Electricity Rates Frozen for Q3... The 'Fuel Cost Linkage System' Remains Ineffective (Comprehensive)

Despite Rising Oil Prices... Government Again Invokes Suspension of Increase Rights

(Photo) [Image source=Yonhap News]

[Sejong=Asia Economy Reporter Joo Sang-don] The government and Korea Electric Power Corporation (KEPCO) froze electricity rates for the third quarter (July to September) of this year. Although rising international oil prices increased the cost of electricity production, creating pressure to raise electricity rates, the government once again exercised its suspension rights. The government has stated that if the "high fuel cost level" continues, it will consider raising electricity rates in the fourth quarter, but there are criticisms that the purpose of the fuel cost linkage system, introduced for the first time this year, has already become meaningless. KEPCO's financial deterioration has also become inevitable.

KEPCO announced on the 21st that it will apply a fuel cost adjustment unit price of -3.0 KRW per kWh for the third quarter, the same as the second quarter. Accordingly, the perceived electricity rate for consumers remains the same as in the second quarter.

The third quarter electricity rates were determined based on fuel costs from March to May. Looking at the three-month trend of fuel costs for bituminous coal, liquefied natural gas (LNG), and bunker C oil, the fuel cost adjustment unit price should be 0.0 KRW per kWh, which is 3.0 KRW higher than the second quarter (-3 KRW). The adjustment unit price is the difference between the actual fuel cost (average fuel cost over the previous three months) and the standard fuel cost (average fuel cost over the previous year). According to KEPCO, the average post-tax price of bituminous coal was 133.65 KRW per kg and bunker C oil was 521.37 KRW, both rising more than 17% compared to the second quarter. However, LNG prices fell by 3.6% to 490.85 KRW, and reflecting this, the total actual fuel cost rose by 3.9% from 288.07 KRW to 299.38 KRW during the same period. Despite these price increases, the government and KEPCO decided to maintain the rates.

An official from the Ministry of Trade, Industry and Energy explained, "Due to the sharp rise in international fuel prices since the end of last year, there was a factor for adjusting the fuel cost adjustment unit price in the third quarter," adding, "However, considering the public's livelihood stability amid prolonged COVID-19 and high inflation rates since the second quarter, and the possibility of utilizing unadjusted amounts from the first quarter adjustment, we notified KEPCO to maintain the third quarter adjustment unit price at the same level as the second quarter."

When calculating the fuel cost adjustment unit price in the first quarter of this year, the government had to reflect the decline in international oil prices and reduce the rate by 10.5 KRW per kWh, but since the quarterly adjustment range is limited to ±3 KRW per kWh, the final reduction was only 3 KRW. Because the electricity rates were not sufficiently lowered in the first quarter, the government considered that there was room for rate reductions in the second and third quarters as well. Additionally, with the consumer price index reaching a 9-year and 1-month high of 2.6% last month, concerns were taken into account that raising electricity rates could potentially trigger increases in public utility prices closely linked to the economy of low-income households.

In particular, the fact that electricity rates for general households using less than 200 kWh per month will increase by 2,000 KRW from July also appears to have contributed to the burden of price increases. The essential usage deduction discount for residential households will be reduced from 4,000 KRW per month to 2,000 KRW starting next month, affecting approximately 6.25 million households.

However, criticism that the purpose of the fuel cost linkage system, introduced this year, has been undermined by the decision to freeze rates in the third quarter cannot be avoided. An industry insider said, "The fuel cost linkage system was introduced to improve the existing rate system that could not reflect electricity production costs, but it has been rendered useless under the pretext of price stability," adding, "From KEPCO's perspective, not being able to reflect rising fuel prices in electricity rates makes financial deterioration inevitable."

Professor Jeong Dong-wook of Chung-Ang University's Department of Energy Engineering said, "The electricity rate freeze shows the government's intention not to apply the fuel cost linkage system unless there are abnormal fuel cost fluctuations," and added, "To avoid unnecessary controversies every quarter, it is necessary to institutionalize a method that allows the unused rate reduction capacity from the previous quarter to be utilized in the following quarter."

Seemingly aware of such criticism, the government indicated the possibility of future electricity rate increases by stating, "If the current high fuel cost level is maintained or the upward trend in fuel costs continues in the second half of the year, we plan to review reflecting fuel cost fluctuations in the adjustment unit price in the fourth quarter."