Jeong Seung il, the 21st president of Korea Electric Power Corporation (KEPCO), was inaugurated. President Jung is an energy expert who has mastered the three major tasks of industry, energy, and trade at the Ministry of Trade, Industry and Energy. He served as Deputy Minister of Industry until November 2020.
In the era of carbon neutrality, KEPCO is faced with the task of playing a pivotal role in change and innovation at a turning point in the electric power industry. President Jeong, the head of Korea's largest public electric power company, is expected to face a difficult road as the task to be solved is formidable.
KEPCO should play a leading role in expanding the supply of new and renewable energy in line with the government's energy transition policy. It is also urgent to resolve the deficit by realizing electricity rates. The biggest challenge is to find a balance between entrepreneurship and publicity.
Since KEPCO is a public corporation that has to fulfill its social responsibilities and fulfill national tasks, it must also represent the interests of its shareholders as it is a stock company listed on the New York Stock Exchange. KEPCO's dilemma begins with the identity of a corporation as well as a public corporation.
Even in a situation where losses from shareholders are inevitable due to accumulation of deficits, we lead large-scale new and renewable energy projects that involve risks while enduring deficits and shareholder opposition, and implement national projects such as the establishment of the Korea Energy Institute of Technology (KEPCO), a presidential campaign pledge of President Moon Jae-in. That's why.
At the inauguration ceremony, President Jung emphasized, “At a time of great transition in the energy industry called carbon neutrality, we need to seriously consider preemptive technological innovation in all energy fields and drastic energy system transition. did.
The first task that President Jung faced was the realization of electricity bills, which his predecessor, Kim Jong-gap, had not finished. The government and KEPCO decided to introduce a fuel cost indexation system from 2021, and as President Jung was a former bureaucrat who served as the vice minister of industry, it was expected that he would persuade the government to raise the electricity rate. I started out with the burden of performance.
Jeong Seung-il, President of Korea Electric Power Corporation / Provided by Korea Electric Power Corporation
① Realization of electricity rates
Resolving the deficit by normalizing the fuel cost index system
In December 2020, KEPCO reorganized the electricity rate system and introduced a new fuel cost index system. The fuel cost indexing system is to periodically reflect changes in the fuel cost used for electricity production in the electricity rate. When the fuel cost of power generation such as crude oil, natural gas, and bituminous coal rises, the electricity rate is lowered, and when the fuel cost falls, the electric rate is lowered.
However, there is growing concern that the system has become obsolete as the government freezes electricity rates in the third quarter as in the second quarter due to inflation concerns despite a surge in fuel costs such as international oil prices.
As the fuel cost index is not working properly, the abolition theory is also rising. Electricity rates have not been raised since November 2013. The government attempted to introduce a fuel price indexation system in July 2011, but delayed the introduction due to continued high oil prices, and was eventually abolished in 2014.
KEPCO announced on June 21 that it has decided to apply the final fuel cost adjustment unit price for July to September this year at minus 3 won per kWh, the same as in the second quarter. Considering the rise in international oil prices, the electricity rate had to be raised by about 3 won per kWh in the third quarter, but in the end, the electricity rate hike failed for two consecutive quarters following the second quarter.
KEPCO said, “There was a factor in the fuel cost adjustment unit price adjustment in the third quarter due to the sharp rise in international fuel prices from the end of 2020. There is a need to promote people's livelihood stability," he said.
Reporter Yoon Seok-pyo The failure to raise electricity rates caused KEPCO to tighten its belt again. KEPCO succeeded in turning to black in the first quarter of 2021 by posting sales of 15.75 trillion won and operating profit of 571.6 billion won, but it is expected to lose money in the third quarter following the second quarter due to the freezing of electricity rates.
Although KEPCO has a long way to go to improve profits, such as raising electricity rates, the number of places to spend money continues to increase. According to the government’s ‘renewable energy 3020’ implementation plan, KEPCO and its power generation subsidiaries will have to invest about 120 trillion won.
In the midst of the global energy transition, KEPCO must shift its business model to new and renewable energy, but the problem is that large scale costs are required in the process of transformation. KEPCO is given the largest reduction obligation in Korea's electricity market.
Jae sun Yoo, an analyst at Hana Financial Investment, described KEPCO's situation as a 'diet while starving' and expressed it as 'muscle loss (capital) accompanying the process of reducing fat (carbon)'. Analyst Yoo said, "While policy costs are steadily increasing, in order to raise capital without government financial support, it is absolutely necessary to increase the selling price by at least the cost increase."
The government announced that if the current high fuel cost level is maintained or the upward trend continues in the second half of the year, it will review the change in fuel cost to be reflected in the adjusted unit price in the fourth quarter. Although the government has left room for a rate increase in the fourth quarter, the industry has a strong view that it will not be easy to raise the electricity rate in reality because it may adversely affect voter votes if the electricity rate is raised ahead of the 2022 presidential election.
② Expansion of low-carbon, eco-friendly overseas business
Eliminating ESG risk with ‘coal-free’
In the era of energy transition, President Jung must also put the environmental, social and governance (ESG) management on the main track, which converts the business model to a low-carbon and eco-friendly one for KEPCO's sustainable management. KEPCO declared ‘coal free’ in October 2020 and is working hard on ESG management.
KEPCO announced a decision to suspend investment in overseas coal power plants in line with its coal-free policy. The strategy is to focus on new and renewable energy and gas complex business instead of pursuing coal fired power generation overseas. As coal power generation is emerging as an ESG risk, KEPCO is accelerating the transition from coal-fired power generation to renewable energy generation together with its power generation subsidiaries.
