Global liquefied natural gas (LNG) prices have surged again, intensifying pressure to raise electricity rates. In the energy industry, analysts say the likelihood has grown that the government will implement its defense measure, the system marginal price (SMP) cap.
SMP refers to the price at which Korea Electric Power Corporation purchases electricity from power plants. SMP is set based on the fuel cost of the most expensive power source in each time slot, and LNG has the highest fuel cost. When LNG fuel costs jump and SMP rises, KEPCO must buy even lower-cost renewable power at the same price, leading to pressure to raise electricity rates.
According to market research firm Trading Economics on the 22nd, JKM (Japan Korea Marker), the spot price indicator for LNG in Northeast Asia, soared into the $21 range per MMBtu (a unit of heat) as of the 21st. Prices that had stabilized to the $16 level early this month on cease-fire talks between the United States and Iran jumped more than 30% on the back of military clashes. It is close to the record high ($22) on Mar. 19, when the Middle East crisis was escalating into a full-scale war.
International LNG prices are reflected in the domestic power market with a lag of about two months due to LNG purchasing, maritime transport, customs clearance, and supply unit cost calculation. With the rise in LNG fuel costs being reflected sequentially and winter approaching, when power consumption is high, SMP in the fourth quarter is expected to climb much more steeply.
Hwang Sung-hyun, an analyst at Eugene Investment & Securities, said in a report published after Korea Electric Power Corporation's first-quarter earnings announcement in May, "Whether the SMP cap will be triggered will likely be decided after July, when SMP actually rises, and we see a high likelihood of adoption."
When SMP rises, pressure to raise electricity rates also grows. The problem is that SMP is currently rising fast and has reached KEPCO's break-even threshold. According to the Korea Power Exchange on this day, the SMP weighted average for electricity transaction on the mainland recorded 140.07 won per kWh. The government sees KEPCO as running a loss if the average annual SMP price exceeds 146 won per kWh.
As pressure to raise electricity rates is expected, the energy industry predicts the government will implement the SMP cap in the fourth quarter. The SMP cap sets an upper limit so that SMP cannot rise above a certain level, forcibly lowering KEPCO's purchase expense.
When international fuel prices rose during the Russia-Ukraine war in 2022 and SMP, which had been in the 120-won range per kWh, spiked above 250 won, the government temporarily implemented this system. The intent was to rein in SMP and prevent a chain reaction of inflation.
For private power producers that could reap huge profits from a spike in SMP, a different settlement method is being strongly discussed. Instead of SMP settlement, the plan would settle based on the "actual fuel cost (heat unit price)" reported by the power producer to the Korea Power Exchange, adding only a reasonable margin.
The unit cost of renewable power generation is 30–40 won per kWh cheaper than that of LNG generation. If KEPCO repurchases electricity based on the spiking SMP, renewable energy operators will enjoy huge profits.
Earlier, Minister Kim Sung-hwan of the Ministry of Climate, Energy and Environment said at a press briefing on the first anniversary of the launch of the popular sovereignty government held at Government Complex Seoul in Jongno-gu, Seoul, on the 4th, "We will review measures to ensure that private gas power producers are guaranteed a reasonable profit but do not earn excessive gains."
Among experts, there are also calls that, since the SMP cap is only a short-term remedy, electricity rates fundamentally need to be aligned with actual costs. If increases in energy costs are not reflected in consumer rates in a timely manner, it may only exacerbate distortions in the power ecosystem.
Yoo Seung-hoon, a professor at Seoul National University of Science and Technology, said, "If the time comes when SMP exceeds 146 won per kWh, the government is highly likely to reintroduce the SMP cap," adding, "If you limit price increases, demand will not fall while supply will, which can cause supply-demand problems. In principle, the SMP cap is not desirable."
For now, the government is maintaining a cautious stance. Moon Yang-taek, director general for power industry policy at the climate ministry, said, "Rather than short-term SMP prices, we will look at longer-term trends as we consider policy."