Sunday, January 1, 2012

Post-Election Prospects for Taiwan's Short-Term Energy Security

Chinese Kilo-class sub (Wikimedia Commons)
    Bustling night markets, bubbling hot springs, welcoming locals – Taiwan has many positive traits. Short-term energy security is not one of them. As statistics by the nation’s Bureau of Energy (BOE) specify, Taiwan imported 99.4 percent of its energy in 2010, up from 88.9 percent in 1982. Forty-nine percent of the country’s 2010 energy supply was composed of imported petroleum, 32.1 percent was imported coal, 10 percent was imported LNG and 8.3 percent was imported nuclear fuel.  Measuring Taiwan against the IEA’s “Model of Short-Term Energy Security”, which defines “short-term energy security” as vulnerability “to physical disruptions [to energy supply] that can last for days or weeks,” yields a troubling result.     Taiwan’s almost total reliance on imports of every major fuel type makes the country highly vulnerable to supply disruptions. Exploitation of renewable resources in power generation might add to Taiwan’s resilience, but the use of these resources is currently low – just 0.4 percent of total energy supply, according to the BOE. Therefore, renewables would currently be of little use in counteracting the negative impacts of a blockade or other major supply disruption. Other potential attenuating factors described by the model, such as the diversity of energy suppliers and the number of ports the country possesses, might be irrelevant or unusable in the event of a Chinese blockade of the island, leaving only a few measures of “internal resilience,” such as fuel stocks, to see the country through a crisis.
    Unfortunately, Taiwan has no significant strategic reserves of any fuel aside from petroleum, while the capacity of those reserves is debatable. Taiwan’s Petroleum Administration Act of 2001 requires refinery operators and importers, such as China Petroleum Corporation and Formosa Petrochemical, to maintain an oil security stockpile of no less than 60 days of supply.  In 2003, responding to allegations of a professor at the Military College of Taiwan’s National Defense University that the island’s oil reserves would actually last only 30 days in the event of a Chinese blockade, then-Premier Yu Shyi-kun responded that Taiwan actually had enough to last 120 days, with private stocks adding 60 days.  Whether one believes the professor or the former premier, the fact remains that segments of Taiwan’s economy that are powered by fuels for which no major reserve exists might still be vulnerable even under the most optimistic blockade scenario.
    The risk of such a blockade is growing. As the US Defense Department’s 2011 report to Congress on Chinese military and security developments specifies, while China’s ability to enforce a full military blockade of Taiwan is still in question, the effectiveness of a PLA Navy blockade will improve steadily in the coming years. China’s ability to obtain the necessary local maritime dominance that a blockade would require will certainly be enhanced if additions to the country’s submarine fleet, improvements to the surface fleet, and progress in the deployment of anti-access and area-denial capabilities – designed to keep the US Navy at arm’s length during a conflict – continue to be made. 
    Within Taiwan, neither the current presidential administration of Ma Ying-jeou nor the main opposition party – the Democratic Progressive Party (DPP) led by Chairwoman Tsai Ing-wen – is oblivious to the negative economic impact that a Chinese interdiction of energy imports would have. “Securing a stable energy supply” is one of three energy policy targets covered in the Framework of Taiwan’s Sustainable Energy Policy, an energy policy strategy document released by the Ministry of Economic Affairs soon after the 2008 presidential election that brought Ma to power.  And, as recently as May 2011, Ma called for citizens to develop an appreciation of energy crisis risks.  On the other side of the political aisle, the Tsai-led DPP released a Ten-Year Policy Platform in August 2011. The first sentence of the "Energy" plank of that platform highlights the share of imported energy as the root of Taiwan’s energy security problem.
    Currently, Ma and Tsai are fighting a close race for the nation’s presidency, which will come to a head on Election Day on January 14, 2012. Since the energy policies that either candidate would promote over the next four years could impact Taiwan’s degree of dependence on energy imports, and, therefore, the country’s short-term energy security, an examination of some similarities and differences in the candidates’ proposed policies might provide a useful indicator of the degree to which Taiwan may be able to overcome its vulnerability to energy supply disruptions in the future.

