The government will raise electricity rates in stages from April this year. As electricity rates are expected to continue to rise going forward, the trend of providing price signals is expected to be strengthened. However, it is expected that this will remain a task in the future as the burden of stores increases due to concerns about inflation, which may raise complaints from the public.
First of all, the government’s measures are expected to improve the performance of KEPCO, which is expected to lose trillions of dollars since it was unable to reflect the soaring cost in the price last year. There are also voices that the realization of electricity rates reflecting raw material prices is inevitable in order to realize carbon neutrality amid the global climate change response.
◆KEPCO, cost recovery rate of 85.9% last year… Is rate realization inevitable?
According to KEPCO’s ‘2021 electricity price cost information’ on the 2nd, the overall cost recovery rate for electricity this year was about 85.9%. This is a value obtained by dividing total revenue (57,814.8 billion won) by total cost (67,328 billion won), and is an indicator of how much KEPCO recovered from sales revenue for the cost of generating and supplying electricity. In other words, if this figure exceeds 100%, it means that the business has been left over.
The cost recovery rates in 2018 (94.1%) and 2019 (93.1%) did not exceed 100%, and in 2020 (101.3%) exceeded 100% thanks to low oil prices. Last year, the cost recovery rate did not exceed 100% as the cost of purchasing electricity and fuel, which accounted for most of the cost, increased due to the rise in oil prices and energy prices.
The cost of electricity purchased this year was 56,581.1 billion won, an increase of about 24.1% compared to last year (45.5757 trillion won). In the beginning of last year, the ‘fuel cost indexing system’ was introduced, which reflects the increase in power generation fuel costs such as oil, liquefied natural gas (LNG), and coal in the rate. ) was frozen at -3 won per person.
◆Reinforcement of ‘rate costism’ in the new year… KEPCO’s financial structure improvement outlook
In order to recover the price function and promote market innovation, the government is planning to promote the gradual settlement of a ‘cost-based rate system’ from the new year. Previously, in the fourth quarter of last year, the adjusted unit price for fuel cost recovered to 0 won per kWh, suppressing the increase in electricity rates. In the first quarter of the new year, the adjusted unit price for electricity rates and fuel costs was also postponed due to concerns about inflation.
KEPCO decided to raise the standard fuel cost by 4.9 won per kWh, respectively, and a total of 9.8 won per kWh on an annual basis, twice, in April and October of this year. The climate and environment rate will also increase by 2.0 won per kWh from April. First of all, KEPCO’s financial structure, which is expected to lose 4 trillion won in annual losses last year, is expected to improve.
However, since the electricity rate increase was decided in April, right after the presidential election in March, criticism that the policy and political influence on public rates is large still remains. The price signal and policy credibility are weakening due to the breakdown of principles in the decision of utility rates.
Fears of rising prices and household burden due to electricity price hike remain
There are also concerns that an increase in electricity rates may affect inflation and increase the burden on households. The backlash resulting from this is obvious.
According to the KEPCO Research Institute, if the electricity rate rises by 1%, the consumer price rises by 0.017%p and the producer price rises by 0.031%p. As of 2017, it ranked 6th among the top consumer price-weighted items. There are only six items with a higher consumer price weight than electricity rates: jeonse, monthly rent, mobile phone bills, gasoline, and apartment house management costs. The cost share of electricity rates in the manufacturing industry is 1.65% on average, and a 1% increase in electricity rates only affects manufacturing costs by 0.0165%.
Increasing pressure to raise electricity rates due to carbon neutrality is also an unavoidable situation. This is because climate and environmental costs, which constitute electricity rates, increase as the ratio of renewable energy supply obligation (RPS) increases. The RPS ratio, which is currently 9% of the total power generation, will increase to 25% in 2026. Large-scale power generation companies that need to procure a certain part of their total power generation with renewable energy purchase a Renewable Energy Certificate (REC) to match the RPS ratio. KEPCO is subsidizing the cost of renewable energy production and REC purchases for power generation companies.
Due to the COVID-19 outbreak, more people are working from home, and the burden of electricity bills on households has increased. Although factors are accumulating both internally and externally, the government has no choice but to worry as there is a fear of public backlash.
According to a report recently published by the National Assembly Legislative Investigation Service, ‘Status and Implications of Electricity Consumption by Industry in Korea during the Corona 19 Pandemic,’ household electricity use increased year-on-year for two consecutive years in the past year and last year. The average monthly consumption by household consumers (consumers per meter) for March-October 2020 and March-October 2021 was calculated as 0.450 megawatt hour (MWh) and 0.469 MWh, respectively.
This is higher than the average monthly consumption of 0.429MWh in the same period in 2019, before COVID-19. The report analyzed that “the increase in household electricity use may have had some impact on the disposable income of the low-income class.”
◆Government insisting on ‘freeze’, ‘white flag’ at supplier loss
Some are of the view that providing distorted price signals to consumers should be avoided in a situation where there is a lot of pressure to increase electricity rates.
Low electricity rates are positive for prices, production costs, and corporate competitiveness. However, there are also negative aspects such as environmental pollution, continued high consumption industrial structure, and restrictions on energy efficiency improvement. In particular, even if the current generation does not pay the cost, it is eventually passed on to the next generation. This is also the background to the fact that the government could not tolerate the loss of suppliers due to lower-cost electricity rates as it is, and eventually turned to an increase trend.
Yang-Hoon Son, a professor at Incheon National University, said, “The government’s argument that the government will not raise electricity rates, which can naturally rise, has reached its limit.
Therefore, improving the public’s acceptance of power facilities such as renewable energy and system facilities is considered the key. Many critics in the industry point out that the government and the National Assembly should strengthen compensation and incentives related to facility construction, publicize the cost of implementing carbon neutrality, and establish and institutionalize cost-sharing principles.
KEPCO also plans to form a consensus on carbon-neutral costs and lead discussions on rational sharing measures. In this regard, we plan to conduct joint research on the desirable structure and governance of the electric power industry in the carbon-neutral era. The plan is to lead the role of electric power group companies in relation to energy policy and market changes, to prepare rational alternatives, and to lead preemptive discussions.
A KEPCO official said, “We will continue to publicize the need to reflect carbon-neutral costs in electricity rates through various channels.”
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