KEPCO Stock: At The Crossroads With Low Carbon Power (NYSE:KEP)

KEPCO (Korea Electric Power Company) (NYSE:KEP) has a long history in South Korea’s power industry, going back to the emergence of electric power in the late 1880’s, although it was only formally established as the Government owned power company in 1961. In the early days there was a big focus on fossil fuel-based power but in 1978 it completed its first nuclear power plant as the beginning of a major focus on nuclear power to complement its fossil fuel-sourced power provision. KEPCO was given discretion to overbuild and focus on long lived construction programs that nuclear power required. The South Korean Government maintains 51.1% ownership of KEPCO (32.9% Govt owned Korea Development Bank, 18.2% direct Govt ownership); it listed first on the Korea Stock Exchange in 1989 followed by NYSE listing in 1994. The company has a monopoly on power generation, transmission and distribution in South Korea and this has led to its interest in various forms of power generation, including hydro, nuclear, coal and more recently renewables (wind, solar and energy storage) and natural gas & LNG. KEPCO considers itself leading the path to carbon neutrality through a three pillar strategy: i) decarbonization of the power industry; ii) decentralization of electricity production and consumption; and iii) intelligentization of the ecosystem of the entire energy sector. These are big ambitious goals. In true South Korean fashion the company has a mascot, the “Energy Boy” which “represents KEPCO’s customer service spirit and personifies the company in its promotion activities“. Energy Boy appears in 30 different forms to deliver messages, one of which is shown below. This is no ordinary company and by overdelivering on power generation capacity, KEPCO has contributed to the development and industrialisation of the country.

The company has had considerable autonomy in its technology developments and this has served the company well, although now the company is facing scrutiny as the energy sector faces big challenges. KEPCO is organised to conduct its domestic business to best serve the public good, while its overseas business activities are focused on profitability and job creation. It has global reach with its overseas business activities in the Middle East, Europe, China, Japan, South East Asia, Africa and North America. Note that electricity sales of KEPCO, which is the main operational activity of the group, were almost exclusively Korean (98.3% in the quarter to end of March 2022). Although Seeking Alpha doesn’t provide up to date financial information on KEP, for those wishing to dig there is a lot of information available for Q1 2022 from a US filing in June 2022.

The corporate structure of KEPCO is huge and diverse, with 6 Electric Power Generation subsidiaries, the biggest of which (12,581 employees) is Korea Hydro & Nuclear Power Co. Then there are 3 engineering companies covering power unit design, equipment maintenance, nuclear fuel, and an ICT service company. Finally there are 17 companies that KEPCO either owns or has a shareholding in. These cover emerging areas such as renewable energy (wind and solar), electric vehicle charging, IP management, LNG import and supply, heating, asset management, customer service etc.

The company has been influential in the international nuclear industry and also in seeking to ensure energy security through upstream investment in nuclear fuel and coal supply. The South Korean Government has identified the need to decarbonize energy and the former Government of President Moon Jae-in was focused on exit from fossil fuel and also nuclear power. The recent election of President Yoon Suk-yeol continues the focus on decarbonization, but it is producing a change with renewed focus on nuclear power possibly at the expense of renewables. Here I address these recent developments, firstly to help investors evaluate possible investment in KEPCO and secondly to help make sense of the complexity of global decarbonization programs. It ain’t simple!

The South Korean power sector

Power (energy) is such a core feature of life that it isn’t possible to consider power suppliers without including a political lens, especially when there is a power monopoly that is Government controlled. For a lot of US investors investment in a Government controlled vehicle is anathema, but Government control of power provision is part of the scene in much of Europe and Asia. South Korea is interesting because Government influence has given KEPCO the ability to be creative about how it manages power provision. An example of this is that KEPCO’s monopoly allowed it to pioneer use of big batteries for frequency regulation long before it became accepted in the rest of the world, and this innovation was a prelude to the use of big lithium batteries for helping manage intermittency of renewables, which has become big business. KEPCO is interesting to consider when thinking about the big energy transitions that are happening everywhere. And South Korea has a big challenge as it has the 4th highest carbon intensity of IEA member countries. There is a purity about having a single body making decisions about energy management, rather than the contest of the market, where vested interests (especially the fossil fuel industry) have a big say.

So in the case of KEPCO the South Korean Government is the real power broker and new President Yoon Suk-yeol is clearly unhappy with KEPCO’s recent performance. Recently appointed Prime Minister Han Duck-soo has gone public by saying that KEPCO’s recent recovery plans are inadequate. KEPCO had a very bad start to 2022 with KEPCO reporting $6 billion losses in Q1 2022, which surpasses the losses of $4.5 billion for all of 2021. So the cries from political masters are for drastic reform.

