[Finding a Way Forward for the Cold-Wave Economy] Heating Bills Are Just the Beginning

Since the beginning of 2023, the increase in heating costs has prompted everyone from the media to politicians to cause an uproar, using provocative words such as “chaos” and “bombshell.” One has to wonder whether this was truly such a shocking and unforeseen surge in heating bills. As someone who spent all of 2022 calling for energy rates to be raised in a timely manner and for the public to be made aware of the urgent need for energy conservation, I feel frustrated by this belated overreaction.

In 2022, with the outbreak of the Russia-Ukraine war, energy prices around the world—especially natural gas—soared to historically unprecedented levels. In May 2020, Europe’s natural gas spot price stood at $0.99/mmbtu, but by the end of August 2022 it had risen to $99/mmbtu, meaning it had increased one hundredfold over a little more than two years. As wholesale natural gas prices surged, the reality in Europe, including Germany and France, was that energy bills rose roughly tenfold.

Most ordinary citizens are probably not well aware of the overseas energy crisis. However, they likely do understand the reality that war has disrupted the supply chains of all raw materials, including energy, making some degree of increase in crude oil and natural gas prices inevitable.

As Russia cut off natural gas supplies to Europe, Europe has been replacing Russian volumes with liquefied natural gas. At the same time, Korea’s liquefied natural gas import bill also rose sharply. Natural gas import volume increased by only about 1%, from 45.90 million tons in 2021 to 46.39 million tons in 2022, but the import value nearly doubled, from $25.45278 billion in 2021 to $50.02219 billion in 2022, meaning the cost of the product itself doubled. Yet retail rates paid by citizens rose by only about 38% over the year. That is why heating charges would still need to rise by about another 2.5 times their current level to make up for the losses incurred during 2022 alone.

How, exactly, did energy prices end up skyrocketing like this? To explain it, we need to talk about the period before the war, because the war alone does not tell the full story. Oil and natural gas prices had already been rising from 2021. In October 2021, Europe saw its wind power generation collapse by half for reasons no one could explain. Quite simply, the wind did not blow.

In particular, wind turbines installed in large numbers in countries such as Germany and the United Kingdom failed to generate enough electricity. As a result, those countries had no choice but to increase gas-fired power generation using natural gas imported from Russia. At that point, natural gas prices in Europe surged. Then, in January 2022, Russia reduced natural gas supplies to Europe, claiming it had no inventory. Again, natural gas prices spiked. Through this chain of events, Russian President Vladimir Putin likely came to realize that Europe was not free from energy shortages, which ultimately contributed to his decision to go to war. Germany’s Finance Minister Robert Habeck admitted that Germany’s disregard for geopolitical risk gave Russia an opening for war and was a cause of Europe’s energy crisis. This, I believe, became an opportunity to show how high a price we pay when we entrust energy to nature, which humans cannot control. Ultimately, Europe’s energy crisis demonstrates that in the process of pursuing carbon neutrality—reducing fossil fuels and shifting toward renewable energy—rising energy prices are unavoidable.

The failure of Europe’s energy transition policy has driven it into a situation where Russian pipeline natural gas (PNG) must be continuously replaced with liquefied natural gas (LNG). In this process, Korea too has been pushed into a position where, because it must generate electricity and provide heating with imported LNG, it must now worry every year about competing with Europe for both supply volumes and prices.

Europe is getting through this winter without major trouble to some extent thanks to a warm winter and reduced demand. But for us, the energy crisis can be said to be only beginning now, because prices were not raised and demand was not reduced in the meantime. We are only at the starting point of having to worry about and prepare for continued rate instability, with electricity and heating charges rising at the same time.

Missed the Chance to Buy Natural Gas at Rock-Bottom Prices After Declaring Carbon Neutrality in 2020

If Europe’s crisis is the cause of the energy crisis stemming from the global energy transition, domestic factors have compounded it. In 2020, crude oil prices turned negative and natural gas prices were in historic free fall. At that very moment, when energy prices were falling again and again, we declared carbon neutrality and raised the Nationally Determined Contribution (NDC), proclaiming that we would achieve the highest emissions reductions in the world.

It was a golden opportunity to purchase natural gas at rock-bottom prices, but instead we were so focused on declaring carbon neutrality and saying we would no longer use fossil fuels that we completely missed the opportunity for favorable contracts and neglected energy security. As a result, we are now fully exposed to higher energy prices and missed the critical window to hedge against future increases in energy rates. Just as in Germany, we are now paying the price for the policy failures of the previous government. China, meanwhile, seized the opportunity and signed numerous long-term contracts, thereby securing a chance to stabilize prices.

Because of problems that began under the previous administration and stemmed from failed energy policy, Korea Gas Corporation and Korea Electric Power Corporation had long accumulated factors that warranted higher gas and electricity rates, yet repeated requests for rate hikes were denied. As of the end of last year, Korea Gas Corporation’s uncollected receivables had risen to 9 trillion won, and Korea Electric Power Corporation’s debt had exceeded 30 trillion won.

At the current rate level, the two companies cannot remain viable. If we refuse to pay the rates that should already have been raised and paid, then we are simply passing the burden on to future users and demanding that future generations fill the gap with taxes. Even now, users must be required to pay the proper rates. Otherwise, deficits will continue to accumulate and people who did not consume the energy will end up paying the cost. Because of an unsustainable energy system, the market is gradually being driven toward collapse, with the possibility of power outages and gas not being supplied on time. In the face of such a crisis, the government must exercise wise judgment, and the political sphere must stop its wasteful disputes and remember that rates are the only solution.

Hongjong Cho, Professor at Dankook University

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Original title: [한파 경제 활로를 찾아서] 난방비는 시작이다

Author: Hong-jong Jo

Date: 2023-03-27

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25487