No Competition, Only Inefficiency... The Conclusion of 25 Years of Splitting Power Generation into Five Companies [Why&Next]

Under Energy Transition and Financial Pressure,
The Separated Generation Company System Loses Its 'Competitive Edge'

"It makes me wonder why Korea Electric Power Corporation's (KEPCO) power generation subsidiaries were split into five separate entities." (President Lee Jaemyung, during the Ministry of Climate, Energy and Environment's work briefing on the 17th)

"The plan was to separate power generation, sales, and transmission/distribution, and to privatize the generation companies as part of the power industry restructuring. However, a massive blackout in California at the time led to the realization that privatization might not be the best approach, so subsidiaries were created under KEPCO and the process was halted." (Lee Hoyoun, Second Vice Minister of the Ministry of Climate, Energy and Environment)

"All that happened was that we ended up with five CEOs for public enterprises. Did splitting KEPCO's power generation division into five subsidiaries actually create any competitive effect?" (President Lee)

"Because KEPCO is the sole purchaser of electricity, the competitive effect originally envisioned did not materialize." (Vice Minister Lee)

Following President Lee's remarks, the government is now considering the integration of the five major power generation public enterprises-Korea South-East Power, Korea Southern Power, Korea Midland Power, Korea Western Power, and Korea East-West Power. This puts the separation system, which has been maintained for over 20 years since the 2001 power industry restructuring, back under scrutiny. A full-scale policy review is underway to determine whether the separation structure, designed to introduce competition, remains valid in the current environment of energy transition and increasing financial burdens.

Wholesale Power Market: Plan to Foster Competition by Creating Multiple Sellers (Generators) and Buyers

The separation of power generation companies began with the 2001 restructuring of the power industry. At the time, the government determined that the vertically integrated monopoly structure-where KEPCO handled generation, transmission/distribution, and sales-was not conducive to improving efficiency. The goal was to introduce market competition by creating multiple sellers (generators) and buyers (retailers) in the wholesale power market (Korea Power Exchange), and to lower costs through price signals. To this end, six subsidiaries-Korea South-East Power, Korea Southern Power, Korea Midland Power, Korea Western Power, Korea East-West Power, and Korea Hydro & Nuclear Power-were established, along with the Korea Power Exchange. The system was changed so that KEPCO would purchase electricity from its generation subsidiaries and new private power producers through the wholesale market.

This was not a simple organizational split. Rather, it was the first step toward a market-friendly power industry structure, with generation and sales (distribution) designated as competitive sectors, and transmission as a natural monopoly. The next step was to split KEPCO's sales division, which handled both purchasing in the wholesale market and retail sales, into several entities. This would have allowed multiple retailers to compete in the retail market, enabling businesses and households-the end consumers-to purchase electricity at lower prices.

The ultimate goal of the generation subsidiary restructuring was clear: after establishing competition among the subsidiaries, the next step was to privatize the generation sector through a phased approach. In fact, the government internally considered the timing and method of selling off the generation subsidiaries.

Privatization of Generation Companies Halted Midway, Resulting in Redundancy and Inefficiency

The problem is that this restructuring was never fully completed. While the generation companies were separated, the split of KEPCO's sales division was abandoned, and the privatization of the generation sector was not pursued. The unified power market and single transmission/distribution network structure were also maintained. As a result, competition among the generation companies was institutionally limited, and the five generation companies became entrenched as subsidiaries under KEPCO.

For the past 20 years, the generation sector has remained in a transitional state, coexisting between a structure designed for competition and a reality where competition is restricted. Similar functions-such as power source development, fuel procurement, overseas business, and research and development (R&D)-have been duplicated across the companies, leading to increased costs and inefficiency. The competitive effects that justified the separation have not been clearly realized, according to accumulated assessments.

These structural issues in the power industry have resurfaced following the President's remarks during the work briefing. As President Lee questioned, the limitations of the separated generation company system have become even more pronounced with the acceleration of the energy transition. The simultaneous reduction of coal-fired power generation, increased price volatility of liquefied natural gas (LNG), and rising investments in renewable energy have all contributed to greater financial burdens for the power generation public enterprises. As of this year, the debt ratios of the major generation public enterprises are as follows: Korea South-East Power at 110.6%, Korea Southern Power at 121.5%, Korea East-West Power at 84.7%, Korea Western Power at 135.5%, and Korea Midland Power at 171.1%, indicating a significant financial strain.

Industry insiders also note that "although the companies were split to encourage competition, competition has been limited, and now even the benefits of economies of scale have been lost." The increase in redundant investments and management costs has become more apparent than the efficiency gains that were initially expected from the separation.

Meanwhile, in recent years, as industrial electricity rates have risen sharply, there has been a movement-especially in the petrochemical industry-to purchase electricity directly from generation companies rather than through KEPCO. In 2011, the Lee Myungbak administration allowed private power producers to operate in order to invigorate competition in the generation market, and now dozens of private generation companies are in operation.

Like the public generation companies, private power producers have also sold electricity to KEPCO. However, the Yoon Sukyeol administration has allowed large-scale electricity users to purchase power directly from generation companies, bypassing KEPCO. Thus, some competition has begun in the sales market as well.

Ambiguous Role of the Korea Power Exchange in the Power Trading Market

At the end of these discussions lies the issue of the Korea Power Exchange. The exchange was established to facilitate competition among generation subsidiaries, but as the limited-competition structure has become entrenched, its current role is seen as more of a management agency overseeing system operations and settlements, rather than a true market.

If the integration of the generation companies becomes a reality, the functions and status of the Korea Power Exchange will also inevitably need to be redefined. The next question will be how to justify a system designed for competition in a structure where competition does not function effectively. However, the opening of the direct power purchase market remains a variable.

Some argue that discussions on integrating the generation companies should not be interpreted as a simple negation or reversal of past separation policies. The separation at the time was a means chosen under the policy goal of introducing competition, whereas the current debate is a restructuring tailored to new policy environments of energy transition and supply stability, making its nature fundamentally different.

Future discussions on integration are likely to lead to a policy choice between operating the power industry with a focus on competition or redesigning it around public interest and stability. Depending on the direction the government chooses, not only the structure of the power generation public enterprises but also the overall structure of the power market is expected to change.