Thermal Remains Favoured Despite Price Mismatch

Taiwan's state-owned utility and largest power producer Taiwan Power Company (Taipower) has awarded one of the largest engineering, procurement, construction (EPC) contracts in Taiwan to a Japanese-led consortium to construct a 2600MW natural gas-fired combined-cycle power plant. We believe that this project is another indication that thermal sources will remain the preferred method of generating electricity in Taiwan. However, this continues to pose a serious risk to Taipower's financial health as the country remains slow in carrying out electricity price reforms to cover the actual cost of electricity generation.

The project is located in Tunghsiao township, Miaoli county, and will replace the existing plant at the site. The selected consortium comprises of Japan-based Mitsubishi Heavy Industries (MHI) and Mitsubishi Electric as well as Taiwan-based CTCI . Under the terms of the EPC contract, MHI will provide gas (its top of the line J-Series) and steam turbines for the plants, Mitsubishi Electric the generators, and CTCI the construction and installation work. The project will involve the construction of three 800MW units, which will commence commercial operations in three phases between September 2016 and June 2017.

Heavy On Thermal
Taiwan - Electricity Generation Forecasts, 2013

Thermal Trumps Nuclear

This project is another indication that thermal sources will remain the preferred method of generating electricity in Taiwan. Taipower had previously signed two contracts with Japanese consortiums to construct large-scale coal-fired power plants in December 2011 and May 2012 ( see 'Planned US$2.6bn Power Plant Highlights Coal Generation Preference', August 11 2011, and 'Thermal Reliance Constinues: A Concern For Taipower', May 15 2012 ). These projects are positive drivers for our forecasts. At present, we are forecasting real growth for Taiwan's energy and utilities infrastructure sector to average 2.6% per annum between 2013 and 2017.

Upside Risk
Taiwan - Energy And Utilities Infrastructure Industry Value Forecasts

This reliance on thermal power is primarily due to the adverse sentiment surrounding nuclear generation. Tensions towards nuclear generation remain high in Taiwan. In March 2013, more than 200,000 of protesters took part in anti-nuclear protests, while in August 2013, a parliamentary session broke down into a brawl between legislators over an upcoming vote to authorise a referendum on whether or not to complete the country's fourth nuclear power plant at Lungmen, near Taipei. This prompted the government to postpone the referendum to September 2013. This anti-nuclear sentiment is not expected to abate as a report released by Taiwan's state-owned investigatory agency, Control Yuan, in August showed that the country's first nuclear power plant, located at Shihmen, had been leaking radioactive water for three years. Although we believe that the outcome of the referendum was likely to allow to the completion of the Lungmen plant in 2016 ( see 'Nuclear Status Quo Most Probable', April 3 2013 ), this adverse sentiment towards nuclear generation makes it unlikely for the government to build new nuclear power plants.

Meanwhile, we have seen limited progress in the development of renewables generation, indicating that renewables is not going to make any significant impact on electricity generation in Taiwan over the next decade and the development of renewables remains a long-term goal ( see Renewables Industry Forecast 'Taiwan - Q4 2013', August 21 2013 ).

Thermal Reliance A Risk To Taipower

This fixation on thermal generation means that the country will remain heavily reliant on energy imports to generate electricity over the next decade. This poses a serious risk to Taipower's financial health. Even though the utility was allowed to hike electricity prices in June 2012 and a slowdown in the global economy resulted in lower energy import prices, Taipower continues to be in the red - the company has been incurring losses since 2006 - as current electricity prices in Taiwan still do not reflect the actual cost of electricity generation.

Plenty To Catch Up
Taiwan - Change In Prices Between 2003 and 2012, %

We do not expect this trend to reverse over the near-term because of strong public opposition towards electricity price hikes. In April 2012, Taipower was originally allowed to hike prices for industrial use by 35%, residential tariffs by 16.9%, and commercial rates by 30% from May 15 2012. These price hikes have since been delayed, reduced and split up to three phases, with the first phase taking place in June 2012. Even then, the second phase of increment did not take place at its originally scheduled dateline of December 2012 and was instead pushed back till October 2013. Meanwhile, the implementation of the third phase will now depend on the performance of Taipower. With Taiwan's economic environment to deteriorate due to declining demand for its exports ( see 'Economic Reprieve Unlikely To Last', August 19 2013 ), it remains to be seen if any additional electricity price hikes will take place even at the current gradual pace.

This article is tagged to:
Sector: Infrastructure, Power
Geography: Taiwan

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