Peter Chien-Tarng Huang MGMT E-5064 Individual Paper

Taiwan’s Energy Sector and Non-Market
Harvard University MGMT E-5064
Peter Chien-Tarng Huang
April 3, 2015

Introduction
Being an island that lacks natural resources, Taiwan imports almost 99% of its energy
resources to support the country’s economic growth. Even if nuclear generation counts as an
indigenous resource, the country still imports at 90% of its energy resources, with coal and
petroleum accumulating over 80% of the energy supplies (Bureau of Energy, Ministry of
Economic Affairs, 2015a). This brings us to the discussion of a sustainable energy solution for
the island. The backbone of Taiwan Bureau of Energy’s policy is to achieve a win-win-win
solution between energy, environment, and economy. Three main frameworks shape the
country’s energy policies: improving energy efficiency, developing green energy, and mitigating
energy dependency to achieve energy security (Bureau of Energy, Ministry of Economic Affairs,
2015b). Specifically, the country’s environmental policy to bring emission level back to 2005
level by 2020 and to 2000 level by 2025 has put immense pressure on the legislation and
Taiwan’s energy regulators, TaiPower and Chinese Petroleum Corporation (CPC), to promote
renewable energies and discover alternative pricing models while keeping the energy supplies
affordable for businesses to sustain competitive advantages. Moreover, the public’s distaste
toward nuclear generation versus the government administration’s decision to build the new
nuclear power plant has excavated the challenges Taiwan faces with its energy conundrum.
Acting as a sovereign state while lacking formal independence recognition globally,
Taiwan’s political risk has clouded its energy sector especially in regards to the country’s
relationship with its rapid growing neighbor, China. The instability of fossil fuel prices, volatility
of energy imports, and the potential blockage of energy imports from China highlight the
concern of energy security in Taiwan’s energy market (Wakefield, 2012, p. 3). To make matters
worse, Taiwan’s total energy demand has tripled in the last two decades with the industrial and
service sectors’ demands growing exponentially. Moreover, per capita energy and electricity
consumption displays a constant positive trend in relation to Taiwan’s near 6% GDP growth.
When energy security risk is coupled with the increasing demand for energy consumption and
potential price volatility, the overall non-market environment impacts are even more dominant
(Huang, Wu, 2009, p. 628).
To highlight, the interest groups involved in Taiwan’s energy non-market are the
government, regulatory agencies (TaiPower and CPC), 9 of Taiwan’s privatized power utilities,
local companies, and the public. External interest groups who are correspondingly influencing

the energy sector include global energy organizations, energy resource exporters, and foreign
countries with China being the dominant force. The domains of concerns that signify the non-
market issues of Taiwan’s energy sector are energy affordability, environmental responsibility,
and energy security. These three main non-market pressures are issues aroused from the energy
market transactions. The life cycles of these non-market issues are intertwined in the evolution of
three main levels: legislative level, corporate level, and the public level. The ability of these life
cycles of non-market issues and the various interest groups to interconnect is essential to
transform the market environment if the appropriate programs are established.
Energy Affordability
According to the World Energy Trilemma of 2014, Taiwan ranks the highest in its energy
equity. This demonstrates that the public and corporate sectors are able to obtain safe and reliable
energy sources. This fact is vital in Taiwan’s economic development due to the fact that the
country’s biggest two industry sectors are industrial and service, respectively. On the down side,
the island’s small size and lack of natural resources only enable it to produce 10% of the energy
it utilizes (World Energy Council, 2014). With conventional thermal accounting up to 80% to the
island’s electricity generation and the rational assumption that energy demand is elevating,
Taiwan’s energy affordability and pricing are believed to be even more volatile in the near term.
Regulators are subsidizing a majority of these costs of generation and trying to stabilize the
price. However, the island’s traditional energy generation infrastructure will eventually escalate
energy prices based on global pricing trends and demands. Viewing from the government’s
perspective, the volatility of electricity prices will largely affect certain groups of citizens with
disabilities. According to the research conducted by the United Nations Educational, Scientific,
and Cultural Organization, patients with multiple sclerosis rely heavily on temperature control
and thus the need for stable air-conditioning. Unemployed citizens are also the subjects to the
volatility of electricity prices (United Nations Educational, Scientific, and Cultural Organization,
2011, p.6). Not to mention corporations that operate production facilities, the impact of energy
volatility and price instability can expand from the public to national scale. With TaiPower and
CPC acting as the central regulators for pricing, Dr. Huang and Dr. Wu argued that the energy
prices in Taiwan do not account its true costs. The pricing model is not fully adjusted to reflect
global trends, internal costs, and let alone external costs. This situation deteriorates the

