HAS TAIWAN PRICED ITSELF OUT OF THE ALTERNATIVE

C O N F I D E N T I A L SECTION 01 OF 05 TAIPEI 000205 SIPDIS STATE FOR EAP/TC, IO, OES/EGC, OES/ENV, OES/PCI, OES/STC, EPA FOR KASMAN, TROCHE AND HARRIS, DOE FOR INTERNATIONAL, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN E.O. 12958: DECL: 02/25/2020 TAGS: SENV ECON ENRG EINV TRGY PREL TSPL TW XE SUBJECT: HAS TAIWAN PRICED ITSELF OUT OF THE ALTERNATIVE ENERGY MARKET? REF: A. 09 TAIPEI 1243 ¶B. 09 TAIPEI 1383 ¶C. TAIPEI 0147 TAIPEI 00000205 001.2 OF 005 Classified By: Economic Chief Hanscom Smith for reasons 1.4 (b) and (d) . ¶1. (SBU) SUMMARY: As part of a multi-pronged strategy to meet the Ma administration's greenhouse gas (GHG) reduction targets, Taiwan authorities plan to increase the island's alternative/renewable energy installed capacity from the current 8 percent to 15 percent by 2025. To achieve this goal, Taiwan has mandated that Taipower, the island's state-owned energy supplier, purchase renewable energy at fixed wholesale prices from producers. In January, the authorities announced a list of wholesale prices for renewable energy. The list quickly came under fire from energy experts, academics, and renewable energy producers, who charged that the rates were not high enough to make renewable energy investment profitable. Although the authorities continued to express public optimism that the rates would attract investment, there have been no public announcements of new renewable energy projects in Taiwan since the rates were published, and the largest wind power investor in Taiwan recently announced it would cease operations on the island. Although the authorities are investing billions of U.S. dollars in developing Taiwan's green energy technologies industrial base, critics contend that low wholesale prices for renewable energy show that the authorities are more interested in the commercial potential of renewable energy technologies, rather than in their potential to reduce the island's own GHG emissions. END SUMMARY. -------------- HITTING THE TARGET -------------- ¶2. (SBU) On a per capita basis, Taiwan ranks among the world's twenty largest emitters of greenhouse gases (GHG), ahead of South Korea, Japan, and the OECD average. The majority of Taiwan's GHG emissions (65 percent) come from the energy sector, where fossil fuels are burned to supply over 90 percent of the island's energy needs. In order to hit GHG reduction targets set by the Ma administration, which aims to bring Taiwan's emissions to 2005 levels by 2020, to 2000 levels by 2025, and to 50 percent of 2000 levels by 2050, Taiwan must increase energy efficiency across the board, decouple GDP growth from energy demand growth, and, in particular, reduce its dependence on fossil fuels. -------------- GOING ALTERNATIVE -------------- ¶3. (SBU) Among the strategies proposed to achieve GHG reduction targets, officials and industry have focused their attention on proposals to promote alternative/renewable energy development. In part, their attention has been drawn by the authorities' much-publicized plan to invest USD 1.5 billion in developing Taiwan's "green technologies" industries (refs). This plan is expected to attract an additional USD 6.25 billion in domestic and foreign investment over the next five years and create 110,000 new jobs. The Taiwan Environmental Protection Administration (TEPA) has worked to leverage widespread support for this industrial development plan into support for policies that would increase the installed capacity of renewable energy resources in Taiwan. TEPA's efforts, the Ma administration's directive to executive-level agencies to develop plans for reducing GHG emissions, and a large, powerful group of Taiwan corporations that have bought into the "green zeitgeist" all work to give the impression that Taiwan is moving TAIPEI 00000205 002.2 OF 005 aggressively and successfully toward building a "low-carbon society" underpinned by the extensive use of renewable energy. ¶4. (SBU) Indeed, the Bureau of Energy has published renewable energy targets for 2015 and 2025 which aim for at least 15 percent of all installed capacity to consist of renewable sources. Most experts argue, however, that, even under ideal conditions, less than 40 percent of the installed megawatt (MW) capacity could actually be produced, meaning that far less than 15 percent of Taiwan's energy supply would come from renewable sources, even if the targets were met. Currently, hydropower, wind, biomass, solar, geothermal, and ocean energy represent about 8 percent of all installed capacity in Taiwan, equal to 3,073 MW, but actually supply less than 0.5 percent of Taiwan's energy. BOE's installed capacity targets for 2015 and 2025 are: Year 2015 Hydro: 5.1 percent Wind: 3.4 percent Biomass: 1.9 percent Solar: 0.7 percent Geothermal: 0.0 percent Ocean: 0.0 percent Total: 11.2 percent (4,972 MW) Year 2025 Hydro: 4.4 percent Wind: 5.3 percent Biomass: 2.5 percent Solar: 1.8 percent Geothermal: 0.3 percent Ocean: 0.4 percent Total: 14.7 percent (8,450 MW) ¶5. (SBU) In order to meet these targets, the authorities have employed strategies, including subsidizing private individuals to purchase and install solar panels, directing the Industrial Technology Research Institute (ITRI) to focus R&D