Gas Price Hike Imminent... Final Negotiations on Timing and Scale Underway

Price Increase Unavoidable Due to Deficit
Next Month's Increase Proposal to Be Announced
No Retroactive Application, Effective From Announcement Date

The government is conducting final discussions on whether to raise the civilian city gas rates used in houses and commercial buildings. Given that city gas rates are being supplied below cost, they are reviewing the timing and extent of rate hikes during the summer, when heating demand is low.

An official from the Ministry of Trade, Industry and Energy said on the 28th, "We are in talks with the Ministry of Economy and Finance about whether to raise civilian city gas rates and when and how much to increase the rates," adding, "The final agreement has not yet been reached."

The Ministry of Trade, Industry and Energy, which oversees gas rates, holds the position that a city gas rate increase is inevitable. Choi Nam-ho, the 2nd Vice Minister of the Ministry, told reporters last month, "KOGAS has not yet overcome its fundamental deficit structure, and unpaid receivables are accumulating," adding, "Gas is different from electricity. We are looking for the appropriate timing for energy rate increases such as gas." This implies the possibility of a priority increase in gas rates.

The ongoing discussions about raising gas rates reflect the severity of KOGAS's financial condition. According to KOGAS, due to the Russia-Ukraine war causing a surge in international liquefied natural gas (LNG) prices, the cost recovery rate, which had fallen to 39% in 2022, recovered to 80% as of March this year following a rate hike in May last year and stabilization of international energy prices. However, the supply below cost continues, and KOGAS's unpaid receivables, which were 2 trillion won in 2021, ballooned to 13 trillion won by the end of last year. Unpaid receivables represent the difference between the cost and supply price for gas supplied below cost, effectively an operating loss. Borrowings increased from 26 trillion won to 39 trillion won during the same period, and interest expenses surged from 600 billion won to 1.7 trillion won. The debt ratio also soared from 379% to 483%. KOGAS fears that unpaid receivables will reach 14 trillion won by the end of this year.

Choi Yeon-hye, President of KOGAS, expressed at a press briefing last month, "The current scale of unpaid receivables is such that even if all employees worked without pay for 30 years, recovery would be impossible, and it feels like standing at the edge of a cliff," adding, "It is difficult to endure as is, so a prompt rate increase is absolutely necessary." Raising the rate by 1 won would recover about 500 billion won of unpaid receivables. To resolve unpaid receivables within a year, an increase of 27 won per megajoule (MJ) is required. As of the 1st of this month, the wholesale city gas rate for residential use is 19.4 won, meaning the rate would need to more than double.

However, the Ministry of Economy and Finance is cautious about raising gas rates due to concerns about the negative impact on inflation. The shock from the 'heating bill bomb' crisis following a 38.5% increase in residential city gas rates at the end of 2022 was significant. Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, stated at a forum the day before, "We will manage electricity and gas rate adjustments as stably as possible for the time being, but will reflect unavoidable cases."

Gas rates are adjusted every odd month through consultations between the Ministry of Trade, Industry and Energy and the Ministry of Economy and Finance. If the government decides to raise rates, practical work will follow, making a July increase possible. However, since final consultations between the two ministries have not yet been completed, it is more likely that the increase will take place in July rather than from the 1st of next month. If a rate increase plan is announced next month, it will not be applied retroactively, and the increased rates will apply from the announcement date.