KEPCO faces renewed cost pressure from rebounding wholesale power prices

Korea Electric Power Corporation (KEPCO) headquarters in Naju, South Jeolla Province. [Courtesy of KEPCO]

Wholesale electricity prices in the power trading market for the purchase by Korea Electric Power Corporation (KEPCO) once again started to rebound last month. The recent uptick in international energy prices is raising concerns that the embattled utility may implement additional electricity rate hikes by the end of the year.

According to the Power Exchange on Sunday, the average settlement price for electricity in July stood at 145.6 won ($0.11) per kilowatt-hour (kWh). This represents a 15.5 percent rise compared to 126 won in June. Furthermore, the price has risen by 23.3 percent from May’s lowest point of 118 won. The average settlement price reflects the wholesale market price KEPCO pays for electricity from the exchange. After rising from 162 won in January to 165 won in February and 170 won in March, the price sharply dropped to 128 won in April and 118 won in May before reaching 126 won in June.

This trend closely correlates with international energy prices. While the Korea Gas Corporation’s unit price for natural gas for power generation averaged 147,134 won per gigacalorie (Gcal) in the first quarter, it dropped to 97,180 won in the second quarter. However, in the past month, it rebounded by 3.5 percent to 95,743 won, reflecting the recent surge in the Dubai crude price, which reached to $86 per barrel from around $75 in late June.

The increase in wholesale electricity prices is expected to lead to a decrease in KEPCO’s power sales margin. KEPCO had escaped a so-called “reverse margin” structure - purchasing electricity at high costs and selling it at lower rates - during May and June of this year, thanks to the series of electricity rate hikes since last year. Despite these hikes, KEPCO’s cumulative loss as of the end of June reached 47.5 trillion won.

With the potential reoccurrence of the reverse margin due to rising wholesale electricity prices, the pressure for additional electricity rate hikes is likely to intensify. Consequently, attention is focused on whether KEPCO will implement further rate hikes in the fourth quarter of this year. However, considering that the Yoon Suk Yeul administration has already raised electricity rates multiple times since its inception and with general elections approaching in April of next year, industry watchers believe that implementing additional rate hikes until the elections might be challenging.

Additionally, KEPCO’s performance in the third quarter is also a topic of interest.

“The distinct decrease in major energy prices in the first half of this year and an anticipated increase in nuclear power utilization suggest that KEPCO should have no trouble achieving an operating profit in the third quarter of this year,” said Song Yoo-rim, an analyst at Hanwha Investment & Securities.

However, if the upward trend in international energy prices continues through the second half of this year, coupled with the impact of a strong won, KEPCO’s performance next year might deteriorate.