Piecemeal rate hikes unlikely to fix Kepco’s structural problem; new energy policy needed
South Korea’s electricity rate is now set to rise by 5 won (0.4 cent) per kWh, starting from July, to grapple with soaring fuel costs and snowballing losses at state-run utility Korea Electric Power Corp.
But it is doubtful whether this type of intermittent electricity rate hike could solve the fundamental energy problem facing the nation, much less the long-distorted pricing structure of Kepco. At the same time, the rate increase is feared to accelerate the buildup of inflationary pressure in a way that will make it harder for policymakers to tame consumer prices.
The rate hike will place an additional burden on both households and companies beleaguered by a fast-paced rise in prices across the board. Under the new pricing plan, a household with four members will see an increase of 1,535 won per month in the electricity bill. That is a 4.3 percent increase from the current rate, but 11.6 percent, or 4,574 won per month, from a year earlier.
Adding to the price pressure is the planned 7 percent hike in the gas rate. Compared to a year earlier, gas bills will jump by 19.5 percent from July. Other public utility fees are expected to go up.
Since utility rate increases tend to have a strong impact on consumer prices broadly, the Finance Ministry was extremely reluctant to raise electricity rates. But it has been speculated that the Yoon Suk-yeol administration will be pushed to allow Kepco to increase the rate from July, given the widening mismatch between production costs and electricity rates, especially after Russia invaded Ukraine in February this year.
The logic is that Kepco’s mounting losses are untenable. The state-run firm suffered a massive operating loss of 7.8 trillion won in the first quarter of this year. It recorded a total of 5.9 trillion won in operating loss last year.
During the previous administration under President Moon Jae-in, Kepco’s debt climbed by 34 trillion won as he pushed the controversial nuclear power phase-out policy that resulted in higher production costs while stubbornly freezing rates.
The Yoon administration may feel the blame it would get from the rate hike is unfair since the previous administration artificially passed the burden. Nonetheless, the dreadful prospect of a 6 percent inflation is looming large as a result of the higher electricity rate as Finance Minister Choo Kyung-ho earlier warned for the June-August period. The country’s consumer prices jumped 5.4 percent on-year in May, the fastest rise in almost 14 years.
A closer look at the impact of electricity rate hike, however, suggests that Kepco’s woes will not be solved with the latest move. The newest rate hike would bring in a fresh injection of 1.3 trillion won, but the amount is far from sufficient to reverse the starkly bleak outlook of Kepco’s losses reaching 20 trillion won this year. To overhaul Kepco’s loss-making pricing structure, a far bigger rate hike is needed, but such a move is now unthinkable as the nation is confronting high inflation.
The Yoon administration, for all the present troubles, should take a forward-looking perspective to find a long-term solution for Kepco in particular and the country’s energy policy in general.
Placing a cap on what is called the “system marginal price,” the price Kepco pays when purchasing power from power generation companies, can be a starting point to minimize the price-to-production gap.
Kepco is also under criticism for its poor management, widespread inefficiency and bloated wages. It is questionable whether the government should continue to shore up Kepco with taxpayer money, even with its executives failing to take necessary self-help measures.
As the world is now faced with a deepening energy crisis, the government is urged to rethink the way it handles electricity pricing and map out a sustainable energy policy.
By Korea Herald (email@example.com