South Korean Media: Electricity Prices May Double Amid Two Shocks from Middle East Conflict

¬ Oil prices up 55%, LNG surges 81%... Wholesale electricity prices may exceed 200 KRW per 100 KRW, with impacts expected to emerge starting May–June as scorching heat arrives

There are growing concerns that the high oil prices triggered by the Middle East conflict will manifest in South Korea’s power generation costs within 2–3 months—specifically in May and June—leading to an unprecedented comprehensive crisis in the country’s electricity market. The reason is that this year's summer heatwave is expected to arrive earlier than usual. If soaring procurement costs coincide with a surge in cooling demand, Korea Electric Power Corporation (KEPCO) could face uncontrollable losses due to "buying high and selling low." Consequently, South Korea faces a dilemma between raising electricity rates or worsening KEPCO’s fiscal condition.

According to data from the Korea Petroleum Association’s oil pricing information system, on the 13th, the benchmark price for Dubai crude—the primary import source for Asian countries—stood at $106.50 per barrel (based on Singapore spot prices). Although oil prices have declined from their peak of $169.75 on March 23, following the outbreak of U.S.-Iran war, they remain over $30 higher than pre-conflict levels of $68.40 (February 27). In particular, the Northeast Asia LNG spot price indicator JKM has surged from $10.72 before the war to $19.44 currently—nearly doubling.

Experts analyze that if the blockade of the Strait of Hormuz persists and oil prices remain elevated, KEPCO’s electricity procurement cost—the wholesale electricity price (SMP)—could double starting in May. During the Russia-Ukraine war in 2022, international LNG prices skyrocketed, causing SMP to triple. At the time, the government did not fully reflect these rising costs in electricity tariffs, ultimately leading KEPCO to accumulate astronomical debt and triggering a sharp rise in industrial electricity prices.

Electricity price hike vs. KEPCO’s mounting debt… the dilemma returns

South Korea’s electricity market operates under a priority dispatch mechanism that favors the lowest-cost sources—nuclear and thermal power—before resorting to the most expensive fuel source: LNG power generation. As such, KEPCO’s electricity procurement cost (SMP) is determined primarily by the unit price of the last-resort energy source—LNG. When LNG prices rise, SMP rises accordingly, driving up procurement costs.

About 80% of South Korea’s LNG imports are long-term contracts, with 70% linked to international oil prices. The U.S.-Iran conflict has driven up oil prices, pushing the Northeast Asia LNG spot price index JKM (Japan Korea Marker) to $19.44 per MMBtu (million British thermal units)—almost doubling from pre-war levels. Industry experts warn: “Even if the war ends immediately, high oil prices are likely to persist for a considerable period.” This will inevitably keep LNG import prices elevated for the long term. Kim Tae-sik (name in Korean), research fellow at the Korea Energy Economics Institute, said: “As far as I know, Korea Gas Corporation recently purchased large volumes of LNG in the high-priced spot market to secure inventory."

The impact of the high oil price shock from the Middle East conflict on South Korea’s power wholesale market may become evident in May–June, intensifying public concern. This is because the early arrival of summer heat is expected to significantly increase electricity demand. The Korea Meteorological Administration forecasts a 60% probability that temperatures in May will exceed historical averages. On the 14th, daytime temperatures in Yangju City, Gyeonggi Province, reached 29.9°C—approaching summer-like conditions.

Early onset of summer heat

Additionally, potential attacks by Iran may damage Qatar’s Ras Laffan gas facility—the world’s largest LNG production hub—adding further instability to supply-demand dynamics. Qatar accounts for approximately 15% of South Korea’s LNG imports. Repairing the Ras Laffan facility will take several years, while European nations are actively building winter gas reserves, further tightening global LNG supply. Professor Jung Yong-hyun (name in Korean), former professor at the Graduate School of International Studies, Asia University, South Korea, predicts: “The SMP price per kWh is likely to break through 200 KRW (approximately RMB 0.93).” Professor Yoo Seung-hoon (name in Korean) of Seoul National University of Science and Technology also forecasts: “Rising fuel costs due to the Middle East conflict, combined with system upgrade expenses from expanding renewable energy capacity, are increasing pressure for electricity price hikes."

If wholesale electricity prices rise, the government will face a difficult choice: either raise electricity tariffs or allow KEPCO to suffer unsustainable losses from “buying high and selling low.” On March 26, President Yoon Suk-yeol candidly stated: “We’re trying to avoid adjusting electricity prices as much as possible,” adding, “If we want to maintain current rates, KEPCO’s losses and deficit will expand dramatically.” With local elections approaching in June, political sensitivity around price increases only deepens this dilemma.

During the Russia-Ukraine war, government efforts to suppress electricity price increases led to the collapse of KEPCO’s financial structure. Subsequently, industrial electricity prices rose sharply, causing a sudden spike in corporate energy burdens. The business community now fears this nightmare may repeat itself.

Government considers suppressing electricity prices

Recent reports from inside and outside the government indicate: “Similar to the Russia-Ukraine war era, the Ministry of Climate Change and Energy is considering temporarily reinstating the SMP cap starting in May.” Refining industries are already suffering losses due to oil price caps; power generation may soon become the next victim. However, a ministry official stated: “The rumors about re-implementing the SMP cap are not true,” though they acknowledged: “Measures are being discussed for emergency situations.”

Experts warn that artificially suppressing electricity prices could worsen the crisis. Professor Cho Young-juk (name in Korean), former president of the Korea Power Exchange, said: “We should subsidize vulnerable energy consumers, but frequently intervening to suppress oil and electricity prices can make citizens lose awareness of the importance of energy conservation.” He added: “Whenever energy prices surge, South Korea’s structural weaknesses as a resource-poor nation become glaringly apparent. The most practical and effective means of energy security is to use price signals to guide reduced demand."

Source: Chosun Ilbo

Original article: toutiao.com/article/1862503340952588/

Disclaimer: The views expressed in this article are those of the author(s).