Striking Similarities

Wind farm near Taichung (Wikimedia Commons)
    Those who look at the grand outlines of both candidates’ energy policies might notice many striking similarities. Current or past proposals made by the Ma administration call for increasing the share of renewables in installed power generation capacity from approximately 7 percent of total generating capacity in 2010 to 14.8 percent in 2025 and 16.1 percent (12,502MW) in 2030.  Other proposals (see also the Framework of Taiwan's Sustainable Energy Policy and various publications of the BOE) involve raising fuel efficiency standards for vehicles, raising appliance efficiency standards, promoting energy-saving lighting and construction methods, replacing old thermal power plants with new ones, building a smart grid, rationalizing energy prices, and putting in place an energy tax to reduce energy waste. 
    The Tsai-led DPP has made many comparable suggestions. For instance, the Ten-Year Policy Platform advocates increasing electricity generation from renewables by 1 percent annually, a target that Winston Dang, Taiwan’s former Environmental Protection Agency Minister, says would result in at least 12 percent of total generation capacity deriving from renewables in 2025 – slightly beneath the Ma administration’s target.  Other proposals include increasing energy efficiency, promoting “green” construction methods, implementing energy conservation measures to reduce growth in electricity use, replacing old thermal plants with new ones, building a smart grid, rationalizing energy prices, reducing subsidies for energy-intensive industries, and implementing an energy tax, the revenue of which would fund “green” energy policies and incentives for the use of “green” energy. 
    In short, both plans are designed to reduce the consumption of imported energy as a whole while reducing the share of imported fuels in power generation through the incorporation of renewables. An analysis of Taiwan’s energy consumption statistics shows the logic of this approach. In 2010, 48.6 percent of energy consumed in Taiwan was in the form of electricity, while 40.2 percent was consumed as petroleum products.  As for petroleum use by sector, industry is the largest consumer (approximately 46 percent), followed by transportation (30 percent), and power generation (8.3 percent).  By proposing increases in the share of renewables in power generation while developing policies to target inefficiency and waste in industry and transportation, the candidates’ plans would reduce the drain of industry and transportation on petroleum reserves during a crisis while building a modicum of generating capacity that is not vulnerable to a blockade. Of course, a cynic might note that even President Ma’s optimistic plan to raise renewables as a share of generating capacity to 16 percent of the total by 2030 would still leave an enormous generating shortfall if other forms of energy were unavailable. An optimist might reply that having the capability to meet 16 percent of generating capacity (nuclear power generation excluded), plus the declining percentage of capacity generated by oil fired plants that could be utilized if enough oil from the SPR were available, would be better than having to rely on oil-fired capacity alone (for projected generation capacity by energy form and price history, see ROC, MOEA, BOE. Long-term Load Forecasting and Power Source Development Plan. 2011. Note, numbers for 2010 are mid-year projections.).
    Whether either political camp would have the will or capability to realize these proposals is another matter. A President Ma or Tsai will have to confront big political obstacles. One of the largest of those obstacles is a historical resistance within Taiwan to rationalizing energy prices – in particular the low electricity prices set at the request of the government by state-owned Taipower, which operates 67 percent of Taiwan’s generating capacity, and the low petroleum product prices offered by large refiners such as China Petroleum Corporation. 
    Adjusted for inflation, electricity prices for households and small businesses actually fell 2.28 percent annually on average between 1982 and 2009, while prices for industrial users fell 0.36 percent per year. Despite significant upward price adjustments in 2006 and 2008, by 2009, the price of one kWh of electricity for households was only NT$2.79 ($0.092) while the price for a kWh of electricity for industrial users was NT$2.41 ($0.079).  The government’s prior resistance to increasing these prices was originally due to a belief that low prices would increase the competitiveness of businesses, although a hesitation of elected officials to lose voter support has also been responsible in recent years.  The negative consequences have been twofold. On the one hand, Taipower has accumulated losses that may rise to NT$135.1 billion ($4.46 billion) by the end of 2011.  This represents a potential strain on government coffers because, while Taipower issues debt to raise capital, as a state-owned enterprise, its losses must ultimately be backed by the government. On the other hand, low prices encourage consumers to waste electricity, and they discourage investment in renewable energies. Indeed, to keep generating costs at a minimum, Taipower invests heavily in coal plants instead of plants that utilize more expensive energy sources.  Meanwhile, faced with Taipower’s artificially low prices, companies that do invest in renewable energies, such as Germany’s InfraVest, a large private wind-power firm, find it difficult to turn a profit on their investments. InfraVest actually announced its departure from Taiwan in March 2010, citing the price issue.  It is clear that Taiwan’s politicians will have to overcome their resistance to raising electricity prices if significant progress on the development of renewable power generation is to be made.
