SMP Cap System Gives Sign of Relief to KEPCO, Suffering from Snowballing Losses
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SMP Cap System Gives Sign of Relief to KEPCO, Suffering from Snowballing Losses
Experts share view that additional dramatic electricity rate hikes are evitable to help KEPCE ease losses

25(Sun), Dec, 2022




Prime Minister Han Duck-soo convened a meeting of the Regulatory Reform Committee at the Seoul Government Complex on Nov. 25, which approved the introduction of a cap in the system marginal price (SMP) with which Korea Electric Power Corp. (KEPCO) purchases electricity from power generation companies. (Photo: Prime Minister’s Office)


A cap in the system marginal price (SMP) with which Korea Electric Power Corp. (KEPCO) purchases electricity from power generation companies was introduced effective Dec. 1. 

The step leaves KEPCO, suffering from snowballing losses, breathing a sigh of relief since experts share the view that additional electricity rate hikes are evitable to help KEPCO ease losses. 

According to the Ministry of Trade, Industry and Energy (MOTIE) and the power industry, MOTIE gave the go-ahead for the cap in the system’s marginal price on Dec. 1. 

KEPCO buys electricity from its subsidiary power companies and independent power firms in the wholesale market, and sells it for general or industrial use in the retail market. 

The introducing of the SMP cap system means that even if wholesale electricity prices soar according to the demand and supply of the market, an allowable upper limit is imposed. 

SMP generally fluctuates according to movements of LNG prices, the most expensive fuel unit price. JMK spot price, an LNG import price index, jumped from $19.02 per MMBtu in October 2021 to $53.38 in October 2022, and during the same period, the integrated SMP surged to 251.65 won, a nearly 2.5-fold jump from 107.76 won. 

A revision to the government’s notice on the upper limit on electricity transaction prices stipulates that if the average SMP in the three months stands above the upper 10 percent of the average SMP for the past 10 years, an allowable upper limit in SMP shall be imposed for one month. 

Industry sources said the SMP cap system is predicted to make KEPCO’s wholesale prices stand at around 160 won per kWh. The figure represents a 30 percent to 40 percent reduction, or a decline of about 90 won of SMP, which fluctuated at 233.42 won in September and 251.65 won in October. 

The allowable upper limit in SMP is expected to see KEPCO reduce its maximum 700 billion won in losses per month. 

But experts said the introduction of the SMP cap system is not a fundamental solution. KEPCO, already seeing its cumulative losses in Q3 soar to 21 trillion won, is predicted to surpass 30 trillion won in losses by the end of this year. 

KEPCO has spent more than 30 trillion won in purchasing electricity in the wholesale market since the SMP has jumped over twice so far this year. 

Power industry experts shared the view that it is evitable to raise electricity rates by at least 30 percent to make KEPCO’s management come back to normal. 

They have pointed out that electricity, recognized as a public asset, should have not set at cheaper prices regardless of unit price. 

An OECD report on the Korean economy said that Korea’s cheaper electricity rates are owed to the government setting them below cost. 
Korea’s household electricity rates are cheaper compared to major countries across the globe. 

Korea had among the lowest electricity rates, except Mexico, a petroleum producing country in 2019. Electricity rates in Japan and Europe are twice higher than those in Korea.
 
An additional electricity rate hike is expected early next year. An about 60 won hike per kWh is required to be made, but it is most likely to happen at around 10 won. 

Power industry sources said the SMP cap system amounts to a stop-gap emergency step for KEPCO, but it cannot be a fundamental solution. 





A view of KEPCO headquarters in Naju, Jeollanam-do. (Photo: KEPCO)

   
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