Wholesale Electricity Prices Hit Record High... Pressure for Electricity Rate Hike Peaks

Government to Decide on Q4 Price Increase Plan This Week

As the decision on whether to raise electricity rates for the fourth quarter of this year (October to December) is expected to be made this week, the System Marginal Price (SMP) applied by Korea Electric Power Corporation (KEPCO) when purchasing electricity from power producers has reached an all-time high this month, intensifying pressure to increase electricity rates.

According to the Korea Power Exchange on the 26th, the average SMP for the month (1st to 26th) on the mainland was 231.85 KRW per kilowatt-hour (kWh), a sharp increase of 18.7% compared to the same period last month (195.2 KRW). After reaching a record high in April (202.11 KRW), the SMP stabilized but has surged sharply this month.

The surge in SMP is due to the price of liquefied natural gas (LNG), a major energy source for power generation, soaring for three consecutive months amid the prolonged Russia-Ukraine war and increased global demand. Based on the Japan-Korea Marker (JKM) for natural gas prices, the spot LNG price this month reached $44.55 per MMBtu, up 68.3% from January this year ($26.46).

The sharp rise in LNG prices is rapidly worsening KEPCO's management structure, increasing its losses. The financial industry reports that if there is no additional rate hike, KEPCO's cumulative deficit this year could reach 35.4 trillion KRW.

The problem is that the government feels burdened by additional electricity rate hikes amid ongoing inflation and the won-dollar exchange rate. KEPCO has reported to the Ministry of Trade, Industry and Energy that to break even in the fourth quarter, the fuel cost adjustment rate must be raised by 50 KRW per kWh. However, if the adjustment exceeds the current maximum range of ±5 KRW through legal amendments, it could face public backlash.

The government is discussing a plan to raise electricity rates by up to 9.9 KRW per kWh next month, while reviewing reforms for industrial electricity rates, which have a cost recovery rate in the 60% range, and agricultural electricity rates, which have a recovery rate in the 25% range. The plan aims to minimize private electricity rate hikes while increasing the cost recovery rate for industrial electricity used by energy-intensive companies to offset KEPCO's deficit as much as possible.

Professor Yoo Seung-hoon of the Energy Policy Department at Seoul National University of Science and Technology said, "The price at which KEPCO sells electricity at a loss is expected to increase to about 150 KRW per kWh," adding, "Considering that high LNG prices are expected to persist for some time after the Russia-Ukraine war, a rate hike that allows KEPCO to endure with minimal strength should be implemented."