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

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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.

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HITTING THE TARGET
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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.

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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

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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.

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REDA GOES TO WORK
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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

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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.

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PRICES NOT HIGH ENOUGH?
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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

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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

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discourage innovation by protecting chosen technologies.

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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