    In the meantime, in an attempt to overcome the hesitation of investors to exploit renewables within Taiwan, the legislature passed the Renewable Energy Development Act in 2009. The stated purpose of the act is to raise installed generating capacity for renewables to 16 percent by 2025. To achieve this goal, the act calls for the establishment of feed-in tariffs for renewable power, with an emphasis on PV solar and wind power generation.  However, while the size of the feed-in tariffs was originally lauded by developers, who were offered a 20-year preferential rate if they signed a deal with Taipower in 2010, the BOE later upset wind and solar investors by announcing that tariffs would actually be determined by when projects began operation. As a result, developers would gain lower than expected returns on their investments. This may be one reason for the slow progress in the development of some renewable energy projects since the REDA was enacted. 
    Electricity is not the only energy product that is priced too low to encourage efficiency. Petroleum products in Taiwan – gasoline in particular – have long been reputed for their inexpensive nature. While gasoline prices do float, they are kept cheap by a low gas tax rate.  They are also highly vulnerable to manipulation. For instance, as world gasoline prices were rising during the presidential and legislative campaign season in late 2007, the former DPP administration implemented a freeze on gasoline prices in order to restrain inflation and to avoid financially burdening the public.  Before the six-month price freeze was ended by the incoming Ma administration, CPC had lost NT$100 billion ($3.276 billion). KMT politicians were highly critical of the DPP government’s action. In particular, Chang Sho-wen, the then-Secretary General of the Kuomintang legislative caucus, demanded that the former heads of the DPP government apologize to the public. Yet Chang’s demand belies the fact that members of his own party have been just as complicit in seeking to gain points among the electorate by advocating the merits of lower gas prices.  For example, prior to the 2008 elections, Kaohsiung City Councilor Chen Li-nah of the Kuomintang erected a campaign poster that read, “The price of rice, gas/oil, flour, pork, toilet paper… up, up, UP! Folks, can you endure it? It’s time to change the ruling party.”  Clearly, the price issue is sensitive regardless of which party is in power.
    Nevertheless, in June 2009, the cabinet’s Tax Reform Committee did propose new energy taxes on coal, gasoline, diesel, kerosene, aviation fuel, LPG, fuel oil, natural gas and nuclear energy, the revenue of which would replace the shortfall caused by abolishing several non-energy taxes.  Energy taxes on gasoline alone, not including a separate environment tax, were slated to rise from NT$5.73 ($0.19) per liter in 2011 to NT$22.92 ($0.76) by 2020. Provided these could be passed on to consumers, they would potentially provide a disincentive to using both petroleum products and electricity. Yet, over two years after the cabinet’s proposal, the taxes have still not been implemented, illustrating the difficulty of taking such an ambitious action. 
    One can imagine many other forms of political difficulty that might slow the implementation of the energy plans of a President Ma or a President Tsai, from the expense of building a smart grid to foot-dragging by local officials not wishing to subject their constituents to new standards. Regardless, it is clear that significant resolve will be needed, even to push through policies on which both sides of Taiwan’s political aisle officially agree.

Deep Differences

Fourth nuke plant under construction (Wikimedia Commons)
    An added level of difficulty will face the winner of the race when he or she attempts to implement policies over which the two political camps are sharply divided. And no energy policy issue divides the two camps more than the question of what Taiwan should do with its three existing nuclear power plants and the soon-to-be-completed Fourth Nuclear Power Plant. Depending on the outcome of the election and the subsequent willingness or ability of either candidate to see their plans to fruition, Taiwan will either decommission every nuclear plant by 2025 or will maintain a minimal nuclear power generation capacity for decades longer. Either choice will impact Taiwan’s ability to withstand energy supply disruptions.
