US embassy cable - 05TAIPEI3096

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, Domestic Politics, 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