South Korea's leading power utility, KEPCO, is poised to implement a hike in electricity tariffs following the parliamentary elections slated for April 2024.
This move has stirred apprehensions among businesses, with concerns over the persistent surge in electricity costs and its potential repercussions on product price competitiveness. Nevertheless, against the backdrop of KEPCO's substantial accumulated losses, industry observers foresee a probable uptick in electricity rates in the latter half of 2024.
As reported by the Asian Times, KEPCO recently unveiled adjustments to fuel costs for the second quarter of 2024 (April to June), maintaining the existing rate of ±KRW5 per kilowatt-hour (kWh). Electricity tariffs in South Korea comprise basic fees, usage charges, environmental levies, and fuel expenses, with the adjustment in fuel costs serving as the fundamental basis for reflecting short-term energy price trends.
Typically, adjustments in fuel costs serve as the yardstick for minor tweaks in electricity tariffs, aimed at flexibly incorporating fluctuations in fuel costs such as coal and liquefied natural gas (LNG) into electricity rates for the preceding three months. In November 2023, KEPCO froze all remaining electricity tariffs, except for those on large-capacity industrial electricity, which saw an average increase of KRW10.6 per kWh.
Throughout 2023, industrial electricity tariffs in South Korea consistently surpassed residential rates. In 2023, KEPCO's unit selling prices for industrial and residential electricity stood at KRW153.7 (approximately US$0.11) and KRW149.8 per kWh, respectively. Since the inception of relevant statistical data in 1961, industrial electricity has only been pricier than residential electricity in 2019 and 2023.
Despite KEPCO's return to profitability in the latter half of 2023 following previous tariff adjustments, there are widespread anticipations of another round of tariff hikes, possibly commencing in the third quarter of 2024. However, with South Korea's parliamentary elections scheduled for April 10, 2024, KEPCO may opt to defer the tariff increases. Notably, KEPCO's longstanding losses have accumulated a debt exceeding KRW200 trillion, necessitating daily interest payments of KRW7 billion.
Speculations regarding potential electricity tariff hikes in the latter half of 2024 have triggered concerns among major electricity consumers in South Korea, notably in the electronics and steel industries. Particularly, the semiconductor industry is bracing for impact, with Samsung Electronics, South Korea's largest industrial electricity consumer, expected to bear increased cost burdens.
According to Samsung's sustainability business report, electricity consumption at Samsung's workplaces has increased annually. In 2020, it exceeded 22,000 gigawatt-hours (GWh), reaching 25,000 GWh in 2021, and 28,000 GWh in 2022. Before the industrial electricity price hike in 2023, Samsung used over 16,000 GWh of domestic electricity in South Korea, paying a total of KRW2.3 trillion.
Considering the November 2023 electricity tariff hike of KRW13.5 per kWh, even without an increase in electricity consumption, Samsung's cost burden is projected to rise by at least KRW2 trillion. Industry insiders estimate that another major semiconductor manufacturer, SK Hynix, pays over KRW1 trillion in electricity bills.
While Samsung's DS division is forecasted to return to profitability in the first quarter of 2024, potential tariff hikes by KEPCO are expected to exert considerable pressure.SK Hynix, which returned to profitability in the fourth quarter of 2023 with estimated operating profits surpassing KRW1 trillion in the first quarter of 2024, may face operational challenges due to persistent tariff hikes.
Academic experts in South Korea suggest that government policies for revitalizing the semiconductor industry should consider electricity costs, given the imperative of tariff adjustments. Previous increments in industrial electricity tariffs have also impacted other electronic manufacturers.
Similar to the semiconductor industry, the panel industry, characterized by large-scale production facilities, consumes substantial electricity. Industry sources reveal that LG Display and Samsung Display were among the top electricity consumers in South Korea from January to September 2023.
Additionally, tariff hikes are anticipated to impact the steel industry. Hyundai Steel and Dongkuk Steel, two major steel manufacturers, have witnessed continuous increases in electricity consumption, with corresponding expenditures exceeding KRW1.9 trillion and KRW1.8 trillion, respectively, in the third quarter of 2023. The projected tariff hikes may impinge upon their profitability.
While businesses acknowledge the necessity of tariff hikes, concerns persist regarding the erosion of competitiveness. Ultimately, increases in industrial electricity tariffs are expected to translate into higher consumer prices, potentially leading to prolonged inflation. Furthermore, industries such as semiconductors and steel, reliant on substantial electricity consumption, fear that rising prices may undermine their export competitiveness.