effectiveness of energy procurement/planning processes conducted by Taiwanese firms and
diminishes the incentives for corporations to implement energy efficiency technologies and
renewable technologies (Huang, Wu, 2009, p. 624). It is therefore apparent for Taiwan’s Bureau
of Energy to implement a new pricing model, an incentive program and a policy that will
efficiently advance energy efficiency, pricing stability, and self-sustainability.
Energy policies in Taiwan are definitely not helping the deployment of renewable and
energy efficiency technologies. The term that the Bureau of Energy uses in its policies is
“promote” instead of “enforce”. As Pasquier listed in her research paper named “Energy
Efficiency Policy Developments”, almost all of the countries in the research are implementing
mandatory energy efficiency policies and building energy codes. Due to the regulatory
supervision of TaiPower and CPC on prices and the lack of incentive programs, the market of
energy efficiency and renewable have not been able to penetrate to the market for Taiwanese
firms and households (Pasquier, 2012, p. 11). With 9 Independent Power Producers (IPPs)
scattered across the island, the government’s initiative is to gradually privatize the energy sector,
stabilize prices, and promote the liberalization of electricity supply. However, due to the isolated
grid system of an island and the absence of interconnections between regions, these IPPs are
required to obtain higher power reserves to meet critical needs. Although these IPPs possess the
ability to sell back its excess supplies to TaiPower, the overall energy policy of the island does
not alleviate with the mere 0.4% of renewable generations especially at industrial sectors and
dense cities (Huang, Wu, 2009, p. 636). An immediate and mandatory energy policy to stimulate
the use of renewable and energy efficiency technologies is compulsory to eventually hedge the
price volatility.
Nevertheless, a mandatory energy policy undeniably raises the operating expenses of all
firms and facilities. Thus, a transparent incentive program and a revised pricing model are
necessary to accelerate the efficiency of such mandatory policy. A successful incentive program
that is successfully implemented in the United States is called Demand Response. Demand
Response program allows firms and households to plan ahead on its energy usages and sell back
its un-used energy generations back to the utilities. As illustrated by Rob Day in his Harvard
Business Review article –“Your Company’s Energy Data is an Untapped Resource”, the
potential for savings when a firm instigate renewable and energy efficiency technologies is not
the lone driving force for corporate shareholders. The core driving force for implementing these

