As the Russia-Ukraine war persists, global energy prices are on the rise and propelling electricity bills around the world even higher. Bucking the trend is South Korea. For a while, the country’s electricity rate freeze will offer a reprieve to consumers and companies, but it is a short-sighted policy that could backfire with a vengeance.
State-run power firm Korea Electric Power Corp. had proposed a 3 won (0.2 cent) increase in the adjusted unit fuel cost, a benchmark for the country’s electricity rates, in the second quarter, citing a drastic hike in global energy costs. But the Moon Jae-in administration rejected it, claiming that it needs to stabilize prices for the people hit by the protracted COVID-19 and high inflation.
Kepco, which has no ultimate say about the rate, helplessly announced Tuesday it would set the adjusted unit fuel cost at zero won per kilowatt-hour for the April-June period of this year, keeping the rate unchanged from the previous quarter.
A closer look at what happened is worrisome. Kepco’s original estimate was that the adjusted unit fuel cost should be raised by 33.8 won, reflecting the steep rise in global energy prices, but it proposed a 3 won increase due to the upper limit in the rate hike. As the government has even rejected a dramatically reduced rate hike, the incoming administration led by President-elect Yoon Suk-yeol has to shoulder the extra burden. The new administration would have to keep raising the rate in the next five years to narrow the gap between cost and price -- a dismal prospect at a time when the pandemic and the war in Ukraine still remain unresolved.
The government claims that the rate freeze is inevitable as the country needs to rein in high inflation. Prices, of course, are a serious issue. Korea’s consumer prices grew 3.7 percent on-year in February and inflation went up more than 3 percent for five months in a row, above the Bank of Korea’s inflation target of 2 percent. The central bank and the International Monetary Fund predicted Korea’s inflation would grow 3.1 percent this year.
Against this backdrop, it is understandable that the government is reluctant to let the rate go up. But inflation is not a new factor. Furthermore, there is no guarantee that consumer prices would stabilize in the near future, even though the government implements a set of moves for stabilization. Delaying the rate hike for electricity bills, therefore, is only a temporary fix.
Local media outlets also pointed out that the rate freeze could be one of the Moon administration’s political calculations. Ahead of the June 1 local elections, a rate hike by the current administration could cast a negative light on candidates of the ruling Democratic Party of Korea.
More importantly, the government’s latest “popular” decision has rendered the flexible billing system almost nonexistent. In 2020, Korea kicked off a flexible electricity rate system in which rates are adjusted every three months in accordance with global prices of liquefied natural gas, coal and crude oil.
But the flexible billing system did not work at all, mainly because the Moon administration kept its “popular” energy policy and ignored the system it had introduced.
Kepco’s snowballing losses are the very outcome of the broken flexible billing system. The state-run company suffered a record operating loss of 5.86 trillion won in 2021. Kepco’s reported debt, excluding capital leases, jumped to around 80.5 trillion won at the end of 2021 from 69.7 trillion won at the end of 2020.
In a free market, price depends on the interaction between demand and supply. The government should stop distorting the price mechanism, as its short-sighted policy will bring more harm than good.
By Korea Herald (firstname.lastname@example.org