Why CPC, Taipower need subsidies

The core principle of economics lies in pursuing the greatest possible collective welfare under the constraint of limited resources. When addressing a controversial issue, it is therefore best practice to disclose as much information as possible in an open, fair and impartial manner to all stakeholders. This can help alleviate concerns on all sides and minimize unnecessary disputes. The following provides answers for common questions to assuage public concerns about government subsidies to CPC Corp, Taiwan and Taiwan Power Co (Taipower).

Since the outbreak of the Russia-Ukraine war, electricity rates in Taiwan have never fully reflected their cost. The expectation is Taipower would be able to make up for its cumulative losses by cutting expenditures and improving efficiency. However, the US-Iran war since late February has sent international oil and gas prices soaring, and Taipower’s finances have further deteriorated. This is why CPC and Taipower still need government support.

There is also the question of why the public has to pay for the government’s policy errors: If Taiwan had not phased out nuclear power, CPC and Taipower would not have needed to import so much natural gas and would not have sustained massive losses. However, the best course is to seek the solutions rather than dwell on what could have been. The task ahead is to think long-term and provide appropriate subsidies to CPC and Taipower, enabling Taiwan’s semiconductor industry to ride the artificial intelligence (AI) boom. This in turn could propel the stock market higher and generate additional tax revenue, which could then be returned to the public.

Taiwan’s economy grew 8.76 percent last year, the highest in 15 years. In the first half of this year, GDP growth further soared to 13.72 percent — about 4.3 times the average of the previous 13 years. This exceptionally high growth rate was primarily driven by the semiconductor and information and communications technology (ICT) supply chains as AI demand soared.

About 90 percent of the world’s advanced chips are dependent on Taiwan’s semiconductor supply chain. This creates significant electricity demand. Last year, Taiwan Semiconductor Manufacturing Co’s (TSMC) domestic facilities consumed 25.8 terawatt-hours (TWh), or 9.1 percent of Taiwan’s total annual electricity consumption of 283TWh. As TSMC and related companies complete more new facilities, electricity demand would rise further. Providing appropriate subsidies to CPC and Taipower could ensure stable power supply, giving greater momentum to the semiconductor and ICT supply chains. This would allow the public to share in the economic prosperity and stock-market gains generated by the AI industry.

Given the limited time to rapidly increase electricity supply, Taiwan must rely on CPC and Taipower, which already possess the know-how. Before 2030, they are the only companies in Taiwan capable of quickly purchasing large quantities of crude oil and natural gas on international markets during a global shortage, and then rapidly convert them into electricity for domestic consumption.

Does this mean the public has to tolerate all the problems associated with subsidizing CPC and Taipower? The international trade system as it stands today is essentially about leveraging comparative advantage to try and obtain the largest possible share of the pie. In a rapidly advancing world, our first priority should be to secure and protect Taiwan’s readily available share of the AI boom, making full use of our own comparative advantage.

To this end, Taiwan urgently needs an adequate supply of electricity. The fastest and most effective approach is to turn to our experts and industry leaders to resolve this key problem as quickly as possible; everything else is secondary. Even if these experts have their shortcomings, the bigger picture must come first. For now, providing subsidies to CPC and Taipower is still the government’s best strategy.

Liao Huei-chu is a professor at Tamkang University’s Department of Economics.