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South Korea to Raise Power Prices as Demand Causes Shortages

South Korea will increase power prices by an average 5.4 percent this week, the second increase this year, as the government seeks to curb soaring demand for electricity that’s caused shortages.

Electricity prices will rise 6.4 percent for industrial plants and buildings, 2.7 percent for households and 3 percent for farms from Nov. 21, the Ministry of Trade and Energy said in an e-mailed statement, following an average 4 percent increase in January. The government also plans to impose a tax on soft coal of 30 won ($0.03) per kilogram from July 2014, and reduce duties on liquefied natural gas and kerosene to shift consumption of coal to gas and oil, the ministry said.

South Korea consumes power at almost twice the average of countries in the Organisation for Economic Co-operation and Development relative to the size of its economy, according to the Hyundai Research Institute in Seoul. The nation has suffered power shortages over the past five years, with demand reaching an “excessive level” and supply failing to keep pace, the institute said in a June 19 report.

“Electricity should be more expensive than other energy because it’s a secondary source that needs other energy to produce it,” Park Kwang Soo, senior research fellow at the Korea Energy Economics Institute in Seoul, said by phone after the announcement. “Most countries have priced electricity higher for this reason, but we’ve kept it lower.”

South Korea’s government has maintained electricity prices at an artificially low level to contain inflation and help export-driven companies make products at lower costs. Power prices rose 32.3 percent between 2000 and 2012, compared with a 117.5 percent increase in city gas prices and a 149.1 percent jump for kerosene, the institute said in a September report.

Over-dependence

That’s led companies and households to depend too much on electricity, rather than other energy sources, according to the report. Electricity accounted for almost 40 percent of energy consumption of industries last year, while gas and oil accounted for 19 percent and 15 percent, the institute said.

With the government setting power prices, state-run Korea Electric Power Corp. (015760), the monopoly electricity distributor known as Kepco, has reported a combined 11.2 trillion won ($10.6 billion) of losses over the past five years. Kepco shares rose 6.9 percent to 31,850 won in Seoul, the biggest gain since August 2011.

Power demand has surged in recent years as domestic electricity prices were kept at low levels, even as international prices of other energy sources such as oil and gas climbed, the ministry said in today’s statement.

‘Shocking’

The price increase is “shocking” and will increase costs for steelmakers, the Korea Iron & Steel Association said in an e-mailed statement. Raising power rates by 6.4 percent may add extra costs of 268.8 billion won in the steel industry, which is already in a slump, the association said.

Power shortages were exacerbated in May when the government ordered the shutdown of two nuclear reactors found to be using components whose safety certificates were faked, and ordered the replacement of cables at two others, one offline for maintenance and the other under review pending the start of operations.

In 2008, South Korea set a goal to generate 41 percent of its electricity from nuclear power by 2035.

An energy ministry-sponsored group of academics and state officials said last month that target should be cut to between 22 percent and 29 percent amid growing public opposition to atomic power after the Fukushima disaster and the domestic safety scandal.

The energy ministry plans to adopt the upper-end of the working group’s range recommended range, an increase from the current 26.4 percent reliance on nuclear power, Song Yoo Jong, director general of energy and resources policy at the ministry, said by phone on Nov. 8.

To contact the reporter on this story: Heesu Lee in Seoul at hlee425@bloomberg.net

To contact the editor responsible for this story: Stuart Biggs at sbiggs3@bloomberg.net

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