🚨 KEPCO & Power Subsidiaries Restructuring
Today Korean Economic News for Beginners | 2025.09.10
0️⃣ 200 Trillion Won Debt Crisis in Non-competitive Power Market
📌 Incomplete power industry restructuring keeps KEPCO and power companies in same structure, worsening competition absence and market distortions
💬 The structural inefficiencies of Korea Electric Power Corporation (KEPCO) and its power generation subsidiaries are under scrutiny again. Since the incomplete 2001 power industry restructuring, five thermal power companies have maintained virtually identical business structures for 24 years. Under government price controls and absence of competition, KEPCO's debt has exceeded 200 trillion won, and power market distortions are intensifying. The Korea Power Exchange uses settlement adjustment coefficients to maintain power companies' profits at certain levels, eliminating incentives for efficiency improvements and keeping innovation and investment sluggish. Experts agree that fundamental restructuring through power subsidiary mergers and power market liberalization is necessary.
1️⃣ Easy Understanding
The reason why Korea Electric Power Corporation (KEPCO) cannot escape losses despite selling lots of electricity seems complicated but is actually quite simple. The government controls electricity rates so KEPCO cannot set prices freely, and power generation subsidiaries operate with almost identical structures without competition.
Let's first understand Korea's power system structure. Before 2001, KEPCO monopolized everything from power generation to transmission, distribution, and sales. However, to improve efficiency and introduce competition, the power generation sector was split into 5 companies. These are Korea South-East Power, Korea Southern Power, Korea Western Power, Korea Midland Power, and Korea East-West Power.
The problem is that this split did not create proper competitive structure. According to the original plan, these power companies should have been able to sell electricity directly, but KEPCO still monopolizes electricity sales. Power companies generate electricity and sell it to the Korea Power Exchange, then KEPCO buys it again and sells it to consumers.
Let me explain this structure's problems using a restaurant analogy. Imagine 5 restaurants that all make the same menu, but customers can only buy food from one place. The restaurants have no reason to compete with each other, and lose motivation to develop new menus or improve services. Eventually, food quality stays the same while the seller loses money.
Actually, all 5 power companies depend on similar thermal power generation. Thermal power using coal and LNG as main fuel accounts for over 80% of total generation. Rather than developing different specialized areas, they maintain almost identical business models.
The problem became more serious with government price controls. The Korea Power Exchange uses a "settlement adjustment coefficient" system to ensure power companies don't lose money by guaranteeing their profits. Since they get similar profits whether they operate efficiently or inefficiently, there's no reason to pursue innovation or efficiency improvements.
KEPCO's situation is similar. The government sets electricity rates, but power generation costs fluctuate based on international raw material prices. When fuel costs rise, losses occur; when they fall, profits occur - KEPCO cannot escape this structure. When energy prices soared due to the Russia-Ukraine war in 2022, KEPCO recorded 32 trillion won in losses due to these structural problems.
Ultimately, the core problem is that inefficiencies created by a "market without competition" have accumulated, causing the entire power industry to stagnate without innovation and development.
2️⃣ Economic Terms
📕 Settlement Adjustment Coefficient
The settlement adjustment coefficient is a correction mechanism used by Korea Power Exchange to maintain power companies' profits at certain levels.
- It adjusts profit rates so power companies don't experience excessive losses or gains.
- While power companies get guaranteed stable profits, incentives for competition and innovation disappear.
- This is evaluated as an artificial correction mechanism opposite to market economy principles.
📕 System Marginal Price (SMP)
System Marginal Price is the standard unit price applied when power companies sell electricity in the power market.
- It's set based on the most expensive power generation cost and applied equally to all power companies.
- Even efficient power companies receive the same price as inefficient ones, lacking differentiation incentives.
- True market competition requires different prices for different power companies.
📕 Power Industry Restructuring
Power industry restructuring means the policy of converting from electricity monopoly system to competitive system.
- In 2001, 5 power companies were separated from KEPCO to introduce competition.
- However, KEPCO still monopolizes the sales sector, making it an incomplete restructuring.
- Complete restructuring requires power companies to sell directly to customers.
📕 Economies of Scale
Economies of scale means the effect where unit costs decrease as production volume increases.
- Efficient operation of large power plants can lower electricity production costs.
- Since 5 power companies operate separately, they cannot properly utilize this effect.
- Integration or specialization is needed to realize economies of scale.
3️⃣ Principles and Economic Outlook
✅ Vicious Cycle of Inefficiency from Lack of Competition
Let's examine the structural problems arising from the disappearance of competition in the power market.
First, homogenized business structures have eliminated differentiation drivers. All 5 power companies depend on coal and LNG thermal power for over 80%, with minimal investment in renewable energy or new technologies. The original restructuring purpose was for each power company to develop different specialized areas and compete, but reality is the opposite. No differentiation occurred like Korea South-East Power specializing in LNG generation or Korea Southern Power in coal generation. Consequently, 5 companies have almost identical portfolios, creating no synergy effects while increasing duplicate investments.
Second, the "safety net" from settlement adjustment coefficients discourages innovation. Since Korea Power Exchange guarantees power companies' profit rates at certain levels (usually 4-5%), motivation to improve efficiency or reduce costs has disappeared. Even if coal power plant operations are optimized to save 10% on fuel costs, those benefits don't go to the power company but are shared with other power companies through adjustment coefficients. This is like grading only by "class average scores," which reduces individual students' motivation to work hard.