technologies is the ability to turn your “cost-center” to a “revenue-generating” facility with high
margins if participated in local utilities’ demand response programs (Day, 2014). This incentive
program creates a shared-value proposition for corporations, households, and the government.
Such a transparent program grants energy data to be fully audited, collected, analyzed, and
utilized by all parties. Moreover, such incentive program automatically inspires corporations and
the public to acquire greater energy education due to its revenue-generating nature. Finally,
Demand Response program in Taiwan is itself a new market coming from a non-market issue.
Various parties’ supplies and demands thus achieve the equilibrium price for energy sources. The
revised pricing model can thus utilize all these data and trends to precisely price the electricity to
include external costs such as environmental impacts. The ultimate goal of this new market is to
completely eliminate regulators’ interventions on energy prices. These market prices will
eventually be the market indictors and incentives for new renewables and energy efficiency
technologies (Wakefield, 2012, p. 12).
Environmental Responsibility
Since 1998, Taiwan has voluntarily participated in the Kyoto Protocol aiming to reduce
CO2 emissions and greenhouse gas. Prior to Kyoto Protocol, it was found that CO2 emission
was increasing at a rate of 72.8% annually. Since then, the number was reduced to 31.1%
annually thanks to the construction of three nuclear power plants that eliminate the burning of
fossil fuels (Huang, Wu, 2009, p. 639). However, World Energy Trilemma of 2014 still rates
Taiwan low in terms of Environmental Sustainability due to the increasing number of electricity
emission per kilowatt-hour. Needless to say, the growing demand to stay economically
competitive has boosted environmental pollutions that harm the natural habitats. This is mainly
due to the fact that previously constructed nuclear power plants are no longer sufficient to sustain
the demand of the country; thus leading to more burning of imported fossil fuels (World Energy
Council, 2014). There are plans to construct new nuclear power plants but the government has
not reached a consensus between the various interest parties. The island’s populated cities and
limited free space possess safety issues for nuclear power waste storages. Moreover, Taiwan’s
position in a zone of frequent earthquakes reminds the public of the nuclear disaster in
Fukushima, Japan. Lastly, with China’s 10,000 missiles aiming at Taiwan, the political risks and
national security issues leave the nuclear power project in debate. Resolutions such as

developing alternative energy sources, reconfiguring power supply systems, and adding
technology options such as smart grid are all long-term perspectives since their return on
investments and effectiveness are not clearly defined with all the participated parties (Wakefield,
2012, p. 15). Since the Bureau of Energy’s policy is to create a low-carbon and potential nuclear-
free country, the government along with TaiPower/CPC and the 9 IPPs must handle this non-
market issue of environmental responsibility from the standpoint of energy users to achieve
maximum result. The research conducted by United Nations Educational, Scientific, and Cultural
Organization highlights three main mind-sets to tackle the issue of environmental security:
taking the approach of social justice, balancing interest parties with ethical behaviors, and
closely connecting the energy infrastructure with technologies (United Nations Educational,
Scientific, and Cultural Organization, 2011, p. 29). The main objective is to formulate a program
that will actively involve the energy users to achieve environmental protection.
Voted as number one by Time Magazine’s Top 10 Green Stories of 2013, California’s
Cap-and-Trade program has achieved stable decline in emission and a healthy trading market of
cap allowances (Walsh, 2013). The successful state-run auctions of Cap-and-Trade program put
a mandate on firms to maintain a cap on their emissions. Prior to the beginning of a new quarter,
the state-run auction will bid on emission allowances in the primary market where the
regulators/utilities release these caps to the companies. Throughout the year, companies have the
capabilities to trade allowances in the secondary market based on specific demands. The
intention is to put a constraint on environmental pollution and emission to progressively address
the issue of climate change and natural pollution. Based on the annual analysis report published
by the Environmental Defense Fund, a healthy secondary market in the Cap-and-Trade program
allows companies to plan emission schedules and corporate strategies accordingly. More
importantly, the current price of $11 per allowance proves to be less expensive for companies to
achieve the cap (Hsia-Kiung, Reyna, O’Connor, 2013, p. 14). Such a long-term solution of
creating literally a new trading market and mandatory energy policy is exactly what Taiwan
ought to pursue. According to the breakdown conducted by Forbes, Cap-and-Trade program
actually improves California’s economy as opposed to the fear that increasing cost of production
may hinder the recovering economy. In Taiwan’s case, a Cap-and-Trade program that is
accompanied by the revised pricing model illustrated by the previous section will provide even
more price signals for companies and the public. Simultaneously, the program accelerates the

