Fuel cost adjustment rate frozen at +5 won per kWh since Q3 2022, when the Russia-Ukraine war sent energy prices surging; SMP breaks 150-won threshold seen as Kepco's loss line; every 10-won rise in the exchange rate costs Kepco 300 billion won in operating profit

Electric meters installed on the exterior wall of a building in Seoul. [Yonhap]
Electric meters installed on the exterior wall of a building in Seoul. [Yonhap]

South Korea will freeze electricity rates for the third quarter — covering July through September — at current levels starting next month. The decision comes despite Korea Electric Power Corporation's debt exceeding 200 trillion won (about $130 billion) and volatile international energy prices driven by the war in the Middle East. It reflects the government's concern about the burden on ordinary households and small business owners as summer cooling demand rises.

Korea Electric Power Corporation, known as Kepco, announced Monday that it would maintain the fuel cost adjustment rate for the third quarter at 5 won per kilowatt-hour, unchanged from the current level.

Electricity bills in South Korea consist of a basic charge, a power usage charge, a climate and environment charge, and a fuel cost adjustment charge. The fuel cost adjustment rate is the benchmark for the last component, which reflects short-term fluctuations in energy prices.

Kepco has kept the rate at its maximum of plus-5 won since the third quarter of 2022, when international energy prices surged following the outbreak of the Russia-Ukraine war, regardless of subsequent fuel cost movements.

With the fuel cost adjustment charge frozen at its current level and no changes planned to the basic charge, power usage charge, or climate and environment charge, overall electricity rates will remain unchanged in the third quarter.

However, pressure for a rate increase is growing despite the government's freeze stance.

The system marginal price — the wholesale electricity price that determines what Kepco pays power generators — has broken through the 150-won-per-kWh mark as fuel costs rise amid the prolonged war in the Middle East. The SMP is directly affected by changes in power generation fuel costs.

According to the Korea Power Exchange, the SMP for the mainland stood at 152.67 won per kWh as of 5 p.m. on June 2, surpassing the 150-won threshold widely regarded as the level at which Kepco's profitability deteriorates.

The government estimates that Kepco could slip into deficit if the annual average SMP reaches around 146 won.

The monthly average SMP has risen consistently, climbing from 90.43 won per kWh in December last year to 103.54 won in January, 108.52 won in February, 110.03 won in March, 118.94 won in April and 121.91 won in May.

The SMP surge is largely driven by a sharp rise in liquefied natural gas prices. According to Korea Gas Corporation, the wholesale price of natural gas for power generation in June reached 19,379 won per gigajoule, up 7.9 percent from the previous month. That follows a 7.5 percent increase in May, marking two consecutive months of gains exceeding 7 percent. The June price is more than 20 percent above the March level of 16,048 won per gigajoule, before the Middle East war escalated.

A persistently high exchange rate adds to the pressure. With the won-dollar rate lingering above 1,500 won, the cost of LNG imports rises while the won-denominated interest burden on Kepco's dollar-denominated debt grows. Kepco estimates that every 10-won rise in the exchange rate worsens its operating profit by around 300 billion won. The company's total debt stands at around 206 trillion won, with daily interest costs alone reaching 11.9 billion won.

Kepco said the government had notified it that the third-quarter fuel cost adjustment rate would remain at plus-5 won per kWh — the same as in the second quarter — "taking into account Kepco's financial situation and the significant amount of unadjusted fuel cost charges." The company added that it had also been instructed to "thoroughly carry out self-rescue efforts toward management normalization."


oskymoon@heraldcorp.com