Losses may force Japanese, S. Korean utilities to delay green investment

Korea Electric Power

07/12/2022 04:29

By Joyce Lee and Yuka Obayashi
       SEOUL/TOKYO, Dec 7 (Reuters) - South Korean and Japanese
power utilities are sustaining heavy losses, kept from passing
rising generation costs on to customers and, according to
analysts, forced to reconsider the timing of green investments.
    The industry is squeezed between high costs of imported
fuel, exacerbated by weak currencies, and government
unwillingness to displease voters and worsen inflation with
price rises.
    During the first nine months of this year, state-run
electricity distributor Korea Electric Power Corp (KEPCO)
reported record operating losses of 21.83 trillion won ($16.69
billion) on revenue of 51.8 trillion won, compared with a loss
of 1.12 trillion won a year earlier.
    KEPCO is staying afloat with bond issuances and bank loans.
Debt had already reached 223% of equity capital at the end of
2021.
    However, President Yoon Suk-yeol's approval rating, just 39%
this month, is too low for him to dare to allow a bigger rise in
electricity prices than the approximately 13% approved for this
year and a similar one for 2023, analysts said. 
    "In order for KEPCO to swing to profit, we estimate
electricity prices must be at least 30% to 40% higher than last
year, or the Dubai oil spot price must fall to pre-COVID
levels," said Na Min-sik, analyst at SK Securities.
    KEPCO said it had no plans to cut maintenance budgets or
facilities investments. 
    But analysts told Reuters that KEPCO's capital spending
would drop about 20% next year. Items likely to be cut would be
improvements to transmission grids to support highly variable
electricity flows from renewable sources, they said. 
    "Since renewable power fluctuates, investment is necessary
in transmission infrastructure to grow the portion of renewables
in energy mix," Na said. "But it's a burden, as 30 trillion won
in losses are forecast this year, and continued losses next
year." 
    Another analyst said: "Out of new power plant construction,
maintenance of existing plants and power grid infrastructure,
the biggest delays will be in new power plant construction,
especially in renewables."
    WHOLESALE PRICE CAP
    Moreover, South Korea this month decided to cap for at least
three months the base rate at which KEPCO buys electricity
wholesale from generation firms.
    This will discourage investment in renewable generators,
according to an industry association.
    "We estimate this could cost us revenues of 90 won per
kilowatt. If this cap is extended for a year, it would cost a 10
megawatt generator 100 million won," said Jung Woo-sik, an
executive at lobby group Korea Photovoltaic Industry
Association. "We'll lose investments. This will cripple the
renewables industry."
    As for Japan, nine out of 10 key regional electricity
utilities booked a net loss for the April-September half-year,
with five companies reporting record losses for the period.
    All eight utilities that have announced an annual forecast
for the fiscal year to March 31, 2023, have warned of a net
loss. Tokyo Electric and Kyushu Electric did not provide
full-year outlooks.
    Most of those that have applied for price rises have said
they would maintain green investment, but analysts expect some
deferral.
    "Investment towards decarbonisation by Japanese utilities
may be delayed as the companies seeking to hike prices are
saying that they would review all new investments," said
Toshinori Ito, president of Ito Research and Advisory which
specializes in energy markets. 
    By the end of November, five out of 10 major regional
utilities had applied to raise prices by between 28% and 46%
from April.
    They said their financial situation had deteriorated sharply
due to soaring fuel prices due to Russia's invasion of Ukraine
and the yen's plunge against the U.S. dollar. That could hinder
stable supply of electricity, they said.
    The Japanese industry ministry will examine whether each
company's efforts to improve management efficiency, such as
reducing labour costs, are sufficient.
    ($1 = 1,308.2600 won)
 (Reporting by Joyce Lee in Seoul and Yuka Obayashi in Tokyo;
Editing by Bradley Perrett)
 ((joyce.lee@tr.com;))