Different Views Emerging on Nuclear Power Phase-out Plans
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
Starting from 2H21, we expect to see a series of announcements regarding both nuclear and coal phase-out policies and renewable energy policies in the run-up to the upcoming presidential election. While the ruling and opposition parties all should advocate reducing the country’s reliance on CFPPs and expanding the penetration of renewable energy (including hydrogen), they are expected to take differing stances on the removal of nuclear from the energy mix. We also draw attention to overseas nuclear orders.
Both major parties aligned regarding renewable energy/fossil fuels
Back in 2017 at the time of Korea’s 19th presidential election, the ruling and main opposition parties largely agreed on the promotion of renewable energy and reduction of coal-fired power plants (CFPPs). In our view, in next year’s presidential election, candidates from the two main parties will remain aligned regarding renewable energy and fossil fuels, especially considering today’s global energy trends, including the spreading RE100 initiative and movement to limit investment in fossil fuels. In detail, fundamental solutions such as carbon capture, utilization, and storage (CCUS) technology should be promoted for the reduction of fossil fuel use, and in the area of renewable energy, the construction of large-scale offshore wind power farms and greater hydrogen distribution infrastructure should be led by both state-owned companies such as KEPCO and KOGAS and private sector players such as SK, HMC, and Hyosung.
Different views emerging on nuclear power phase-out plans
Unlike in the 19th presidential election, the ruling and opposition parties are to take differing policy directions regarding nuclear power phase-out for the 20th presidential election. Candidates from the ruling party will likely stick to their existing nuclear power phase-out policy, while those from the opposition party will likely take an opposing view against making Korea nuclear-power-free. However, given that the nuclear power utilization rate is projected to fall below 70% or lower in July and August, the power reserve ratio, which should fluctuate depending on summer heatwaves, is likely to support either view.
However, irrespective of how domestic nuclear power policies unfold, overseas nuclear power plant orders will likely be seen from Egypt, the Czech Republic, Poland, and Saudi Arabia. For the first time in a decade since its UAE Barakah nuclear power plant project in 2010, Korea is expected to win an order for an overseas nuclear power plant. For reference, there has not been a nuclear power plant project in Korea in the past five years. Given such circumstances, we believe that valuation re-rating is likely for the sector.
Utility sector warrants renewed attention
Highly vulnerable to government policies, the utility sector has been isolated from overall stock market movements over the past five years, owing to heavy regulation. Going forward, however, the sector might benefit from expected substantial policy changes, such as removal of nuclear from the grid and normalization of the fuel cost pass-through system.
We suggest KOGAS as our top pick for the utility sector, as the company is expected to see increasing profits at the overseas E&P business and a full-fledged beginning of its hydrogen distribution business in 2H21. We also draw attention to KEPCO, which is likely to benefit from expected government policy changes, though investor sentiment has been dampened by a recent government decision not to raise electricity rates in 3Q21.