growth of clean tech and green energy innovations as observed in California. These new clean
technology companies provide job opportunities and overall economic development. From the
government’s perspective, TaiPower and CPC now have the capability of investing the funds
raised by the auctions on transforming overall country-wide clean energy infrastructures to
address climate change and environmental issues (EDF Energy Exchange, 2014). These funds
also ease the financial pressures these two regulators face. Cap-and-Trade program appears to be
aligned with Taiwan’s energy vision of creating a carbon-less, self-sustainable, and clean country
(Bureau of Energy, Ministry of Economic Affairs, 2015b).
Every policy or program comes with some risks. Thus, it is critical to enforce the Cap-
and-Trade program with regulatory control. Currently, Taiwan’s Greenhouse Gas Reduction Bill
already includes non-market strategies such as issuing emission credits, carbon fee, and emission
offset licenses. These non-market strategies are labeled as command-and-control mechanisms
and are proven to be less effective and costly to execute (Chien, 2015, p. 58). Especially if
Taiwan’s goal is to harmonize both the energy market and the country’s competitive advantage
to achieve win-win-win solution, the operation of Cap-and-Trade program provides similar
benefits as the Demand Response program given that the companies can now acquire revenues
by trading away their allowances if they implement clean technologies to reduce emission.
Although most economists have reached the consensus that market-based mechanisms are more
suitable to address environmental issues than command-and-control mechanisms, market-based
mechanisms have the risk of creating monopolies. In the case of Cap-and-Trade program, these
rich monopolies will deceive the system and buy their way out of pollution. Not only does that
defeats the purpose of limiting emissions, these actions taken by the monopolies possess huge
upward price-driven consequences on the cap allowances (United Nations Educational,
Scientific, and Cultural Organization, 2011, p. 38). To reiterate, regulatory control is compulsory
for achieving a systematic Cap-and-Trade program. The result of an effective Cap-and-Trade
program does not only mitigate non-market issues related to pollution but also present market
potentials for growth and economic development.

Energy Security
To measure energy security, two common indicators are employed: Imported Energy
Ratio (IER) and Energy Concentration Ratio (ECR). IER denotes the stability of energy supplies
by calculating the ratio of imported energy over total energy generated. ECR measures the range
of energy sources that a country can utilize. The higher the ECR means that the country depends
on more analogous energy resources. Taiwan ranks last in energy security using both IER and
ECR when compared to countries like Germany, France, Japan, South Korea, Spain, United
Kingdom, and the United States (Wakefield, 2012, p. 21). Previously illustrated programs of
Demand Response and Cap-and-Trade serve primarily as incentive market-based mechanisms in
attempt to promote renewable technologies, long-term investments on cleaner energy
infrastructure, and the tightening of environmental regulations. However, in regards to energy
security issue, these market-based mechanisms are no longer practical since Taiwan is heavily
engage in the global energy market and is exposed to the risk of global energy supplies. To
illustrate this point, if say that Taiwan successfully over-achieves its renewable energy
generation to more than 10,000 mega-watts by 2025 according to the country’s Renewable
Energy Development Act, the percentage of renewable generations yet still accounts for less than
5% of the island’s energy generations (Wakefield, 2012, p.24). Furthermore, even if renewable
energy development is exploited at full capacity, the maximum percentage of energy generations
using renewable technologies will only reach 15%. These numbers prompt many researchers to
vote for the construction of more nuclear power plants. They view this stage as a “bridge” for
Taiwan to gradually transform from fossil fuel intensified generations to more renewable
technologies. In addition, nuclear power generation has lower emission and lesser price
volatility. Most importantly, nuclear power plants partially solve the energy dependency issue.
Then again, as illustrated by previous section, the debate on nuclear generation between
environmentalist, politicians, utilities, and the public is stalling the project and exposing even
more energy security risks for Taiwan (Huang, Wu, 2009, p. 643).
Multiple researchers propose energy cooperation on renewable developments and the
construction of a shared economy to remedy Taiwan’s energy security issue. Dr. Chi-Yuan Liang
proposed that this energy cooperation be conducted with the United States. The cooperation
comprises of technology transfers, resource sharing, nuclear waste storage, and standardization
of emissions. On the other hand, Dr. Hongyi Lai argues that energy security can be accomplished

