The International Energy Agency Friday urged South Korea to loosen state-run companies' grip on the country's electricity and natural gas markets, and received cautious backing from the government.

The IEA's recommendation comes as South Korea is mulling solutions to power problems, which caused rolling blackouts in Asia 's fourth-largest economy last year and could threaten electricity supply this winter. Given doubts about the safety of nuclear power plants and South Korea 's heavy reliance on imported natural gas for electricity, Korea needs to re-evaluate its natural gas industry as well.

A liberalized and competitive electricity market will help South Korea maintain steady power supply, and the country's gas market needs similar reforms, IEA Executive Director Maria J.A. van der Hoeven told a news briefing in Seoul , after the Paris-based organization issued its report on South Korea 's energy policies.

State-run Korea Electric Power Corp. (015760.SE) and its affiliates produce 85% of the country's electricity supply, while Korea Gas Corp. (036460.SE) is the country's only wholesale natural gas supplier.

"Strong and committed government intervention is required if reform is to succeed," while a well-thought out reform program can support economic growth and deliver a steady supply of electricity to all users, Ms. Hoeven said.

The IEA's recommendation comes as South Korea braces for more power shortages. Demand for heating in winter usually causes electricity consumption to rise, and two of Kepco's nuclear reactors are offline because of safety concerns, increasing the need for natural gas for power generation.

Reform programs should include the development of a mechanism that allows large users of electricity to buy power directly from the Korea Power Exchange, while large buyers of natural gas should have the option to purchase gas from a supplier other than Korea Gas at appropriate market rates, the IEA report said.

The government agrees with the IEA's recommendations as well as the need for a sustained, strong determination for reforms, said Cho Seok, vice minister for the Knowledge of Economy Ministry, which oversees the country's energy policies. He said the country's electricity and gas markets have been monopolized by the public sector for a long time, but Kepco has been selling electricity below cost to local industries, which consume 60% of the country's power demand.

"By how much competition should be increased and what the time frame should be has to be thought over," as related parties may have different views, Mr. Cho said.

The IEA stressed that greater competition is needed in local energy markets and that regulators must be independent to ensure successful reforms.

In September last year, South Korea was forced to implement unscheduled rolling blackouts for one day to contain power demand on an unusually hot day when several power plants were offline.

Earlier this year, Kepco's nuclear power unit, which has 23 nuclear reactors that account for around 30% of the country's power supply, discovered that five reactors used parts from suppliers that forged quality certificates. Of the five, two were taken offline for a complete replacement of affected parts and have yet to resume operations, exacerbating the country's struggle to meet rising demand for electricity as temperatures plunge.

Korea 's increased reliance on natural gas for electricity generation coincides with a surge in demand for the clean fuel from neighboring Japan , which has been facing electricity supply concerns after the Fukushima Daiichi nuclear accident in March 2011 forced it to shut most of its nuclear reactors and rely on natural gas and oil.

The IEA also said all local gas companies should be encouraged to trade gas among themselves and buyers of gas should be free to sell them to all end users.

Kogas is the only company that can import liquefied natural gas for trading purposes, and companies in Korea have questioned its position as the country's only wholesale gas supplier.

While the government has allowed companies to import LNG for their own consumption since 2001, only a few deals have materialized since then.

Earlier this year, a Kepco unit said it signed a $3.4 billion deal with Switzerland 's Vitol to buy liquefied natural gas under a long-term contract, bypassing Kogas for the first time.

Korea Gas, the largest corporate buyer of liquefied natural gas in the world, plans to import 36.456 million metric tons of LNG this year, up 7.3% from about 33.97 million tons last year.

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