Current Generation Uses Cheap Electricity and Gas... Future Generations Bear the Burden [Debt Giant in Crisis]②

KEPCO and Gas Corporation, Daily Interest Approaches 17 Billion Won
Different Groups Bear the Burden: Those Using Below Cost and Those Paying Increased Charges Due to Interest
Delay in Rate Hike Makes Stable Power Supply Difficult

The massive debts of Korea Electric Power Corporation (KEPCO) and Korea Gas Corporation (KOGAS) are not problems confined to these two public enterprises alone. Due to supplying electricity and gas below cost, KEPCO and KOGAS have been operating at a loss and are running their companies by borrowing money. Debt is not free. With interest added, it grows over time, creating a vicious cycle that forces steep rate hikes. Additionally, cheap electricity and gas consumed by the current generation shift the burden onto future generations, causing unfairness in the rate-payer structure. Experts warn that if the financial crisis of KEPCO and KOGAS is further neglected, reduced facility investments could negatively impact the stable supply of electricity and gas.

According to KEPCO and KOGAS on the 23rd, last year's annual interest expenses (on a consolidated basis) amounted to 4.5 trillion won for KEPCO and 1.7 trillion won for KOGAS, totaling 6.2 trillion won. This means daily interest alone reaches 17 billion won.

◆Interest payments increase debt... Violating the beneficiary-pays principle

KEPCO recorded an operating loss of 4.5416 trillion won last year, piling up interest expenses as debt. Even KOGAS, which posted an operating profit of 1.5534 trillion won, could not cover interest costs from its earnings. This crisis is clearly reflected in the statements of the heads of the two public enterprises. KEPCO President Kim Dong-chul said in May, "KEPCO has reached the limit where it can no longer bear the large accumulated deficit by its efforts alone." KOGAS President Choi Yeon-hye expressed feeling "on the edge of a cliff."

The combined debt of KEPCO and KOGAS, reaching 250 trillion won, is likely to cause various adverse effects beyond the deterioration of the two companies' financial conditions. Professor Jung Yeon-je of the Department of Energy Policy at Seoul National University of Science and Technology pointed out, "The debts of KEPCO and KOGAS generate enormous interest, and in a situation where they cannot earn enough money, they have no choice but to increase debt to pay interest. This creates a problem where the people who used electricity and gas (at prices below cost) are different from those who later bear the burden of increased rates reflecting interest."

Thus, electricity and gas rates violate the beneficiary-pays principle. A KEPCO official said, "Electricity is an essential good, and power supply must not be interrupted even for a moment. If rate hikes continue to be delayed, public funds will inevitably have to be injected. If massive public funds are invested in the power industry, the cost of power supply will be deferred to future generations, and it could trigger controversy over preferential treatment for high-income users and large corporations that consume a lot of electricity."

The situation in the city gas market is similar. KOGAS recovered the huge unpaid amounts caused by the difference between cost and supply price from 2008 to 2012 over five years until 2017, thanks to rate hikes in 2013 and the subsequent prolonged low oil prices. However, due to the global energy crisis, including the Middle East war, high oil prices are expected to persist long-term, making it difficult to expect the same method of recovering unpaid amounts as before. Without rate hikes, KOGAS explains, the result will be 'increase in unpaid amounts → increase in borrowings → deterioration of financial structure → downgrade of KOGAS credit rating → increase in interest expenses → additional factors for rate hikes → increased burden on future generations.'

◆Below-cost electricity and gas weaken incentives for energy saving

Supplying electricity and gas below cost also reduces consumers' incentives to reduce energy consumption. A KOGAS official expressed concern, "Rates significantly lower than international market prices encourage unnecessary energy overconsumption and increase expensive energy imports, leading to a deterioration of the national current account balance." In fact, energy import costs surged 70% from $112.4 billion in 2021 to $190.8 billion in 2022. Because of this, South Korea recorded a record trade deficit of $47.5 billion in 2022. According to KEPCO, South Korea's energy self-sufficiency rate is only 18%, but due to prolonged low rates, electricity consumption ranks among the highest globally, while energy efficiency is among the lowest. A KEPCO official emphasized, "To improve domestic power consumption inefficiency and solve electricity overconsumption, the first step is to normalize electricity rates to restore the price signal function."

If KEPCO and KOGAS continue to operate at a deficit, stable power supply will become difficult, and the power industry ecosystem itself may collapse. The power industry is characterized by proactively building facilities expected to be needed in the future and recovering investments over a long period. According to the draft of the 11th Basic Plan for Electricity Supply and Demand (Electricity Basic Plan 2024?2038) released by the government at the end of May this year, the maximum power demand in 2038 is expected to be 128.9 GW, an increase of 30.6 GW compared to last year's peak demand of 98.3 GW. This is due to increased electrification demand centered on data centers and industrial sectors, driven by the expansion of the semiconductor industry and artificial intelligence (AI). Large-scale investments are needed to secure the necessary facilities in a timely manner.

However, KEPCO, which is currently struggling to repay debt, cannot avoid reducing facility investments. Reduced facility investments will eventually lead to a decrease in orders for power equipment and construction, raising concerns about contraction in related industries. In the long term, this could weaken the competitiveness of the power industry and negatively affect stable power supply. Power outages are already increasing. According to KEPCO, the number of power outages last year was 1,046, a 12.1% (113 cases) increase from 933 in 2022. KEPCO reduced its investment in transmission and distribution reinforcement from 2.5579 trillion won in 2021 to 2.4295 trillion won last year.

The deterioration of KOGAS's financial condition could also lead to more expensive liquefied natural gas (LNG) imports. A KOGAS official said, "The worsened financial condition of KOGAS, including a high debt ratio, reduces its bargaining power in price negotiations with LNG sellers, raising LNG procurement costs and increasing the burden on the public. If a global energy crisis like that in 2022 recurs and LNG prices soar again, the possibility of KOGAS being unable to pay for gas cannot be ruled out."