KEPCO's 'Corporate Bond Vicious Cycle'... Monthly Issuance Hits Record 4 Trillion Won, Interest Alone Expected to Reach 3 Trillion Won

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Dongwoo Lee] Korea Electric Power Corporation (KEPCO) set a new record for the highest monthly issuance amount by issuing corporate bonds worth 4 trillion won last month for operating funds. Despite the government's request to refrain from issuing corporate bonds due to concerns over market disruption, the scale has actually increased this month. KEPCO, which is recording the largest deficit in history, maintains that it must continue issuing bonds to secure operating funds, raising concerns about growing management burdens such as interest expenses.

According to the power industry on the 6th, KEPCO issued a total of 4.03 trillion won in corporate bonds last month at an average interest rate of 5.67%. This surpassed the previous monthly record of 3 trillion won set in September within just two months, marking the first time in 41 years since KEPCO's establishment in 1981 that monthly issuance exceeded 4 trillion won. As a result, KEPCO's cumulative corporate bond issuance this year reached 27.93 trillion won, a 2.4-fold increase compared to last year's 11.77 trillion won. If KEPCO continues issuing corporate bonds through this month, it is expected to surpass 30 trillion won by the end of the year. The cumulative bond amount KEPCO must repay also nearly doubled compared to last year's total, reaching 66.482 trillion won as of last month, up from 34.1 trillion won.

The significant increase in corporate bond issuance last month is attributed to the nearly 8% surge in the System Marginal Price (SMP), the wholesale electricity price applied when KEPCO purchases power from power generation companies, within a single month. According to the Korea Power Exchange, the SMP in October was 251.65 won per kWh, a 7.8% increase from 233.42 won in the previous month. KEPCO pays the electricity trading fees to the Power Exchange in four installments the following month, and due to the sharp rise in SMP, last month's operating funds increased by 1.5 trillion won compared to the monthly average of 2.5 trillion won.

The problem is that as KEPCO continues to issue corporate bonds worth trillions of won, its interest burden is rapidly increasing. According to the Korea Financial Investment Association, the issuance rate for 3-year KEPCO bonds rose from an average of 2.71% in January this year to 5.27% as of yesterday. The average interest rate on corporate bonds peaked at 5.825% on October 21 before slightly declining recently but still remains above 5%. With the sharp rise in interest rates, KEPCO spent 1.926 trillion won on interest expenses through the third quarter of this year, already surpassing last year's total annual interest expense of 1.9145 trillion won. The industry expects KEPCO's interest expenses to reach about 3 trillion won this year.

KEPCO's structure of 'losing money the more electricity it sells' is due to the global energy price surge this year, where it purchased electricity at an average of 177.4 won per kWh but sold it at 116.4 won per kWh, incurring a loss of about 60 won per kWh. To resolve KEPCO's deficit, the government plans to gradually reduce the burden of electricity purchases starting this month through the 'SMP Cap System.' The SMP Cap System is triggered if the average SMP over the previous three months ranks in the top 10% compared to the average SMP over the past 10 years. The industry expects KEPCO to reduce its deficit by up to 700 billion won per month through the implementation of the SMP Cap System.

However, some argue that the SMP Cap System is merely a temporary measure to address KEPCO's deficit management. They emphasize that normalizing KEPCO's management through electricity rate increases is an urgent priority. Professor Seunghoon Yoo of Seoul National University of Science and Technology said, "The more KEPCO increases corporate bond issuance, the more the damage will inevitably spread to general companies. The government needs to prepare practical support measures such as normalizing electricity rates rather than emphasizing industry pain-sharing through bond issuance and the SMP Cap System."