KEPCO to be challenged by tighter nuclear regulation

Nuclear reactors’ utilisation rates could hit 80-85% in 2019-2020, lower than levels in 2014-2015.

As nuclear safety concerns arise and the Korean government eyes lower risk energy sources, Korea Electric Power Corporation (KEPCO) and its subsidiary Korea Hydro & Nuclear Power (KHNP) should expect tighter regulation on nuclear generation, Moody’s Investors Service said.

According to a note, the average capacity utilisation rates of the nuclear reactors run by KHNP will remain at 65%-70% in 2018 and at the lower end of the range of 80%-85% in 2019-2020, which is below the 85%-86% recorded in 2014-15 and 90% or above achieved until 2011.

"The heightened safety controls on nuclear generation will preclude a strong recovery in KEPCO's nuclear utilisation over the next 12-18 months," says Mic Kang, a Moody's vice president and senior credit officer. "And, the likely greater use of costlier fuel will weaken
KEPCO's cost structure, given the prolonged delays in timely tariff adjustments to compensate for higher costs."

More prudent processes for the overhaul of the nuclear reactors under the heightened safety controls indicate that it will take longer to overhaul the reactors and gain approval for re-commissioning, the firm noted.

“In addition, KEPCO will face greater execution risks associated with the commissioning of new nuclear reactors under construction, with a total capacity of 4.2GW,” it added. As a result, KEPCO could rely more on the costlier liquefied natural gas (LNG) over the next 12-18 months at the projected capacity utilisation rates of the reactors.

“Generation from renewables will be insufficient to cover increasing power demand and the decline in coal generation,” Moody’s said. “The use of LNG will rise further if nuclear generation is lower than Moody's expects, or power demand is higher.”

KEPCO will then shoulder most of the cost increases, given the delays in timely tariff adjustments, and take on more debt in increasing capital spending to complete the construction of conventional power plants and expand its transmission and distribution networks and renewable developments.

Moody’s projections of KEPCO's funds from operations (FFO)/adjusted debt fall in the range of 14%-16% in 2018-2019, down from 24%-30% in 2015-2017. “KHNP's FFO/adjusted debt will also weaken to 24%-28% from 29%-40% over the same periods, reflecting the lack of a strong recovery in nuclear utilisation rates and delayed commissioning of new reactors,” it added.

"However, stranded asset risk for nuclear reactors will remain low over at least the next four to five years, because the planned move away from nuclear generation will not translate into the early shutdown of operational reactors before the end of their design lives, given the nuclear generation sector's importance to Korea's economy," Kang added.

It remains that the future from 2025 onwards will be increasingly challenging for KEPCO and KHNP will face greater challenges from 2025 onwards when the design lives of KHNP's main nuclear reactors start to expire, if extensions beyond those dates are not granted to the reactors and KEPCO's cost pass-through tariff system to compensate for higher fuel costs does not improve materially, Moody’s concluded. 

Photo by IAEA Imagebank - 04790180, CC BY-SA 2.0