Adjusted unit price for electricity in the second quarter is finally frozen… Neutralization of fuel cost index

The ‘fuel cost adjustment unit price’ to be applied to electricity rates in the second quarter of this year was frozen at ‘0 won per kWh’. Although the price of power generation raw materials such as coal and liquefied natural gas (LNG) has risen sharply this year due to the Ukraine crisis, the government has prevented it from being reflected in electricity rates at all. Due to the government’s artificial electricity rate control, KEPCO is expected to record the worst operating loss in history this year.

Hankyung DB

Hankyung DB

KEPCO announced on the 29th that after receiving a notice from the government on the 28th to suspend the application of the adjusted fuel cost in the second quarter of this year, the adjusted fuel cost to be applied from next month was fixed at 0 won per kWh. The fuel cost adjustment unit price is one item that constitutes the electricity rate, and is adjusted every three months by reflecting the international fuel price.

On the 16th, KEPCO submitted to the government a proposal to increase the electricity rate by raising the fuel cost adjustment from 0 won to 3 won per kWh. Due to the sharp rise in fuel prices, the actual fuel cost adjustment unit price was calculated at 33.8 won per kWh, but to prevent a sharp increase in electricity rates, the quarterly adjusted unit price increase is limited to a maximum of ±3 won. In December 2020, the government introduced a fuel cost indexing system with the core of adjusting electricity rates according to fuel costs but preventing sudden fluctuations.

However, the government did not even accept the proposal for a three-won increase in accordance with the fuel cost indexation principle. According to KEPCO, the government notified KEPCO that it would freeze electricity rates on the grounds that “it is necessary to stabilize the lives of the people who are suffering from the prolonged Corona 19 and high inflation.”

In December of last year, the government also raised the ‘standard fuel cost’, which is an electricity rate item that is adjusted every year to reflect the fuel cost, and the climate environment rate. The main reason for the fixed price freeze was cited.

Among the items of electricity rates, the items that change by reflecting the fuel cost are largely divided into the standard fuel cost and the fuel cost adjusted unit price. The base fuel cost is adjusted once a year, and the fuel cost adjustment unit price is adjusted quarterly. The government explained that it would be difficult to accept the increase in the second quarter as the public’s electricity bill burden rose from April in accordance with the adjustment of the standard fuel cost.

However, the government’s increase in the standard fuel cost reflects changes in international fuel prices from December 2020 to November 2021. Fuel cost increases since December of last year were not reflected. Fuel prices, which have soared sharply due to the worsening Ukraine crisis this year, are not reflected in electricity rates at all.

The financial situation of KEPCO is expected to deteriorate significantly. KEPCO, which failed to raise electricity rates in time last year, posted an operating loss of 5,860.1 billion won in one year last year. It was the largest operating loss in history. This year’s operating loss is expected to increase further.

Meritz Securities predicted that KEPCO would incur an operating loss of 19.9 trillion won this year under the assumption that the unit price of KEPCO’s electricity sales will rise by 15.1 won per kWh in stages. KEPCO’s operating loss this year is expected to exceed 20 trillion won as the fuel cost adjustment unit price has been frozen due to the government’s artificial price intervention.

By Jung Eui-jin, staff reporter [email protected]

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