on increasing the efficiency of green energy technologies, encouraging official entities such as the Institute of Nuclear Energy Research (INER) and Taipower, the state-owned energy supplier, to set up renewable energy demonstration projects, and passing legislation to expand domestic use of renewable energy. Of these strategies, TEPA Minister Stephen Shen has said the single most important tool for increasing renewable energy development and use in Taiwan is the Renewable Energy Development Act (REDA),which passed the Legislative Yuan in July 2009. -------------- REDA GOES TO WORK -------------- ¶6. (SBU) REDA's stated goals are to "promote the utilization of renewable energy, increase energy diversification, improve environmental quality, energize related industries, and enhance national sustainable development." The means for achieving these goals, per the language in REDA, are: 1) Mandating that Taipower purchase alternative energy; and 2) Creating a Renewable Energy Development Fund, which will receive financial contributions from power utilities using fossil and nuclear fuels, and these contributions will be used to subsidize both the wholesale price of renewable energy and the purchase of renewable energy equipment. (Note: A schematic showing how funding would flow into and out of the Renewable Energy Development Fund is available on TAIPEI 00000205 003.2 OF 005 the Department of State Communities "Made in Taiwan" blog, in the ESTH section. End Note.) ¶7. (SBU) From July-December 2009, a committee of 19 experts from ministries and academia, organized through BOE, met a total of five times to discuss wholesale pricing for renewable energy, and also held a series of public hearings. On January 25, 2010, the committee announced its "2010 feed-in tariffs for renewable energy," and revealed its pricing calculation formula. The "feed-in tariff" (FiT) is the wholesale price that Taipower would pay to renewable energy producers. The committee explained that rates would be reviewed annually and could be adjusted, and that any project built in a given year would have that year's FiT rate locked in for 20 years. ¶8. (SBU) The rates announced for 2009-2010 (converted into USD at a rate of 32:1) were: - Solar Energy: Between USD 0.35 and USD 0.41 per kilowatt hour (kWh),depending on the amount of electricity the device can produce under ideal conditions, i.e., peak output; - Wind Power: Between USD 0.07 and USD 0.23 per kWh, depending on whether the system is on- or off-shore and peak output. Most wind power devices would fall into the USD 0.07 per kWh category; - Geothermal: USD 0.16 per kWh; - Waste Power: USD 0.07 per kWh; - Hydropower, Biomass, all others: USD 0.06 per kWh. ¶9. (SBU) Officials at BOE noted that if the costs of the feed-in tariff are passed on to consumers, this would lead to a rise in electricity rates of about USD 0.11 per household per month. A poll conducted last year by Shih Hsin University showed that 90 percent of respondents island-wide were willing to pay higher electricity prices to support developing renewable energy. ¶10. (SBU) Under the provisions of REDA, Taiwan will use the FiT mechanism to subsidize renewable energy up to an installed capacity of 10,000 MW. Official estimates claim the FiT will lead to installation of at least 6,500 MW of renewable capacity by 2030, which would reduce CO2 emissions by over 125 million metric tons over the next 30 years. -------------- PRICES NOT HIGH ENOUGH? -------------- ¶11. (C) Contacts in renewable energy industries, including solar cell and wind power component manufacturers, told us throughout the summer and fall of 2009 that the FiT rates the BOE committee was contemplating were too low, and would not only discourage new investment in the renewable energy sector, but could also cause current investors to pull out. Most blamed the influence of Taipower, which, contacts claimed, had little to gain from expanding renewable energy. Taipower, they argued, would rather see the expansion of liquefied natural gas, traditional fossil fuels, and nuclear energy, because Taipower directly owns and operates plants using these energy sources. A number of renewable energy producers added that low FiT rates reflected BOE's desire to sacrifice development of renewable energy for increasing nuclear power, which is produced and distributed by Taipower, and which the Taiwan authorities consider to be a form of alternative energy. Chen Tian-jy, who served as chairman of the Council for Economic Planning and Development (CEPD) in 2008-2009, told us he believed Taipower was discouraging the TAIPEI 00000205 004.4 OF 005 development of alternative energy in a bid to maintain its monopoly on power provision, and the utility's financial ties to politicians helped support this policy. Meanwhile, Taiwan EPA Minister Stephen Shen, the island's leading high-level supporter of the FiT mechanism for promoting renewable energy, has complained to us on multiple occasions that Taipower's sclerotic bureaucracy and political clout are the largest obstacles Taiwan faces in increasing renewable energy production. ¶12. (SBU) When the FiT prices were announced, wind power suppliers in particular complained they were too low. Groups led by Germany's InfraVest Wind Power, which