Rising energy prices and increasingly frequent power outages are affecting the chip manufacturer. The island’s industry is losing its competitiveness because the government favors renewable energy production.
Taiwan’s difficult energy transition is straining its industry, and after a series of price hikes by Asia’s largest semiconductor giant TSMC, it now expects to pay more for energy at home than elsewhere. The world’s largest chipmaker also operates factories in the United States and Japan, and is building one in Germany. “The price of electricity has doubled in the past few years. Next year, we think the price of electricity for us in Taiwan will be the highest of any region where we operate,” Chief Financial Officer Wendell Huang told investors.
Having some of the cheapest electricity in the world has long been one of the island’s competitive strengths, along with other incentives for manufacturers such as tax breaks and cheap land. Now, however, the low levels of support have become unsustainable, as the skyrocketing world prices of fossil fuels since the Russian invasion of Ukraine and the lack of alternative energy sources burden the state-owned utility Taiwan Power Company with ever-increasing losses. Taipei has had to raise electricity prices four times since 2022. In order to keep inflation under control and to protect the weaker parts of the economy from the worst shocks, the government started shifting the main burden to industry, the biggest users and exporters.
The local government raised electricity prices by an average of 11 percent in April, but the largest industrial users, including TSMC, suffered a 25 percent increase. Last month, it froze electricity prices for households and companies with declining energy use, but raised them by a further 14 percent for large industrial users in healthy sectors. “Household electricity prices have been higher than industrial electricity prices in most advanced economies to reflect the higher costs of supplying households with switching from high voltage to lower voltage,” said Jheng Rui-he of the Chung-Hua Institution for Economic Research. , a senior analyst at a government think tank.
Although the pace of electricity price increases in Taiwan since 2022 is still slower than in some other advanced economies that depend on energy imports, such as France and South Korea, researchers expect industrial electricity costs to exceed those of Japan and South Korea, Taiwan’s closest competitors in export markets. . Although Taiwan relies heavily on offshore wind energy and aims to produce 27-30 percent of its electricity from renewable energy sources by 2030, it started the transition very late. Meanwhile, the country has begun phasing out nuclear power, which provided half the supply in the 1980s but is now down to 6 percent, with the last reactor scheduled to shut down next May. Thus, more than 80 percent of Taiwan’s energy supply comes from coal and liquefied natural gas – both imported – while the share of renewable energy sources is only 9.5 percent.
The rise in energy prices is not a significant financial problem for TSMC. The company expects its gross margin to be diluted by 1 percentage point next year — a minimal impact given that the chipmaker’s gross margin is close to 60 percent. According to Jheng, electricity accounts for only 1.5 percent of operating costs in the electronics industry, as equipment such as state-of-the-art lithography machines and research and development expenses dominate expenses. But price spikes are part of a wider energy problem for Taiwan’s industry.
“In the longer term, shortfalls in electricity supply could hinder the expansion of TSMC’s chip production in Taiwan,” wrote S&P Global in a recent research note, which warned that energy availability is increasingly a risk for the company. In the past 10 years, Taiwan’s electricity its operating reserve has repeatedly fallen below the government’s 15 percent target, leading to more outages.While key exporters such as TSMC are given priority to restore supplies, the problem is coming at the worst possible time for the tech industry.
The energy demand for the production of the most advanced semiconductors is skyrocketing, the need has almost doubled compared to two generations before. In TSMC’s case, it took 40.5 kilowatt-hours last year to produce a mask layer equivalent to a 12-inch wafer, nearly double the amount needed in 2017 with processing technology two generations earlier. Taiwan also needs to support the massive data centers that cloud providers such as Google are building and expanding in the country as the spread of artificial intelligence increases demand for server capacity.
The American Chamber of Commerce in Taiwan said in a white paper this year that maintaining a reliable and affordable power supply in the face of the impending reduction of coal and nuclear power is an “urgent challenge.” They warned that unpredictable and sudden price spikes would “disrupt operations and hinder growth, which is of particular concern to global investors looking to maintain or expand operations in Taiwan.” “Instead of low prices, what companies need most is a reasonable electricity price system,” said Chen Jong-shun, a researcher at the Green Economy Center of the Chung-Hua Institute. Due to unorganized price increases, companies “suffer losses when planning their investments, which makes it difficult to control project risks,” he said. In the current system, “corporate profits depend on the government’s policies or favors – this is really not how a country that strives for a high degree of democracy should behave.”
Source: sg.hu
