KEPCO faces challenges in raising funds as power bill increase delayed

Korea Electric Power Corp. building [Photo by Han Joo-hyung]

Pressure is mounting on Korea Electric Power Corp. due to the South Korean government’s decision to delay raising energy bills that was planned in the second quarter.

The power supply monopoly is already facing a significant loss and if electricity fees are not increased, KEPCO may find it legally difficult to issue additional corporate bonds for future power purchases.

KEPCO purchases electricity from multiple generators based on the cost of producing 1 kilowatt hour of electricity, which has soared due to the prolonged war between Russia and Ukraine as well as disruptions in the global energy supply chain.

KEPCO recorded its worst operating loss of 32.65 trillion won ($24.73 billion) last year and is expected to narrow to 9.88 trillion won, according to market tracker FnGuide.

“As KEPCO continues to lose money, it is inevitable to raise electricity bills,” said Jerng Dong-wook, an energy systems engineering professor at Chung-Ang University. “To minimize the impact on low-income families and small enterprises, bills should be increased proportionally to power consumption.”

If KEPCO incurs a loss of over 5 trillion won this year, it will exceed the limit on corporate bond issuance as stipulated by the KEPCO Act. In the worst-case scenario, the state-owned company may not be able to issue bonds, making it difficult to pay for power purchases, equipment and various construction projects, which could bring a crisis to the entire power industry in Korea.

KEPCO currently raises funds for power purchases by selling bonds each month because the cost recovery rate from electricity bills is only around 70 percent. If investment in transmission and distribution networks, which is around 6 trillion won to 7 trillion won per year, stagnates and the electricity from power plants cannot be sent to customers, power plants may restrict their power output, leading to potential vulnerability in the nation’s power grid.

The bigger problem is that if the hike in energy bills is delayed, KEPCO will have to increase the size of its bond sales, which could cause turmoil in the bond market.

An excessive bond issuance by KEPCO can act as a confounding factor in the local debt market, eroding bond demand and driving up interest rates that could make it difficult for other companies to raise funds, said a market observer.

KEPCO bonds accounted for 37.2 trillion won, or 4.8 percent of the total bond issuance last year, and they already reached 2.6 percent in the first quarter of this year. Interest on KEPCO’s debt also rose to 5.8 percent in October from 1.6 percent in June 2021 before falling to 4.3 percent last month.