Kepco debt crisis exposes South Korean vulnerabilities

South Korea’s debt-ridden state energy monopoly Kepco made a reprieve last month when the nation’s nationwide assembly voted to raise the business’s financial obligation ceiling from two times to 6 times its equity.

The vote followed a caution from the business that Korea dealt with a “nationwide recession with electrical energy supply being interfered with and the electrical energy market paralysed” unless it was permitted to obtain more.

In 2015, Kepco made a predicted loss of Won30tn ($ 24bn) and released $17bn in bonds as it battled with the chaos in international energy markets. 2 days after the nationwide assembly raised its financial obligation ceiling, Kepco revealed the nation’s biggest quarterly energy rate boost in more than 40 years.

Bond traders and experts stay positive that the Korean federal government, which owns a bulk stake in Kepco, will never ever permit the going to pieces energy supplier to go to the wall. However although the instant pressure has actually been reduced, Kepco’s current travails have actually exposed numerous of the Korean design’s vulnerabilities.

One problem is the level to which South Korea has, through Kepco, utilized low-cost commercial tariffs to subsidise its market’s competitiveness. Korean business pay less for electrical energy than their Chinese equivalents, regardless of South Korea’s gross nationwide earnings per capita being more than 3 times greater than China’s. Through its bulk stake in Kepco, the Korean federal government can surreptitiously support its own business while likewise keeping any losses off its own balance sheet.

Kepco’s financial obligation issues call the sustainability of that design into concern. Unless rates are raised much even more Kepco’s financial obligations are most likely to install. By crowding out other debtors, the scale of Kepco’s bond issuance has actually currently added to a fall liquidity crunch that set off federal government and reserve bank interventions in October in 2015. However if rates are raised considerably, this might not just feed inflation however likewise deteriorate the nation’s valued export competitiveness.

Another vulnerability is highlighted by Kepco’s bad record on performing its green shift– both a sign and a reason for South Korea’s flat-footedness on renewables. In 2020, the nation had the second-lowest share of renewable resource in the G20, simply above Saudi Arabia, according to an evaluation by energy think-tank Cinder.

Kepco financier discussions reveal that in 2021 coal represented 43 percent of the business’s power generation possessions in 2021, followed by 38 percent from nuclear, 15 percent from melted gas and simply 3 percent from hydroelectric and renewables.

“[Kepco has] been doubling down on nonrenewable fuel sources even while the proof was clear that high and unstable coal and LNG rates mostly identified its operating margins,” stated Christina Ng, of the Institute of Energy Economics and Financial Analysis. “[Its] inactiveness caused repeating functional losses for the majority of the last years and a constant boost in financial obligation regardless of the business currently being overleveraged.”

Joojin Kim, handling director of Solutions For Our Environment, a Seoul-based advocacy organisation, keeps in mind that the business acquires 69.4 percent of its power from 6 Kepco-owned generation business, or gencos. These represent 100 percent of the energy South Korea gets from nuclear, 90 percent it gets from coal, simply over 40 percent from gas and simply under 10 percent from renewables.

This indicates that more than 90 percent of the energy South Korea obtains from renewables is offered by gencos not owned by Kepco. “For Kepco, spending for renewables is money heading out the door, since it is going to personal gencos instead of remaining within the Kepco system,” stated Joojin Kim. He argues that Kepco’s imposition of punitive charges on generation business it does not own is pricing renewables out of the marketplace.

This has actually had ripple effects for business such as Samsung Electronic devices, which is under pressure from financiers and clients like Apple to decarbonise its supply chains.

Samsung, which devoted in 2015 to attaining 100 percent eco-friendly electrical energy in its around the world operations, is being hamstrung by a lack of competitively priced renewables in your home. However observers keep in mind that if Korea’s leading corporations do handle to change to renewables suppliers from outside the Kepco system, the resulting loss of custom-made would deal another large blow to the energy monopoly’s practicality.

” For many years, Kepco’s service design threatened South Korea’s green shift,” stated Joojin Kim. “What we are seeing now is South Korea’s green shift threatening Kepco’s service design.”

christian.davies@ft.com