Early Heatwave and Rising LNG Prices Pressure Electricity and Gas Rates

Rising international liquefied natural gas (LNG) prices and an expected increase in cooling demand this summer are intensifying pressure for electricity and gas rate hikes in the second half of the year. The surge in LNG prices is beginning to be reflected in domestic gas rates, while the potential for increased electricity demand is raising concerns about higher wholesale electricity prices, which could further strain the finances of Korea Electric Power Corporation (KEPCO) and Korea Gas Corporation (KOGAS).
 
According to KOGAS on June 3, the wholesale price of natural gas for city gas power generation has risen to 20.8335 won per megajoule this month, a 10.4% increase from last month’s 18.8694 won. Wholesale prices for industrial and transportation natural gas have also increased by around 10%, indicating that the rise in international LNG prices is starting to affect domestic rates.

The upward trend in international LNG prices continues. The Japan Korea Marker (JKM), a key indicator for spot LNG prices in East Asia, rose from $10.7 per million British thermal units (MMBtu) on February 27 to $18.6 per MMBtu as of June 2, marking an increase of over 70% in approximately three months.

A key issue is that the rise in LNG prices impacts domestic energy rates with a delay. Typically, the import price of LNG is reflected in electricity and city gas rates four to five months later. If the current trend of high international prices continues, the pressure for rate adjustments in the second half of the year could intensify.

The Korea Energy Economics Institute recently projected in a report that even if geopolitical uncertainties in the Middle East ease, the domestic LNG import price is expected to remain high until October. The report noted that high oil prices, which influence LNG pricing, combined with increased cooling demand in Asia, will likely limit the speed of price declines.
 
The electricity supply situation is also becoming increasingly strained. The Korea Meteorological Administration forecasts that temperatures this summer are likely to be above average. Indeed, the average temperature across the country this spring was the second highest since 1973, and early June has already seen temperatures exceeding 30 degrees Celsius in many areas, leading to an earlier-than-usual increase in cooling demand.

If the heatwave persists, the share of LNG in power generation is expected to increase to meet the surge in electricity demand. This could further accelerate the rise in wholesale electricity prices (SMP), which typically increase as LNG generation costs rise.

So far this year, SMP has been on an upward trend each month. The average SMP was 90.43 won in December last year, rising to 103.54 won in January, 108.52 won in February, 110.03 won in March, 118.94 won in April, and reaching 121.36 won in May. In June, the daily average is approaching the 130 won mark.

If SMP rises above a certain level, KEPCO's electricity procurement costs could increase by billions of won in a short period. Currently, KEPCO has maintained a freeze on rates for industrial users since the fourth quarter of 2024 and for general users for 12 consecutive quarters, forcing it to absorb rising costs.

KEPCO's financial burden remains significant, with its consolidated debt reaching approximately 206 trillion won and borrowings at 128 trillion won. Daily interest expenses amount to about 11.4 billion won, raising concerns that prolonged increases in electricity procurement costs could hinder profitability recovery.

KOGAS faces similar challenges. As of the end of March, the 'receivables from residential customers' due to supplying gas below cost amounted to 13.3717 trillion won. Its debt is also around 42 trillion won, indicating substantial financial pressure.

In this context, the burden of high exchange rates must also be considered. Given South Korea's high dependence on energy imports, rising exchange rates inevitably lead to increased raw material costs. Reports indicate that for every 10 won increase in the won-dollar exchange rate, KEPCO and KOGAS face annual foreign exchange losses of 200 billion won and 20 billion won, respectively.

While inflation remains stable, the ongoing rise in energy costs has industry insiders anticipating that discussions on adjusting electricity and gas rates will intensify in the second half of the year.

An industry official stated, "The recent simultaneous rise in LNG prices and summer electricity demand is concerning. Public rate increases have been effectively suppressed due to local elections, but if cost burdens continue to accumulate, rate adjustments in the second half of the year will be unavoidable."