Further Tariff Hikes To Come

BMI View : We believe that the government's decision to increase electricity prices is aimed at reducing electricity consumption in South Korea. The country has experienced power shortages at least once in each of the past three years as demand has grown tremendously on the back of low prices, and it lacks sufficient reserve generation capacity. We expect the hike in electricity prices will lead to a moderation in electricity demand, and see room for additional increments in 2014.

On November 19, the South Korean Ministry of Trade and Energy announced via an emailed statement that it would be increasing electricity prices in the country by an average of 5.4% starting from November 21. Prices for industrial plants and buildings would be increased by 6.4%, while the rates for households and farms would be raised by a more modest 2.7% and 3.0% respectively. This is the second increase this year, following an increment of around 4% in January this year. The statement from the ministry also highlighted a plan to impose a tax on soft coal of KRW30/kg (US$0.03) from July 2014, while reducing duties on liquefied natural gas and kerosene to shift consumption of coal to gas and oil.

We believe that the government's decision to increase electricity prices is aimed at reducing electricity consumption in the country. South Korea has experienced power shortages at least once in each of the past three years as demand has grown tremendously, and it lacks sufficient reserve generation capacity ( see 'Dangjin Biomass Plant Indicates Growing Viability', November 12). Electricity consumption grew an average of 5.1% per annum over the last decade, and per capita consumption is one of the highest in the world, even among developed countries. As such, the government is under pressure to reduce the rate of growth in electricity consumption, and raising electricity prices is one way of doing so.

Power-Hungry South Korea
Electricity Consumption by Country, kWh per capita

BMI View : We believe that the government's decision to increase electricity prices is aimed at reducing electricity consumption in South Korea. The country has experienced power shortages at least once in each of the past three years as demand has grown tremendously on the back of low prices, and it lacks sufficient reserve generation capacity. We expect the hike in electricity prices will lead to a moderation in electricity demand, and see room for additional increments in 2014.

On November 19, the South Korean Ministry of Trade and Energy announced via an emailed statement that it would be increasing electricity prices in the country by an average of 5.4% starting from November 21. Prices for industrial plants and buildings would be increased by 6.4%, while the rates for households and farms would be raised by a more modest 2.7% and 3.0% respectively. This is the second increase this year, following an increment of around 4% in January this year. The statement from the ministry also highlighted a plan to impose a tax on soft coal of KRW30/kg (US$0.03) from July 2014, while reducing duties on liquefied natural gas and kerosene to shift consumption of coal to gas and oil.

We believe that the government's decision to increase electricity prices is aimed at reducing electricity consumption in the country. South Korea has experienced power shortages at least once in each of the past three years as demand has grown tremendously, and it lacks sufficient reserve generation capacity ( see 'Dangjin Biomass Plant Indicates Growing Viability', November 12). Electricity consumption grew an average of 5.1% per annum over the last decade, and per capita consumption is one of the highest in the world, even among developed countries. As such, the government is under pressure to reduce the rate of growth in electricity consumption, and raising electricity prices is one way of doing so.

Power-Hungry South Korea
Electricity Consumption by Country, kWh per capita

We highlight that electricity tariffs in South Korea are one of the lowest among developed countries, which is a major reason for the unbridled growth of electricity consumption. This is because the government keeps prices at an artificially low level to boost export competitiveness of domestic companies and contain inflation. For instance, electricity prices in the country only increased by 32% between 2000 and 2012, compared with a 100% and 150% increase in gas and kerosene prices respectively. As the costs of generation have exceeded electricity prices, state-run Korea Electric Power (KEPCO) - which is the monopoly electricity distributer - has been forced to record losses consecutively over the past five years, necessitating the need for financial support from the government. As such, increasing electricity prices would narrow KEPCO's losses, and also the amount of financial support that the government has to provide.

It is our opinion that the hike in electricity prices will lead to a moderation in electricity demand. This is because industrial users - who will feel the greatest pinch at the 6.4% increase due to the energy-intensive nature of their activities - are likely to reduce consumption to combat rising costs. For instance, the Korea Iron & Steel Association said that the 6.4% increase would incur additional costs of KRW68.8bn (US$65mn) on the steel industry via an emailed statement.

At present, we believe that the government is likely to increase to electricity tariffs further in 2014. This is because electricity prices are still below generation costs, and generation costs are likely to increase further in 2014 (as the share of costly LNG as a feedstock for electricity generation increases). In particular, we see room for prices to increase by around 5-10% more in 2014, in order to bring prices in line with costs and create financial viability for KEPCO.

No Price Respite In Sight
Value Of LNG Imports By Month (US$mn)

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Sector: Power
Geography: South Korea
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