SEOUL, Aug. 9 (Yonhap) -- South Korea's recent power crisis stems largely from a surge in consumption triggered by a record heat wave, but it can also be blamed on a decades-old rate policy that favors manufacturers and other businesses, market watchers said Thursday.
The Korea Power Exchange, the state-run distributor of electricity, was forced to issue a power shortage warning twice this week as its electricity reserve dropped to below 3 million kilowatts, less than 4 percent of the country's total supply.
The spike in consumption results, of course, directly from high mid-day temperatures that have stayed well above 35 degrees Celsius since late last month, the market watchers said. The capital Seoul is also under a record 13-day streak of tropical nights where overnight temperatures remain above 25 C.
They, however, said a more fundamental cause of the problem is a government policy that sets the price of electricity used by the country's industrial sector significantly lower than the cost to produce, a legacy of the industrial development era in the 1960s.
In 2010, the average price of electricity consumed by the country's industrial sector cost US$0.058 per kilowatt-hour, the lowest among all members of the Organization for Economic Cooperation and Development, according to state power firm Korea Electric Power Corp. (KEPCO).
To offset its rising costs, the government last week allowed KEPCO to raise its rates for the industrial sector by an average 6 percent and the overall price by 4.9 percent as the price for ordinary households was hiked by 2.7 percent.
Still, the current rate for the industrial sector is significantly lower than that for households and represents only about 80 percent of production costs.
As a result, most energy-intensive businesses continue to be encouraged, if not forced, to use electricity than others as the average price of electricity rose only 21 percent from 2002 as of the end of last year while that of natural gas jumped 72 percent and diesel by 165 percent, according to KEPCO. Consumption of electricity over the cited period surged 63 percent but that of diesel dropped 27 percent.
The government acknowledges a higher price will eventually lead to reduced or more cautious use of electricity by consumers, including businesses, but refuses to raise the price by a large margin, even to bring it to par with the cost, apparently out of fear that a sharp increase may build up inflationary pressures.
"It will take at least a double-digit increase (of rates) to have any restraining effect on consumption, but the government will never approve such a large increase," a government official told reporters earlier.
KEPCO had initially sought to increase its rates first by 13.1 percent, but was quickly denied by the government. A later request to hike prices by 10.7 percent was again dismissed.
Instead, the government is paying hundreds of millions of dollars out of taxpayers' money to find enough power reserves to prevent a nationwide blackout, which it says may take billions of dollars and months to repair.
With no means to quickly build a new power plant, the government asks businesses, which use the most electricity in the first place, to briefly cut down their consumption when faced with a possible power shortage, a request that entails an indemnity of up to 10 times the price of electricity that would have been consumed by the businesses if left alone.
The government is expected to pay about 400 billion won (US$354 million) this year alone in compensation for cuts in consumption by businesses.
It, however, claims such an arrangement is more cost-effective than finding ways to permanently increase the country's supply, saying each power plant with generation capacity of 1 million kilowatt takes at least five years and 1.5 trillion won to build.
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