While the South Korean government remains reluctant to raise electricity rates in the second quarter, the state-run Korea Electric Power Corp. (Kepco) announced it would take drastic cost-cutting and self-help measures.
“We will prepare and announce additional measures as soon as possible, including measures to slash labor costs, innovate organizations, support the vulnerable groups and improve public convenience,” Kepco CEO Chung Seung-il said in a statement Friday.
In the company’s first CEO statement over electricity bills, Chung asked the public to understand that eventual higher electricity rates were inevitable, citing the troubling situation Kepco faces.
With detailed plans to be announced later, Kepco said it would carry out projects to improve its financial soundness valued at over 20 trillion won ($15 trillion) before raising the electricity rates.
However, the possibility that Chung’s appeal to the public will work in the form of a rate hike seems slim at best. The Yoon Suk Yeol administration and the ruling People Power Party are hesitant to make a decision on the electricity rate adjustment, since a hike could worsen the public opinion and undercut their political standing ahead of the general election next year.
Any discussion by government officials on the electricity rates is unlikely to take place, as President Yoon is set to make a visit to the United States for a summit with US President Joe Biden, a crucial meetup that is expected to involve key bilateral issues. Officials in charge of energy policy are scheduled to accompany Yoon.
Despite the wide gap between purchase and sales prices of electricity, Kepco raised the rates by only minimal amounts last year. High inflation and economic slowdown were cited as reasons for such limited rate hikes.
As a result, Kepco’s operating loss reached a record 32.63 trillion won in 2022, alarming to policymakers about the need to tackle the issue seriously and raise rates to normalize the state-run utility firm’s financial status.
In the first quarter of this year, the electricity rate was raised by 13.1 won per kWh, the biggest hike in four decades, but Kepco and experts argued that more hikes are necessary.
But the government finds it tricky to push ahead with the rate hike since it involved a set of complicated issues. First, Kepco’s losses are largely affected by delayed rate hikes, but it has not helped itself enough. On the contrary, it created bewildering controversies that have prompted auditing by the Board of Audit and Inspection (BAI) and the Ministry of Trade, Industry and Energy.
The BAI is currently investigating Kepco’s operations to see whether it made erroneous management decisions. In particular, the BAI is focused on the allegation that Kepco employees had been engaged in solar energy businesses through the borrowed names of their families.
The hasty establishment of the country’s first energy-focused university, Korea Institute of Energy Technology (KENTECH) -- an election pledge espoused by former President Moon Jae-in -- is also in dispute. Aside from KENTECH, Moon’s nuclear energy phaseout policy reportedly forced Kepco to shoulder additional 25.8 trillion won in costs, according to a report by the National Assembly -- a revelation that is likely to keep disputes raging about Kepco’s woes.
Kepco spent 331.2 trillion won on KENTECH and subsidiaries since 2020. This year, Kepco and its affiliates plan to invest additional 158.8 billion won in KENTECH, raising the eyebrows of policymakers reviewing the company’s snowballing losses.
Kepco’s debt ratio jumped from 223 percent in 2021 to 459 percent in 2022. Unless the government opts for drastic rescue efforts as well as big rate hikes, Kepco’s operating loss is forecast to reach 12.6 trillion won this year. To avoid a liquidity crisis, Kepco has increased bond sales including the issuance of bonds worth 8 trillion won in the first quarter, which is feared to destabilize the domestic bond market.
The Yoon administration must seek a consensus from experts and the public before setting an optimal level and timing of electricity rate hikes. Delaying decisions for political reasons could worsen the situation. And Kepco has to implement drastic cost-cutting measures to persuade people about the need for rate hikes.
