Expectations for Electricity Rate Hikes Premature
The author is an analyst of KB Securities. She can be reached at hyejung.jung@kbfg.com. -- Ed.
KEPCO shares up 8.55% on possibility of electricity rate hikes
— The Presidential Transition Committee announced five key measures for the normalization of energy policies, highlighting the need for a cost-based policy. This gave way to expectations for electricity rate hikes, leading KEPCO shares to close 8.55% higher DoD at KRW22,850 (Apr 28).
Five key measures announced by the Transition Committee
— The general direction of the measures announced involve an energy mix of nuclear power and new/renewable energy, a shift away from supply expansions and toward a policy focused on the demand side, and normalization of energy market mechanisms. The five key measures are as follows.
— (1) More realistic carbon-neutral policies and energy mix: Nationally Determined Contribution (NDC) targets should be respected, but action plans should be made more feasible via utilization of nuclear energy (i.e., an increased proportion of nuclear power generation via resumption of construction for no. 3 and no. 4 Shin Hanul plants; continued nuclear plant operations and an adjustment to utilization rates; higher renewable energy penetration and reduction in LNG power generation to rational levels)
— (2) Efficient demand management and an energy market based on competition and market principles: Strengthened independence and expertise of electricity committee; cost-based system for electricity rates; softening of the monopoly enjoyed by KEPCO via widening of scope for PPA permits
— (3) Restoration and export of the nuclear energy business ecosystem and development of energy-related new growth engines (solar/PV, window power, hydrogen): Strengthening of Korea-U.S. alliances; set-up of a counsel for nuclear energy exports (10 nuclear power plant order wins targeted)
— (4) Considering the supply chain crisis, inclusion of key minerals within the scope of resource security
— (5) Better energy welfare policies for the low-income class and reduction of coal-fired power generation
Expectations for electricity rate hikes premature
— Key takeaway from the latest announcement is the plan for a cost-based policy in determining electricity rates. Since KEPCO has been suffering huge losses due to soaring commodity prices, the statement by the Committee, that adverse practices, if left unchanged, would widen losses, have given way to expectations for rate hikes.
— However, the Committee stopped short of detailing reform plans, stating that inflationary pressure on consumer prices would have to be considered in the event of steep increases in electricity rates; such stance does not indicate any changes in direction from the existing system for determining electricity rates. The Committee also mentioned the need for internal self-rescue measures for reducing losses at KEPCO.