Third, qualitative deterioration in R&D and facility investment continues. Since 2010, the 5 power companies' R&D spending ratio has been around 0.3% of revenue, significantly lower than general manufacturing (2-3%). Investment decisions also focus simply on replacing old facilities or mandatory environmental facility expansion, being passive about future technology or new business development. Without competitive pressure, they don't feel the need to take risks investing in new technologies. This inevitably leads to long-term decline in Korea's power industry technological competitiveness.
In markets without competition, efficiency improvements and innovation naturally stop, ultimately returning as burdens on consumers and the national economy.
✅ KEPCO's Structural Dilemma and Financial Deterioration
Let's analyze the structural background behind KEPCO's 200 trillion won debt and its ripple effects.
First, profit instability from price controls is the biggest problem. KEPCO cannot freely set electricity rates. As the government suppresses rate increases considering political burden, KEPCO immediately turns to losses when fuel costs or purchased power costs rise. KEPCO's operating profit was 8 trillion won in 2021, but recorded 32 trillion won losses in 2022. A 40 trillion won difference in just one year shows structural problems where profits are determined by external factors regardless of KEPCO's management capabilities.
Second, the transaction structure with power generation subsidiaries also amplifies inefficiency. KEPCO must buy electricity expensively from subsidiaries and sell it cheaply to consumers. Power companies get guaranteed appropriate profits through settlement adjustment coefficients, but KEPCO has no such guarantee mechanism and bears losses completely. Especially when international energy prices surge like in 2022, KEPCO bears all the fuel cost increases from power companies, causing losses to snowball. This is a strange structure where the parent company KEPCO bears subsidiaries' losses instead.
Third, debt surge is rapidly reducing new investment capacity. KEPCO's debt increased 6-fold from 33 trillion won in 2004 to 200 trillion won in 2024. This astronomical scale equals 30% of the government budget (about 650 trillion won). With debt increases, interest burden alone exceeds 10 trillion won annually, delaying essential investments like transmission and distribution network modernization or renewable energy connection facilities. This eventually leads to qualitative deterioration of power infrastructure, becoming a risk factor for national power stability.
KEPCO's financial deterioration is not simply a corporate-level problem but a structural crisis threatening the sustainability of the national power system.
✅ Need for Power Industry Restructuring in the Renewable Energy Transition Era
Let's examine the direction and tasks of power industry structural reform suitable for the energy transition era.
First, renewable energy expansion is revealing the limits of existing thermal power-centered structures. As solar and wind power generation rapidly increases, existing thermal power plants' operation rates are declining. Especially during daytime, increased solar power generation frequently requires reducing thermal power plant operations. However, all 5 power companies specialize in thermal power and cannot adapt to these changes. Expertise in efficiently combining renewable energy with existing power sources like Germany or Denmark is needed, but innovation is difficult with current structures.
Second, new business models responding to distributed power system transitions are needed. While the past was a centralized system where large power plants unilaterally supplied electricity, the future is changing to distributed systems where small-scale solar power or ESS (Energy Storage Systems) are installed everywhere. In such environments, new technologies and services that coordinate power supply and demand in real-time become important. Power companies must also expand beyond simply producing electricity to energy management services or battery businesses, but leading such changes is difficult with current non-competitive structures.
Third, complete power market liberalization with expanded private participation is inevitable. With KEPCO monopolizing power sales as currently, various energy service innovations are difficult to occur. True competition begins when consumers can choose among multiple power companies and power companies can directly provide services to customers. Complete power market liberalization like in the UK or Germany would make existing power companies pursue innovation for survival, and new private companies' participation could activate the entire market. However, gradual and careful approaches are needed to avoid harming power supply stability during this process.
Power industry in the renewable energy era makes competition and innovation survival essentials, making current protected structures impossible to respond.
4️⃣ Conclusion
The structural problems of Korea Electric Power Corporation and power generation subsidiaries show that fundamental transformation of national energy policy is needed beyond simple corporate management dimensions. The "competitive system without competition" sustained for 24 years is clearly no longer sustainable.
The most urgent problem is KEPCO's 200 trillion won debt. This has reached levels threatening the sustainability of the national power system, not simply one company's financial deterioration. The abnormal structure where only KEPCO bears losses between government rate controls and power companies' guaranteed profit structures can no longer be neglected.
The homogenized business structures of power generation subsidiaries are also urgent problems needing improvement. With all 5 companies clinging to similar thermal power generation, they cannot secure competitiveness in the renewable energy era. They must escape from complacent management guaranteed profits through settlement adjustment coefficients and pursue developing specialized areas and innovation.
The solution is clear. Through complete power market liberalization, power companies should directly sell electricity to consumers and introduce genuine competition. Simultaneously, economies of scale should be realized through power subsidiary mergers, and each should specialize in different professional areas. For example, one company specializes in renewable energy while another specializes in energy storage systems.
However, careful approaches are needed to avoid harming power supply stability during such structural reform processes. Market liberalization should be gradual, increasing private participation while establishing competitive systems. Also, transmission and distribution network investment and technology development supporting renewable energy transition must be conducted simultaneously.
Most importantly, market principle-based rate systems should be established, escaping from price controls based on political logic. Electricity rates formed at appropriate levels can normalize KEPCO's financial structure and revive power companies' efficiency improvement incentives.
Ultimately, Korea's power industry stands at a critical crossroads requiring paradigm shift from "protected monopoly" to "competitive market." Success in this transformation can build efficient and innovative power systems, but failure will return accumulated problems as greater burdens on the entire national economy.
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