[Energy Odyssey]③ Why Natural Gas Prices Keep the Financial Market on Edge

Ⅰ. South Korea Faces an Energy Bottleneck

Rising Tensions in the Middle East Send Natural Gas Prices Soaring

Higher Gas Prices Drive Up Wholesale Electricity Rates

KEPCO’s Financial Structure Worsens as Power Purchase Costs Climb

"SMP Price Cap Risks Distorting the Market... Coal-Fired Power an Option in Emergencies"

Editor's NoteThe importance of energy is greater than ever, as global supply chain crises and government-led mega projects increase amid the recent Middle East war. South Korea, which relies heavily on imports for its primary energy supply, faces the difficult challenge of achieving energy security, carbon neutrality, and economic growth all at once. Our reporters are on the ground covering the energy sector, analyzing challenges, and searching for solutions through a special article series.

As the war between the United States and Iran drags on, European countries are rushing to fill their natural gas storage facilities ahead of the winter season. Asian nations are also increasing their liquefied natural gas (LNG) reserves, pushing LNG prices to their highest level in three years. LNG prices are directly linked to Korea’s wholesale electricity rates. When wholesale electricity prices rise, Korea Electric Power Corporation's (KEPCO) financial structure worsens, forcing KEPCO to issue more corporate bonds. This acts as a ticking time bomb that can shake the Korean financial market. The energy crisis originating in the Middle East is now impacting Korea's financial markets.

Europe Increases Natural Gas Storage, But Late

According to Bloomberg News, futures prices for natural gas traded at the Netherlands TTF exceeded 80 euros per megawatt hour (MWh) on September 9 (local time), hitting the highest level since January 2023. This is more than double the level prior to the outbreak of the United States–Iran war.

The main reason behind the substantial rise in natural gas prices is the ongoing war in the Middle East. European natural gas companies typically stockpile gas during the summer in preparation for winter, when heating demand is high. However, this year, they waited in hopes that the war would end and prices would fall. U.S. President Donald Trump also fueled expectations by repeatedly stating that the U.S. and Iran were close to reaching an agreement.

However, as tensions between the U.S. and Iran escalated again, Europe belatedly began to build up reserves, causing natural gas prices to surge. According to the Financial Times (FT), by the last week of August, Europe’s natural gas inventory ratio stood at just 63%, the lowest level in a decade.

After the Russia-Ukraine war in 2021 deepened the energy crisis, Europe had previously pledged to raise natural gas reserves above 90% by November 1 to prevent Russia from weaponizing its gas. This year, the target was lowered to 80%, but even this goal looks increasingly unattainable.

Meanwhile, Asian countries are also competitively racing to secure LNG supplies, further driving up natural gas prices. Europe receives gas via pipelines, but Asian countries import LNG, which is natural gas liquefied at minus 162 degrees Celsius to reduce its volume.

According to Trading Economics, the spot price for LNG in the JKM (Japan Korea Marker) market stood at $24.815 per million BTUs on the 10th, the highest level since January 2023.

Kim Tae-sik, a research fellow at the Korea Energy Economics Institute, said, “With LNG production facilities in Qatar damaged and supply not flowing smoothly, Asian countries are stepping up purchases in the spot market,” adding, “Competition between Asian and European countries is fueling further increases in natural gas prices.”

In Korea, Korea Gas Corporation and private direct importers mainly sign long-term contracts ranging from 10 to 20 years, with prices generally tied to international crude oil benchmarks. International oil prices affect Korea’s LNG import prices with a delay of about 3 to 5 months. Around 70% to 80% of domestic LNG imports are under long-term contracts. However, as Qatar declared force majeure in March of this year, disruptions have occurred in the long-term contract supply, and the shortfall must be covered by purchasing expensive LNG in the spot market.

Recovery Delays at Qatar LNG Facilities

Qatar supplies about one-fifth of the world's LNG. After the United States–Iran war broke out, Iran repeatedly attacked the Ras Laffan industrial complex in Qatar. The Ras Laffan area is known as the "heart of Qatari LNG" and is among the world’s largest LNG production and export hubs. Ninety percent of the LNG produced here is destined for the Asian market.

Qatar’s LNG production and exports have dropped dramatically due to Iranian attacks. Having experienced extensive LNG facility damage, Qatar declared force majeure in March. A declaration of force majeure is triggered when a company cannot fulfill contractual obligations due to uncontrollable and exceptional events like war or natural disasters. Qatar has extended its declaration of force majeure through October.

According to major foreign media, as of six months after the outbreak of the war, Qatar's LNG exports had decreased by 96%. It is expected to take a considerable period to restore LNG production facilities, with state-run QatarEnergy estimating that recovery could take 3 to 5 years. The Wall Street Journal reported that only six out of fourteen LNG production facilities at Ras Laffan are currently in operation.

South Korea imports natural gas primarily from overseas sources: Middle East and Asia (Qatar, Oman, Yemen, Egypt), Southeast Asia (Indonesia, Malaysia, Brunei), Russia (Sakhalin), Australia, and the United States.

According to the Korea International Trade Association, as of 2025, Australia was Korea’s largest supplier of natural gas, accounting for 32.8% of total imports, followed by Qatar (15.8%), Malaysia (15.0%), the United States (9.2%), Russia (5.1%), Oman (4.5%), and Indonesia (3.5%).

Korea’s dependence on Middle Eastern natural gas imports hovered between 49.2% and 44.9% from 2016 to 2019 but fell to 19.7% last year. This is largely attributed to Korea diversifying gas imports by reducing reliance on Qatar and Oman while increasing Australian imports. Although Korea’s dependence on Middle Eastern natural gas has declined, the region remains one of Korea’s key sources.