The first indicator that the fate of the nuclear power plants would be an issue in this campaign was the March 24, 2011 announcement by Tsai that, if elected, she would not allow the Fourth Nuclear Power Plant, due for completion between 2012 and 2013, to come online. Her announcement partially reflected heightened concerns within earthquake-prone Taiwan over the safety of nuclear power generation following the Fukushima disaster two weeks earlier.  The Tsai-led DPP would later release additional details regarding their nuclear plan in the Ten-Year Policy Platform. The platform calls for the completion, but not the commercial operation, of the Fourth Nuclear Power Plant and a refusal to prolong the life of Taiwan’s existing plants.  Since Taiwan’s youngest operating reactor is licensed until 2025, the plan effectively calls for an end to domestic nuclear power generation by that year.
    In terms of its impact on Taiwan’s ability to withstand disruptions to its energy supply, the Tsai-led DPP’s plan is less than ideal. Taiwan’s three existing plants have a capacity of over 5,000MW.  They represent over 10 percent of the island’s generating capacity and over 17 percent of its actual electricity generation.  Moreover, the two reactors of the Fourth Nuclear Power Plant would add an additional 2,600MW of generating capacity.  Although these reactors use imported fuel, since nuclear reactors can frequently run for up to 18 months without refueling, chances are high that Taiwan would have access to most of its nuclear generating capacity for many months in the event of a blockade. 
    The energy source chosen to replace nuclear might not provide the same degree of resilience. The DPP’s Ten-Year Policy Platform calls for building new natural gas and renewable energy generation capacity to compensate for the shortfall caused by phasing out the nuclear plants. Regarding natural gas, Taipower has estimated that one delivery of nuclear fuel, enough to supply the Fourth Nuclear Power Plant for one year, is the equivalent of 48 ocean deliveries of LNG (Taipower. Understanding Electric Power (in Chinese). 2004.).  In the event of a blockade, such deliveries might not be possible, and local reserves would be unable to make up the shortfall. In 2010, the country imported 14.9 billion cubic meters of gas, transported as LNG.  In comparison, the country produced just 255 million cubic meters of natural gas from domestic sources and maintained a small but rising LNG storage capacity equivalent to 1.17 million cubic meters of gas at CPC’s two LNG import terminals.  Therefore, without a big increase in storage, an increase in the use of natural gas might reduce the capability of the country to endure a supply disruption.
    In contrast, switching to renewables such as wind and solar, which require no imports, would technically enhance Taiwan’s resilience. However, since these renewables would replace nuclear plants which, as mentioned, can go for many months without refueling, they would offer less resilience than if they were used to replace generation by one of Taiwan’s other energy imports.
    In fairness to the Tsai-led DPP, the party has taken its position based on much more than calculations of energy security. Rather, the DPP has long questioned the safety of nuclear plants and has enjoyed a long-standing and intimate connection with Taiwan’s anti-nuclear movement. Going so far as to describe Taiwan’s anti-nuclear movement as a “party-dependent movement”, National Taiwan University professor of sociology Ho Ming-sho describes an unequal symbiotic relationship between anti-nuclear activists and the party. (Ho, Ming-sho. "The Politics of Anti-nuclear Protest in Taiwan: A Case of Party-Dependent Movement (1980-2000)." Modern Asian Studies. 37.3 (2003): 683-708.) Ho claims that this relationship formed when the independent politicians who would later consolidate themselves into the DPP were building the organization in the mid-1980s. In the authoritarian and pro-nuclear KMT-dominated state, anti-nuclear activism became a powerful means of opposition to the ruling party. When the government of Chiang Ching-kuo finally allowed for the formation of independent political parties, anti-nuclear activists found within the newly-formed DPP a rising elite that was sympathetic to their views. Meanwhile, by welcoming anti-nuclear activists into the fold, the DPP gained an energized voting constituency. Ho calls the relationship unequal because, as the DPP became more successful, party leaders could no longer afford to always satisfy the anti-nuclear constituency. They were forced to compromise on the nuclear issue. Consequently, while newly elected DPP president Chen Shui-bian announced that his government would terminate construction of the Fourth Nuclear Power Plant in 2000, a significant backlash from the KMT-dominated legislature was able to force Chen to allow construction to resume.  Nevertheless, the new government did succeed in inserting an article (Article 23) into the Basic Environment Act of 2002, a piece of legislation formulated by the legislature to raise environmental quality. The inserted article pledged the government to “establish plans to gradually achieve the goal of becoming a nuclear-free country.”
