Taiwan’s energy security is at intrinsic risk because of its overwhelming dependence on imports. Some 98 percent of the energy Taiwan uses is imported, and that import mix depends especially on fossil fuels, which comprise a whopping 93 percent of Taiwan’s overall energy supply.
Such a high level of import dependence is an intrinsic security challenge because some 76 percent of Taiwan’s oil came from the Middle East in 2018, a region that could turn even more volatile as the collision between the United States and Iran (and between Iran and Middle East Arab states, including oil producers such as Saudi Arabia) intensifies. As of September 2019, Saudi Arabia alone comprises some 30 percent of crude purchases by Formosa Petrochemical, one of Taiwan’s two leading oil refining companies.3
Import dependence also exposes Taiwan to the instability of reserve margins, which have dropped to some precipitous lows in recent years—reaching their lowest point in 2017 when Taipower, the state owned utility, had an operating reserve margin of just 1.7 percent.4 As a result, during a blackout in August of that year, Taiwan lacked the reserve capacity to avoid widespread power outages.5
Happily, the reserve margin of power improved to 16.8 percent in 2019.6 Indeed, one reason for the low reserve margin prior to 2018 was that Taiwan’s fourth nuclear power plant had been scheduled to begin operating in 2014 or 2015 but was instead sealed in 2014. Reserve margins have gradually improved since the commissioning of coal-fired units in Linkuo and Dalin and the gas-fired unit in Tongxiao.
But Taiwan’s energy security is also at risk because its opportunities for international cooperation, including in the event of global supply and price shocks, have been so constrained.
Unlike two leading neighboring economies, Japan and South Korea, Taiwan is not a member of the Organization for Economic Cooperation and Development (OECD). It is not, therefore, a member of, or even associated with, the International Energy Agency (IEA), the Paris-based intergovernmental organization within the OECD framework that coordinates strategic reserve stockpiles.7 The IEA also hosts the world Clean Energy Ministerial (CEM) Secretariat and Energy Efficiency Hub. It undertakes a variety of data sharing and technology development initiatives from which Taiwan—an economy among the world’s top twenty-five by nominal gross domestic product—could benefit.
With Taiwan excluded not just from the IEA but also from most other international energy coordination mechanisms such as the World Energy Council, creative efforts to revitalize, strengthen, and intensify ad hoc partnerships with a wider variety of international players could multiply its opportunities.
2. EQUITY AND AFFORDABILITY RISKS
Energy equity remains a challenge too.
Fiscal and investment obstacles have impeded the creation of a more efficient energy market in Taiwan. And while the government has worked to find a proper balance between, on the one hand, keeping power prices low and, on the other, ambitiously building out renewables in the overall fuel mix, Taiwan’s next set of policy choices about subsidies and regulation could yield new pressures on power pricing.
Household electricity prices in Taiwan are relatively low ($0.09 per kilowatt hour [kWh] as of September 2019 compared to a world average of $0.14/kWh), yet the burden of heavy subsidization is ultimately shouldered by Taipower, whose electricity business suffered NT$14 billion in losses in 2018 and an additional NT$10 billion in the first two months of 2019 alone.8 This has left Taipower in a financially precarious position at a time when investment in grid upgrades is sorely needed to address periodic blackouts, both planned and unplanned. The sustainability of this pricing model will hinge on future declines in fuel costs as Taipower’s debt burden continues to increase.9
Taiwan especially needs additional energy storage and gas-fired generation capacity, as well as further price rationalization reforms to its power market. One reason is that Taiwan’s electricity consumption continued to rise at a rate of 1.76 percent per year from 2004 to 2019, with industrial consumption making up 56 percent of the total in 2019, the largest share among all sectors.10 And Taiwan’s gross electricity generation increased by 14 percent between 2005 and 2015, from 227 terawatt hours (TWh) to more than 258 TWh (see figure 1).11
But Taiwan’s grid system is isolated, which could make it susceptible to power shortages in the event of a sudden supply shock. This problem is potentially made worse by the continued overreliance on fossil fuels—for instance, if reserves are low due to shipment delays caused by instability in the Middle East.
3. SUSTAINABILITY RISKS
The third leg of Taiwan’s energy trilemma also remains a challenge. Enhanced international cooperation could be essential to Taiwan’s buildout of environmentally sustainable power.
Nuclear power, which once generated as much as 20 percent of Taiwan’s electricity, has fallen by the wayside amid decades of political controversy (see figure 3).12 Taiwan’s last nuclear generating unit, at Maanshan in the southern county of Pingtung, will reach the end of its operating license in May 2025, bringing to an end a once-flourishing era of nuclear power generation on the island. This will mean a crunch for the government’s ambitious effort on renewables, so improved policies will be needed to help further incentivize international partnerships and investments in offshore wind, solar, and next generation energy technologies.
