Korea’s electricity pricing system is overly favorable to large corporations, resulting in relatively high prices for residential electricity and small and medium-sized businesses. There is a need to improve this unreasonable structure and come up with a fair electricity plan for both people and businesses.
Every summer, there are news reports of electricity supply and demand problems and calls to turn off air conditioners to save electricity. This is caused by the low supply of electricity compared to the demand for electricity, which is caused by excessive demand rather than a lack of supply. Korea’s per capita electricity use has been increasing every year, and recently overtook Japan and Germany to become the second largest electricity user after the United States. Moreover, while other countries’ electricity usage is decreasing, ours is increasing.
It seems logical that we would turn off our air conditioners to save electricity. But the truth is that the amount of electricity used in a typical home, such as air conditioning and heating, doesn’t contribute much to overall usage. This is because the proportion of electricity used by the average household is small. In OECD countries, on average, 32% of total electricity use is for residential purposes, compared to 14% in Korea. The rest is divided into educational, agricultural, and industrial use, with businesses using 64% of the total. The amount of electricity used by businesses, in particular, continues to grow, which means that per capita electricity use continues to rise.
The problem is that the largest companies, the top 1%, account for more than 50% of all electricity use, and they are using electricity at ridiculously low prices. The reason behind this phenomenon is an unreasonable electricity pricing system, which we’ll explain in more detail below.
Industrial electricity pricing favors large companies
Korea has a well-developed electricity industry, so electricity prices are generally low compared to other countries. Depending on the use of electricity, it can be divided into residential and industrial use, and industrial electricity is particularly cheap. Of course, it is difficult to directly compare electricity bills due to differences in the proportion of raw materials for power generation and losses in the transmission and distribution grid, but Korea’s industrial electricity bills are currently among the cheapest in the OECD, regardless of the indicators used.
Industrial electricity is charged at different rates depending on the time of day. For example, the hours from 11pm to 9am are categorized as light load hours and are cheaper than other hours. The problem is that these rates are not just cheap, they are cheaper than the cost of production. By selling to companies at a lower price than the cost of production, the supplier is losing money. In particular, large companies consume most of the light-load electricity, with the top 50 companies with the highest electricity usage accounting for 50% of the light-load hours. In other words, large companies benefit from cheap electricity. In 2013, the 10 largest companies in Korea received a discount of KRW 1.5 trillion in below-cost electricity through this tariff structure.
Large companies, such as steelmakers and large electronics firms, often need to operate around the clock, and because their electricity demand is so high, it makes sense to give them some incentive to use electricity in the early morning hours when demand is relatively low. However, the current situation of below-cost supply is hardly unique in the world. Moreover, small and medium-sized enterprises are paying higher rates because they use electricity during peak load hours, when electricity is most expensive due to the nature of their business. The deficit generated from below-cost light-load tariffs is reflected in their peak-load bills, creating a laughable situation where SMEs are subsidizing the electricity bills of large companies.
The negative effects of cheap industrial electricity
The price of industrial electricity in South Korea is very cheap compared to other energy sources such as oil and gas. If you compare the price of oil and electricity for the same amount of heat, the OECD average is 150% of the price of kerosene, while in Korea it is only 60%. Electricity, a higher-order energy source, is cheaper than unprocessed energy. Businesses also continue to use electricity because it is much cheaper and more convenient than oil and gas, which requires them to generate their own power.
There are also many negative effects of cheap electricity. Businesses don’t feel the need to improve their electricity efficiency because they don’t have to pay for it. They don’t invest in technologies, processes, and equipment that reduce electricity use, and as a result, industries develop in a way that consumes a lot of electricity. The relationship between electricity prices and electricity efficiency is evident in OECD countries such as France and Japan, where electricity prices are higher than ours.
Moreover, as energy issues such as renewable energy have recently become a global issue, energy-efficient technologies and industries are gaining prominence, and Korea is likely to become less competitive in this area. In fact, Australia has increased electricity prices by more than 70 percent in the last decade, after providing very cheap electricity from domestically produced coal. As a result, businesses have reduced their electricity consumption and the renewable energy market has grown, making it a good example of a developing electricity efficiency industry.
Progressive residential bills
In addition to industrial electricity bills for businesses, residential electricity bills are also a big problem. At the root of the problem is a system called progressive pricing. The progressive system is a system that divides electricity usage into six tiers based on 100kwh units and charges different rates for each tier. This system, which was introduced to curb consumption in the past when electricity generation was inadequate, charges much higher rates the more electricity you use.
Not only the base rate, but also the per-unit electricity charge keeps increasing with each tier, with the 6th tier costing 11 times more than the 1st tier. The large price difference puts a huge burden on the average household, with 50% of households using as much electricity as those in tiers 3 and 4. Less than 10% of households are in tiers 5 and 6. Residential electricity consumption averages 1088 kWh/year, a quarter of that of the United States and half that of France and Japan. Considering that South Korea ranks second in the world in electricity use per capita, it’s easy to see how unbalanced the ratio between residential and industrial use is.
The average residential electricity bill in South Korea is 220 won/kWh, which is about the third tier of progressive tariffs. On the other hand, the price of industrial electricity supply is only 88 KRW/kWh. This huge disparity suggests that households are making up for the deficit in industrial electricity.
The need for a reasonable electricity pricing system
Electricity is an asset that the state shares with businesses and citizens and should be distributed rationally. However, this is not the case in the current situation. Ordinary people are stuck with a progressive tariff system and pay high prices for electricity, while large corporations get a lot of benefits. Of course, it doesn’t make sense to overcharge companies that are the backbone of a country’s economy. However, the current electricity pricing system disproportionately favors heavy users, leaving small and medium-sized enterprises and ordinary people to bear the burden.
It’s time to revise the electricity pricing system, which was created to make companies more competitive during radical economic development. By distributing electricity in a rational and fair way, we can create a structure that allows both people and businesses to use energy in a sustainable way.
