Power Market Changes Coming in 2021
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
The government is encouraging domestic companies to participate in RE100, a collaborative initiative of influential businesses committed to 100% renewable power usage. The initiative is being participated by global players such as Google, Apple, and Amazon. To achieve its targets, the government is to devise institutional support measures, including green premium pricing and third-party power purchase agreements.
Under the Electric Utility Act amendment, non-consolidated KEPCO will be permitted to participate in offshore wind power projects. Upon passage, non-consolidated KEPCO is expected to make sizable investment in offshore wind power. Meanwhile, the cost pass-through system is likely to be introduced. The cost pass-through system is to help KEPCO generate stable profits, which is an important consideration for the firm is has been dealing with worsening financials.
Countries around the globe are strengthening green policies, and renewable energy investment cycle is beginning in earnest. Accordingly, mid/long-term earnings visibility for utility firms is growing. That said, given that a round of share-price rallies was already witnessed in the utility sector on policy momentum concentrated in 2H20, we advise taking a selective approach to KEPCO and US renewable energy and domestic hydrogen policy-related firms which are well situated to benefit from new policy momentum.
I. Power market changes coming in 2021
Major global players (including Apple, Google, Amazon, and Starbucks) have been driving the spread of the RE100, a global initiative bringing together the world's most influential businesses committed to 100% renewable electricity. In turn, Korean companies in close work relations with global firms have been under growing pressure to join the RE100 initiative. In Korea, LG and SK Groups have announced their own plans to achieve the RE100 targets. On the government side, regulatory framework is being laid to promote the RE100 drive. We note that renewable energy is gradually reaching grid parity.
II. KEPCO being freed to transform
The latest amendment to the Electricity Utility Act is designed to permit KEPCO’s participation in offshore wind power projects. Once the bill is passed, non-consolidated KEPCO is to make large-scale investment in the offshore wind power projects. We believe the fuel cost pass-through system needs to be re-introduced in order to support KEPCO’s stable investment in the future. Annual capex at KEPCO exceeds W18tn, and from 2022, it will need to investment more than W5tn for offshore wind power projects. Considering its deteriorated financial status, stable earnings generation over a mid/long-term will be important, and in our view, the anticipated re-introduction of a fuel cost pass-through system should contribute to such
III. Global renewable energy industry growth becoming increasingly visible
Over the coming years, we expect the US’s shift towards renewables to accelerate, in turn leading to stronger earnings visibility for players with high exposure to the US market. Looking at Korea, while solar and wind energy-related momentum could weaken next year, the planned release of new hydrogen support policies warrants attention. With valuations of renewable energy players having already risen on robust policy momentum in 2020, we advise taking a selective approach towards renewable energy plays.
IV. Top picks
We maintain a Positive rating towards the utility/renewable energy sector. LS Electric deserves particular attention, as it is likely to benefit in 2021 from: 1) Korean companies’ participation in the RE100 initiative; 2) greater government subsidies for ESSs for peak load reduction; 3) data center capacity additions; and 4) strong EV relay sales. Meanwhile, KEPCO is expected to reap stable earnings on: 1) the passing of a revision to the Electric Utility Act; and 2) introduction of the cost pass-through system, with its participation in an offshore wind project also boding well for earnings growth.