(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/ 

(AmCham Taiwan｜Contributing Writer: Angelica Oung) The immediate cause of Taiwan’s latest major blackout is indisputable – in fact, it was caught on camera. In a closed-caption video, the supervisor on shift at Kaohsiung’s 4,326MW Hsinta Power Plant is seen hovering in front of a control panel for 20 minutes before turning on a switch labeled 3541. The adjacent switch 3540 had had its insulation gas drained as a part of routine maintenance, which caused 3541 to short out when it was tripped. The video went dark shortly after as the power went out for almost 5.5 million users across Taiwan.

Some households in Kaohsiung, the most severely affected region, lost power for more than 12 hours. Although it is difficult to estimate the actual economic damage, the state-owned Taiwan Public Television Service quoted a figure of NT$6 billion (US$204 million). There was a human toll too, as two older men in Kaohsiung passed away after the outage caused their respiratory support equipment to fail.

The incident occurred at 9:16 a.m., when Taipower was showing a comfortable 24% in operational reserves, and electricity output from Hsinta Power Plant accounted for less than 3% of Taiwan’s grid. So then how was it possible for one user error to cause the collapse of Taiwan’s power supply in such a catastrophic manner? The authorities and experts agree: At least part of the problem lies with Taiwan’s increasingly fragile grid infrastructure.

Loss of power at Hsinta was the first of a series of unfortunate events that triggered the island-wide rolling blackout, according to Taipower’s report to the legislature following the incident. A protective relay – a component designed to trip a circuit breaker when a fault is detected – should have taken Hsinta off the grid, but ironically the new digital protective relay misinterpreted the signals from Hsinta’s older equipment, and the crisis point reached the Lunchi Ultra High Voltage (UHV) substation, near Tainan.

Even then, disaster might have been averted if the Lunchi Substation had not been undergoing major maintenance at the time. Four of Lunchi’s eight connection buses were offline, reducing the substation’s ability to separate the rest of the grid from the effects of Hsinta’s blackout. All major power stations south of Lunchi took themselves offline as a protective measure, as any “backflow” of electricity could cause significant damage to power-producing equipment.

The grid north of Lunchi was successfully isolated from the cascading collapse. But unfortunately, the Lunchi substation was the southernmost node that collected energy from the power-producing south to the power-consuming industrial north. The grids of northern and central Taiwan were forced to enter rolling blackouts because they were starved of power imports from the southern part of the grid, though they managed to recover more quickly as no power plants north of Lunchi needed to be taken offline.

Taiwan’s grid is both isolated and relentlessly centralized, with heavy reliance on larger plants like Hsinta in the south to be the workhorses that power the island. Of the more than 30 high-power voltage substations that gather and distribute power, two stand out in particular: Lunchi in the south and the Longtan UHV substation in the north, with the Zhong Liao switching station in between. Together, those three critical pieces of infrastructure form Taiwan’s electric superhighway, and traffic flows only one way: from south to north. If any of the three nodes falter, as one wrong switch flipped at the Hsinta power plant caused Lunchi to do, there is no way around this massive central artery. The result? An electrical heart attack.

“Taiwan must accelerate the development of regional smart grids that can operate both independently and in tandem with one another to improve grid resilience,” says Chiang-Chien Le Ren, professor of electrical engineering at National Cheng Kung University (NCKU). “If regions of the grid can self-isolate and protect the provision of electricity locally, we can reduce the spread and impact of future blackouts.”

The goal of a smart grid is to automatically monitor energy flows and adjust to changes in energy supply and demand in real-time with the aid of digital connectivity and battery energy storage systems. In good times, smart grids can be power savers as they enable electricity to be aggregated and distributed more seamlessly. This is important for accommodating intermittent electrical generation from increasingly important renewable energy sources. It can also aid in “demand response” – shifting electricity demand from peak to off-peak hours. In the case of a systemic failure, smart grids would make Taiwan’s grid more robust by allowing regional grids to function in the event of central failure.

