South Korea's new energy plan puts pressure on Kepco
Power utility giant must adjust to push for less nuclear power and coal usage
KIM JAEWON, Nikkei staff writer
SEOUL/JEJU - The blades of some 20 wind turbines spin at the Sinchang Wind Power Complex, off the western coast of Jeju, South Korea's popular resort island. The turbines, run by a subsidiary of Korea Electric Power, are part of a project to make the island, which is serving as a test bed for advanced energy technologies, carbon free by 2030.
It is also part of a broader effort by state-owned Kepco, the country's dominant power producer, to increase its capacity in the renewables sector, which includes wind power and solar energy. According to the company, it wants renewables to account for 11% of the company's electricity generation capacity by 2029, up from 6% last year.
The new government of President Moon Jae-in is now setting an even more ambitious target for renewables. It wants 20% of the country's electricity to come from green sources by 2030 so as to reduce South Korea's dependence on nuclear reactors and coal.
Moon has already ordered the temporary suspension in June of 10 coal-powered plants that are at least 30 years old before shutting them down completely by the end of his five-year term in 2022. The action is in response to increased pollution levels and a search for cleaner energy sources.
Moon is also hoping to phase out nuclear power due to safety concerns, although a deadline is still unclear. He has already promised not to build any new nuclear power plants and abandon two reactor sites that are already under construction. The announcement has caused Kepco's share price to tumble as investors worry that the company's operating costs will rise.
Kepco's share price has fallen by 13% from its year high on March 23 to 42,450 won on May 26, while the benchmark Kospi index rose by 8% over the same period to a record high of 2,355.30 on May 26.
A reduced dependence on nuclear and coal will mean that Kepco will have to rely more on liquefied natural gas to generate power, which will squeeze profit margins. Nomura analyst Cindy Park estimates that Kepco's net profit will decline by 6% if there is a 6.5% increase in LNG power generation to offset a 5% fall in coal power generation, for example.
"The Moon Jae-in government's policy to cut coal-powered generation and increase LNG generation has been weighing on Kepco's stock price recently because of worries over higher fuel costs," said Shon Ji-woo, an analyst at SK Securities. "Investors are concerned that generation from expensive LNG will increase while that from cheap coal will diminish."
Nuclear and coal
Kepco has been a heavy user of coal and nuclear power, with coal accounting for 29% of power generation and nuclear 22% as of last December, according to the company. Sean Hwang, an analyst at Moody's, the credit ratings agency, said the temporary closure of the coal-fired power plants, "which aims to curb the country's airborne fine dust, is a credit negative for Kepco because a reduction in coal-fired generation means increased reliance on more expensive gas-fired plants, thereby lowering operating cash flow."
Poor performance in the first quarter also caused the decline in the share price. The company posted 15.1 trillion won ($13.5 billion) in sales in the January-March period, down 3.4% year-on-year, while net profit attributable to shareholders tumbled 59.3% to 869.5 billion won.
Analysts said that this is largely due to increased power purchases from independent power producers as well as rising energy prices. "Kepco increased power supplies from outside the company, resulting in reducing operating profits by 754.3 billion won," said Kang Seong-jin, an analyst at KB Securities. "Prices for coal and oil also increased, hiking fuel costs by 15.8%."
Paik Un-kyu, an energy engineering professor at Hanyang University in Seoul who produced Moon's energy policy, said that Kepco needs to change to cope with the switch from nuclear to renewables.
"Kepco should lead big renewable energy projects alongside small and medium-sized enterprises. The company also should change the structure of the power industry by adopting platforms based on the internet of energy rather than distributing and selling electricity," said Paik, referring to the use of digital technology to make energy usage more efficient.
Paik said Moon's energy policy "reflected social demands for renewable energies based on the need for clean air and public safety." The new energy policy was based on a review of energy policies in the U.S., Germany, the U.K., France, Japan and China.
Analysts said that Kepco will be under pressure to adopt such changes quickly due to its state ownership and role as the country's main power utility. The government owns 51.1% of Kepco, including a 32.9% held by the state-run Korea Development Bank.
"Kepco is likely to invest in developing renewables and retrofit its existing coal-fired power plants to meet stricter environment regulations. The government will continue to want Kepco to implement the country's energy policy," said Hwang.
In response to the government's recent action on coal-fired plants, Cho Hwan-eik, the Kepco chief executive, held an emergency meeting with the heads of 11 affiliates on May 19 to plan how to cut fine dust produced by coal-powered plants by half, from 174,000 tons last year to 87,000 tons by 2022. Kepco said it would invest 7.5 trillion won over the next five years to improve environmental facilities and emission measurements.