LNG Prices Directly Linked to Wholesale Electricity Rates

Korea imports LNG through Korea Gas Corporation or private direct importers, with about half of the imported amount used for power generation. KEPCO purchases electricity from power generators at wholesale rates and then sells it to end consumers, including households and businesses. The wholesale price KEPCO pays to power generators is called the System Marginal Price (SMP).

Korea’s electricity market is structured so that the cost of the highest-cost generation unit at a given time determines the wholesale electricity price. Generally, LNG-fired generation sets this SMP, which tends to be higher than nuclear or coal-fired generation costs.

The SMP is a critical variable that determines revenues and operating profits for KEPCO and domestic power producers. When the SMP rises, KEPCO's profits inevitably deteriorate. Because KEPCO cannot freely raise retail prices, increases in wholesale prices cannot be immediately passed on to consumers.

The prolonged United States–Iran war has driven up LNG prices, which in turn has kept the SMP on an upward trend. According to the Korea Power Exchange, the weighted average SMP for mainland Korea rose to 177 won on September 11. SMP has continued to climb throughout the year, with the monthly average for the mainland rising from 103.53 won in January to 108.52 won in February, 109.99 won in March, 118.92 won in April, 121.32 won in May, 114.1 won in June, 133.8 won in July, and 148.39 won in August.

KEPCO’s break-even SMP is reported to be 146 won. On this basis, KEPCO entered the red in August. If LNG prices continue to rise, KEPCO’s deficits are all but certain.

Is a Second KEPCO Bond Crisis Looming?

KEPCO’s financial structure is already severely deteriorated. As of the first half of 2026, total accumulated debt amounts to 210.7 trillion won, with daily interest alone at around 11.5 billion won.

KEPCO’s ballooning debt stems from the fact that fuel costs for LNG and coal soared following the Russia-Ukraine war in 2021, but these costs could not be passed on through retail rates. As international LNG prices spiked, SMP soared, but the government restricted raising electricity prices to stabilize inflation and reduce public burden. In 2022, KEPCO posted its largest annual operating loss ever, at 32.7 trillion won.

To secure working capital, KEPCO issued trillions of won in corporate bonds every month. As top-rated KEPCO bonds flooded the market with yields as high as 5%–6%, capital concentrated on these bonds. Meanwhile, corporate bonds from private companies were shunned, tightening credit in the market. This situation came to be known as the “KEPCO bond crisis.”

In response, the government amended the Korea Electric Power Corporation Act to temporarily expand the bond issuance limit from “two times (capital plus reserves)” to a maximum of “five to six times.” This provision is set to expire at the end of 2027. Additionally, a “SMP price cap” system was temporarily introduced to prevent wholesale electricity prices from rising above a set threshold, and a market stabilization program worth more than 50 trillion won was launched to secure financial stability in the short term.

However, solutions that simply pay debt with more debt have failed to improve KEPCO’s financial health. Despite the one-year countdown to the sunset of the expanded bond issuance limit, the financial crisis at KEPCO persists. With fuel prices surging due to the Middle East conflict, instability in the financial markets is intensifying.

In the “2026 National Assembly Audit Issues Analysis Report” published last August, the National Assembly Research Service stated, “If the sunset provision is not extended, KEPCO will be unable to issue bonds exceeding twice the sum of its capital and reserves, which could prevent KEPCO from paying for electricity purchases—in turn, negatively impacting the energy ecosystem and financial markets.”

The government is also considering implementing a SMP cap system that would prevent KEPCO from raising wholesale electricity prices beyond a set threshold. However, such a cap would likely harm private power producers, and compensating them could ultimately require taxpayer money. Price controls could also distort the market.

Experts point out that a fundamental solution is to establish a framework that links KEPCO’s electricity rates directly to fuel costs. However, KEPCO’s residential and commercial rates have been frozen for 12 consecutive quarters through the third quarter of this year, and industrial rates have been frozen for six consecutive quarters.

With KEPCO’s finances still uncorrected, its investment burden is increasing. To support government-led mega projects such as those in semiconductors and AI data centers, major expansion of the power transmission network is needed. The Ministry of Climate, Energy, and Environment plans to inject an additional 500 billion won into KEPCO next year, but many believe this is not a fundamental solution.

Some experts propose increasing the use of coal-fired power plants when SMP spikes. Yongheon Jeong, CEO of Ubic Co. (former professor at Ajou University), stated, “Currently, utilization rates at private coal-fired power plants on Korea’s east coast are limited to 20%–30% due to congestion in the power grid. In emergencies, it may be necessary to relax reliability standards to allow greater grid usage.”

Relaxing the current N-2 (simultaneous outage of two power lines) standard would permit greater operation of east coast coal-fired generators. Increasing the operation rate of low-cost coal-fired plants would reduce KEPCO’s electricity purchase costs.

Despite the government’s plan to phase out coal-fired power plants by 2040, the National Assembly legislated a special law in August allowing some coal-fired plants to remain as security power sources, as stipulated in the “Special Act on Support for Coal-fired Power Plant Workers and Closure Regions.”

LNG Could Stabilize at Lower Levels in the Long Term

Currently, LNG prices are roughly double pre-conflict levels in the Middle East, though lower than during the energy crisis driven by the Russia-Ukraine war. Some experts expect LNG prices to remain elevated into next year if the war persists.

However, forecasts suggest LNG prices could stabilize at lower levels between 2028 and 2029. Kim Tae-sik, a research fellow, said, “The U.S. is rapidly ramping up LNG supply and by 2028, supply may exceed demand.”

This content was produced with the assistance of AI translation services.