The price of electricity is unusually cheap in Korea.
Power bills in this country are the third lowest among OECD countries. That makes Koreans the fourth-heaviest electricity spenders in the club of mostly rich countries. Workers wear cardigans in their offices in the summer as air conditioners are set on full blast, while children play in shorts in their apartments during winter as the thermostat is set high.
That is hard to understand, given this resource-poor country depends on imports for more than 90 percent of its energy needs. Korea's renewable energy share stood at 8.1 percent last year, thereby placing it 38th out of the 44 countries surveyed.
Koreans think electricity is an essential good that must be supplied cheaply. They also think the energy industry is there to help other manufacturers rather than being an independent, for-profit sector. Politicians, who face elections every four or five years, have not dared to challenge such perceptions ― except during emergencies like the oil shocks of the 1970s.
This must change as the world worries about its sustainability amid climate change. The energy industry must be a key sector itself.
Two recent developments reaffirmed the need for a shift.
Last Wednesday, Kim Dong-cheol, the new CEO of Korea Electric Power Corp., called for “normalizing” electricity rates. KEPCO’s total debt came to 201.4 trillion won ($151.5 billion) in June, the largest among all listed companies. The state utility’s operating loss reached 32.63 trillion won last year, more than quadrupling from 2021. “As things stand now, the energy industry’s ecosystem could break down,” Kim said.
A day later, the government said the U.S. had slapped countervailing duties on two Korean steelmakers. “South Korea’s cheap electricity is effectively subsidizing its steel industry,” the Ministry of Trade, Industry and Energy quoted its U.S. counterpart as saying. The protracted Russia-Ukraine war has pushed up global natural gas prices, forcing KEPCO to supply electricity at prices 30 percent lower than its generation cost. Korea’s low power bills have even become an international trade issue.
As always, the Yoon Suk Yeol administration blames its predecessor for the situation. It especially criticizes the previous government’s policy to phase out nuclear power generation. However, despite the Moon Jae-in administration’s slogan to shift from nuclear to renewable energy, the share of atomic power generation rose from 26.8 percent of the total in 2017 to 27.4 percent in 2021. Moon might be somewhat hasty in his idealistic energy policy but not wrong. Yoon’s undue reliance on atomic energy is costlier and riskier than renewables in the long term.
Electricity price hikes are inevitable. The question is how high and who bears how much of the burden. Korea’s 20 largest companies spend 10 percent more electricity than all households combined. For a long time, these industrial consumers paid far less per kilowatt hour than individuals. The price gap narrowed recently but the preferential pricing system remains. That disincentivizes the conservation of energy by businesses and its more efficient use.
Not all households are are the same. The government needs to encourage mid or higher-income families to more efficiently use energy in their homes. For the bottom 20 percent of income earners, it should maintain or lower energey rates.
The supplier also has many problems. KEPCO ― 51 percent owned by the government ― remains a monopolized supplier. Korea cannot privatize it fully but needs to allow increased participation of private firms with creative ideas. That should include improving the nation’s power grid. The current system to transmit and distribute electricity is unfit for renewable energy, thereby making it too costly. In the long term, it could even consider the idea of decentralizing the overall power supply system.
KEPCO vows to reform itself. But only competition and further market-opening measures can change it.
President Yoon Suk Yeol has accused his predecessor of delaying the unavoidable due to populism. However, alarmed by angry public opinion, caused by “heating bill bombs” last year, his government made only nominal rate cuts.
People will watch to see whether and how this government acts differently until April's parliamentary elections.