Taiwan’s increased reliance on LNG and the recent steep rise in the cost of the fuel in global markets are putting growing financial pressure on Taipower.
“Taipower cannot be allowed to collapse.”
Those were the words of Minister of Economic Affairs Wang Mei-hua on March 17 when she was questioned at the legislature about her ministry’s decision to increase electricity prices for certain users. How did it come to pass that Taiwan Power Co., the state-owned utility that generates the bulk of the nation’s electricity, and the word “collapse” could be mentioned in the same sentence?
“For as long as we have observed it, Taipower’s balance sheets have been worsening gradually,” says Raymond Hsu, chief analyst with Taiwan Ratings Corp. “It is now deteriorating dramatically.”
The war in Ukraine spiked fossil fuel prices – especially for Liquefied Natural Gas (LNG), the power source Taiwan is increasingly relying on. Bound by government policy, the state-owned electricity giant found itself unable to pass on the cost. Plans call for half the electricity in Taiwan to be produced using LNG by 2025.
According to Taiwan Rating’s analysis, Taipower will continue to sell electricity at a heavy loss even after the 11% average price hike that went into effect on April 1, primarily hitting heavy industrial users. In January this year, Taipower paid an average of NT$4.4 to generate each kilowatt hour of electricity. That’s 41% more than the average sales price of NT$3.12 per kilowatt hour after the price increase.
In 2022, Taipower took eye-watering losses of NT$267.5 billion (about US$8.9 billion), an all-time high, on top of previous cumulative losses of NT$40 billion. This year, Taipower suffered a loss of NT$32 billion in January alone. Taiwan Ratings estimates that the 2023 deficit will come to between NT$190 billion and 200 billion, assuming fuel costs remain at 2022 levels, even when taking into account the recent rate hikes.
Despite the poor condition of the company’s balance sheet, Taipower has no problem raising funds by selling bonds, given the assumed backing of the Taiwan government. “Taipower’s credit rating remains AA+ on the S&P global scale because it receives the same rating as the sovereign rating of Taiwan,” says Taiwan Rating’s Hsu. Even if the company’s financial situation continues to deteriorate, it will “almost certainly” continue to receive “special financial support” from the Taiwanese government, says Hsu. After all, as Minister Wang said: “Taipower cannot be allowed to collapse.”
However, if its creditworthiness were calculated on a standalone basis, Taipower would likely receive a bond credit rating of BB, or non-investment grade, Hsu notes. Such a rating would indicate that Taipower could be unable to meet its financial obligations if exposed to unfavorable business, financial, or economic conditions.
The government argues that Tai- power and the state-run CPC Taiwan Corp. (formerly Chinese Petroleum) play a vital role as “shock-absorbers” for the economy in an unexpectedly high fuel-price environment. CPC, which procures much of the fuel for Taipower, is also unable to pass on the recent high cost of hydrocarbons to consumers and thus is also suffering heavy losses.
“The rise in fuel prices due to the war in Ukraine put energy companies the world over in great difficulties,” said Vice Minister of Economic Affairs Tseng Wen-shen, speaking at Taipower’s 2022 year-end news conference. “Here in Taiwan, Taipower and CPC shouldered the responsibility of stabilizing prices and prevented serious inflation from taking hold. I believe the government will support them in turn for their contributions.”
Support has come in the form of the Ministry of Economic Affairs (MOEA) purchasing NT$150 billion in newly issued Taipower shares in December 2022. Taipower will also receive a NT$50 billion cash injection from a one-time tax surplus disbursement approved by the Executive Yuan in February 2023. But unless LNG prices fall substantially, Taipower will experience annual losses that cannot be offset solely by tax windfalls and stock sales.
While recognizing that Taiwanese power prices have chronically been set too low, National Central University (NCU) Economics Professor Dachran Wu cautions against aggressively raising electricity rates, considering the government’s push for more Taiwanese manufacturers to “reshore” to Taiwan and its encouragement of growth in semiconductor production, which is resource-intensive in terms of both power and water.
According to Bloomberg, Taiwan Semiconductor Manufacturing Company (TSMC) alone already uses more than 6% of Taiwan’s electricity. That figure could grow to 12.5% by 2025.
While the recent power rate hike came to an average of 11%, the MOEA is keen to point out that most households and some small businesses are spared. But conversely, this means that large power users, specifically industrial users using high and ultra-high voltage, will see their power prices increase by a considerable 17%.