However, Taiwan still has a long way to go before achieving such a system, according to Yeh Tsung-kuang, a professor at National Tsing Hua University’s Department of Engineering and System Science. “The persistent reliance of northern Taiwan on electricity imports from the south is both the biggest source of fragility in the grid and something that cannot be solved through grid improvements alone,” he notes.

Before finalizing any plans for better grid distribution, the authorities will also need to ensure that power plants are distributed in clusters in the island’s north. “We have an enormous amount of power going from south to north – around three gigawatts in the summer,” says Yeh. “That amount is only going to increase.”

On the day of the 303 blackout (named for March 3, 2022, the date on which it occurred), Taiwan’s grid north of the Lunchi UHV substation could have been spared if the north generated enough electricity to meet its own needs, notes Yeh. “It’s true we have underinvested in our grid infrastructure, but while we have a grid problem, we also have a capacity problem,” he says. “Our capacity problem will make the grid worse; however, just making the grid better will not solve our power generation capacity problem.”

Human errors

One way grid and power generation capacity issues intersect is in the human element of the grid: the Taipower staff who physically operate the equipment. Due to operator error – the proximate cause of both the 303 blackout and last year’s 513 blackout – Taipower staff have come under unprecedented scrutiny. In fact, the Kaohsiung Ciaotou District Prosecutors’ Office announced it would investigate the three staff members involved in the 303 blackout for violation of Article 176 of the criminal code – intentionally or negligently causing the destruction of something by means of gunpowder, steam, electricity, gas, or another explosive substance. The charge’s seriousness reflects the damage done by the outage, but frontline Taipower employees say they are terrified and exhausted as they work overtime in their struggle to keep the lights on.

“It’s like we are walking on a high wire,” says one Taipower engineer who wishes to remain anonymous. “Because power supply is so tight, we’ve been pressured to shorten the maintenance period for our power plants.”

In engineering, there is an old saying: If you don’t schedule your maintenance, it will schedule itself. And no one is more aware of that than the engineers and technicians at Taipower. “From the point of view of system stability, the maintenance period should never be skimped, says the engineer. “The inevitable result will be more accidents. And once another accident inevitably occurs, the blame will fall on another lower-level Taipower staff. This is a gross injustice.”

A culture of high-pressure deadlines and blame, including the possibility of facing criminal charges, has crushed the morale of Taipower workers, says another frontline employee. “We’re scared. We seem to be to blamed no matter what happens. And for the sake of our jobs, we stay silent, but if things go on like this, a lot of Taipower staff will go elsewhere. We don’t feel safe.”

But help is on the way, said Deputy Minister of Economic Affairs and Taipower Interim Chairman Tseng Wen-sheng in a briefing to the legislature in March. During the briefing, Tseng said an infusion of NT$100 billion from the general budget would be allocated to improving Taiwan’s grid.

Due to the woeful state of Taipower’s finances, driven in part by Taiwan’s low electricity prices, the company, while well-aware of grid issues, has not been able to address them. In the wake of gangbuster economic growth and increased demand for power, it is essential for the Taiwan government to allocate resources to help the wounded giant.

The draft plan to improve the grid has three main goals. The first is to alleviate the pressure on the “south-to-north superhighway” with additional power transmission lines. The second is to connect power plants with industrial and technology parks directly, allowing some industrial power use to bypass the main grid completely. The third is to initiate the installation of smart grids, like those suggested by NCKU’s Chiang-Chien. But Tseng posits that the current budget allocation is still insufficient. “It will probably take more than NT$100 billion,” he says. Parts of the ambitious overhaul will also take time – as long as 10 years for some reforms. In addition, Taiwan’s power problems are more than grid-deep, notes Tseng. “As long as we are relying on using power generated in the south up in the north, the burden on the central north-south artery will continue.”

(Source: https://topics.amcham.com.tw/2022/05/fixing-taiwans-grid-issues-requires-redistribution/)