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| A POSCO Energy plant in Incheon |
Calls for amending problematic pricing strategy grow
By Nam Hyun-woo
Domestic private power utilities are suffering from a deteriorating bottom line, as steeply rising fuel prices lead them into the situation of "the more you operate, the more you lose."
To cope with their weakening profitability, the utilities are seeking expansion overseas, but industry officials say the priority is creating a "fair playing field" here, stressing the government and the state-run power distributor, the Korea Electric Power Corp. (KEPCO), should apply a pricing standard the same as applied to public power producers.
According to each firm's regulatory filing, POSCO Energy posted 5.9 billion won ($5.2 million) in operating profit in the second quarter of this year, down 77 percent from 25.9 billion won a year earlier.
GS EPS logged 20.8 billion won in operating profit in the second quarter, down 41 percent from 33.5 billion won the previous year.
Except for SK E&S, which posted an 18.4 percent year-on-year growth, two of the three major power utilities saw a plunge in their profitability.
Situation is worse for smaller firms.
Dongducheon Dream Power, which is running a 1716.8 megawatt liquefied natural gas (LNG) plant, posted a 53.1 billion won net loss last year. S-Power, running an 834 megawatt LNG plant was down 8.8 billion won, and Pocheon Power, running a 1,560 megawatt LNG plant, lost 8.7 billion won.
The power companies say the core reason for their faltering profitability is rising prices for fuel, mostly LNG.
During a National Assembly audit earlier this month, KEPCO CEO Kim Jong-kap said, "LNG prices rose 11 percent and coal, 10 percent, during the first half of the year."
According to Bluegold Research, the Japanese LNG price stood at $9.10 per million British thermal units in January last year, but it quickly rose to $11.60 in October this year. During the same period, Chinese LNG jumped from $8.90 to $11.60, and other countries' payments showed similar trajectories.
The average soft coal price imported to Korea from January to August this year was $110.90, up 8.1 percent from last year's average of $102.60, according to Korea Coal Association.
"More than 80 percent of the expense for LNG-based power generation is the cost of the gas and the recent fuel price hikes led us to post solid numbers in sales but almost no operating profit or net profit," a power company official said asking not to be named.
"However, the more fundamental reason for power utilities' suffering is the unfair pricing structure."
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| A GS EPS plant in Dangjin, South Chungcheong Province |
Unfair playing field
Whether it is private or public, a power producer makes money by selling electricity through the Korea Power Exchange (KPX) to the country's only electricity distributer KEPCO.
Depending on its estimation on the country's electricity demand, the KPX makes an order with each to produce a certain capacity of electricity.
In doing so, the basic principle is "economic feasibility," meaning the KPX gives the majority of demand to power firms using cheap but potentially dangerous and polluting fuels, such as nuclear energy and coal. Thus, private utilities, most of which rely on clean but costly LNG, are given small capacities on mostly emergency orders from the KPX, according to industry officials.
"So this means that power generators are not operating as much as people think," an official from another power utility said. "When we say we have 10 generators, an average six of them are idle."
He compared LNG generators to a car, which requires a lot of fuel when the engine is started and then allows the driver to take care of the fuel economy. "LNG generators consume the most fuel when we turn them on but we have to turn them off after a short period of time." he said.
To cover losses occurring from this, five power producing affiliates of KEPCO have a special adjustment factor in calculating their electricity price. However, private utilities do not benefit from this, with their prices being calculated based on the assumption that power generation is at its optimal status.
"This is truly an unfair market for private power utilities," the official said. "Public power companies will make up for their losses with the adjustment factor, but private firms don't have anything like that."
Another private firm's official said: "LNG power plants are a sort of emergency remedy for soaring electricity demand and operate when the KPX makes an emergency call. However, the current structure of the more you operate, the more you lose is showing that the current pricing structure is unfair."
As their calls grow, the government announced a revised bill for taxation on fuel. In the revision, the government took into account the environmental cost of each fuel, raising special excise tax on soft coal from 36 won per kilogram to 46 won and cutting that of LNG from 91.4 won per kilogram to 23 won.
However, firms are showing a lukewarm response to the move, saying the existing cost gap between fuels is too wide to be addressed by tax relief.
Industry officials say the cost for coal power is still 10 won per kilowatt lower than that of LNG, even if the bill passes the National Assembly. This means that the KPX will still prioritize nuclear power and coal above LNG.
Prioritizing environment
This is why power firms are still casting doubts on the government's initiative of shifting to clean and renewable energy.
Along with his pledge to lower the country's reliance on nuclear power, President Moon Jae-in also vowed to raise the operating ratio of LNG power plants to 60 percent, but private utilities don't have high expectations on this promise.
"In the electricity market, the fuel cost is the highest principle in deciding priorities for plants," the official said. "Unless the principle is changed to prioritize safety and the environment, the current energy structure of relying on nuclear power and coal will not change."
LNG is regarded as one of the key elements complementing the shortcomings of renewable energy, because Korea does not have enough solar or wind energy due to its geographical limits. Korea's solar generation efficiency stands at 14 percent.
"Renewable energy is not a resource which can make electricity when we need it. It makes electricity when it can, meaning its stability should be complemented by other energy sources, namely LNG," a separate energy firm official said.
"It would be best if we can make electricity safely and cost-efficiently in a clean way, but there is no electricity satisfying all of that. To meet the goal of its energy policy, the government should pay more attention to addressing the unfair structure of the electricity market."
