Korea Electric Power Corporation (KEPCO) is demanding 25 trillion won in advance payments for electricity from Samsung and SK Hynix.

Korea Electric Power Corporation (KEPCO) is seeking to monetize future electricity revenue in advance to address funding gaps for grid expansion, with two major chip giants potentially becoming key sources of financing.

The Korea Electric Power Corporation (KEPCO) has proposed a plan to Samsung Electronics and SK Hynix, requiring the two companies to prepay a total of 25 trillion won (approximately US$18.1 billion) in electricity bills to cover their electricity needs for the next five years. According to KEPCO and sources in the power industry, Samsung Electronics is required to prepay 20 trillion won, and SK Hynix 5 trillion won.

Behind this move, KEPCO aims to raise funds for the construction of power transmission networks for the semiconductor industry cluster in Yongin and Hunan, while reducing the scale of bond issuance. If this plan comes to fruition, it will be a significant transformation for KEPCO, upgrading its existing prepaid electricity fee mechanism from a convenient arrangement to a large-scale power grid investment financing tool.

KEPCO stated that it has contacted major power users, including Samsung Electronics and SK Hynix, regarding the proposal, but the companies' willingness to participate, interest rates, and the amount and duration of prepayments have not yet been finalized.

With a huge funding gap, power grid expansion is urgently needed.

KEPCO's request for advance funding is directly driven by the massive increase in electricity demand generated by its semiconductor industry cluster. The early completion of the Yongin cluster and the construction of the new Honam cluster are estimated to generate an additional 20.6 gigawatts of electricity, with surrounding AI data centers requiring an additional 7.9 gigawatts. KEPCO originally planned to invest 72.8 trillion won in power grid construction by 2038, but the ever-expanding scale of related projects has further increased its funding needs.

Financial pressure is also a major reason why KEPCO is actively seeking alternative financing. In the first half of this year, KEPCO's consolidated operating profit was 4.91 trillion won, but as of the end of June, its debt had risen from 205.6 trillion won at the end of last year to 210.7 trillion won, with interest expenses alone reaching 2.1 trillion won in the first half of the year. Furthermore, the special measure temporarily raising the upper limit on KEPCO's bond issuance will expire at the end of 2027, and from 2028 onwards, the issuance limit will revert to the regular standard of no more than twice the combined capital and reserves. This means that KEPCO must find new sources of funding besides bond financing.

Solution structure: Lower than bond costs, better than government bond returns

Under the current proposed plan, the two companies will make up the prepayment in installments over approximately one year, with KEPCO subsequently deducting the remaining balance from the electricity bill each month. Options considered for handling the remaining balance include paying interest every six months or offsetting it against future electricity bills.

The interest rate under consideration is higher than the yield on two-year government bonds, and equal to or slightly lower than the yield on two-year KEPCO bonds. This structure is attractive to both parties: KEPCO's financing costs are lower than issuing its own bonds, while the two chip companies can obtain returns higher than government bonds, put idle funds to use, and reduce the risk of delays in the grid construction required for the new factory.

The 25 trillion won prepayment is close to a quarter of KEPCO's annual revenue—the company's revenue for the first half of the year was 46.32 trillion won. If the prepayment is amortized over five years, approximately 5 trillion won in electricity costs will be deducted from the balance annually starting in 2027, which is equivalent to locking in about 5% of the annual sales cash flow in advance.

It is worth noting that since prepayments are only recognized as revenue upon actual electricity supply, KEPCO's revenue and profit will not immediately increase as a result. The practical effect is that KEPCO can use electricity fees that would otherwise be collected later for grid construction in advance, and correspondingly reduce the scale of its bond issuance.

Existing mechanisms may be expanded, potentially altering financing models for major clients.

Prepaid electricity is not a new concept in South Korea. Currently, customers can pay their electricity bills in advance, and KEPCO pays interest based on the holding period. Last year, the total prepaid amount was approximately 390 billion won, with the funds mainly coming from government agencies.

KEPCO is evaluating whether to transform this mechanism, originally positioned as a payment convenience tool, into a grid investment financing instrument for large electricity users. This proposed 25 trillion won amount is approximately 64 times the total amount prepaid last year, indicating the significant scale of this potential transformation.

The above calculations are based on the actual electricity expenditures of Samsung Electronics and SK Hynix last year—4.1 trillion won for Samsung Electronics and 900 billion won for SK Hynix—and are used to extrapolate the prepayment amounts for the next five years (2027 to 2031).

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