Kepco debt crisis exposes South Korean vulnerabilities

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South Korea’s state of Kepco’s debt-ridden energy monopoly was given a reprieve last month when the country’s national assembly voted to raise the company’s debt ceiling from twice to six times its equity.

The vote followed a warning from the company that Korea was facing a “national economic crisis in which electricity supply was disrupted and the electricity market crippled” unless it was allowed to borrow more.

Last year, Kepco posted an expected loss of $30 trillion ($24 billion) and issued $17 billion in bonds as it grappled with the turmoil in global energy markets. Two days after the national assembly raised the debt ceiling, Kepco announced the country’s biggest quarterly energy price increase in more than 40 years.

Bond traders and analysts remain confident that the Korean government, which owns a majority stake in Kepco, will never allow the floundering energy supplier to go to the wall. But while immediate pressure has been eased, Kepco’s recent trials have exposed several vulnerabilities of the Korean model.

One problem is the extent to which South Korea, through Kepco, has used cheap industrial tariffs to subsidize the competitiveness of its industry. Korean companies pay less for electricity than their Chinese counterparts, despite South Korea’s gross national income per capita being more than three times that of China. Its majority stake in Kepco allows the Korean government to covertly support its own companies while keeping any losses on its own balance sheet.

Kepco’s debt problem calls into question the sustainability of that model. Unless prices are raised much further, Kepco’s debt is likely to mount. By crowding out other borrowers, the size of Kepco’s bond issuance has already contributed to an autumn liquidity crisis that led to government and central bank intervention in October last year. But if prices are raised substantially, it could not only fuel inflation but also weaken the country’s prized export competitiveness.

Another vulnerability is illustrated by Kepco’s poor track record of executing the green transition – both a symptom and a cause of South Korea’s flat-footed renewable energy resources. In 2020, the country had the second-lowest share of renewable energy in the G20, just above Saudi Arabia, according to a review by energy think tank Ember.

Kepco investor presentations show that coal accounted for 43 percent of the company’s 2021 power generation assets in 2021, followed by 38 percent from nuclear, 15 percent from liquefied natural gas, and just 3 percent from hydro and renewables.

“[Kepco has] has doubled on fossil fuels even while it was clear that high and volatile coal and LNG prices were largely driving operating margins,” said Christina Ng of the Institute of Energy Economics and Financial Analysis.[Its] inaction led to recurring operating losses and a steady increase in debt for most of the past decade, despite the company already being over-indebted.”

Joojin Kim, general manager of Solutions For Our Climate, a Seoul-based advocacy group, notes that the company sources 69.4 percent of its power from six Kepco-owned generation companies, or gencos. These account for 100 percent of the energy South Korea receives from nuclear power, 90 percent from coal, just over 40 percent from gas, and just under 10 percent from renewable sources.

This means that more than 90 percent of South Korea’s renewable energy comes from gencos that are not owned by Kepco. “For Kepco, paying for renewable energy is cash going out the door because it goes to private gencos rather than staying within the Kepco system,” says Joojin Kim. He argues that Kepco’s imposition of punitive levies on generation companies it does not own is pricing renewables out of the market.

This has had knock-on effects for companies like Samsung Electronics, which are under pressure from investors and customers like Apple to decarbonise their supply chains.

Samsung, which committed last year to achieving 100 percent renewable electricity in its global operations, has been hampered by a shortage of competitively priced renewables domestically. But observers note that if Korea’s leading conglomerates manage to switch to renewable energy suppliers from outside the Kepco system, the resulting loss of customers would deal another serious blow to the energy monopoly’s viability.

“For years, Kepco’s business model has been a threat to South Korea’s green transition,” says Joojin Kim. “What we are seeing now is South Korea’s green transition threatening Kepco’s business model.”

christen.davies@ft.com

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