Concerns about a surge in electricity prices due to ‘cost-based rates’… Pay attention to the possibility of privatization of the electricity market

As the Presidential Takeover Committee announced on the 28th that it would strengthen the principle of ‘cost-based’ for electricity rates, there is a forecast that electricity rates may rise significantly in the second half of the year.

This is because, given the recent surge in energy prices, a rise in electricity rates is inevitable if the increase is reflected in accordance with the cost principle.

According to the industry, electricity rates consist of basic rates, electricity rates (standard fuel costs), climate environment rates, and fuel cost adjustment rates.

Among them, the fuel cost adjustment rate reflects changes in fuel costs such as coal, liquefied natural gas (LNG) and oil, and is calculated on a quarterly basis.

The fuel cost adjustment unit price is determined within the maximum range of ±3 won/kWh (kilowatt hour) compared to the previous quarter, and ±5 won/kWh per year, and all or part of the application may be temporarily suspended according to the government’s decision.

The government frozen the fuel cost adjustment unit price for the second quarter despite the surge in energy prices on the 29th of last month.

In the aftermath of the fuel cost adjustment unit price freeze, the burden on KEPCO, which accounts for 80% of its financial structure for fuel and electricity purchases, has grown.

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Last year, KEPCO posted a loss of 5.8 trillion won, the largest ever recorded.

KEPCO explained that its sales were 60.6 trillion won, an increase of 2 trillion won from the previous year, but fuel and electricity purchase costs increased by 10.5 trillion won to 41 trillion won.

As a result, there were voices calling for the normalization of the fuel cost index, which had become ineffective.

As the transition committee announced on the same day that it would strengthen the principle of cost principle, there is an observation that the limit will be expanded more than ±3 won/㎾h along with the fuel cost adjustment rate increase in the second quarter.

This is because, if the current limit is maintained, the gap with the increase in fuel costs cannot be bridged even if the maximum of 3 won is raised in the next quarter.

KEPCO’s initial estimate of the fuel cost increase in 2Q was 33 won/kWh. If the increase in raw material prices is reflected, it means that it does not go below 33 won per 1 kWh.

In fact, as of the 18th, the price of LNG was $113.3 per ton, up 20% from the beginning of the year, and the price of coal for electricity as of the 23rd was $370 per ton, up 83.6% from the beginning of the year.

The power generation using these fossil fuels accounts for more than 60% of the total.

Some in the industry are discussing the possibility of returning to the overall cost calculation method, which was maintained until 2020, in addition to an increase in the increase in fuel cost adjustment rates.

The overall cost is the appropriate cost (appropriate cost) used for electricity production and supply plus the appropriate remuneration for the assets invested for electricity production and supply (appropriate investment fee).

An industry official emphasized, “In either case, fuel prices must be reflected in order to resolve KEPCO’s financial crisis.”

However, there are concerns that an increase in electricity rates could increase prices and act as a burden.

The fact that the government continued to freeze the fuel cost adjustment rate despite the increase in energy prices is in fact a measure for price control.

Public opinion about the rate hike is also one of the areas of concern.

The reason that President-elect Yoon Seok-yeol’s pledge to freeze electricity rates as a presidential campaign was in consideration of public opinion.

Another official in the industry said, “KEPCO proposed an adjusted fuel cost of 33 won/㎾h in the second quarter, but the government failed to raise it even by 3 won. It will not be easy for the next government to raise it. said

Meanwhile, the transition committee announced that “KEPCO’s monopoly sales structure will be gradually opened,” suggesting the possibility of privatization of the electric power market.

Overseas, the privatization of the electric power industry has progressed considerably.

In the current electricity trading market, KEPCO purchases electricity from power generation companies through the power exchange and sells it exclusively. However, if the system is changed, a structure in which private power generation companies directly contract with consumers such as companies and supply them directly will become possible.

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