This blog post examines why South Korea’s electricity tariff system, which favors large corporations, is unfair.
Who is using the most electricity?
Every summer, news reports urge people to turn off air conditioners and conserve electricity due to power supply issues. This phenomenon occurs because supply falls short of demand, though excessive demand is the primary cause rather than supply shortages. South Korea’s per capita electricity consumption increases annually and has recently surpassed Japan and Germany, ranking second only to the United States. Moreover, while electricity usage in other countries is decreasing, South Korea’s continues to rise.
From this perspective, conserving electricity by turning off air conditioners seems reasonable. However, the electricity consumed by air conditioners, heating, and other appliances in ordinary households does not significantly impact total usage. This is because the proportion of electricity used by households is small. Among OECD countries, residential electricity accounts for an average of 32% of total consumption, but in South Korea, it is only 14%. The remainder is categorized as educational, agricultural, and industrial use, with businesses accounting for 64% of total consumption. Particularly, corporate electricity consumption continues to rise, leading to a steady increase in per capita electricity usage.
The problem is that among these corporations, the top 1% of large companies account for over 50% of total electricity consumption while using power at absurdly low prices. Behind this phenomenon lies an unreasonable electricity pricing system. Let’s examine its structure in more detail.
Industrial Electricity Pricing Structure Favoring Large Corporations
South Korea has a highly developed electricity industry, resulting in generally lower electricity rates compared to other countries. Electricity rates are broadly categorized by usage type into residential and industrial, with industrial rates being particularly low. Of course, direct comparisons are difficult because each country has different ratios of power generation sources and transmission/distribution network loss rates. However, regardless of the metric used, South Korea’s current industrial electricity rates are among the cheapest in OECD countries.
Industrial electricity rates are tiered based on demand volume and time of day. For example, the period from 11 PM to 9 AM is classified as off-peak, incurring lower rates than other times. The problem is that these rates are not just low; they are below production costs. Supplying electricity to companies at prices below cost creates a structure where the supplier incurs losses with every unit sold. Notably, large corporations consume most of the off-peak power, with the top 50 power-intensive companies alone accounting for 50% of off-peak electricity usage. Ultimately, the benefits of cheap electricity flow primarily to large corporations. In 2013, the top 10 domestic companies received discounts totaling 1.5 trillion won under this tariff structure, amounting to supply below cost.
It is reasonable to offer certain benefits to encourage usage during early morning hours when demand is relatively low, especially for large corporations like steel or major electronics companies that often require 24-hour operation and have extremely high power demands. However, the current practice of supplying electricity below cost is virtually unheard of globally. Furthermore, SMEs, due to the nature of their businesses, often use electricity during peak hours when rates are highest, paying expensive bills. The deficits incurred from sub-cost off-peak rates are reflected in peak-hour electricity prices, leading to the absurd situation where SMEs are subsidizing the electricity costs of large corporations.
The Negative Effects of Cheap Industrial Electricity
South Korea’s industrial electricity prices are also very cheap compared to other energy sources like oil or gas. When comparing the price of oil and electricity for the same amount of heat output, the OECD average shows electricity costs 150% of kerosene prices, whereas in South Korea, it’s only 60%. Electricity, a higher-order energy source, is cheaper than unprocessed energy. Companies also find using oil and gas cumbersome because it requires separate power generation, whereas electricity is much cheaper and more convenient, leading them to continue using electricity.
Cheap electricity prices also cause numerous negative effects. Companies feel little burden regarding electricity consumption, so they see no need to improve electrical efficiency. Investment in technologies, processes, or equipment to reduce electricity usage is minimal. Consequently, industries are developing with structures that consume large amounts of power. Among OECD countries, France and Japan, where electricity rates are higher than ours, invariably exhibit high electrical efficiency. This clearly demonstrates the relationship between electricity rates and electrical efficiency.
Moreover, as energy issues like renewable energy have become global concerns, energy-efficient technologies and industries are gaining prominence. South Korea risks losing competitiveness in this field. Australia, for instance, relied on domestically produced coal for power generation, supplying very cheap electricity, but raised its electricity rates by over 70% in the last decade. As a result, corporate electricity consumption decreased, and the renewable energy market expanded, demonstrating a positive example of the development of the energy efficiency industry.
Residential Electricity Bills Burdened by the Tiered Rate System
The problem extends beyond industrial electricity rates used by businesses to include residential electricity rates used by the general public. At the root of the residential electricity rate problem lies the progressive rate system. This system divides electricity usage into six tiers based on 100 kWh increments and applies different rates to each tier. Introduced in the past when power generation was insufficient to curb consumption, it imposes significantly higher rates the more electricity is used.
Not only does the base charge increase per tier, but the unit electricity rate also rises progressively. At the sixth tier, the rate is 11 times higher than the first tier. This substantial rate difference places a heavy burden on ordinary households. Approximately 50% of households fall into tiers 3 or 4, while less than 10% reach tiers 5 or 6. This residential electricity consumption averages 1088 kWh/year, which is about one-quarter of the level in the United States and half that of France and Japan. Considering that per capita electricity consumption ranks second globally, it is easy to see how unbalanced the ratio of residential to industrial usage is.
The average residential electricity rate in Korea is approximately 220 won/kWh, corresponding to the third tier of the progressive rate system. In contrast, the industrial electricity supply price is a mere 88 won/kWh. This absurdly large disparity reveals that ordinary households are subsidizing the deficit of industrial electricity.
The Need for a Rational Electricity Pricing System
Electricity is a shared national asset between the state, businesses, and citizens, and it must be distributed rationally. However, the current situation falls short of this ideal. Ordinary citizens are shackled by the progressive rate system, paying high prices for electricity, while large corporations consume electricity while receiving significant benefits. Of course, imposing excessive rates on businesses that form the backbone of the national economy is unreasonable. However, the current electricity pricing system disproportionately concentrates benefits on high-usage corporations, shifting the burden onto small and medium-sized enterprises (SMEs) and ordinary citizens.
It is now time to revise the electricity pricing system, which was established during the past period of rapid economic development to enhance corporate price competitiveness. By distributing electricity in a rational and fair manner, we must create a structure enabling both citizens and corporations to use energy in a sustainable way.