“Taiwan is a heavily export-oriented country, and more than half our power use goes to manufacturing,” says NCU’s Wu. “This sector will be very sensitive to electricity price increases. Too much upward adjustment at the wrong time could cause systemic shocks.”
Wu also urges Taipower to be more proactive in managing LNG price volatility, as global competition for the super-chilled fuel is far stiffer than before the war in Ukraine, creating price fluctuations never seen before.
According to the International Monetary Fund, the price of LNG in Asia crashed to US$2.05 per MMBtu (million metric British Thermal Units) in June 2020 due to pandemic-induced decreased demand, before peaking in August 2022 at US$54.2 per MMBtu. The latest available data from February 2023 shows prices have fallen back to US$16.0 per MMBtu, but it’s unclear whether the market will settle back into any semblance of stability.
“Right now, Taipower is managing risk mainly with long-term contracts tied to the oil price,” says Wu. “That’s good for assurance of supply, but to protect themselves from price swings, they need to hedge more aggressively.”
In addition to price volatility, Wu also warns that relying on LNG for half the electricity production could be a national security issue. Unlike coal, which can be stockpiled, LNG comes through specialized receiving terminals and is then stored in tanks. Taiwan has only two such receiving terminals, on average holding about 11 days’ supply of LNG, with less in the summer. Although a third LNG terminal is slated to open in 2025, Taiwan will still require fourth and fifth facilities to have sufficient capacity.
“In a blockade scenario, it can be concerning to have such a limited supply of a key fuel,” says Wu.
The untimely nuclear exit
President Tsai Ing-wen set Taiwan on a course for high LNG use when she was sworn into office in May 2016. According to the IMF, the Asian spot price of LNG that month was US$6.8 per Btu. The government’s priority was to phase out nuclear power by 2025 (going from 12% to 0% of the energy mix) and to reduce the use of coal (from 46% to 30%) by raising the percentage of LNG (from 32% to 50%) and increasing the amount of renewable energy (from 4% to 20%).
Renewable energy, such as solar and offshore wind, was supposed to neatly take the place of nuclear power in Taiwan’s energy mix. This transition would have replaced one source of low-carbon power with another. But the renewable energy sector has struggled with delayed construction due to Covid-related restrictions and supply shortfalls caused by Taiwan’s strict localization demands for the industry. The slow growth of renewables and increases in overall power consumption means gaps left by closing nuclear plants will likely be filled with more LNG for the time being.
Bloomberg reported that when the second reactor at the Kuosheng Nuclear Plant was permanently closed in March, CPC bought at least 10 LNG shipments between May 2023 and March 2024 for delivery to Taipower. Citing “traders with knowledge of the matter,” Bloomberg reported that the purchases were part of a larger strategy to secure gas over the next year amid weaker nuclear output. Two new gas-fired plants were also opened to make up for the lost power supply.
The second nuclear reactor at Kuo-sheng accounted for around 3% of Taiwan’s electricity production. Just two reactors, accounting for around 5%, remain, both at the Maanshan Nuclear Power Plant near the southern tip of Taiwan. Both are due to be shuttered by 2025 when their 40-year licenses expire, even though similar plants in the U.S. have received life extensions of 60 or even 80 years.
Tung Tzu-hsien, chairman of Taiwanese electronics manufacturer Pegatron Corp. and vice chairman of the pro-Democratic Progressive Party think tank New Frontier Foundation, in March warned that if Taiwan follows through with its planned nuclear exit, its energy mix will “slip dangerously close to 10% low-carbon.” Taiwanese businesses could get “taxed until they’re dizzy” once the international community starts charging a carbon price, he said.
“Our carbon emission per capita is now seventh highest in the world,” Tung noted at a business forum on March 20. “If we keep shuttering our nuclear plants, that might rise to first in the world. If we had kept all our reactors open, that alone would have been a respectable 15% low-carbon energy.”
With the first nuclear power plant at Jinshan and the second at Kuosheng already shuttered, however, only the two reactors at Maanshan remain as candidates for life extension.
By the time 2025 rolls around, President Tsai will no longer be in office to be evaluated on the energy policy targets set in 2016. She is term-limited, and her successor will be sworn into office in May 2024.
Whether the new administration will choose to save the remaining online nuclear power plants and implement policies that accelerate renewable energy construction remains to be seen. If not, Taiwan’s electricity supply is likely to become more unstable and expensive over the coming years. The severity of the situation will depend on whether the highly volatile LNG markets of the past two years were an aberration or a sign of things to come.