Above: In July, Taipower submitted an application to shut down the two-unit Maanshan nuclear power plant (Photo credit: Uwe Aranas / Shutterstock.com)

 

THE EARLY CLOSURE OF TAIWAN’S Kuosheng 1 reactor, which provided 3% of the country’s total power supply, has already led to two blackouts amid increasing summer air-cooling demand that has been exacerbated by a coronavirus lockdown and capacity constraints, and while the government is adamant the closure will not impact power supply margins the removal of nuclear capacity from a generation mix that is otherwise dependent on imports is likely to impact margins in the short to medium-term, particularly if industrial demand growth, which increased by an annual average of 0.34% between 2015-20, is maintained.

In January 2017 the government passed legislation to phase out nuclear by 2025 and increase the share of renewable energy to 20% as part of a climate policy to halve carbon emissions by 2050. The problem with this policy is that by effectively replacing baseload nuclear capacity with intermittent renewables will have little impact on emissions in the medium-term as coal (36.4% of installed capacity in 2020) and LNG (32.4%) provide over two-thirds of Taiwan’s supply.

Exiting nuclear may be politically popular in the post- Fukushima age, but it potentially increases exposure to market risks caused by the heavy dependence on fossil fuel energy imports. Coal and LNG prices have surged this summer, driven up by above normal temperatures in Beijing, Shanghai, Tokyo and Seoul ramping up air-cooling demand, while oil, which provided 3.6% of installed capacity in 2020, has also surged on post-COVID demand growth optimism.

Like many economies, Taiwan is seeking to move from an energy policy underpinned by affordability and supply security to a policy driven predominantly by sustainability. Central to this approach is the progressive investment in renewable capacity and the partial displacement of coal fired capacity by gas to achieve a 20-30-50 generation mix by 2025 with gas providing 50% and 30% from coal. Between 2021-25 Taiwan plans to add 5.7GW of already allocated offshore wind to the grid with an additional 10GW of offshore wind to be added between 2026-35. Additionally, Taiwan plans to add 14.2GW of solar by 2025.

Assuming this renewable capacity is added in full and on schedule, and there are no grid constraints, the increased renewable capacity will lower generation emissions by 2025, but if Taiwan’s government is sincere in its long-term decarbonisation plans it needs to fully phase out coal.

This would be easier if it had maintained, or expanded, its nuclear capacity.

Not only does maintaining reliance on imported coal limit decarbonisation progress it also potentially impacts affordability and increases market risk. Asia is expected to account for 75% of global coal demand by 2025 and, unlike the EU and US, coal demand is expected to grow in the medium-term with prices potentially following. And with LNG demand growth of 3% forecast in 2022 and continued annual growth expected though this decade LNG prices will also increase, augmenting the market risk.

To reduce the market risk of its import-dependent LNG market and augment the sustainability of its predominantly intermittent renewable generation Taiwan needs to be more flexible on LNG pricing and invest in battery storage technology. Moving away from long-term oil-indexed LNG contracts and balancing with spot and shot-term LNG cargoes could reduce LNG market risks, and particularly the risk of opportunity losses, while battery storage would limit the need for quick response gas capacity to balance intermittent renewable load.

By phasing out nuclear before coal, Taiwan’s decarbonisation pathway potentially presents with increased market risks that could pare the medium-term sustainability benefits.

Author: Jeremy Wilcox is Founder and managing director at Commodity Management Services