However, KEPCO decided to continue promoting the Java 9/10 and Vietnam Bungang 2 projects among the four coal fired power generation projects being promoted overseas, taking into consideration the relationship between the government and business partners of the other country and the joint advancement of Korean companies.
The other two projects, the Pangasinan thermal power plant project in the Philippines and the Tabamesi project in South Africa, are considering suspension. After 2050, all overseas coal fired power generation projects operated by KEPCO will be terminated.
As President Moon announced at the Climate Summit on April 22 to suspend public financial support for new overseas coal power plants, the position of coal power companies is getting narrower. It may be excluded from investment by global institutional investors.
Because KEPCO is making large-scale investments in overseas coal fired power generation projects, major global pension funds, including the Dutch public pension fund, have recovered their investment one after another. BlackRock, the world's largest asset manager, has also warned of a halt in investment for the same reason.
Ignoring ESG can make business and financing impossible. Companies that do not meet ESG standards are excluded from investment or exercise of shareholder rights in investment companies is on the rise. According to data from the Federation of Korean Industries, the size of global ESG investment assets stood at 40.5 trillion dollars last year (about 46020 trillion won), which has more than tripled compared to 2012. Europe and the US account for 46% and 39%, respectively, of 85% of global investment.
KEPCO is actively reviewing the gas combined project as an alternative to coal power generation. KEPCO is operating a number of overseas gas combined cycle power plants, such as Ilihan in the Philippines (1200MW) and Shweihat S3 in the United Arab Emirates (1600MW). Malaysia's Pulau Indah (1200 MW) will start commercial operation from January 2024. KEPCO and its power generation subsidiaries plan to develop the technology by 2023, undergo a demonstration test from 2024, and apply it to a new LNG combined cycle power plant or replace existing facilities.
③ Expand the supply of new and renewable energy
Creating future food from ‘offshore wind power’
According to the government policy, KEPCO should play a leading role in leading the expansion of the supply of new and renewable energy. The electric vehicle charging infrastructure construction project that KEPCO is developing as a new business is also part of the supply of new and renewable energy.
KEPCO is creating various business models by collaborating with private companies based on 9,800 charging infrastructures nationwide. It is cooperating with SK Energy, SK Rent-a-Car, Tmap Mobility, and GS Caltex to develop services to improve the convenience of charging electric vehicles and promote the supply of electric vehicles.
The passage of amendments to the Electricity Business Act to keep pace with the government's 2050 carbon neutrality policy also depended on President Jeong. According to the ‘renewable energy 3020’ policy, the government aims to increase the proportion of offshore wind power to 12 GW by 2030.
KEPCO is developing offshore wind power as a new revenue source in line with the government's Green New Deal policy and energy transition. With the restructuring of the electric power industry in 2001, KEPCO was unable to generate electricity and sell electricity at the same time. In July 2020, if the amendment to the Electricity Business Act, proposed by Representative Song Gap seok of the Democratic Party of Korea, is passed, KEPCO will be able to produce electricity while directly operating new and renewable energy generation facilities such as solar and wind power generation.
Following the restructuring of the electric power industry in 2001, KEPCO, which had only sold electric power and had a grid business, is preparing to directly enter large scale renewable power generation projects such as offshore wind power. However, the law has been pending in the National Assembly for nearly a year as civil society groups point out that there is a risk of undermining net neutrality.
Although KEPCO announced that it will focus on public-led large-scale offshore wind power projects, which the private sector cannot participate in, the observation that KEPCO can directly participate in the renewable energy power generation project is gaining momentum as KEPCO launched the offshore wind power project group in September 2020. In the industry, it was interpreted that KEPCO formed a dedicated organization with the passage of the Electricity Business Act amendment in mind.
KEPCO has not been able to directly participate in the renewable energy power generation business in Korea, so it has been engaged in the renewable energy business by investing in and establishing a special purpose company (SPC). Currently, KEPCO is developing the Shinan offshore wind power project (1.5GW), the southwest Jeollabuk do offshore wind power project (1.2GW), and the Jeju Hallim offshore wind power project (100MW). It plans to complete the development and construction of the Jeju Hallim Project in 2025, the Jeonbuk Southwest Region Project in 2028, and the Shinan Project in 2029 and start commercial operation.
Recently, KEPCO has developed a new technology, “offshore wind power batch installation technology,” that can shorten the construction period of offshore wind power plants from 90 days to 10 days. This technology is a method of assembling the lower foundation and upper turbine of a generator in a safe port, then lifting the entire structure of the generator and transporting it to the sea for installation. A batch installation ship (MMB), which is a specially manufactured vessel, is used.
MMB can be applied to the lower foundation transportation installation of KEPCO's southwest region and Shinan offshore wind power project. It is also expected to be used for small-scale offshore wind farms and multi-purpose offshore operations promoted by the private sector. KEPCO expects that the use of MMB will contribute to the expansion of offshore wind power generation, which is the key to carbon neutrality in 2050.
KEPCO is also striving to develop innovative technologies to solve the intermittent and volatility problems of new and renewable energy. KEPCO has recently succeeded in developing a system that maintains the stability of the power system by predicting the amount of power generated from solar and wind power plants.
When the amount of new and renewable power generation changes rapidly due to the influence of weather, it is important to take proactive measures to keep power facilities stable. It is expected that about 25 billion won in system reinforcement costs will be reduced by 2025 by improving the power system's new and renewable energy capacity.
