(AmCham Taiwan｜Contributing Writer: David Stinson & Angelica Oung)  Taiwan has some of the world’s lowest electricity prices. The question is why? With no domestic energy reserves, every lump of coal and drop of liquefied natural gas (LNG) – the mainstays of Taiwanese power generation – must be imported. Yet even as the prices of those commodities have soared on the global market, the price for residential power in Taiwan has stayed at NT$2.6253 per kilowatt-hour – a number that has remained unchanged since 2018.

Although the state-run Taiwan Power Co. (Taipower) is traded on the Taiwan stock market, key decisions – including the price of power – are out of the company’s control. Instead, Taiwan’s electricity prices are set by a 17-member Power Tariff Review Committee, made up of experts and academics. The committee, which convenes twice a year, has a price formula that allows the rate to be increased by 3% every six months, or 6% annually. But for the past four years, it has consistently declined to raise prices, even as global oil prices have increased significantly since 2021.

International development bodies generally now advise against price subsidies for electricity. Experts argue that suppressing prices is an inefficient way to help people in the lower-income bracket – since the rich tend to consume more power, energy subsidies are poorly targeted. Moreover, making energy artificially cheap encourages the overuse of a scarce resource. Worst of all, taxpayers eventually end up paying the final price when electricity revenue cannot cover the cost of fuel and power generation infrastructure maintenance.

The reason for Taiwan’s continued suppression of electricity prices in the face of rising costs is political, says Chen Jong-Shun, research assistant at the Center for Green Economy at the Chung-Hua Institution for Economic Research (CIER). Low electricity prices have long been seen as an implicit part of the social contract in Taiwan – a way for the state to care for the people.

“In fact, the amounts involved are not large,” says Chen, referring to the public expenditures required to keep prices from rising, as well as the public benefits from these subsidies. “The problem is that the costs are so widespread. Any breakfast stall, for instance, can see when prices increase, so it becomes a political issue.”

Price-sensitive voters are not the only constituency lobbying for discounted electricity prices. Taiwan’s export-driven economy also benefits from the low prices, with industrial rates ranking sixth lowest in the world. This impact is particularly significant for Taiwan’s highly successful semiconductor industry, which is exceptionally power-intensive. Power subsidies are therefore historically an important part of Taiwan’s economic development, says Chen.

Passing the buck

As electricity usage rises, economic planners face urgent questions about both the environmental and financial sustainability of Taiwan’s price support policy. State-owned oil refiner CPC Taiwan Corp. posted losses of NT$43.4 billion last year due to an ongoing government-mandated freeze on the price of natural gas, despite the commodity’s rising global cost. CPC is the natural gas supplier for Taipower, Taiwan’s primary electricity producer, and sold gas to Taipower for an average purchase price of NT$8.2929 per cubic meter in 2021. According to an April 12 statement by newly appointed CPC Chairman Lee Shun-chin, by the end of April, CPC’s cumulative losses could total NT$65 billion – equivalent to about half of its paid-in capital – if prices remain unchanged.

Although CPC recently raised its sales price of natural gas for electricity generation to NT$12.0873 per cubic meter, the number is still much lower than the company’s current purchase price of about NT$20. There are few signs that international prices will decrease anytime soon, and Taipower will be unable to absorb even the current pricing on an ongoing basis.

After earning NT$48 billion from operations last year, Taipower reported operational losses for the first two months of 2022, when the price it paid for natural gas was NT$11.4033 per cubic meter. Meanwhile, lack of profits has caused the upkeep and improvement of the nation’s power grid to be neglected.

Deputy Minister Tseng Wen-Sheng of the Ministry of Economic Affairs (MOEA) said in March that at least NT$100 billion would be needed this year to increase grid stability. Premier Su Tseng-Chang noted that this sum would be paid by the government, in contrast to previous years when it showed up on Taipower’s balance sheets. However, the final allocation of costs between Tai-power and the government has yet to be determined.

