[Why&Next] Will Electricity Prices Rise in Q4? The Key Factor Is the 'Neutdewi'

The government is conducting final negotiations on the timing and extent of electricity rate hikes ahead of the fourth quarter this year. While the government acknowledges that a rate increase is inevitable considering the financial situation of Korea Electric Power Corporation (KEPCO), it remains cautious due to high cooling demand caused by the lingering heat. Ultimately, how long the late heatwave lasts is expected to be a key variable in deciding the timing of the electricity rate increase.

According to the Ministry of Trade, Industry and Energy and the power industry on the 20th, KEPCO will announce the fuel cost adjustment unit price for the fourth quarter on the 23rd. Electricity rates consist of a basic charge, electricity consumption charge (standard fuel cost), climate environment charge, and fuel cost adjustment charge. The adjustment charge is calculated by multiplying the adjustment unit price announced by KEPCO this time by the amount of electricity used. The adjustment unit price is determined by reflecting the changes in fuel costs such as bituminous coal and liquefied natural gas (LNG), which are the production costs of electricity, over the three months prior to the relevant quarter.

KEPCO must submit the adjustment unit price to the Ministry of Trade, Industry and Energy by the 16th of the last month of each quarter, but this month it was submitted on the 19th due to the Chuseok holiday. The Ministry of Trade, Industry and Energy, based on the adjustment unit price submitted by KEPCO, holds discussions with the Ministry of Economy and Finance, which oversees inflation, and then the Electricity Committee under the Ministry of Trade, Industry and Energy makes the final decision on electricity rates.

Residential electricity rates have been frozen for five consecutive quarters from the third quarter of last year to the third quarter of this year. This was a measure to alleviate the burden on the general households and self-employed, who are part of the low-income economy, due to high inflation. The government also announced in the '2024 Economic Policy Direction' released earlier this year that public utility rates would be kept frozen in the first half of the year.

As electricity rates did not properly reflect production costs, KEPCO's debt rapidly accumulated. The debt, which was 108.8833 trillion won in 2014, surged by 93.3736 trillion won to 202.4502 trillion won last year. KEPCO posted an operating profit surplus of 2.5 trillion won in the first half of this year, but total debt increased to 202.8905 trillion won. This is a consequence of the rapid increase in total debt over a short period, which also increased interest burdens. KEPCO spent 2.28 trillion won on interest expenses in the first half of this year alone.

KEPCO President Kim Dong-cheol, who took office in September last year, appealed for normalization of electricity rates, saying, "The company’s survival is being questioned due to an unprecedented financial crisis." At a recent press conference, he reiterated the need for electricity rate hikes, stating, "Over the past two years, before normalizing electricity rates, KEPCO has done everything it can, including cost reduction, workforce downsizing, voluntary retirement, and wage sacrifices."

The government also agrees that electricity rate hikes are necessary to resolve KEPCO’s massive debt. Last month, Minister of Trade, Industry and Energy Ahn Deok-geun clarified the policy of raising electricity rates, saying it is a matter of timing. He added, "First, the heatwave must pass, so it is difficult to raise electricity rates immediately, but once this situation passes, we will try to adjust the timing as much as possible to normalize electricity rates." The key to the timing of the electricity rate hike is when the still-persistent late heatwave will subside.

Anduk Geun, Minister of Trade, Industry and Energy. (File photo)

According to the Korea Meteorological Administration, the heatwave that lasted through the Chuseok holiday is expected to ease after nationwide rain this weekend. However, daytime temperatures after the 23rd are expected to remain high at 22?30 degrees Celsius, above the average (maximum temperature 23?26 degrees Celsius).

If the late heatwave continues, the timing of the electricity rate hike may be delayed. Although the fuel cost adjustment unit price applicable from the fourth quarter will be announced on the 23rd, other components of electricity rates, such as the electricity consumption charge, can be separately adjusted and announced by the government as needed. When residential electricity rates were raised in the second quarter of last year, the increase was implemented in mid-May, not April.

An official from the Ministry of Trade, Industry and Energy said, "The fuel cost adjustment charge is one component that mechanically reflects changes in fuel costs in electricity rates," adding, "The fuel cost adjustment unit price and general electricity rate adjustments are separate. We plan to separately review the timing and extent of electricity rate hikes through consultations with related ministries, considering KEPCO’s financial situation and inflation."