Energy Public Enterprises Increasing Debt, Reckless Renewable Investments... "Need to Enhance Financial Transparency"

"1 Trillion Won Shortfall in Renewable Energy Investment... External Financing via Corporate Bonds"
Expansion of RPS Ratio... Renewable Power Purchase Costs Up 2.6 Trillion Won Since 2015
Ruling Party Opens Path for KEPCO's Renewable Energy Generation... "Need to Strengthen Outside Directors' Authority"

[Asia Economy Reporters Kim Bo-kyung and Moon Chae-seok] The financial conditions of Korea Electric Power Corporation (KEPCO) and six power generation companies are deteriorating as investments in renewable energy and greenhouse gas emission costs increase due to the government's energy transition policy.

The fundamental reason behind the rising debt of public power companies lies in a structural problem where they are forced to manage in accordance with government policies. To achieve the goals of the energy transition policy, the government sets excessive targets for public enterprises, and these enterprises reluctantly comply despite knowing the targets are unrealistic.

To meet the 'Renewable Energy 3020' policy, which aims to increase the share of renewable energy generation to 20% by 2030, public enterprises have improved environmental facilities at coal-fired power plants or increased investments in renewable energy. The shortfall in funds was covered by borrowing. As a result, debt has been snowballing. Korea Midland Power stated in its 2019 business report, "Due to increased investments in eco-friendly, low-carbon coal power and renewable energy projects, a funding shortfall of over 1 trillion won occurred in 2019," adding, "The shortfall is being financed externally through domestic and international corporate bond issuances."

Energy Public Enterprises Struggling with Debt

Rushing to increase large-scale renewable energy facility investments with uncertain cost-to-profit returns has prevented these companies from escaping deficit management. At the end of last year, Korea East-West Power's affiliate Korea Offshore Wind Power recorded a net loss of 10.4 billion won, while joint ventures Chuncheon Energy and Taebaek Gadeoksan Wind Power recorded net losses of 24.5 billion won and 1.6 billion won, respectively. A representative from East-West Power said, "Since these projects are still under construction, no revenue has been generated from the investment expenditures."

The cost issues arising from the government's expansion of the Renewable Portfolio Standard (RPS) system for renewable energy supply obligations are also significant. This year, power companies are increasing renewable energy facilities to supply at least 7% of total power generation from renewable sources. As the proportion of expensive renewable energy increases, KEPCO also bears the burden. Last year, KEPCO's power purchase costs increased by approximately 8.2 trillion won compared to 2015. While nuclear power purchase costs decreased by 1.74 trillion won, renewable energy and RPS purchase costs increased by 2.56 trillion won. The government aims to raise the RPS ratio to 28% by 2030.

Greenhouse gas emission provision liabilities to comply with environmental regulations are also a headache. At the end of last year, Korea South-East Power's greenhouse gas emission provision liabilities amounted to 337.6 billion won, accounting for 82.3% of its total provision liabilities of 410 billion won. Provision liabilities refer to liabilities with uncertain timing or amounts of expenditure, mainly accounted for in advance to avoid additional cost increases.

An official from a power company said, "Due to the government's reduction of free greenhouse gas emission allowances last year, greenhouse gas emission provision liabilities increased by about 213.8 billion won compared to the previous year, raising the debt ratio by 4.2 percentage points," adding, "Although the obligation to submit emission allowances is decreasing due to early coal power plant closures and reduced power generation, it is not enough to offset the burden of submitting allowances, so greenhouse gas emission costs and liabilities are expected to continue increasing."

KEPCO Also Forced into Renewable Power Generation... 'Government's Excessive Interference Must Be Checked'

In this situation, the ruling party is paving the way for KEPCO to directly engage in renewable energy power generation through legislative amendments. Song Gap-seok, a member of the Democratic Party of Korea, has introduced a bill to amend the Electricity Business Act, allowing KEPCO to directly operate renewable energy power generation facilities and produce electricity. If this law passes, KEPCO will be able to simultaneously generate renewable energy and sell electricity. This reflects the government's intention to support renewable energy projects such as offshore wind power, which require large-scale investments through KEPCO.

Although government policies influence management and investment decisions and debts and costs are increasing, power producers have not presented any sharp alternatives beyond 'cost management.' Their efforts are limited to ▲self-help measures ▲strategic investments ▲strengthened risk management, which have been implemented since the past.

Experts advise that transparency in appointing outside directors should be improved to prevent government policies from excessively influencing power producers' management decisions. Professor Jung Dong-wook of the Department of Energy Systems Engineering at Chung-Ang University said, "From the perspective of public power companies, management decisions reflect policies, and it is burdensome to carry out bold restructuring of executives and employees," adding, "Since greenhouse gas emission provision liabilities act as a kind of 'cost,' it is difficult to improve financial soundness solely through internal cost reduction. Therefore, the authority of outside directors should be strengthened to minimize the impact of major management decisions, such as renewable energy investments, on the company's financial condition."