KEPCO's operating profit is expected to surge this year as industrial electricity rates rise and the prices of materials and supplies for power generation fall. In response, industry groups are calling for lower rates, saying KEPCO's improved cost competitiveness makes it more likely to sustain its earnings recovery.
According to FnGuide on the 30th, KEPCO's fourth-quarter revenue is estimated at 23.9248 trillion won and operating profit at 3.27 trillion won. Full-year operating profit is forecast to rise 77% on-year to 14.8309 trillion won. KEPCO struggled with losses for three straight years starting in 2021 but returned to profit last year.
The biggest driver of KEPCO's improving results since last year has been the hike in industrial electricity rates. According to KEPCO, as of the first half of this year, the industrial electricity rate was 179.23 won per kWh (kilowatt-hour). The Korea Enterprises Federation previously said the average unit price of industrial electricity rates rose 75.8% over the three years from 2022 to last year.
Although the Ministry of Trade, Industry and Resources decided on the 22nd to freeze next year's electricity rates, KEPCO is still expected to continue its earnings recovery. That is because lower costs are being maintained as prices of key materials and supplies needed for power generation decline. FnGuide estimates KEPCO's operating profit at 17 trillion won next year and 19 trillion won in 2027.
KB Securities researcher Jeong Hye-jeong said, "With industrial electricity rates frozen since Oct. last year, the unit price of power sales will rise only 0.2% on-year in the fourth quarter," and added, "By contrast, the unit cost of power procurement will fall 7.7% due to lower materials and supplies prices, which is expected to significantly increase KEPCO's revenue."
Despite the decision to freeze next year's electricity rates, actual bills are likely to rise slightly. That is because KEPCO proposed a fuel cost adjustment rate of +5 won per kWh for the first quarter.
Electricity bills consist of a basic charge, energy charge, climate and environment charge, and fuel cost adjustment charge. The fuel cost adjustment rate is set within a range of ±5 won per kWh after taking into account changes over the past three months in prices of materials and supplies such as bituminous coal and liquefied natural gas (LNG).
KEPCO's rate calculation indicates the required fuel cost adjustment rate for the first quarter of next year is -13.3 won per kWh. This means there is a factor for a cut as materials and supplies prices have fallen. However, regardless of the power procurement cost, KEPCO has applied the ceiling of +5 won per kWh for the fuel cost adjustment rate since the third quarter of 2022.
Industry groups argue that a rate adjustment is needed now that there is room to cut electricity prices. Industrial electricity in Korea, at won per kWh, is relatively expensive compared with China (127 won) and the United States (116 won), which they say inevitably erodes production competitiveness. High electricity costs are also cited as a reason some corporations are pursuing plans to transfer factories overseas.
Yu Seung-hun, a professor in the Department of Future Energy Convergence at Seoul National University of Science and Technology, said, "Key national industries have recently been struggling due to weakening cost competitiveness," and added, "Even temporarily, exempting the Electric Power Industry Infrastructure Fund (currently 2.7% of the electricity bill) or lowering industrial electricity rates would enable competition with the United States and China."
However, many in the power generation industry expect that KEPCO will find it hard to readily cut industrial rates despite the recent improvement in results. They cite the still-weak financial structure due to years of accumulated losses. KEPCO posted a record loss as the system marginal price (SMP) soared amid the 2022 energy price spike, and as of the third quarter this year, its liability exceeded 205 trillion won.