KEPCO hit by Moon's nuclear-free energy policy

By Yoon Ja-young

Korea Electric Power Corp. CEO Kim Jong-kap

The government's plan to shift to renewable energy from nuclear and coal power is hitting Korea Electric Power Corp. (KEPCO) with snowballing losses. Analysts say that the rates for electric power will inevitably be raised.

According to regulatory filing by KEPCO, the state-run utility company sustained a 127.6 billion won operating loss in the first quarter. It recorded a deficit for two consecutive quarters for the first time in more than five years.

Though its total sales grew 3.7 percent to 15.7 trillion won, KEPCO recorded losses due to rising costs. While it has not raised the rates it charges consumers, its costs have surged steeply as it is increasingly sourcing electricity from expensive LNG-fueled power plants instead of nuclear reactors following the administration's nuclear-free policy. The utilization rate of nuclear reactors fell to 58 percent of capacity in January, with eight of the country's 24 nuclear reactors having halted operations. Before the country adopted the nuclear-free policy, the average annual utilization rate stood at over 80 percent.

KEPCO is getting electricity from LNG-fueled generators instead, but they are expensive. While KEPCO spent 68.1 won to get 1KWh of electric power from nuclear reactors, it takes 126.2 won to get the same amount from an LNG-fueled plant. The government also suspended operations of old coal-fired power plants amid growing concerns of fine dust.

Analysts expect KEPCO to continue suffering for some time. KEPCO CEO Kim Jong-kap had also announced upon his inauguration last month that the company will enter “emergency management” to cut costs.

“The low utilization rate of nuclear reactors is not a short-term issue. It will be a long-term trend based on the shift of the national energy strategy,” said Shin Hyun-joon, an analyst at Hanwha Securities. He expects strengthened safety regulations will restrict increasing utilization of nuclear reactors.

Ethan Won, an analyst at HI Securities, said the second quarter won't be any better.

“The operation ratio of coal-fired power plants will be low at 70 percent, following suspension of five old plants. The recent surge of global coal and oil prices will also pull up fuel costs,” he said.

Global oil prices have been soaring steeply amid growing tension in the Middle East, triggered by the U.S. decision to abandon the Iran nuclear deal. LNG prices, which are linked to oil prices, and coal prices are also soaring.

KEPCO's share price has been rising steeply recently on expectations of inter-Korean economic cooperation, but the nuclear-free policy could be a threat to this. KEPCO trades at around 37,000 won, which compares with 31,000 won in March. Won said that the deteriorating performance will weigh on investor sentiment, calling for a conservative approach by investors.

The government has been stressing that the nuclear-free policy won't lead to rate hikes. It is currently considering raising rates for manufacturers consuming electricity at night, but analysts say that KEPCO would need to make more extensive increases in rates as deficits keep piling up.

“When raising the night time rates for manufacturers by 1 percent, KEPCO's earnings will increase by between 70 billion and 90 billion won annually. However, steep hikes won't be easy,” said Ryu Je-hyun, an analyst at Mirae Asset Daewoo.

“KEPCO needs more than 5 to 6 trillion won operating profit when considering cash flow and an adequate level of ROI. It needs extensive rate hikes, not those limited to manufacturers,” he added.