Due to Increased Oil Cost in 1H21
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
We expect the SMP to rise to W96/kWh (+63% y-y) in 2H21. Considering that the SMP is: 1) the purchasing price for KEPCO, and at the same time 2) the sales price for IPPs, the likely SMP hike is to be negative for KEPCO but positive for IPPs. Among IPPs, we view firms with coal co-firing power generation or renewable energy as being better positioned than those with LNG power generation.
SMP to rise in 2H21 due to increased oil cost in 1H21
Since the system marginal price (SMP; the market price for electricity applied each hour) is mainly determined by LNG generation, the oil price presents its main variable. The LNG price in Korea is systemically linked 100% to the oil price. With the average Dubai crude price having upped from US$55/bbl in January to US$72/bbl in June, LNG imported in 2H21 is to be impacted by this oil price increase. We estimate that the 2H21SMP will reach W96/kWh (+63% y-y), a level similar to that in 2H18 and sufficient to noticeably affect the electricity market.
Power purchase price hikes negative for KEPCO
The electricity produced by: 1) KEPCO’s generation subsidiaries; and 2) Independent Power Producer (IPPs) is purchased by KEPCO at the SMP price. Accordingly the expected SMP rise in 2H21 is to amplify KEPCO’s cost burden. Considering that electricity purchase cost of KEPCO increases W200bn per additional W1/kwh rise in SMP, we estimate that KEPCO’s 2H21 electricity purchase costs will climb W3.6tn y-y. Should the system for reflecting fuel cost hikes into electricity rates not start working efficiently until September, we believe that KEPCO’s 2H21 earnings will deteriorate, noted an accompanying expansion in coal purchasing needs.
IPP earnings to differentiate according to power source
For IPPs, which sell electricity to KEPCO, the likely SMP hike should prove positive as the electricity sales price is calculated by SMP. Renewable power generating firms who sell electricity and RECs should also benefit. However, earnings at IPP players who generate electricity via LNG are unlikely to improve sharply, given that their sales price and material costs are at a similar level. But, players with power sources other than LNG are expected to enjoy stronger earnings. While the expected SMP rise also bodes well for renewable power generating firms, an ongoing REC price decrease presents a negative factor for them.