Electric Utility Act Needs to Be Revised
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Companies that help lead the country’s Green New Deal stand to benefit. The passage of a revision to the Electric Utility Act and the reintroduction of the cost pass-through system are key requirements for KEPCO to implement Green New Deal policy. We maintain KEPCO as our top pick for the utility sector.
Electric Utility Act revision and cost pass-through system are key requirements
We maintain a Buy rating and TP of W26,000 on KEPCO. Passing a revision to the Electric Utility Act and reintroducing the cost pass-through system are key requirements for KEPCO to successfully implement the country’s Green New Deal policy. Solar power generation capacity (mainly at private suppliers) rose from 3GW in 2016 to 14GW in June. However, wind power generation capacity stands at only 1.5GW, lower than targeted. Large-scale offshore wind power projects were planned, but they failed to proceed, due to issues in selecting locations, licensing, and attracting large-scale investment. We believe that a revision to the Electric Utility Act will enable KEPCO to directly participate in the expansion of the nation’s offshore wind power generation capacity. Given KEPCO’s financial structure, it is currently unable to execute large-scale investment. Comparing its average annual capex and EBITDA, KEPCO needs borrowings of more than W3tn annually. Stable earnings from a revision to the electricity rate system?ie, the reintroduction of the cost pass-through system?will be essential in successful implementing Green New Deal policy.
According to media reports, the government plans to introduce a cost pass-through system that is linked to oil prices, but has an upper limit when prices surge. As it was in 2018, those who oppose the revision to the electricity rate system blame a planned reduction in nuclear power generation, saying that a decline in nuclear power generation portion will lead to a rise in overall generation cost, thus resulting in a hike in electricity rate. However, as nuclear power generation capacity will remain unchanged until 2030, following the recent introduction of four new nuclear power plants, it is unlikely to influence electricity prices for some time. Also, the unit cost of renewable power generation is similar to that of coal power generation, so expanding renewable energy is unlikely to increase prices. Even if the cost pass-through system is introduced, the possibility of a related electricity price hike is limited. We believe that revisions to the electricity rate system will focus on cutting any unnecessary rate benefits or irrationalities.
Demand uncertain, but 3Q20 earnings can improve
Predicting 3Q20 power demand is difficult due to the implementation of Level 2.5 social distancing rules?the monthly power statistics report will determine the exact level. Currently, we estimate KEPCO’s 3Q20 OP at W2.1tn (+75% y-y).