Power utilities struggle with heavy losses

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Power utilities struggle with heavy losses

SEOUL TOKYO South Korean and Japanese power utilities are struggling with heavy losses, kept from passing rising generation costs on to customers and forced to reconsider the timing of green investments, according to analysts.

The industry is squeezed between higher 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, 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 to a loss of 1.12 trillion won a year earlier.

KEPCO is afloat with bond issuances and bank loans. At the end of 2021, debt had reached 223 per cent of equity capital.

President Yoon Suk-yeol's approval rating, just 39 per cent this month, is too low for him to allow a bigger rise in electricity prices than the 13 per cent approved for this year and a similar one for 2023, analysts said.

According to Na Min-sik, an analyst at SK Securities, "In order for KEPCO to swing to profit, we estimate that electricity prices must be at least 30 per cent to 40 per cent higher than last year, or the Dubai oil spot price must fall to pre-COVID levels."

KEPCO said it had no plans to cut maintenance budgets or facilities investments.

Analysts told Reuters that KEPCO's capital spending would drop 20 per cent next year. They said items that would be cut would be improvements to transmission grids to support highly variable electricity flows from renewable sources.

Since renewable power fluctuates, investment is necessary in transmission infrastructure to grow the portion of renewables in the energy mix, Na said. It's a burden as 30 trillion dollars are projected to be lost this year, and there will be more losses next year. Another analyst said that the biggest delays in new power plant construction, maintenance of existing plants and power grid infrastructure are the biggest delays in new power plant construction, especially in renewables. South Korea has decided to cap the base rate at which KEPCO buys electricity wholesale from generation firms for at least three months.

According to an industry association, this will discourage investment in renewable generators.

We estimate that this could cost us revenues of 90 won per kilowatt. Jung Woo-sik, an executive at the Korea Photovoltaic Industry Association, said if the cap is extended for a year, it would cost a 10 megawatt generator 100 million won. This will hurt the renewables industry. For Japan, nine out of 10 key regional electricity utilities booked a net loss in April-September, 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 who have applied for price rises said they would maintain green investment, but analysts expect some deferral.

According to Toshinori Ito, president of Ito Research and Advisory, the companies that are saying they would review all new investments and may delay investment towards decarbonisation by Japanese utilities.

By the end of November, five out of 10 major regional utilities had applied to raise prices by between 28 per cent and 46 per cent from April.

Their financial situation had deteriorated sharply due to Russia's invasion of Ukraine and the yen's plunge against the U.S. dollar. They said that that could hinder the supply of electricity.

The Japanese industry ministry will examine whether each company's efforts to improve management efficiency, such as reducing labor costs, are sufficient.