Cover Story: Power Hungry
With the long-expected fourth nuclear power plant in doubt and few independent power plants under way, many are wondering whether Taiwan will have enough power to ensure a bright future. Most feel certain the island does not.
by Mat Matich
His office is as clean as a newly built power plant. Papers, folders, and books are stacked tall and neatly like turbine towers on his desk. Yet S.C. Lai does not seem at peace in his office at the Taiwan Power Co., or Taipower, where he serves as vice president. Lai sits on the edge of his couch as if he could dart out the door at a moment's notice. His face alternates between a look of concern and agitation as he discusses the cancellation of the fourth nuclear power plant.
"We had planned on [the fourth nuclear plant]," Lai says. "Now we have to find new ways to produce enough power."
For Lai, and many others whose job it is to make certain Taiwan has enough electricity, the loss of the fourth nuclear plant was a real blow. The central government and Taipower had counted on the nuclear plant to keep the nation's power production just above its power consumption in the coming years. Even if the plant were completed on time in 2004 and were producing an expected capacity of 2,700 megawatts, the island would be just skirting an energy shortage, according to executives in the private sector and sources in the government. During the hottest days of June, when air-conditioners islandwide were working overtime to keep the heat at bay, Taiwan's margin reserve - the amount of extra energy the nation's power plants can produce beyond demand ran at just 0.8 percent. Taipower officials say they ideally generate between 15 and 20 percent more energy than needed. During 2000, Taipower estimates the average daily reserve margins will reach just 11.9 percent and will fall to 9 percent in 2001.
"We planned on the nuclear power plant for 20 years. We expected to rely on it," says one government official close to the review of the fourth nuclear power plant. "Now we have to do without it. All for political reasons.
Now Taiwan faces the challenge of generating more and more power every year without relying on increased nuclear power, a relatively cost-effective way to produce large quantities of electricity (see box, page 21). The government's solution has been independent power plants (IPPs). IPPs are private firms that build and operate power plants, selling their electricity to the government power monopoly, Taipower. It is a first step toward the liberalization of Taiwan's energy market, a process that many nations throughout Southeast Asia have already undertaken.
At first glance, it seems reasonable that private thermal plants could make up for the lost power from the cancelled nuclear plant. Just five 600-megawatt plants would do the trick. But despite the central government's declared reliance on independent power producers, the private investors attracted so far have had a rough go of it. Of the original 11 consortiums that intended to build power plants in Taiwan seven years ago, only one is producing and distributing power today. In June, the central government approved another four IPPs, but some of these projects are also meeting with delays and setbacks. By year's end, one had already failed to meet key deadlines and was deemed by the Energy Commission to face an uncertain future. Clearly, private plants will not end Taiwan's energy woes until the government finds a way to keep investors investing.
When the government first announced it would allow private power plants, many local and foreign firms were eager to jump into the market. But after three rounds of IPP approvals and a severe drought of success stories, many doubt that any international firms will even bid in the next round. Sources in the MOEA say the ministry is having trouble finding any company, local or foreign, to enter the latest leg of the IPP race.
As officials at the Ministry of Economic Affairs prepare to allow a fourth slew of private firms to try their hand at the IPP game, possibly as early as this year, the question remains whether Taiwan's mix of free market reform and government leadership can charge the nation up before it is too late.
Power Starved
Taiwan is a power hungry nation in a very literal way. The island generates, and consumes, a capacity of nearly 28,000 megawatts of electricity, more per capita than any other Asian nation except Japan or South Korea. For its part, Taipower insists it has kept just ahead of power demand. In 1999, Taiwan's power consumption rose 1.6 percent to 24,206 megawatts while production capacity increased 6.8 percent to 28,480 megawatts. But this picture of plentiful power is largely a matter of statistical smoke and mirrors, critics say. While on the average day Taiwan makes 12 percent more power than it needs, during the highest demand days of the year, the nation makes little more 0.8 percent above what is necessary to keep the island humming.
"With or without the fourth nuclear power plant, we would have an energy crisis," says Kim Christensen, president of Alstom Taiwan, a global producer of power generation equipment. Christensen foresees "brown out" periods when power to different areas of Taiwan is significantly reduced, as early as this year.
