Government Takes Drastic Measures Amid Historic Deficit... How Much Will Electricity Rates Rise Next Year?

An electric meter is installed in a multi-family house in Seoul. Photo by Jinhyung Kang aymsdream@

[Asia Economy Sejong=Reporter Dongwoo Lee] To normalize the management of Korea Electric Power Corporation (KEPCO), which is suffering from massive deficits, there is a growing possibility that next year's electricity rates will increase by more than 20% compared to this year.

According to related ministries on the 24th, the Ministry of Trade, Industry and Energy will announce the fuel cost adjustment unit price for the first quarter of next year at the end of this month. The announcement schedule, originally planned for the 21st, was temporarily postponed for inter-ministerial consultation.

The Ministry of Trade, Industry and Energy stated at the National Assembly's Industry, Trade, Energy, Small and Medium Enterprises Committee (Sanjoongwi) that an increase of 51.6 KRW per kWh is necessary for next year's electricity rate hike to normalize KEPCO's management. This is 2.7 times the increase this year (19.3 KRW per kWh). If the standard fuel cost rises by 50 KRW per kWh, the monthly electricity bill burden for a family of four with an average monthly usage of 307 kWh will increase by approximately 15,350 KRW.

However, the government is unlikely to fully reflect the 50 KRW per kWh increase next year, citing reasons such as the burden on low-income households and price stability. The Ministry of Economy and Finance decided to raise next year's electricity rates higher than this year but to spread the total rate increase over the next four years starting next year. Minister Lee Chang-yang of the Ministry of Trade, Industry and Energy also said at the National Assembly Sanjoongwi plenary session, "We will proceed with the increase gradually within the possible range."

In this case, the existing upper and lower limits of the fuel cost adjustment unit price, which were ±3 KRW per kWh compared to the previous quarter and ±5 KRW compared to the previous year, are likely to be further expanded in the first quarter of next year. Some expect the maximum adjustment range to exceed ±10 KRW. The industry forecasts that if the electricity rate is raised by 1 KRW per kWh, KEPCO could reduce its annual debt by 500 billion KRW.

Financial industry predicts KEPCO's deficit will reach 21.8 trillion KRW by the third quarter and increase to 34 trillion KRW by the end of this year. The debt ratio is expected to rise from 223.23% last year to 424.9% this year. As of the 12th, newly issued corporate bonds this year amount to 29.3 trillion KRW, about 2.5 times compared to last year (11.77 trillion KRW).

If the stepwise rationalization of electricity rates is implemented, the scale of corporate bonds issued by KEPCO next year is expected to decrease to less than one-third compared to this year. In this case, the size of corporate bonds next year is expected to be around 10 trillion KRW, and the average monthly issuance amount is expected to decrease from about 2.5 trillion KRW this year to 830 billion KRW next year.

Minjae Lee, a researcher at NH Investment & Securities, predicted, "Electricity rates are expected to be evenly raised quarterly in 2022 and 2023, so the full effect will be reflected in 2024. Considering the low coal prices reflected from the second half of 2023, operating profit in 2024 is estimated to turn positive to 6 trillion KRW compared to the previous year."