Option for Solving Capital Raising Issues
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
During the Sep 2020 parliamentary inspection of government, the issue of electricity market restructuring was brought up, including a focus on the need for adjustment regarding the consolidation and abolition of KEPCO’s power generation subsidiaries. Given conflicts of interest, it is unlikely that such functional changes will be made in the short term. However, the suggestion remains as one alternative capable of solving capital raising-related issues for renewable energy and eco-friendly facility investment.
Details of power industry restructuring
Unlike in the stock market, KEPCO and its power generation subsidiaries remain popular among bond investors. However, as fossil fuel facility investment becomes restricted due to ESG issues, KEPCO and its subsidiaries are losing their bond market appeal. In contrast to the past, when even if operating losses sustained, survival was possible through capital raising, the financial state of KEPCO and its power generation subsidiaries has now deteriorated to the point where it is difficult to secure additional capital in the mid/long term. We note that as the power generation subsidiaries must invest in renewable energy generation in addition to eco-friendly facilities for existing fossil fuels, large-scale capital is required.
During the Sep 2020 parliamentary inspection of government, Kim Jeong-ho of the Democratic Party of Korea proposed a restructuring of the power industry. In terms of electric power, restructuring was suggested as follows: 1) the integration of five thermal power plants scattered across the country into two companies divided according to the central and southern regions; 2) the establishment of a separate public entity specializing in the integrated management of renewable energy generation; and 3) the enhanced focus of KHNP on nuclear power plant business through the transfer of its hydro business to a firm specializing in renewable energy generation.
Option for solving capital raising issues
Restructuring of the electric power industry remains as one of the main options to solve current difficulties in securing capital. First, as a separate public company specializing in renewable energy should have an advantage in raising capital, such as that enjoyed by Orsted in Denmark and Iberdrola in Spain, sustained renewable energy investment would likely become feasible. Of note, Orsted is continuing its investment by issuing 1,000-year hybrid bonds. Meanwhile, thermal power generation firms based in the central and southern regions would likely switch from coal to LNG and invest in eco-friendly facilities for remaining coal power plants. Lastly, KHNP would be able to improve its expertise in nuclear power business by intensively investing in the operation and dismantling of existing nuclear power plants, as well as winning orders for overseas nuclear power plant projects.