The author is an analyst at KB Securities. She can be contacted at [email protected] — Ed.
The fuel cost adjustment rate for 3Q22 electricity bills will be increased by 5 KRW/kwh
– On June 27, KEPCO and the Ministry of Commerce, Industry and Energy (MOTIE) decided to increase the quarterly fuel cost adjustment rate for 3Q22 electricity bills by 5 KRW /kwh. During 1H22, the government did not adjust the rate to support the stabilization of the cost of living in a context of high inflation. However, growing concerns about KEPCO’s profitability and financial health amid mounting losses and soaring international energy prices appear to have made the rate hike necessary.
— KEPCO requested MOTIE to raise the quarterly and annual adjustment rate ceiling to KRW 5/kwh and KRW 10/kwh, respectively. MOTIE accepted the quarterly cap (KRW3/kwh→KRW5/kwh) but kept the annual cap at KRW5/kwh.
Positive move, but still interim measure
— With the increase in tariffs, the unit selling price of electricity in 3Q22 should increase by 10.5% year-on-year (112.7 KRW/kwh in 3Q21→124.6 KRW/kwh in 3Q22E). If the adjustment rate is maintained in 4Q22, KEPCO’s unit electricity selling price should increase by 15.3% year-on-year over the quarter (109.6 KRW/kwh in 4Q21→126.3 KRW/ kWh at 4T22E); this reflects an increase of 4.9 KRW/kwh in the base cost of fuel to be applied to electricity bills in 2Q22 and 4Q22 as well as an increase of 2 KRW/kwh in the climate/environment rate to be applied from 2T22. If the fuel cost adjustment rate remains unchanged in 4Q22, 2H22 revenue is expected to increase by KRW 1.4 billion.
— The increase in the cost of fuel should clearly exceed the growth in the unit selling price of electricity over the same period. The 1H22 avg. the international price of coal, which affects fuel costs in 2H22, amounts to 309.9 USD/mt (+223.32% year-on-year). Moreover, the average of 2Q22. The price of crude in Dubai reached 109.4 USD/bbl (+64.9% YoY).
— The growth in fuel costs through 3Q22 could lead to an increase in electricity tariffs of 33.6 KRW/kwh, more than six times more than the increase in tariffs of 5 KRW/kwh.
Despite KEPCO’s efforts to reduce losses, electricity rates are unlikely to normalize
— For 2022, we estimate the operating loss at 25 tn KRW. To reduce losses, KEPCO plans to secure KRW6tn through the disposal of subsidiary interests and domestic / foreign real estate properties as well as to reduce costs. In addition, he asked MOTIE to recalculate electricity tariffs based on overall costs and to introduce an accounts receivable system. Meanwhile, MOTIE plans to introduce an SMP cap, which could come as early as August.
— The main obstacle to such efforts is the rapid acceleration of domestic inflation. Consumer prices rose 5.4% in May, and Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho expects consumer prices to climb 6% this summer. While KEPCO requires an electricity tariff hike above KRW 33.6/kwh to fully reverse the losses, there is unlikely to be a large electricity tariff hike or normalization of tariffs in a foreseeable future.