Mon, May 20 2024 20 May, 2024

South Korea energy sector becomes burden due to LNG price hikes

A new report says LNG price hikes in 2022 are a major reason for South Korea’s energy sector woes.

An LNG tanker berthed in the port of Busan, South Korea (Photo: Adobe Stock/Mariusz)

Energy markets in South Korea are under increasing pressure as its largest electricity producer and supplier Korea Electric Power Corporation (KEPCO) continues to incur debt to cover financial loses. Complicating matters, much of the problem stems from the country’s over-reliance on imported LNG price hikes.

A new Institute for Energy Economics and Financial Analysis (IEEFA) report found that South Korea’s LNG and fossil fuels usage for its power sector distorted domestic market prices for electricity.

In spite of a population of only 52 million people, South Korea remains the world’s third largest LNG importer. In 2022, it imported 46.4 million tonnes (mt) of LNG, marking the highest volume of the super-chilled fuel imported into the country in the past ten years. 

Moreover, recent government pledges to pivot to more renewable energy have fallen flat. Fossil fuels dominated South Korea’s power generation mix at some 63.6 percent in 2022, with LNG accounting for 27.5 percent the same year and 26.8 percent in 2023. The country now has seven LNG import terminals with a combined regasification capacity of around 153 million tonnes per annum, in addition to some 6.3 mt of LNG storage.

The IEEFA report found that South Korea’s LNG intensive fossil-fuels usage burdened the country with an extra US$17 billion in electricity costs in 2022. It cited three key factors for surging electricity prices during what it referred to as the 2022 Russia-Ukraine crisis. The first factor was South Korea’s fossil fuel-intensive energy security, followed by lack of competitiveness and third, the country’s delayed energy transition.

LNG price dynamics

The report also pegged LNG price hikes in 2022 as a major reason for South Korea’s energy sector woes. Spot LNG prices hit a record US$70.50 per million British thermal units (MMBtu) in 2022, but since have dropped to a current price around US$9/MMBtu.

These price hikes are “a crucial determinant of the country’s wholesale electricity market’s system due to the high amount of LNG in the power mix. This also pushes electricity tariffs,” the report said.

“Soaring wholesale power prices, while artificially low retail electricity tariffs amid the global energy crisis, worsened state-owned energy utility KEPCO’s tenuous financial instability,” it added.When wholesale power prices nearly doubled year-on-year to a record high in December 2022, KEPCO’s power sales price to consumers increased by only 11.1 percent.”

Debt-ridden utility

KEPCO holds a unique if not troubled position in South Korea’s energy sector with a monopoly over power generation and distribution. The South Korean government and a state-controlled bank together hold more than 50 percent of the utility. The balance is traded on both the New York and Korean Stock exchanges.

The IEEFA pressed its argument further, alleging that the government “battled the inflationary impact of the global energy crisis by maintaining low end-user power tariffs, which ultimately required KEPCO to sell electricity to consumers at massive losses.”

“Low regulated prices aggravated KEPCO’s financial troubles, leading the company to issue more bonds, which are implicitly backed by the government, creating Double Moral Hazard,” the report said.

This exacerbated KEPCO’s financial problems and created a “vicious cycle” of spiralling debts for the utility and government deficits, which the report said will “end up as a financial burden for future generations.”

Reports from within South Korea have also shed light on debt-ridden KEPCO’s operations. The utility’s recently appointed CEO, Kim Dong-cheol, said in October that new electricity rate hikes of nearly 40 percent were still insufficient for the utility to handle “its mounting debts worth hundreds of billions of dollars.”  Since the report, KEPCO has decided to implement a hike in electricity tariffs following the parliamentary elections slated for this month.

Added to the fray, in November KEPCO slashed some 2,000 jobs at its corporate headquarters, marking a work force reduction of around 20 percent, downsizing from eight headquarters and 36 divisions to six headquarters and 29 divisions.

KEPCO’s problems have the potential for domestic economic contagion since South Korea’s most integral sectors and industries – semiconductors, automobile manufacturing and exports, steel and petrochemicals  – are energy intensive, The Korea Times reported in November.

The contagion could also impact South Korea’s plans to lead the world in cutting-edge technology, artificial intelligence, carbon reduction and a clean energy transition, since these sectors will require greater energy intensity and major infrastructure investments. Such changes will be “increasingly difficult for debt-saddled KEPCO,” the IEEFA report added.

Political interference

However, the way out for KEPCO could be more convoluted than it appears at first blush to an outside observer. A simple raising of electricity rates to fair market prices and buying cheaper gas feedstock may be hard to come by.

“The Ministry of Trade [responsible for setting energy prices in South Korea] sees reduced electricity prices for many of South Korea’s manufacturing companies as helping the country’s competitiveness for its products and services” London-based gas specialist and former associate fellow at Chatham House, Keun-Wook Paik, told Gas Outlook.

“Since an increased electricity price is not popular in South Korea, politicians are forcing the ministry to make sure the electricity price will be within the range of the government’s price range,” he added.

Another quandary for KEPCO is its LNG procurement policy. It’s forced to buy the super-chilled fuel from state-owned Korea Gas Corporation (Kogas) which holds a monopoly over gas sales in the country.

“Kogas officers have no clue how to take advantage of a big buyer’s position to reduce the imported price,” Paik explained.

Kogas, however, has global operations and is one of the world’s largest commercial LNG buyers. In July, it announced its participation in Mozambique’s US$$7 billion gas and LNG development project.

“Kogas doesn’t allow all the breakdown of the imported price under the excuse that the exposure of imported price details are against LNG import negotiations,” Paik added.

“Everybody in the LNG industry doesn’t understand why Kogas is maintaining its policy of paying more of a premium for the LNG imports. Simply, Kogas is hiding their incompetence by blocking the public’s open access to the imported LNG price breakdown in time,” he said. 

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