But S.C. Lai of Taipower says there will be no brown outs, and certainly no black outs, in the near future, pointing to the company's diversified and expanding power production system complimented by Taiwan's single operating private plant. Presently, Taiwan gets 16 percent of its power from hydroelectric facilities, 65 percent from thermal power plants (burning fossil fuels or LNG gas), and 19 percent from nuclear power.
But even Lai readily admits Taipower alone cannot keep Taiwan energized. For one thing, as a government monopoly, the company has been hemmed by laws that require approval from the Legislative Yuan for major decisions. This makes purchasing land and constructing new power plants a long and very political process witness the 20-year stop-and-go history and current uncertain fate the fourth nuclear power plant.
This is where IPPs come in as saviors of Taiwan's future power supply, Lai says. "We are very sure there will be enough power because private enterprise is strong here and can build more quickly and efficiently than we can," he says.
Running Low
In 1994, when the Ministry of Economic Affairs' (MOEA) Energy Commission approved the first run of IPPs, the opportunity seemed the chance of a lifetime to many investors. Everyone in Taiwan - from the hot and bothered who live beside the air-conditioner during Taiwan's long summer to the thousands of factories across the island - needs electricity. It stands to reason that those who supply the island with power will find a market continually starved for their product.
But there were a few catches on the way to the bonanza. First off, it requires no small fortune to purchase land in crowded Taiwan, construct a power generation plant, and then fire it up and start cranking out 600 megawatts of electricity. After securing the funds or credit, investors must then win approval from the local government presiding over the plant site, as well as acquiring lease rights for power transmission lines. After working through a maze of small town bureaucracy and private landowners looking for high lease fees, investors still face the constant threat of environmental-minded protests. If all these battles have been won, and the plant is producing electricity, private producers face one final limitation: they can only sell their power to Taipower when it needs the power, and at prices it sets.
To put it in an understated way, Taiwan's energy market has proved challenging for investors. So challenging that, of the original 11 private consortiums approved in the first two bidding rounds, only one is producing and selling electricity today. Among these, one has had its construction suspended, one had had its test run delayed, and two of the three under construction have met with delays. No less than five of the consortiums approved to build plants so far have pulled out of their agreements altogether. In June, four new IPPs were approved, but by year's end, one was already behind schedule and faced an uncertain future, according to the Energy Commission.
What is chasing off the much-needed private plants? Those firms and consortiums that dove into IPP bidding rounds had the site selected and approved and other requirements satisfied. The bigger problem was the long drawn-out process of acquiring the necessary financing and wading through the sea of approval papers needed from national and local government agencies, says Dr. H.K. Kwan, president of GIBSIN Engineers. GIBSIN is a consultant for several of Taipower's fossil fuel plants and many IPP plants.
Securing financing and government and public approval are particularly tough for foreign firms, says Kim Christensen of Alstom. Local residents rarely see huge pollutant-producing power plants as a blessing, especially when a foreign firm based thousands of miles away is behind it. Christensen says local objections can lead to vocal protest that not only lengthen the construction process, but can eventually kill a deal.
One example is the Chang-chang power project in Taoyuan County. This year, Ever Power IPP Co. suspended construction when the most recent installment NT$350 million of its guarantee payment came due. Randy Chiang, vice president at Ever Power, says the main problem was not finances but the unrealistic construction deadline set in the agreement. If Ever Power does not complete the plant within three years from the plant's approval, it faces a penalty fee even larger than its latest installment payment. Chiang says building the plant in this time frame is impossible in Taiwan, given a myriad of problems: the long process of land acquisition, leasing transmission rights, and receiving all necessary government approval. Worse yet, Ever Power's extension project must wait until 2003 before it can receive gas turbines. Kim Christensen of Alstom says that the world's four manufacturers of gas generators cannot fill any new orders for turbines until 2003 at the earliest due to a boom in the world market which has seen demand double in the past year. This, Chiang insists, shows that the government is demanding that private investors accomplish what Taipower cannot, even with the full power of the central government behind it. "Even Taipower never finishes its projects on time," Chiang says. WHow can they expect IPPs to complete such huge projects without any leeway?"
