South Korea may limit planned electricity price increases in an effort to shield consumers, people familiar with the matter said, a headache for the country’s largest utility after it posted a record loss last year.
(Bloomberg) — South Korea may limit planned electricity price increases in an effort to shield consumers, people familiar with the matter said, a headache for the country’s largest utility after it posted a record loss last year.
Rising living costs have become a hot-button issue in Korea, as support for the government falters. A Realmeter poll published on Monday showed President Yoon Suk Yeol’s approval rating fell for a third straight week, to around 33%.
The government has dragged its feet over an expected rate increase in the second quarter, citing concern for consumers. Officials had previously signaled rates would rise by about 13 won (1 cent) per kilowatt-hour each quarter to alleviate financial strain at state-owned Korea Electric Power Corp., known as Kepco. But they’re now discussing a smaller single-digit hike for the April-June period, according to people who didn’t want to be identified discussing private matters.
While the floated increase may be small compared to other countries amid a surge in inflation, any raise is a sensitive issue for voters, and residents often refer to the payments as a tax. Koreans were already rattled by a jump in their utility bills at the start of 2023, after years of little change.
“Politics are deeply involved in the process of revising South Korea’s electricity rates, and that’s been making things tricky for Korea Electric to lift prices,” Kim Yung San, a professor at Hanyang University’s college of economics and finance, said by phone. “If there’s a further delay in raising utility rates, Kepco will likely issue more bonds or rely on loans, which will only exacerbate the current situation.”
Kepco, responsible for about 70% of Korea’s electricity supply, is now at an impasse — it’s operating at a loss, which threatens its AAA-rated credit profile among investors, and will struggle to accelerate the move toward cleaner energy without additional cash. It has already vowed to reduce debt by cutting costs and selling assets. Absent the ability to pass on the higher cost of energy and operations to consumers, Kepco may now need to take out loans, which generally have higher borrowing costs than bonds, further denting its performance.
While Kepco itself has said an eventual increase is inevitable, for now it’s tapping the bond market. So far this year, it already issued about a third of the value of record activity over the whole of last year. But there’s a limit to that strategy, after the government in 2022 capped issuance.
Cheong Seung-il, chief executive officer at Kepco, said in a statement last week that the delay in rate increases could distort the financial market with the increased issuance of bonds, and also put stable power distribution at risk. The company did not comment further or provide details on the rate increase.
Relying too much on the bond market can have a ripple effect, according to Kim Eun-gie, a credit analyst at Samsung Securities Co.
“More issuance from top-rated Kepco may have a crowding-out effect on the credit market, like we saw with the turmoil last year. That would leave less demand for corporate bonds, especially lower-rated ones,” he said from Seoul. “That could eventually widen spreads on corporate bonds overall.”
The country’s flexible power pricing system took effect in 2021, with the aim of charging consumers for fluctuating prices of LNG, coal and crude imports, though the provider’s held off on big increases so far. That contributed to Kepco’s record operating loss last year as fuel prices soared.
Koreans have struggled with skyrocketing prices for basic goods and services. Food prices soared the most in two decades last July, according to government data, and while inflation has eased in recent months, the Bank of Korea signaled it’s yet to see clear signs of a lasting trend. A 5% wage boost at large firms did little to ease financial stress for households, who are the most indebted among major economies.
–With assistance from Youkyung Lee.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.