RAISING TAIWAN UTILITY PRICES: IF NOT NOW, THEN

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003096

SIPDIS

STATE FOR EAP/RSP/TC, NP/NE - ALEX BURKART, OES/PCI
STATE PLEASE PASS TO AIT/W AND USEPA
EPA FOR OIA - DAN THOMPSON

E.O. 12958: DECL: 07/15/2015
TAGS: ECON ENRG PGOV PREL SENV TW ESTH
SUBJECT: RAISING TAIWAN UTILITY PRICES: IF NOT NOW, THEN
WHEN?

REF: A. 2005 TAIPEI 02601


B. 2003 TAIPEI 00892

C. 2002 TAIPEI 03912

Classified By: AIT DIRECTOR DOUGLAS PAAL FOR REASONS 1.4 (B) AND (D)


1. (C) Summary. Problems in Taiwan,s water and power
infrastructures abound. Water prices in Taiwan are lower
than in Malawi and impede Taiwan from improving its extremely
low sewage treatment rate of about 8 percent; if new power
plants are not built by 2010, Taiwan will again face power
shortages; Taiwan,s state-owned power company Taipower is
facing negative budgets for its first time in history;
electricity prices have not been increased since 1983;.
Despite all this, the Chen Administration continues to vow
not to increase water or electricity prices and is
discouraging the primarily state-owned Chinese Petroleum
Corporation (CPC) from raising gasoline rates. This is a
clear indication that to date the second Chen Administration,
like the first, has put politics above economic prudence.
End Summary.

--------------
No Rate Hikes Guaranteed
--------------


2. (U) In recent weeks, on numerous occasions, Premier Frank
Hsieh has publicly committed not to raise utility rates for
water for at least a year and electricity rates for at least
the summer. Similarly, Economic Minister Ho Mei-yueh is
urging CPC not raise gasoline prices despite rising
international crude oil prices. She also has promised not to
raise electricity rates for at least the next few months.

--------------
The Impact of Low Water Prices
--------------


3. (SBU) Low water prices prevent Taiwan from maintaining its
water infrastructure and discourage consumers from conserving
water. In Taiwan, water costs only about 7 New Taiwan
Dollars per cubic meter, making it among the lowest priced in
the world ) below even that of Malawi and Ivory Coast in
Africa. This low price, unchanged for over a decade, does
not generate enough revenue to fix the extraordinary number
of leaky pipes, which are estimated to result in at least a
30 percent loss of Taiwan,s water supply. Furthermore,
Acting President of Taiwan,s Institute for Economic Research
(TIER) David Hong estimates that, due to the high price
elasticity of water, for each one percent increase in price,
there would be almost a one percent decrease in demand. As a
result, raising the price of water could both lower its
consumption and provide enough income to fix the leaky pipes,
both significant factors in Taiwan,s recurrent water
shortages during low rainfall periods.


4. (SBU) Taiwan faces similar problems in its wastewater
infrastructure. Currently, disposing of wastewater in Taiwan
is free. If Taiwan were to start charging for wastewater
disposal, it could over time generate enough income to build
wastewater treatment plants and underground sewage systems.
Currently, only 8.26 percent of Taiwan,s wastewater is
treated as compared to an average wastewater treatment level
of approximately 59 percent in OECD (Organization for
Economic Cooperation and Development) countries. According
to Hong, it is likely that many private firms would be
willing to build the required infrastructure without any
initial outlay of funds by the Taiwan Government if those
firms were guaranteed to receive the revenues generated from
the fees for a long enough time to recover the costs of
construction and make a profit (within about 25 years). Such
systems could also be used to recycle more of Taiwan,s
water, lowering even further the demand for new water
supplies.

--------------
Energy Prices
--------------


5. (SBU) Taiwan,s energy prices are similarly artificially
low. Despite rising energy costs over the past few decades,
Taiwan has not increased electricity rates since 1983. Low
energy rates coupled with a belief that the Kyoto protocol
would not aquire the needed ratifications to go into effect
have led Taiwan to pay little attention to increasing energy
efficiency, promoting energy conservation, or reducing
greenhouse emissions in recent years. As a result, with the
world's 17th largest GDP, in 2004, Taiwan was the world's
23rd largest emitter of greenhouse gases and energy
efficiency has steadily decreased over time. In fact, it
remains commonplace for stores in Taiwan to keep the doors of
their highly-air conditioned stores open in hopes of drawing
in foot traffic seeking relief from sweltering summer
temperatures.


6. (SBU) Moreover, largely due to a sharp rise in coal prices
in 2004, Taipower (Taiwan,s state-owned power company) lost
New Taiwan Dollars 9 billion (USD 290 million)*- the first
loss in its history. If political promises not to raise
electricity rates hold, Taipower could lose approximately NTD
19 billion (USD 613 million) in 2005. Note. World coal
prices nearly doubled in 2004 due to supply problems in
China, Indonesia and Australia. China's Shanxi province
suffered mining accidents, heavy rain in Indonesia reduced
production, and inadequate port infrastructure in Australia
slowed exports. End Note.