Ever Power did not give up. The guarantee payment was due December 15, but Chia says his company will continue seeking a way to finish the plant without paying devastating penalty fees for deadlines missed.
Other local investors are often willing to build IPPs, but lack the financing in Taiwan's rocky, stock-market-driven economy, say many in the industry. Thus, Taiwan-based firms will often hire an international company to add weight to their IPP bid and loan applications.
Yet almost everyone in the private sector agrees the single highest hurdle for foreign and local IPP hopefuls alike is financing. This is because of the unattractive terms that the government and Taipower now offer investors through the power purchasing agreements (PPA) the initial agreement signed between Taipower and the private energy producer outlining how much power Taipower will buy from the new private plant. Perspective private producers complain the agreement does not promise high enough returns to warrant the hefty investment needed to start a plant. According to Christensen and many executives in the power industry, the present PPA is useless for those seeking financing from a bank outside Taiwan. "You can't show that PPA to any bank and expect financing," says one executive who has served as a consultant to perspective IPPs since the industry liberalized. "The PPAs are a joke."
The PPAs illustrate the conflict between Taipower's liberalization and the government's drive to insure a well-powered future. One of the least favorable terms of the agreements is that Taipower need only buy electricity from IPPs when its own facilities do not meet demand an arrangement that offers no guarantee IPP investors will see a single NT dollar of profit if Taiwan's power production outpaces demand.
S.C. Lai, a vice president at Taipower, dismisses such complaints. Taipower's purchasing agreement with IPPs does insure the independent producers will earn enough to cover the cost of building and operating the plant over the course of the 25-year agreement. He says IPPs can also expect a 15 to 20 percent return on their power production investment. But while investors still balk at such slow and slim returns many in the government complain that private power investors must take a long-term approach to Taiwan's energy market.
Ironically, business sense is the main reason Taipower retains protective clauses in its power purchasing agreements. It is because Taipower is about to enter a free, liberalized market that the company cannot tie itself to any entangling, unfavorable contracts. "We will have to compete soon, too," explains S.C. Lai.
Getting Private
Plans are already drawn for the privatization of Taipower, an event that promises an initial public offering that will dwarf the record-setting first listing of Chunghwa Telecom this past fall. Taipower's capitalization is estimated at US$1 trillion. Originally, Taipower was to be privatized by 2001, but recent shakeups in the energy industry have led the government to push the date back, likely to 2004 or 2005. This should give the Legislative Yuan time to pass and enforce a series of energy laws that have been kicked around the legislature's floor for more than a year now. If passed, the revised ROC Electricity Law will deregulate the energy market and put Taipower on equal footing with other energy firms as it loses its energy monopoly.
As the government continues to balance the threat of an energy crisis and to push for market liberalization, one thing remains certain: the island is facing a tight power squeeze in the years ahead. The fourth nuclear power plant was due to kick out capacity of 2,700 megawatts by 2004. Its delay or absence puts a major dent in the MOEA's long-range energy plan. And the main solution for making up this shortfall - independent power producers - suffers from a terrible track record.
Even creative solutions to the possible power shortfall are proving difficult because Taiwan is so power strapped that it cannot be flexible. Kim Christensen of Alstom recommends another innovation that would increase Taipower's production levels for a low price - retrofitting older, fossil fuel burning plants with new components that reduce emissions and boost efficiency. Yet Lai says that while upgrading the old coal burning plants is a sound idea, there remains one problem - the plant would have to stop operation for many months, a price Taipower cannot afford at a time when every power plant counts. "We cannot spare a plant for that long," Lai says. Underlining, once again, just how tight Taiwan's power supply runs.
Note: As this article went to press, the ROC Council of Grand Justices announced on January 15 that the cancellation of the fourth nuclear power plant by the Executive Yuan in October was found to be "improper" because the Legislative Yuan must first be consulted. This throws the future of the plant back into debate, giving the LY the chance to reinstate it by either replacing the premier or passing a law on the issue.