The government has set ambitious targets to change the underlying fuel mix—a “20-30-50” formula that would see 20 percent of Taiwan’s power generated by renewable sources, just 30 percent from coal, and 50 percent from natural gas by 2025. Yet Taiwan still has a long way to go to meet that bold aspiration. In 2019, renewables comprised just 6 percent of Taiwan’s electricity supply (see figure 2). And the system is likely to come under strain as the grid is fitted to manage new capacity (see figure 4).
TABLE 1. TAIWAN’S RENEWABLES BUILDOUT
Type of Renewable Energy
Current Capacity, February 2020
Planned Capacity by 2025
Solar
4.150 GW
20 GW
Wind
0.845 GW
7.7 GW
Hydro Power
2.092 GW
2.15 GW
Biogas
0.741 GW *
0.813 GW
Geothermal
0.3 MW
0.2 GW
What is more, the turn from coal to gas could lead to an array of stranded assets. Taipower expects to operate some 25 gigawatts (GW) of gas power plants by 2028. Along with nearly 10 more GW of gas-generated electricity from independent power producers, this could pose challenges of overcapacity in the system.
The bottom line is that Taiwan faces a high bar—and competition from other economies in Asia—as it seeks to meet its bold sustainability targets and attract the investment needed to do so.13 To add some 27 GW of generation capacity from renewables, the government aims to attract as much as $59 billion (NT$1.8 trillion) in foreign investment.14
Just take offshore wind power. Asia is projected to be by far the world’s largest offshore wind market, hosting as much as 60 percent of global capacity by 2050. But in that context, Taiwan is already a regional leader. The Ministry of Economic Affairs has built out offshore wind development through competitive auctions that explicitly target foreign partners, including the $627 million, 128 megawatt (MW) Formosa 1 wind complex off Miaoli County in west Taiwan, the first of its kind to be commissioned in the Asia-Pacific region.15 It includes four foreign partners: Japan’s JERA (32.5 percent ownership stake), Denmark’s Ørsted A/S (35 percent), Australia’s Macquarie Group Limited (25 percent), and Taiwan’s own Swancor Holding Co. (7.5 percent).
This is just one of eleven offshore wind projects that have attracted substantial investment to Taiwan, particularly from the Nordic countries, and that are expected to add 5.5 GW of capacity to Taiwan’s electrical grid by 2025, with an additional 10 GW targeted for 2035.16 But these projects have faced challenges, not least with the permitting process.17
As investment activity in Taiwan’s renewables sector picks up—the offshore wind projects alone are expected to generate nearly $31.7 billion in new investment—more U.S. investors should, quite clearly, be a central part of the mix.18 And although attracting funding remains a challenge that introduces significant risks and uncertainties, the good news is that some have already pursued the opportunity. For example, in August 2019, a New York–based asset manager, Stonepeak Infrastructure Partners, acquired a 95 percent stake in Swancor’s renewables subsidiary.19 But many more could be encouraged and incentivized to do so. Foreign partners and investors, including Americans, can play an important and constructive role in enabling Taiwan’s energy transition.
S TRUCTURAL CHALLENGES TO TAIWAN’S ENERGY FUTURE
The focus of Taiwan’s next set of energy policies should be on three structural issues:
improving energy storage systems to accommodate the projected surge in renewables;
further rationalizing prices in an already relatively cost-effective electricity market; and
enabling highest-quality energy investments, not least from the United States.
IMPROVING STORAGE SYSTEMS AND SURGING RENEWABLES
Taiwan’s energy future is now deeply tied to the government’s determination to increase the share of renewables in the power generation mix. But wind and solar are known as “variable” not “dispatchable” power sources because, as David Roberts has written, they depend on the vagaries of weather, time of day, and season.29 Simply put, because they depend on nature, “they cannot be turned on and off, or up and down, according to the grid’s needs. They don’t adjust to the grid; the grid adjusts to them.” So, a grid with a high penetration of renewable energy needs to be shifted, smoothed, and responsive to sudden decreases or increases. To put this another way, because the main sources of renewable power—sun and wind—are intermittent by nature, a utility needs to ensure a stable power supply.
One solution is to deploy more storage systems. But while the costs of renewables and battery storage are coming down, there are intrinsic limits to how much power can be stored at any given moment. Each of Taiwan’s power providers will need to look at shifts within a season not just in a day. Battery technology, unfortunately, has not advanced far enough to be able to deal with such seasonal shifts. At present, the largest energy storage system is a pumped storage power plant, but it can only store energy on a daily basis, not weekly, let alone monthly or seasonally.
For Taiwan, this means that both gas and batteries will be required to keep the grid viable and running smoothly for industrial and residential customers alike. Storage is not cheap. So, Taiwan will need incentives that encourage new players to enter the market for better storage. One example could be a virtual power plant (VPP) for residential batteries, which can both reduce loads and be configured in a flexible way.30
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