Nuclear Politics
--------------


7. (SBU) Exacerbating Taipower's economic problems is the
Chen Administration's political commitment to make Taiwan
Nuclear Free (reftels). Currently, nuclear power accounts
for about 16 percent of Taipower's installed capacity.
Generators using carbon based fuels: coal (34%),LNG (27%),
and oil (11%) make up 70% of installed capacity, with hydro
filling out the rest. However, nuclear power is
significantly less expensive than other power sources (just
.67 NTD per kilowatt/hour) (note: 1 USD = 32 NTD),compared
with coal at 1.0 NTD/kwh, oil at 2.0 NTD /kwh, hydro at 1.8
NTD /kwh, and LNG at 5 NTD/kwh. Because nuclear power is
significantly cheaper to produce, it accounts for a
disproportionately large 23% of total electricity generation.
Without the continuation in service of Taiwan,s three
existing nuclear power plants and the completion of the
fourth nuclear power plant, given current growth trends, not
only are Taiwan's energy costs likely to rise significantly,
but also Taiwan can be expected to face energy shortages by

2010.


9. (SBU) Furthermore, failure to complete the construction of
the USD 7-8 billion fourth nuclear power plant (which is well
over half built) would have additional consequences. When
the Chen Administration froze construction of the plant in
October 2000, the political and economic consequences were
great. The decision to cancel the project led to a 3 month
suspension of its construction and cost the Government close
to USD 30 million dollars. In addition, it spurred an
unsuccessful attempt to recall President Chen and culminated
in a Council of Grand Justices ruling that the decision to
stop the construction was "flawed." After three months, the
Chen Administration backtracked on the decision and agreed
that construction would be resumed. At the same time, the
Chen Administration reaffirmed its committment to make Taiwan
a &nuclear-free homeland.8


10. (SBU) To avoid another political fiasco over the fourth
nuclear power plant, the recent National Energy Conference,
as expected, did once again agree to complete the plant.
Nonetheless, there are still anti-nuclear activists within
the DPP (i.e., former DPP Chairman Lin I-Hsiung and current
Environmental Protection Administration Head Chang Kow-lung)
who believe that even if the plant is completed, it should
never be put into operation. Moreover, despite all of the
trade-offs in terms of global warming and energy costs posed
by Taiwan,s nuclear-free homeland goals, there was no
dicussion of nuclear energy at the June National Energy
Conference.

The Renewable Energy Myth
--------------


11. (SBU) Although there was no discussion of nuclear energy
at the Conference, its conclusions note that a reduction in
nuclear energy would be made up in part by an increase in
coal consumption. However, they also suggest that renewable
energy sources would play a large role in filling Taiwan,s
energy gap.


12. (SBU) Taiwan,s renewable energy resources other than
hydro currently account for a negligible 2 MW of Taiwan,s
installed capacity of 33 gigawatts. As reported in reftel,
according to a recent Taipower publication, &due to(
geological and environmental restrictions( the percentage of
conventional hydro power in the entire system will be
decreased from 5.7 percent in 2003 to 4.3 percent in 2015."
The June National Energy Conference claimed that renewable
energy could make up between 10-12 percent of Taiwan,s
energy mix by 2025. This will be difficult to achieve given
that, with current technologies, Taiwan,s only potential
renewable energy option other than hydro is wind and wind is
not reliable as a base-load source due to its
unpredictability. In reality, if nuclear free homeland
policies are continued, carbon-emitting coal can be expected
to fill in the majority of the energy gap that would be left
behind.

Energy Security
--------------

13.(C) The National Energy Conference also did not touch on
energy security issues. Implementing Taiwan,s nuclear-free
homeland policies has security implications. It takes only
one aircraft to supply enough nuclear fuel to provide 18
billion kilowatt hours of electricity. To produce the same
level of power from oil, natural gas or coal would require
38, 50 and 65 sea cargo shipments respectively. In the
absence of nuclear power, Taiwan would have a maximum of one
month's power generating fuel if maritime thoroughfare were
impeded, increasing Taiwan,s vulnerability to the threat of
a blockade by the PRC.

Comment
--------------

14.(U) In the long run, artificially low prices means lower
quality water and power supplies for Taiwan consumers. They
also distort free market incentives for conservation and
investment in new technologies and infrastructure. Everyone
AIT talked to in government, academia and think tanks
readily acknowledged this is a major problem in Taiwan. They
also all forcefully argued why it is important for Taiwan to
raise utility prices. Nonetheless, the Chen Administration
continues to vow not to increase water or electricity and is
discouraging CPC from raising gasoline rates. In the past,
policy makers claimed that while they knew it was in
Taiwan,s economic interest to increase utility rates, they
were holding off until after the March 2004 Presidential
election to take action. Following President Chen
Shui-bian's reelection, there were promises not to impose the
much needed rate hikes until after the Legislative Yuan
elections in December 2004. Now it is likely the multiple
city and county magistrate elections that will occur in
December that is stopping the Chen Administration from
acting. The bottom line is that, to date, the second Chen
Administration, like the first, has put politics above
economic prudence.
PAAL