Profitability of LNG Power Generation Worsens
Korea’s reliance on LNG-fueled power plants has sharply increased under the Moon Jae-in government as it pursues a rapid transition from nuclear power to renewable energy, such as solar power and wind power. But one problem with this transition is that the profitability of private LNG power plants has got worse. Accordingly, the more LNG plants are operated, the more losses they make.
Some private power plants are asking power subsidiaries under the Korea Electric Power Corp. (KEPCO) to purchase a stake in them. However, they cannot even sell their shares to KEPCO subsidiaries as state-run corporations are banned from investing in loss-making private companies.
Private LNG power plants are expected to suffer bigger losses next year as the wholesale price of power generated by LNG will get lower following the reduction in the special consumption tax on natural gas.
According to the Financial Supervisory Service (FSS) on November 13, DongDuCheon Dream Power Co., one of the private LNG power plants in the metropolitan area, posted 25.06 billion won (US$22.1 million) in net loss in the first half of this year. The company, which has started commercial operation in 2015, is a 1,716.8-㎿ LNG power plant. It was established with a capital of 1.6 trillion won (US$1.41 billion). Its shareholders include Korea Western Power Co. with a 33.6 percent stake, Samsung, C&T Corp. with 31.2 percent, Hyundai Development Co. with 14.2 percent, GS Energy Corp. with 10 percent. DongDuCheon Dream Power recorded a net loss of 10.31 billion won (US$9.09 million) in 2015, the first year of commercial operation, and showed a greater loss of 27.94 billion won (US$24.64 million) the next year. Its net loss nearly doubled to 53.11 billion won (US$46.83 million) in 2017.
The problem is that the losses are getting bigger and bigger as the rate of operation has risen in the process of shifting from nuclear power and coal-fired power to renewable energy. The Moon Jae-in government laid out the 8th Basic Plan on Electricity Demand and Supply last year. Under the plan, it will reduce its dependency on nuclear and coal power and increase the ratio of LNG power in the process of raising the ratio of renewable energy to 20 percent of the nation’s total power generation by 2030. LNG power plants play a role as a stepping-stone in the “Renewable Energy 2030” implementation plan.
This is why some private power producers are seeking to sell off their shares. Samchully Co. has decided to sell a 41 percent stake in S-Power Co. and has been asking the Korea Southeast Power Co. to buy a 51 percent stake from 2016. However, the plans fell through every time because of the opposition of the Ministry of Economy and Finance. An official from the government said, “In principle, state-run companies cannot invest in loss makers.”
The cause of losses is largely due to low electric rates. Generally, the profit of power plants is determined by the system marginal price (SMP), which refers to the cost of the most expensive generating unit included in the price setting schedule (PSS). When the SMP is higher than production costs, power plants make a profit. However, they make a loss when the SMP is lower than production costs. In addition, power plants can run a surplus when they make enough money to cover an interest cost on a massive amount of initial capital expenditures (CAPEX) and operating expenses. However, the SMP halved from 160.12 won (US$0.14) per kwh for land, excluding Jeju Island, in 2012 to 76.91 won (US$0.07) in 2017. The figure rose to 81.39 won (US$0.07) in 2017 but it was not enough to make a profit. The LNG power industry complained that its losses get bigger as it operates power plants more.
This year, the SMP has rebounded to the 100 won (US$0.09) level. However, there is a negative outlook that the situation will take an unfavorable turn again next year. The government has lowered the special consumption tax on LNG from 91.4 won (US$0.08) per kilogram to 23 won (US$0.02) through its new tax reform plans this year. This aims to encourage to purchase more LNG power, which is relatively environmentally friendly, than coal-fired power considering the economic principle that purchases more electricity at lower prices.
However, the SMP is bound to get lower as the production cost of LNG is down. LNG, which is usually the most expensive power source, determines 90 percent of the SMP. When the production cost goes down, the selling price falls as well. Furthermore, the Moon Jae-in government has pledged not to raise the electric rates during his term in office. The power industry expects that LNG power will not be able to play a role as a stepping stone for energy transition unless a system that changes the electricity rates depending on the production costs is introduced.