KEPCO has frozen electricity bills that will be applied from April to June. If the fuel cost index applied from January this year was applied, it had to raise 2.8 won per KWh from the first quarter, but the government stepped up and prevented the price increase. The government explained that this is a judgment in consideration of the fact that an increase in electricity rates could lead to inflationary pressure. There is also an interpretation that it is a political decision to prevent the separation of public sentiment ahead of the re-election on the 7th of next month. The fact that KEPCO succeeded in turning into a surplus with an operating profit of 410 trillion won last year contributed to the freezing of electricity bills. The government’s plan for a soft landing of the fuel cost indexing system so that oil prices can be immediately reflected in fuel costs has been distorted as it faces the ambush of rising international oil prices.
Why did you introduce fuel cost indexing system?
Since the inauguration of the Moon Jae-in administration, KEPCO’s deficit has accumulated. This is because, as the government promoted the’de-nuclear and de-coal’ policy, it reduced nuclear power plants and coal power plants, which cost less power generation, and increased power generation and new renewable energy, liquefied natural gas (LNG), which has a high power generation cost. In particular, LNG was directly affected by oil prices and became the main culprit in the deterioration of KEPCO’s financial soundness. Accordingly, the government and KEPCO announced in December of last year that from this year, they will introduce a fuel cost indexing system that calculates the cost of electricity by linking it to fuel costs.
The existing rate system could not reflect changes in cost such as oil prices in a timely manner. This is why electricity rates have not increased since November 2013. Also, the costs related to climate change were not clear. The fuel cost indexing system is aimed at improving this point, separating the fuel cost adjustment fee from the climate environment fee and reflecting it in the electricity price.
KEPCO recorded a deficit of 2 trillion won for two consecutive years in 2018 and 2019. This is the effect of the government’s energy conversion policy. As LNG and new renewable energy increased, KEPCO’s electricity purchase cost increased significantly. In 2016, before the inauguration of the government, KEPCO’s electricity purchase cost from power generation companies was 41.71 trillion won. However, in 2018, after two years, the cost of electricity purchase soared to 49,915.8 billion won. This had a big impact when the LNG power transaction volume increased from 118552 GWh to 15,473 GWh during the same period. This is because the LNG power purchase cost alone increased by about 3.5 trillion won during this period. Moreover, due to the government’s energy conversion policy, power generation costs will inevitably increase after 2024 due to an increase in the proportion of LNG. This means that KEPCO losses can be snowballed.
The government has made a choice to create a pricing structure that reflects the increase in power generation costs in electricity bills. The key was the fuel cost indexing system. The new fee system calculates the fuel cost adjustment unit price by multiplying the difference between the standard fuel cost (average fuel cost for the previous year) and the actual fuel cost (average fuel cost for the previous three months) by the amount of power used. The fuel cost adjustment unit price, which is the basis of the electricity bill, is reflected in three-month increments after a one-month notice. Changes in fuel costs are periodically reflected in electricity bills. This also implies that it will reduce the likelihood of consumers predicting the adjustment of electricity rates. This means that if the oil price rises, it can induce consumers to reduce their energy use accordingly.
In particular, the government judged this year as the right time to implement the non-fuel interlocking system. This means that it has decided that the system could be introduced while preventing an increase in electricity rates that could lead to price resistance. Even at the time of policy announcement, energy prices were showing a downward stabilization due to a decrease in demand due to the Corona 19 epidemic. So, when the government announced the fuel non-linkage system, it even suggested a plan to reduce the burden of electricity bills of 1 trillion won in the first half by reducing 3 won per ㎾h in the first quarter and 2 won per ㎾h in the second quarter.
However, since the end of January this year, oil prices have changed sharply, and the government’s plan to soften the fuel cost index by lowering electricity prices has also been distorted. For the second quarter, electricity rates will be raised or lowered based on how high or low the average fuel cost was from December 2020 to February this year, based on the average fuel cost from December 2019 to November last year. The government estimated fuel costs in the second quarter of this year in December of last year, and predicted that the oil price in the first half of this year will remain at around $44 per barrel. In the second half of the year, the government’s judgment was that the increase in electricity prices would be possible only after next year, as it remained at the $48 per barrel level.