has invested more than USD 310 million in Taiwan over the last nine years, protested outside the Executive Yuan, claiming that Taiwan was essentially saying "no" to renewable energy. InfraVest's local vice general manager, Wang Yun-i, noted that Taiwan's feed-in tariff rate for wind power was well below the global average, and lower even than rates in the PRC. On February 25, InfraVest announced it would pull out of Taiwan and shift its business to Fujian, PRC. ¶13. (C) BOE Director General Yeh Huey-ching responded to criticism from industry, academia, and the NGO community, arguing that Taiwan's pricing formula was fair, and offered a generous rate of return for energy producers. For solar energy, according to BOE figures, Taiwan's current FiT would allow producers to achieve investment payback in 10-15 years, depending on location and variability in sunlight. Yeh emphasized that the FiT rates will be revisited annually and could be adjusted upward, a given year's rate is fixed for 20 years, and mathematical models used by the BOE commission show that Taiwan's FiT compares favorably to FiT rates around the world. Yeh added that following the announcement of Taiwan's FiT rates, foreign firms began expressing interest in making renewable energy investments in Taiwan. ¶14. (C) Shortly after the FiT rates were announced, TEPA invited a group of German experts as keynote speakers to the February 9 "International Symposium on Renewable Energy Development and its Implications for Building a Low-Carbon Society in Taiwan." TEPA Minister Shen told us he hopes the German experts can provide long-term "consulting" services to Taiwan as the island moves to implement and "improve" its feed-in tariff system. In private conversations with us, the German experts noted that Taiwan officials seemed overly concerned with building a complex pricing system for renewable energy, and should have instead focused more closely on getting the prices right. Dr. Volker Oschmann of the German Federal Ministry for Environment, Nature Conservation, and Nuclear Safety opined that Taiwan authorities should have created a basic and transparent mechanism that guaranteed potential investors would be able to operate profitably. Oschmann and his colleagues told us they were not convinced that the current FiT rates would allow renewable energy companies to pass the "profitability threshold" in Taiwan. ¶15. (C) Meanwhile, a visiting expert from the U.S. Department of Energy's Brookhaven National Laboratory commented that Taiwan's focus on setting prices for renewable energy was misplaced. He argued that Taiwan should instead work to "overhaul its entire energy pricing system," which he described as irrational and inefficient. Daigee Shaw, president of the influential Chung-Hua Institution for Economic Research (CIER),agreed, telling us that a feed-in tariff system was only a "third-best policy" for promoting renewable energy in Taiwan, behind energy taxes and competitive bidding for renewable energy projects. Shaw argued that feed-in tariffs would simply encourage low-efficiency firms to enter the market, and would TAIPEI 00000205 005.2 OF 005 discourage innovation by protecting chosen technologies. -------------- COMMENT: SAVING THE WORLD? -------------- ¶16. (SBU) In the ongoing debate over Taiwan's FiT rates, one could point to the old adage that actions speak louder than words. If the tariff was high enough to offer a reasonable rate of return, and the funding mechanism was correctly structured, then business investment should follow. So far, however, the largest wind power investor in Taiwan has pulled out, and no new renewable energy producers have announced they are planning to produce for the Taiwan market. Critics of the FiT rates say the "proof is in the pudding," and supporters of the current rates have been hard pressed to make an effective counter-argument. Although there is a mechanism in place to adjust rates upward one year from now, mounting pressure from foreign experts, local academics, Taiwan EPA, and especially potential investors could push BOE officials to revisit the pricing formula earlier. ¶17. (C) In an interesting side-bar, Minister without Portfolio and energy expert Liang Chi-yuan recently noted that there are several "limiting factors" to Taiwan's domestic use of alternative energy, including geography, climate, and residential housing patterns, and renewable energy could only ever make a small dent in Taiwan's GHG emissions. Liang said that in light of this fact, Taiwan's aggressive promotion of renewable energy is aimed not so much at increasing domestic use of solar, wind, and other renewables, but instead at stimulating Taiwan's photovoltaic (PV) and other "green energy" industries. Indeed, major Taiwan companies such as TSMC, AU Optronics, and Hon Hai have all recently announced investments in PV cell and module manufacturing, with the stated goal of grabbing market share overseas. Liang, perhaps noting that his comments could be read as downplaying the importance of environmental issues vis-a-vis economic development, quickly added that even if Taiwan doesn't expand its own use of renewable energy by very much, increasing production and export of green energy goods could help Taiwan "save the world." STANTON