Chinese Taipei’s Renewable Energy Development, Promotion and Pricing Mechanism

1. APEC Workshop on Renewable Energy Promotion and Pricing Mechanism 3F The Banquet, San Want Hotel, Taipei, Chinese Taipei Chinese Taipei’s Renewable Energy Development, Promotion and Pricing Mechanism Feng-Shuo Yang Director, Research Division V Taiwan Institute of Economic Research 26 September 2013

2. Outline • Energy Supply and Demand • Trends and Achievements of Renewable Energy Development • Renewable Energy Promotion Policy • Renewable Energy Pricing Mechanism • Conclusion 1

3. I. Energy Supply and Demand Energy Supply Sources In 2012 indigenous energy was only 2.51%, while percentage of imported energy reached 97.49%. Energy Supply Mix Fossil energy remains as the major sources: coal (29.7%), oil (48.0%), natural gas (12.2%) and nuclear (8.3%) Renewable energy accounts for 1.8% of energy supply 2

4. I. Energy Supply and Demand Energy demand structure A. Energy consumptionindustrial (38.2%), services (11.0%), residential (10.9%) and transportation (11.9%) B. Electricity consumptionindustrial (52.8%), services (19.4%), residential (17.9%) and transportation (0.5%) • Industrial sector is the largest energy consumer, therefore, structural adjustment of the sector and promotion of energy efficiency measures are key strategies. Domestic energy consumption 1993~2012 (by sector) 2012 Domestic energy consumption structure (by sector) 3 3

5. Adoption of bidding mechanism for Solar PV “Thousand Wind Turbines and Million Solar Rooftop PVs” Project 5-year renewable energy demonstration plan was promoted Promulgation of the “Renewable Energy Development Act” II. Trends and Achievements of Renewable Energy Development Completion date as the basis for solar PV tariff % 103 MW 2nd National Energy Conference conclusion: to formulate specific act for renewable energy The percentage of Renewable Energy of power supplying The Installed capacity of Renewable Energy

6. II. Trends and Achievements of Renewable Energy Development Ocean and geothermal energy: developing 1. As of the end of May 2013, cumulative installed capacity of renewable energy is approximately 3,748.9 MW, 7.7% as of total power system. 2. Total installed area of solar water heating system is 2.27 million m2 (estimated 500,000 household installed, penetration rate 3.63%), installation density is 5th in the world (2008). 3. Comprehensive supply of biodiesel B2, with annual usage of 100,000 kiloliters. 4. Promotion Achievement • 1998~2009: average annual increase of installed capacity of renewable energy power generation is 88.7 MW. • 2010~2012: average annual increase of installed capacity of renewable energy power generation is 132.0 MW. • Installed capacity of solar PV has grown 23 times after Renewable Energy Development Act passed in 2009. Biomass Wind power Hydro Solar PV Cumulative installed capacity of renewable energy (2013.05)

7. III. Renewable Energy Promotion Policy 1. The Evolution of Renewable Energy Promotion 1998 1st National Energy Conference conclusion: renewable energy development 5-year renewable energy demonstration plan promoted by MOEA, include subsidies for wind power generation and solar PV 2000 2005 2nd National Energy Conference conclusion: formulate specific renewable energy act • “Renewable Energy Development Act” was promulgated in July 2009. Feed-in tariff for renewable energy was adopted. • The installation of solar PV system in public buildings was subsidized in “Economic Revitalization Policy” and 6% renewable energy use in public building was promoted • NSTPE announced to enhance R&D on renewable energy technology in next 5 years. 2009 • Comprehensive use of B2 diesel • Subsidiary acts of “Renewable Energy Development Act” was passed, and FIT for renewable energy was started to operate. • Promote gasohol project in Taipei and Kaohsiung metropolitan area 2010 New energy policy Framework aims to ensure nuclear safety, promote green and low carbon environment, and gradually move towards a nuclear-free society. 2011 “Thousand Wind Turbines and Million Solar Rooftop PVs” Project was approved by Executive Yuan, and the project office was set up. 2012 2013 6