However, based on Dubai oil, the oil price, which was around 49 dollars a barrel at the end of last year, soared to the 60 dollar level at the end of February. When calculating the electricity bill for the second quarter based on this, it had to be increased by 2.8 won per kwh compared to the first quarter. It was a situation in which electricity rates were inevitably increased to the level at the end of last year, offsetting the reduction in electricity bills in the first quarter. However, the government decided to freeze electricity bills for the second quarter.
Will the fuel cost index be maintained?
The government excluded the effects of oil and LNG price hikes from the process of calculating electricity bills in the second quarter, and put it on the basis of a clause stating that if an exceptional situation occurs, such as a sharp increase in oil prices within a short period of time, the government may withhold the rate adjustment. The recent rise in oil prices is a temporary situation caused by the cold wave in the US, so it will not be immediately reflected in electricity bills.
Above all, the explanation is that it reflects the concern about rising inflation, both domestically and internationally. This is because if the price of agricultural products such as leeks rises, and energy prices rise, the burden of costs on the entire industry can be increased. The increase in electricity prices is a factor that can affect all sectors of the industry, from manufacturing to service. On the 19th, the 1st Vice Minister of the Ministry of Equipment Kim Yong-beom said, “We will stably manage utility bills in the second quarter so that the impact on consumer prices will be minimized.”
It was also factored in that it made about 4.1 trillion won in operating profit last year as the low oil price situation continued due to Corona 19. The fuel cost of power generation subsidiaries decreased by 3.5 trillion won compared to the previous year due to falling oil and coal prices. It is said that KEPCO considered the fact that the physical strength to withstand the freezing of electricity bills has been stocked up.
There is also an interpretation that this fuel cost freeze is a political judgment by the government. After the introduction of the fuel cost indexing system, they are feeling a burden when the factor of raising electricity rates faster than expected. It is interpreted that it would have been difficult to decide even an increase in electricity bills, which had a significant impact on people’s lives, in a situation where’table prices’ such as agricultural products surged ahead of the 4·7 election by the mayors of Seoul and Busan. He said he was worried about the public sentiment that would be caused by an increase in electricity bills, which directly affects the lives of ordinary people. The government promoted the introduction of the fuel cost indexing system in 2011, but was not able to speed it up, but gave up on reasons such as price stability before the 2014 local elections.
If the fuel cost index works well, fuel cost hikes will be inevitable from 3Q. Bank of America and JP Morgan predict that oil prices could rise to the level of 100 dollars per barrel within the year. The Wall Street Journal (WSJ) also recently analyzed that “oil prices will continue to rise for the time being as demand for oil, which showed a recovery mainly in China and India at the end of last year, moves to developed countries this year.”
When oil prices rise, other energy prices, such as LNG, which are linked to them, are bound to rise as well. The fuel-free interlocking system is a structure that reflects such an increase in energy prices in electricity prices. However, the width of the impression is limited. It was not possible to raise or lower the price by more than 3 won per ㎾h compared to the previous quarter, and it also prevented an increase or cut in excess of 5 won per ㎾h compared to the previous year’s average fuel cost. Electricity rate hikes in 3Q are expected to rise to 3 won per ㎾h from 2Q, and 2 or 3 won in 4Q. Assuming the maximum increase, the electricity bill for a household of 4 people using an average of 350㎾h per month could increase by 2100 won compared to the first and second quarters to 56,100 won per month at the end of this year. However, as inflation pressure is expected to be high in the second half of the year, there is a possibility that the government will again delay electricity price hikes.
Because of this, inside and outside KEPCO, there are concerns about the situation in which the government’s right to reserve rate adjustments is triggered from time to time. This is from the prospect that the implementation of the fuel non-linkage system could be neutralized once again. Korea Investment & Securities Research Institute Choi Woon said, “This decision on electricity rates was an important inflection point to prove whether the non-fuel-linked rate system actually works. The government will freeze electricity rates, and the market’s distrust of the government and the non-fuel-linked system will continue.”
Reporter Jihoon Lee [email protected]