This goes beyond controversy about control of electricity prices, which are probably a key reason (along with a very high level of debt) that KEPCO has performed poorly in recent times.

Components of power generation in South Korea

South Korea to stabilise (boost?) nuclear power

The World Nuclear Organisation indicates that South Korea generates 23 GWe of nuclear power from 25 reactors, providing 27% of Korea’s electricity. While the South Korean nuclear fleet is not old by the standards of the US nuclear fleet (average age ~40 years), 15 of the 25 South Korean nuclear reactors are more than 20 years old.

South Korea’s interest in things nuclear has see-sawed in recent times. The previous President, Moon Jae-in, (2017-2022) was highly focused on South Korea decarbonizing its power sector, but also ceasing to back nuclear power. His plan was to cut nuclear power generation from the current 27.1% to 10.1% by 2034. One thing I note about nuclear power is that it is expensive at every step of the way, with huge decommissioning costs evident in recent reporting from KEPCO.

Recently elected (May 2022) President Yoon Suk-yeol continues to be serious about a decarbonized power transition, but part of that involves a renewed interest in Korea’s nuclear industry both at home and as an export industry. His plans for the local nuclear industry are for nuclear power to contribute 30% to South Korea’s power generation by 2030, a small increase on the existing position which is based on optimal operation of the existing (including new builds underway) nuclear fleet.

Change initiated by the new administration in the past few months is that construction on two new nuclear reactors (stalled since 2017) has re-commenced, while extension of the life of existing reactors is planned. It is too early to get an understanding as to whether the new administration plans new reactors in South Korea, although that seems to be the assumption. The key issues that need to be faced for any new builds is the long delays in getting nuclear projects off the ground and the massive cost compared with renewable energy projects that can be fast tracked. This is a big deal if the new administration is serious about decarbonization.

Regarding nuclear power on the international stage, KEPCO is in talks with Westinghouse over plans for export of 10 nuclear plants by 2030. Note that no agreements have yet been signed between KEPCO and Westinghouse. Westinghouse recently signed a strategic cooperation agreement with Hyundai Engineering & Construction to work jointly on global AP1000 leads. The nuclear power business is not cheap. The construction by KEPCO of 4 APR-1400 nuclear units in the UAE has cost ~$16 billion as of 31 March 2022 (construction commencing between 2012 and 2015) and the contract between KEPCO and UAE is reported to involve $20.4 billion for 5,600 MW capacity. Two of the 4 APR-1400 units are operating and two are nearing completion. KEPCO has been interested in participating in possible nuclear resurgence in the UK, although at this stage there are just preliminary talks.

The change in attitude by KEPCO concerning nuclear power is reflected around the world with Governments in many countries putting (or at least discussing) nuclear expansion in the mix. This is no doubt significantly due to efforts by the fossil fuel industry to blunt renewables developments. Nuclear is an excellent delay strategy for the fossil fuel industry because nuclear power takes so long to develop and it remains unclear if there is appetite for dramatic increases in electricity prices that nuclear power adoption entails. The contra to this position involves European plans to double down on renewables developments in response to the Russian invasion of Ukraine. Time will tell whether nuclear power gets a new life. Note that the timelines for nuclear are long and Governments might also consider what energy supply might look like in the future. For example the developments in wave/tidal power generation are beginning to look interesting.

Renewable energy in South Korea

Former President Moon Jae-in was a big supporter of the energy transition based on renewable energy, no doubt in part due to South Korea’s participation in renewables developments. As a result there are various developments underway in South Korea to rapidly expand solar PV, wind power and energy storage. However, the language used by the new Government after meetings in June 2022 does not mention the clear targets of the previous Government, instead using the term “Considering the supply conditions, rationally re-establish the target for the supply of renewable energy, and derive an appropriate proportion by source, such as solar and wind power ( offshore )”. There is mention of developments in grid stabilisation to include increased renewable energy.

This looks like backing off from targets of the previous Government. No percentage of contribution by renewables is mentioned. The challenge for those wishing to slow renewables developments is that renewables (plus storage) are now substantially cheaper than both fossil fuel and nuclear sources. How this will play out is unclear as policies are being formulated now.