    Until this year, the Ma administration has shown little indication that it has been willing to honor that pledge. In fact, a January 2011 BOE publication that features projections in electricity generation out to 2019 (Long-term Load Forecasting and Power Source Development Plan. 2011) specifies that nuclear power generation capacity is expected to make up 2.3 percent more of Taiwan’s total generating capacity by 2019 than it does today.  However, in the midst of a tight race for the presidency, the Ma administration suddenly announced a November 2011 compromise policy. Under the new nuclear policy, the administration pledged not to extend the operating lifetimes of the existing nuclear plants, leaving only the Fourth Nuclear Power Plant in commercial operation after the closing of the last of the older reactors in 2025.  This would leave Taiwan with some measure of nuclear generating capacity through at least 2050. It would also technically allow the Ma administration to claim that it was complying with Article 23 of the Basic Environment Act, and it might bring the administration slightly more in line with public opinion on the nuclear issue. As a January 2011 poll conducted by the Taiwan Institute of Sustainable Energy suggests, only 35.4 percent of respondents favor the construction of additional nuclear plants.  That percentage would have almost certainly fallen after the Fukushima disaster.
    As a consequence of the new policy announcement, the Ma administration, like the Tsai-led DPP, must face the question of how to replace the decommissioned plants. The administration’s new nuclear strategy calls for a “reasonable use” of natural gas, but doesn’t specifically refer to other fuels. In contrast, the BOE’s January 2011 publication about electricity generation projections presents a more-detailed snapshot of the future. Unfortunately, due to the Ma administration’s November policy change, the projections, which do not assume the closure of any nuclear plants before or after 2019, are no longer very useful. Nevertheless, it is still possible to draw a few conclusions based on the projected figures. They forecast that 45 percent of the new capacity added before 2019 will be coal-fired, 24.2 percent will be gas-fired, 16.1 percent will be nuclear, 14.3 percent will be renewable, and the remaining 0.4 percent will be oil-fired.  Based on these numbers, it is clear that the Ma administration has already demonstrated its willingness to make greater use of cheap, high-CO2-emitting coal in power generation, despite the fact that the Taiwan Institute of Sustainable Energy poll also found that 52.7 percent of respondents believe that the government is not doing enough to fight climate change. Whether the electorate’s aversion to pollution will restrain further expansion of coal-fired capacity remains to be seen. Regardless, in terms of Taiwan’s ability to maintain a stable energy supply, the question of whether the administration’s focus will be on coal or natural gas is academic at best. Taiwan produces no coal and has minimal reserves, therefore the country will be no better off regardless of which commodity the government will favor for power generation. 

Weighing the Options

    Weighing the policies of the two candidates in terms of enhancing Taiwan’s ability to resist an interdiction of its energy imports alone, it seems that the Ma administration’s policy provides for a marginally better resistance capability than that of the Tsai-led DPP. This conclusion is based on the roughly similar approaches both plans would have on energy conservation, the slightly higher share of renewables in the Ma administration’s projections, as well as the slightly higher degree of resistance that maintaining one nuclear plant in operation would provide as opposed to shutting all of the nuclear plants. Yet it may not be fair to pass judgment on the two plans in this manner. After all, as the above analysis suggests, there is no guarantee that the expansion of generating capacity based on renewables will go smoothly for either occupant of Taiwan’s Presidential Office Building. Moreover, since the Fourth Nuclear Power Plant would represent just 2,600MW of capacity, compared to a 2010 national installed capacity of approximately 48,500MW, and since electricity makes up only half of the island’s total energy consumption, it is hard to believe that one nuclear plant would make an enormous difference to the island during a blockade.
    One safe assumption about both plans is that, in the short to medium term, neither plan will be able to ensure that Taiwan will have the energy it needs in the event imports are cut off. Efficiency improvements alone will only reduce the amount of petroleum, natural gas, coal and other imports consumed. They cannot entirely eliminate dependence on those imports. As for renewables, they will continue to be a small percentage of power generation, and an even smaller percentage of total energy consumption, for decades to come. Taiwan will continue to have a challenging short-term energy security profile regardless of which candidate wins the presidency.