But the company is waiting for decisions by the government on what to do over the long term, especially regarding the ambitious renewables target, which goes beyond Kepco's plan. "At this moment, we don't have any specific plan for an energy policy, which is determined by the government's energy supply plan," said Kim Hyung-kwan, a Kepco spokesman.
The energy ministry said the new government has set a clear target -- for 20% of all power generated in the country to come from renewable sources by 2030. One energy official said the new guideline presents a dilemma since the need for an environment-friendly policy must be balanced against the power supply and demand situation -- and take into account economic efficiency.
If the government plan regarding greener energy is to be implemented, Kepco would wish to pass on its added costs to its users, as renewables are more expensive than coal or nuclear. Paik hinted at a possible increase in electricity bills, which are among the lowest in the region. But he also stressed any hike would be kept to a minimum.
The government, meanwhile, intends to introduce tax incentives geared toward renewable energy sources to avoid a drastic rate increase.
One big impact of the new energy policy is that it throws into doubt the government's earlier efforts to export nuclear technology and reactors, which are led by Kepco. The company was managing 36 energy projects in 24 countries as of March, including an $18.6 billion nuclear deal that was signed in 2009 for four reactors in the United Arab Emirates. Kepco is designing and building the nuclear units. It is also supplying nuclear fuel and giving technical support and training.
Kepco has also recently been in talks with Toshiba about acquiring its 60% stake in the British nuclear power company NuGen. Paik said Moon's energy advisors did not discuss the future of the overseas nuclear deals, while Kepco said it is still in negotiations with Toshiba about NuGen.
Critics say that it is about time to reform Kepco, whose workforce is well-paid and enjoys job security, which reflects the company's near-monopolistic status. Kepco is the most favored state company among university graduates and other job seekers, according to a recent survey by Saramin, an online job search company.
Kepco is often referred to as the "workplace of God" because of its favorable job conditions. An average Kepco employee earned 79 million won in 2015, according to the finance ministry, more than two times the average salary in South Korea. Employees are guaranteed jobs until they turn 60 when most South Korean companies try to retire workers when they are still in their early 50s. But those cushy conditions may not last as the new energy policy could reduce income.
A history of challenges
The company, however, has had to confront other challenges since it was founded in 1898 as Hansung Electricity, which was managed by two American engineers. Since then, the company survived the Korean War to play a key role in the country's rapid modernization that began in the 1960s.
In 2001, Kepco's monopoly grip on the power market was broken when the government allowed other companies to produce power under a liberalization program. Since then these independent power producers, which include Posco, SK and GS, can sell their power through the Korea Power Exchange. They accounted for 25% of total electricity capacity in 2016, and the government plans to increase their share to 34% by 2029.
Kepco also adapted a decentralized structure by creating six affiliates responsible for power generation in separate regional markets, while the parent company focused on the transmission and distribution of electricity. But Kepco has been seen at times as resisting further market liberalization.
Analysts said another problem with Kepco is that its bureaucracy acts like a government ministry despite being a commercial enterprise. This is due to the fact that government officials often land top management jobs at Kepco after retiring from the civil service.
The 64-year-old Cho, for example, was a veteran bureaucrat, including being vice minister at the ministry of industry and energy, before being appointed as Kepco chief executive in 2012 after his predecessor was forced to resign over a scandal. Cho has been credited, however, for improving the company's performance, which is why he is serving his third term which is due to expire in March 2018.
Other key posts are often given to former lawmakers who lost elections or retired heads of government agencies. The company's auditor, Lee Seong-han, is a former head of the National Police Agency who has little knowledge of the energy sector. Cho Jeon-hyuk and Lee Kang-hee, former lawmakers, have been outside directors of the company since 2014 even though they lack energy experience.
Kepco has also been accused of acting in an arrogant manner at times when dealing with the public. Several years ago, Kepco clashed with the residents of Miryang, a small rural village, over the building of power transmission lines. The villagers, many of them elderly, alleged that Kepco sought to buy support by giving local supporters money, which divided the community. The company also called in the police to remove local protesters.
Kepco, however, may enjoy one benefit with the coming to power of Moon. The new president is likely to oppose moves to privatize the company, an idea that had been discussed by previous conservative governments. Instead, he believes that government agencies and companies, including Kepco, should play a bigger role in tackling social problems.