Lowered Expectations for Electricity Rate Hikes... KEPCO's Growing Concerns

[Asia Economy Reporter Eunmo Koo] The stock price of Korea Electric Power Corporation (KEPCO) continues to hit bottom day after day. This is because the burden of environmental costs for energy transition, such as phasing out coal and nuclear power, is increasing, while expectations for electricity rate hikes remain low.

According to the Korea Exchange on the 3rd, KEPCO closed at 20,950 KRW, down 1.64% (350 KRW) from the previous trading day. KEPCO's stock price fell to 20,600 KRW during the previous day’s session, setting a new 52-week low, and has declined for six consecutive trading days, dropping 19.7% over this period. Institutional investors were the largest sellers of KEPCO shares during this time, with net sales of 76.6 billion KRW. Foreign investors also sold 90.7 billion KRW worth of shares.

The continuous decline in KEPCO’s stock price is interpreted as a result of increasing environmental cost burdens while expectations for electricity rate hikes are diminishing. KEPCO faces steadily rising costs related to energy transition, including the third phase of the emissions trading scheme starting next year, necessitating countermeasures. Last year, KEPCO incurred environmental costs of 2.4 trillion KRW, including greenhouse gas emission rights costs and Renewable Portfolio Standard (RPS) purchase costs. This year, environmental costs are expected to exceed last year’s, and related expenses are projected to continue increasing until 2030 according to government plans.

However, expectations for electricity rate hikes remain low. The recent spread of the novel coronavirus (COVID-19) has intensified concerns about economic downturns and increased inflationary pressures. Jae-hyun Ryu, a researcher at Mirae Asset Daewoo, said, "In a situation where the possibility of economic deterioration is high, it is difficult to choose to increase the cost burden on economic agents. Electricity rate hikes will only be possible if poor performance continues to the extent that the debt ratio becomes unsustainable."

As KEPCO’s social responsibilities, such as energy transition, grow daily, it is pointed out that the electricity rate system must be restructured to share costs between consumers and environmental expenses for meaningful performance improvements. Min-jae Lee, a researcher at NH Investment & Securities, stated, "Without restructuring the electricity rate system, it is impossible to improve KEPCO’s financial structure, ESG (environmental, social, and governance) performance, and investments in renewable energy, nuclear phase-out, and coal phase-out, as well as overall social improvements."

Min-ho Heo, a researcher at Shinhan Financial Investment, also advised, "The recent sharp stock price decline appears to be influenced by ESG factors from global asset management firms beyond poor performance. Since KEPCO has a high proportion of coal power generation, it is difficult to be free from ESG issues. Therefore, accelerating coal phase-out and raising electricity rates to secure funding are necessary in the second half’s 9th Basic Plan for Electricity Supply and Demand."

However, there is analysis that immediate performance improvement is likely due to falling oil prices and rising nuclear power plant operation rates. According to financial information provider FnGuide, KEPCO is estimated to post an operating profit of 572.6 billion KRW in the first quarter of this year and 3.2383 trillion KRW for the full year, turning profitable.