[Opinion] Electricity Rates Require Mid- to Long-Term Measures

Professor Jeong Dong-wook, Department of Energy Systems Engineering, Chung-Ang University.
Photo by Asia Economy DB

[Asia Economy] The government has initiated an increase in electricity rates due to the severe deficit faced by Korea Electric Power Corporation (KEPCO). The deficit reached 8 trillion won in the first quarter alone, and this year’s deficit could soar to as much as 20 trillion won. The primary cause of the deficit is the rise in fuel costs. Coal prices have nearly doubled compared to this time last year, and gas prices have increased by 1.5 times. According to the settlement prices by energy source from the Korea Power Exchange, last month the average coal-fired power price was 129 won per kWh, and LNG was a staggering 162 won, which is more expensive than solar power at 139 won. Fortunately, nuclear power at 39 won played a significant role in curbing the expansion of the deficit. KEPCO’s deficit also threatens its role in expanding the transmission network and renewable energy for carbon neutrality. However, no citizens welcome electricity rate hikes, considering their impact on inflation and the monopoly position of the power market.

In the short term, raising electricity rates is the only solution to resolve KEPCO’s deficit. Currently, the more electricity is sold, the more KEPCO’s deficit accumulates, and energy imports increase. Therefore, alongside rate hikes, the government must implement policies that encourage electricity conservation. The progressive rate system, which was relaxed during KEPCO’s profitable years, should be reinforced. Such measures can also alleviate the burden of electricity rate increases on low-income households.

The same applies to industrial electricity. Currently, there is no progressive rate system for industrial electricity. Introducing a progressive rate system based on electricity consumption should be considered. Utilizing demand response programs funded by the Power Industry Infrastructure Fund is another way to promote energy savings and mitigate deficit expansion.

In the mid to long term, the first priority is expanding Power Purchase Agreements (PPAs). PPAs are already permitted for renewable energy, but they should also be allowed for nuclear power. This can help avoid price volatility of fossil fuels and provide a lifeline for companies burdened by carbon border adjustment taxes.

The second is strengthening consumer choice. If consumers can choose electricity from renewable energy, gas, or nuclear power, resistance to price increases may be lower. Consumer opinions can also be reflected in long-term power source policies.

The third is adjusting the maximum electricity price system in the power market. The power market sets the price for electricity that meets the highest daily demand, and KEPCO purchases electricity at that price to sell to consumers. However, KEPCO’s generation subsidiaries must consider generation costs when setting prices to prevent excessive profits. On the other hand, private power producers can supply electricity at lower prices but sell at the maximum price, allowing them to earn huge profits when prices soar, as they do now. Considering the public nature of electricity, an adjustment mixing the maximum price system and cost-based pricing is necessary.

The fourth is to incorporate an electricity rate stabilization function into the Power Industry Infrastructure Fund. This fund is accumulated by electricity consumers. During periods of significant electricity rate hikes, the reserve should be used to reduce the burden on consumers. Although this fund is a resource for the power industry, it does not impose a burden on KEPCO. If a rate stabilization function is added, KEPCO should contribute to the fund when it earns substantial profits.

Finally, expanding the share of nuclear power is essential. Nuclear power has helped mitigate KEPCO’s deficit and the pressure to raise electricity rates. This is why expanding nuclear power utilization is necessary.

The deficit of KEPCO, a public enterprise, cannot be ignored. However, short-term measures like electricity rate hikes have limitations. It is hoped that long-term measures will be introduced to suppress electricity rate volatility and gain public acceptance.

Jung Dong-wook, Professor, Department of Energy Systems Engineering, Chung-Ang University (President, Korean Nuclear Society)