The National Development Council (NDC) has proposed that the state sector invest a collective NT$440 billion in energy-related upgrades by 2030, which will be an ongoing financial burden. Taipower has accumulated reserves worth NT$40 billion, an amount that can only temporarily support the upgrades. The utility has also yet to write off the estimated NT$285 billion loss from Taiwan’s fourth nuclear power plant, following a referendum vote last December to scuttle the project. Overall, it appears that the government’s attempts to stabilize prices have only created additional instability.

The MOEA has recognized that the current situation is a problem. When the Power Tariff Review Committee voted to freeze the price again, MOEA Minister Wang Mei-hua described electricity prices as “too cheap.” The committee is convened under the auspices of the MOEA and the government appoints nine of its 17 members, though it is supposed to act independently.

Taiwan has made sudden corrections to electricity prices before, although politics has always been in the background. Shortly after winning a presidential election, the Ma Ying-Jeou administration raised power prices twice in 2012 and 2013, amounting to a total increase of 16.7%. The 2018 price freeze also appeared to be politically timed, occurring shortly after a minor price increase following the election of President Tsai Ing-Wen. It seems no administration dares raise rates in the runup to an election. And the present moment is particularly tricky, as campaigning for the 2024 presidential election will begin almost immediately after the “nine-in-one” local elections this November. No clear political window for rebalancing thus exists until later in 2024.

Meanwhile, the EU is considering future border carbon tariffs to harmonize international energy transformation efforts. In response, Taiwan’s Environmental Protection Agency has proposed a fee of US$10 per ton of carbon. This amount is easily eclipsed by the current price subsidies, as well as any conceivable price subsidies in the near future. Indeed, Taiwan’s practice of subsidizing electricity prices contradicts the government’s ambitious stated intentions to reach net zero by 2050. Partially as a result of the subsidies, Taiwan currently has the fifth-highest carbon emissions per capita among the world’s top 21 economies.

But system reform is in the works. By 2025, Taipower will be split into two entities: one for generation and another for distribution. This mechanism should allow for more market-based pricing, although many details remain undetermined, including practical responsibility for grid stability. This step will nevertheless mark a milestone in Taiwan’s reform of its power market.

No relief in sight

Taiwan’s energy transition will take place in an environment of persistently high fossil fuel prices. Global oil and gas prices are set to rise in the medium term as a result of pandemic recovery and, more recently, the war in Ukraine. These increases follow a long period of reduced investment in capacity after several years of pain for producers and are thus unlikely to be quickly counteracted.

Liang Chi-Yuan, an economics professor at National Central University and a former Minister Without Portfolio, anticipates that supply will decrease faster than demand as the world moves toward decarbonization, resulting in a seller’s market that could last a decade or more.

“In order to achieve net-zero greenhouse emissions by 2050, the International Energy Agency (IEA) suggests that starting from 2021, all new development of coal and oil fields should stop, which will decrease the supply of oil,” he says. “However, it also suggests that sales restrictions on news cars fueled by oil come much later, in 2035. These two factors might lead to supply shortages until 2035.”

Some opportunities for short-term adjustments by consumers exist, given functioning price signals. CIER’s Chen points to old air conditioners as low-hanging fruit, as they can become significantly less efficient after just a decade. Air conditioners were partially blamed for one of the major outages in May last year.

In the longer term, the energy transition will not only require changes in consumption patterns but also greater changes in industry structure. In some cases – such as last year’s referendum, which rejected nuclear power – prices will only be a background factor for individual decisions with complex upstream and downstream consequences. In the view of many experts, it is time for Taiwanese power consumers to start seeing its true price. Nevertheless, further steps to rationalize the market will take place in the context of financial pressure as the bills for many years of deferred reform come due.

Source: https://topics.amcham.com.tw/2022/05/the-high-cost-of-taiwans-low-electricity-prices/