A snapshot of some of South Korea’s recent renewables plans for the power sector is as follows:

Solar PV produced 6.3% of South Korea’s power in 2021. By 2030 renewables (solar PV and wind, mix not clear) will be below 30% but by 2034 the goal remains 41.9% for renewables. The figures for solar now seem lower than a reported Wood Mackenzie target of 34 GW solar PV installed by 2030. And Wood Mackenzie had indicated that this goal could be exceeded.

KEPCO plans major offshore wind projects with South Korea’s goals for offshore wind by 2030 to be up to 12 GW. This includes a planned 8.2 GW offshore wind project.

There is some ambiguity in figures for % renewables since the distinction between electricity generation and overall power consumption is sometimes unclear. For example it is reported that the Government goal is fossil fuel imports be reduced to 60% of total energy supply by 2030, down from 81.8% in 2021. If this is correct, then renewables plus nuclear contribution would be 40%. If the figures for nuclear power stand, this could mean that the goal is for some planned renewables builds might be replaced by nuclear power. Clearly the claim for renewables + nuclear to be 40% of power generation by 2030 is inconsistent with renewables contributing ~30% by 2030.

KEPCO and coal, natural gas/LNG

For a number of years KEPCO was an aggressive supporter of development of major new coal mines even as the South Korean Government turned against coal.

It has been involved in high profile Indonesian coal investments. In 2022 KEPCO finally lost its ability to proceed with a major coal development at Bylong in NSW Australia after legal appeals to overturn refusal to allow the development to proceed.

KEPCO has been a major supporter of coal power plants in a number of Asian countries, including Vietnam, but it is becoming clear that its ability to insure these plants has become a major problem. This, plus climate-related pressures, could be a significant part of KEPCO losing interest in coal developments.

Due to investor and activist interest KEPCO has declared that it will exit all coal activities by 2050. Notwithstanding a flurry of activity recently due to the Russian invasion of Ukraine leading to huge short term gas and coal supply deficit, a South Korean exit from coal by 2050 seems a goal that will lag developed nations significantly.

For some time South Korea has planned to exit coal and this has led to adoption of LNG as a bridge to renewables. Today ~25% of Korea’s electricity is generated from LNG-fired power plants. The LNG is all imported. The challenge is that the Russian invasion of Ukraine has precipitated a crisis for gas in Europe and this has contributed to LNG prices beyond that which makes sense for Asian nations, even affluent ones like South Korea and Japan. In the short term South Korea is doubling down on LNG importation, but if the excessive prices continue this may trigger the response that is happening in Europe, an urgent acceleration of renewables developments.

Analyst ratings

Perhaps reflecting that it is the major integrated electric utility company in South Korea, KEPCO is not covered on Seeking Alpha, with no Seeking Alpha authors in the past 30 days, and no Wall Street Analyst ratings are reported in the past 90 days. Its performance has been lacklustre possibly because it has been targeted by the South Korean Government to control electricity prices at a time when cost of electricity generation has risen substantially. In April The Value Pendulum published an article on KEPCO with an overall bullish take, although curiously this analysis didn’t mention KEPCO’s significant developments in renewable energy.

Conclusion

For the reasons covered in this article, I suspect that KEPCO will not be of interest to many USA investors. Being effectively Government controlled and embarking on a major energy transformation to reduce emissions (exit fossil fuels), with a new and significant interest in nuclear expansion, means change in many directions. A lot of energy investors want the security of the fossil fuel (oil & gas, coal) past, except that this past is rapidly threatened in the face of climate emergencies everywhere.

South Korea is an interesting country that sits at the center of the Asian technology revolution. It has a major international presence in the lithium battery story (eg LG Energy Solution, Samsung SDI (OTCPK:SSDIY), SK On) and is emerging as a country with strong interest in BEV technology (eg Hyundai (OTCPK:HYMTF)). If any country (other than China) will influence the development of nuclear power in the West and Middle East, it has to be South Korea and specifically KEPCO.

In some sense South Korea is a good country to look at to see where the energy transition is heading in the Asian region. KEPCO is majority Government owned and it controls a very wide range of technologies as it moves to modernise and decarbonize its grid. A most interesting thing about KEPCO is whether it can succeed in restarting the nuclear industry in the West. My focus is how KEPCO manages the conflicting tension between cheap renewables and a new attraction to expensive nuclear power.

I am not a financial advisor but I do pay close attention to massive changes in the energy and transport sectors as the need to decarbonize bites. I hope that my comments on KEPCO help give you and your financial advisor perspective as you make decisions about where energy fits in your investment portfolio.