP reached a high of 276 won when the implementation of the cap began on Dec. 1 and 2, according to the Korea Power Exchange.

As the government fixed the cap at 158.96 won per kilowatt hour for inland, non-island supply in the month of December, Kepco only had to pay this amount, which is about 42 percent cheaper than what Kepco would otherwise have paid during the period.

The cap is 1.5 times the weighted average of the wholesale electricity price in the decade from September 2012 to August 2022.

Over the weekend, the wholesale price for Kepco was also around 40 percent than it would be without the cap.

But if fuel costs are too high, Kepco would need to cover the cost additionally, so the actual price that the distributor pays may vary.

According to the Korea Power Exchange, the average SMP in June was 128.84 won, which doubled in November to 242.17 won. The rapid surge was due to the disruption of liquefied natural gas (LNG) supply caused by the Russia-Ukraine war. The rising demand for heating this winter is anticipated to further increase the price.

The implementation of the cap would reduce the pressure on Kepco, as the country’s sole power distributor continues to report losses. Its operating loss was 21.8 trillion won in the first nine months of the year, which is a 1,842.5 percent year-on-year surge.

It is anticipated that its operating loss will reach over 30 trillion won this year.

Due to steady losses, the state-owned power company had to issue bonds.

The new implementation of the cap and the price increases of electricity in the first quarter of next year is expected to help the company.

A drop in SMP by 80 to 90 won is expected to reduce the power company’s loss to 700 billion won a month at maximum, according to industry insiders.

“The unprecedented loss of the company returns as a burden on power consumers,” said a spokesperson for Kepco.

“But private power generation companies are seeing high profits due to the rise in the SMP. As Kepco pays for the fuel cost, there won’t be any large damage to these private companies.”

Power generation companies argue that government intervention is passing the pressure on Kepco caused by external factors, such as a rise in LNG price, to them.

“The measure will be implemented for three months, but people say this will cause power generation companies to collapse,” said a spokesperson for a power generation company.

“Financial damages are already seen excluding some affiliates of large companies that were able to purchase LNG at a cheap price.”

Some companies are planning to file a lawsuit based on the actual financial loss these companies have accumulated due to the implementation of cap prices.

“The power generation which requires much plant and equipment is mostly in need of financial loans,” said an industry insider.

“But due to high interest rates and the cap on SMP, it is expected financing will not be that easy, which would eventually fall in the government’s hands to take care of the matter when companies collapsed and power generators stop operating.”

Some say as placing the cap on SMP is not the ultimate resolution to reduce Kepco’s losses, other practical measures, such as increasing electricity prices and supporting the power industry, should be drawn.

“The government needs to draw up practical support measures by raising the electricity prices by 50 won per kilowatt hour in the next first quarter, provide direct financial support to Kepco if needed, alleviate limits on coal generation and consider ending SMP caps earlier,” said Yoo Seung-hoon an energy policy professor at the Seoul National University of Science & Tehnology’s Graduate School of Energy and Environment.

BY CHUNG JONG-HOON [cho.jungwoo1@joongang.co.kr]