Electricity Pricing Scheme Revamp Necessary
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
KEPCO is to lie at the heart of the government’s Green New Deal, which aims to expand the use of renewable energy and establish smart grids. Should KEPCO’s plans to prepare a new electricity tariff overhaul scheme and obtain government approval within 2H20 meet with success, the firm will likely carry out aggressive investment activity thereafter.
Green New Deal to be led by KEPCO
Under the plans for the Low-Emission Development Strategy (LEDS) 2050 announced in Feb 2020, greenhouse gas emissions are set to be cut by 125.3mn tons by 2050, representing a 19% reduction from the 2017 level. Moving ahead, we predict that 39% of the reduction target will be achieved by power demand control, with another 37% to be achieved via a power generation mix overhaul. Against this backdrop, the significance of smart grids and renewable energy is to rise.
As Korea’s largest power producer, KEPCO, is to play a crucial role in the country’s shift from nuclear and coal power to renewable energy. In overseas countries, the firm is currently carrying out wind power (500WM) and solar power (270MW) projects. And on the domestic front, KEPCO and its power generating subsidiaries (GENCOs) are investing in the Saemangeum solar power (300MW) and Southern West region offshore wind power (2,500MW) projects.
We foresee that the ongoing industrial structure changes (eg, EV fleet and data center expansion) will lead to higher power demand. To meet such demand, it is essential to build smart grids for power demand control. Plans for investment in advanced metering infrastructure (AMI), energy storage systems (ESSs), and distributed energy resource (DER) systems are to be mapped out going forward.
Electricity pricing scheme overhaul crucial for Green New Deal
Given that KEPCO’s environmental expenses (eg, ETS and RPS-related expenses) are estimated to reach W6tn in 2025 and over W8tn in 2030, the firm would likely suffer operating losses even if the oil price stays around US$40/bbl.
From 2020 onwards, besides renewable energy and power distribution/transmission investment, KEPCO needs to invest in scrapping nuclear power plants (NPPs), retrofitting old coal-fired power plants, and installing eco-friendly facilities. These initiatives should push up its capex to W18tn pa. Absent of an overhaul of the electricity rate system (which reflects the environmental cost burden to be shouldered by KEPCO), it is unlikely that the power producer can carry out such massive investment. Also, an electricity pricing scheme revamp is necessary to facilitate active power trading between small-scale power producers and consumers.