through the energy cooperation with Mainland China. Dr. Lai emphasizes some advantages that
Taiwan possesses over China such as its nuclear technology expertise and refining capacity of
crude oil. With China being one of the largest exporters of coal and oil, Taiwan benefits
tremendously when such cooperation occurs in full capacity. Since 2008, Taiwan and China have
been heftily engaged in cross-strait conferences and cooperation. The Cross-Strait Economic,
Trade, and Cultural Forum in 2009 was the starting point of a joint cooperation in terms of the
sharing of renewable technologies and knowledge. The Taiwan-Mainland Economic Cooperation
Framework Agreement (ECFA) highlights the strategic alliances between multiple state-own
corporations on energy, steel, and telecommunication (Wakefield, 2012, p. 35). Due to the fact
that the two countries share common language and cultures, Taiwan’s energy market can benefit
tremendously while maximizing its competitive advantages in technologies and mitigating
energy security issue. Unfortunately, linkages with China amplify Taiwan’s dependency on
Chinese energy exports and the political risks behind a potential take-over or war.
Personally speaking, a well-maintained and systematic cooperative relationship with
China is necessary for Taiwan to remain economically competitive and help remedy the energy
security issue. Yet, this cooperative mentality should be expanded to all of Taiwan’s energy
importers such as Australia and Canada. The objective is to fully secure sufficient and stable
energy supplies. With that said, government policies are the biggest factors regarding energy
security solution. Government policies should continue to be consistent even if there is a change
in the ruling party. A stable diplomatic policy will ensure a stable progress in solving energy
security.
Conclusion
To recap, the immense and mounting energy expenditures are clouding the economic
growth of Taiwan and its businesses. The consequences of energy affordability issue will
develop into social issues such as unemployment, lower wages, and the increase of the cost of
living. The lack of renewable technologies joined with a significant emission level is
undermining the standard of livings of the public and even cause health issues due to climate
changes. The shortage of international energy cooperation and the island’s special political
situation are presenting slim opportunities for Taiwan to unravel its energy security dilemma. If
you include China’s international pressure on the sovereignty of Taiwan, these non-market issues

are all factors that are contributing to Taiwan’s recent economic struggles, lowered salaries, and
the public’s growing dissatisfaction toward the government. As observed, these life cycles of
effects originating from Taiwan’s energy non-market dilemma are simply interconnected
together. These interconnections possess serious risks for a systematic impact on Taiwan’s
overall political, economical, and social levels.
The non-market issues of Taiwan’s energy sector cannot be resolved with one perfect
solution. Recommendations such as Demand Response, Cap-and-Trade, and international
cooperation are mainly market mechanisms to tackle specific non-market issues. However, these
mechanisms can benefit tremendously from one another and achieve a systematic reform.
Ideally, the shared-values of these mechanisms can be maximized through the support of
regulators and the government. Thus, a structural reform is necessary to give the Bureau of
Energy more hierarchical authority in the legislation instead of just a single department under the
Ministry of Economic Affairs. A revised pricing model is necessary for both TaiPower and CPC
to invest back to the society and alleviate their debt ratio of 82.6% and 71.9%, respectively.
(Laio, Jhou, 2013). Government’s simultaneous and harmonized implementations of the
recommended programs are the key drivers for renewable innovation and liberalized energy
prices. Lastly, the willingness of the public and corporations to collaborate and participate is a
major driver for the success of these programs. A comprehensive and extensive energy education
program is another objective that the Bureau of Energy should collaborate with the Ministry of
Education and another reason why the Bureau of Energy should be given more authority.
Taiwan’s energy non-market issues can hopefully be minimized through the top-down policies,
programs, and cooperation. The shared-values of these initiatives can then be maximized through
comprehensive bottom-up integrations, participations, and collaborations.

References:
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Energy Policy. Retrieved March 29, 2015, from
http://web3.moeaboe.gov.tw/ECW/english/content/Content.aspx?menu_id=1524
Chien, H.C. (2015). Market and Non-Market Mechanism: A Hybrid Approach in Taiwan.
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