Taipower reported losses exceeding US$6.26 billion in 2023, even after receiving a US$1.57 billion subsidy from the government. This comes after even larger losses of US$8.39 billion in 2022.

The projections for 2024 look better after a rate hike announced on March 22, and after an expected subsidy of US$3.14 billion from the government. Taipower will thus likely balance its books in 2024, but this still leaves open important questions about the future.

First, how long can the government subsidize Taipower to the tune of US$3 billion every year? Second, even with the large subsidy, will Taipower be able to make the necessary investments in additional electricity capacity? Third, how will Taipower cope with an energy shock in the future? Will it suffer from enormous losses, as it did in 2022 and 2023, before it is allowed to raise prices?

The origin of Taipower’s losses is no mystery. Taiwan depends on fossil fuels for most of its electricity generation. More than 80 percent of Taiwan’s electricity is currently generated from coal and natural gas, all of which is imported into Taiwan. Taipower’s costs thus soared when energy prices increased due to Russia’s invasion of Ukraine.

Taiwanese officials point to Korea as a model for Taiwan’s response to the energy shock. Korea decided to freeze electricity prices. Korea’s electric utility thus had to absorb the cost, resulting in losses that reached US$23 billion in 2022. Taiwan also froze prices and forced Taipower to absorb the higher costs.

There are three considerations in evaluating this choice:

Is it efficient? Do the users – households and businesses – have an incentive to use electricity efficiently and avoid waste? Does it make the energy supply more resilient? Does the electric utility have the resources (and the incentive) to invest in additional electricity capacity and to strengthen the electricity grid? Is the choice fair? Does the solution protect low-income households and small businesses while getting wealthy households and profitable firms to pay more?

The answer to all three is a resounding “no.”

First, users of electricity have no incentive to use it efficiently, or to spend on equipment and facilities that will economize on the use of electricity. Why bother when electricity is so cheap

Second, Korea’s electric utility needs money to invest in future capacity and transmission infrastructure. It is almost impossible for it to do so when it is facing enormous losses. It has already substantially cut back on investment in future capacity. It has also frozen salaries and turned to sales of its assets (mostly buildings so far) to reduce its debt burden..

Third, freezing electricity prices is anything but fair. Weather families not only consume more electricity but also can pay higher prices without much sacrifice. How can it be fair when a wealthy family charges their Tesla at subsidized rates? How can it be fair for a struggling small business to subsidize an energy-intensive semiconductor company?

Eventually, Korea raised electricity prices several times last year, which will help narrow its losses. Still, the enormous losses it has accumulated have left it with a debt exceeding US$150 billion. This debt, along with the lack of investments over the last few years, will degrade Korea’s electric capacity in the future. More importantly, the uncertainty and the constant lurching from crisis to crisis likely cause long-run damage to a vital utility company.

Likewise, the short-run crisis at Taipower may be over with the recent rate hike. But the negative effects of the crisis at Taipower over the last two years will only be evident in the future.

More importantly, this is a good time to take stock of lessons learned and look forward. In particular, is there a better way to deal with a similar energy shock in the future?

Instead of copying Korea’s strategy, a better solution is Singapore, which explicitly does not subsidize electricity. Singapore sets the price of electricity as a function of the average cost of its imported fuel over the previous 2 ½ months. This has the advantage of providing a temporary buffer to electricity users, but eventually the higher cost of energy is fully passed on to consumers.

There are multiple advantages of Singapore’s solution to higher energy prices. First, it provides an incentive to use energy efficiently and avoid wasteful consumption of electricity. Second, Singapore’s utility consistently generates a modest profit. It does not depend on subsidies from the government or decisions by a committee whether it should be allowed to raise rates. It does not lurch from crisis to crisis which makes investment decisions very difficult.

It is understandable that politicians, in Taiwan and Korea, want to shield poor households and small businesses from the cost of higher electricity. But here Singapore also points to a more efficient way to accomplish this goal. Specifically, Singapore subsidizes these households and businesses through lump-sum transfers instead of lower electricity rates. But they still face the full cost of electricity so they have an incentive to economize on electricity.

Now the immediate crisis is over, it is time to rethink Taiwan’s energy policy so that next time energy prices rise Taipower is not forced into another crisis that causes further damage to Taiwan’s energy security.

About the Author

Chang-Tai Hsieh is the Phyllis and Irwin Winkelried Professor of Economics and PCL Faculty Scholar, University of Chicago Booth School of Business

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