8. III. Renewable Energy Promotion Policy 2. Renewable Energy Promotion Target Planning principles Results of plan • Solar PVs (1) Promote “Million Solar Rooftop PVs project” (2) Gradual expansion; ground-mounted after rooftop • Wind power • Promote “Thousand Wind Turbines project” • (2) Offshore after onshore Mature and feasible technology Cost-oriented • Biomass (1)Waste-to energy: transformation of existing municipal waste incineration plants into biomass energy centers (2)Biomass power: better use of existing agricultural wastes, and biogas from waste (sewage) treatment plants (3)Biodiesel: comprehensive use of B2 biodiesel Balanced development phases • Geothermal • Superficial geothermal energy exploration then deep thermal technology development Driving domestic industrial development • Hydro power Developed by Taipower company and private power enterprises • Ocean power • R&D of ocean power system • Pioneer demonstration project to attract the participation of private sector Acceptable impact of power price 7

9. III. Renewable Energy Promotion Policy 2. Renewable Energy Promotion Target (1) Target Expansion and Overall Development Strategy Due to the geographical environment and natural resource limitations, The renewable energy with matured technology and low power generation costs will have priority in government development policy. Moreover, the authorities will encourage the industry players to consolidate their R&D and manufacturing capabilities. Thus, Chinese Taipei can be one of the Green Power Exporting countries. (2) Target of the Promotion of Renewable Energy According to the “Renewable Energy Development Act”, the target of renewable energy installation shall increase up to 6,500MW for 20 years. To correspond with the upcoming goals for GHG reduction, energy diversification, and renewable energy expansion, the renewable energy installation target is revised to reach 9,952MW by 2025, and 12,502MW by 2030 (i.e. meet the target of increasing 6,500 MW in 20 years 5 years earlier). In other words, more aggressive targets are set for developing renewable energy in Chinese Taipei. 8

10. (3) Aggressive Installation Capacity Targets To prompt the solar PV and off‐shore wind power, we also approve the “Million Solar Rooftop PVs” and “Thousand Wind Turbines Promotion” project. The goal of project will be conducted to reach the goal of installing 3,100 MW of PV systems by 2030 and 1,000 wind turbine ( including 450 on‐shore and 600 off‐shore wind turbine) . III. Renewable Energy Promotion Policy 9

11. III. Renewable Energy Promotion Policy 3. New Energy Policy Framework (2011.110.03) (1) Solar PV: “Million Solar Rooftop PVs project” A. Promotion strategies: gradual expansion, rooftop first then ground mounted. B. Promoting measures: coordination and mutual support between central and local governments, procedure simplification and deregulation, financing environment for market mechanism. Introduction of PV-ESCO combined with available financing to reduce the burden of the installers. C. Overall objective: cumulative installed capacity reaching 2,500MWby 2025, 3,100MW by 2030 (RF 3,000MW and GM 100MW). (2) Wind Power: “Thousand Wind Turbines project” A. Accelerate Onshore promotion: 1,200 MW (about 450 units) completed by 2020. B. Offshore demonstration incentive: 4 demonstration units completed by 2015. 600MW wind farm (about 120-180 units) completed by 2020. C. Offshore development block: annual increase of offshore wind farm of 240MW. 2,400MW completed in next 10 years. D. Overall objective: 3,000 MW of offshore wind farm completed by 2030. 4,200MW of total wind farm completed by 2030. 10

12. III. Renewable Energy Promotion Policy 3. New Energy Policy Framework (2011.110.03) (3) Biomass power A. Coordinating with FIT for renewable energy and ”MOEA Biogas Power Generation System Subsidy Scheme” to encourage the industrial participation in the installation. 4 counties (Pingtung, Tainan, Yunlin, Changhua) have submitted their application in 2013. B. Investment in advanced fuel conversion technology (e.g. biomass pyrolysis oil, firing technique), diversification of biofuel sources and improvement of fuel quality. C. Short-term objective: 877MW by 2015. D. Long-term objective: 1,400MW and 3.42% of total power generation completed by 2025. (4) Ocean power A. Short-term objective: demonstration of MW grade power plant completed by 2015 and development of commercial power plant (30MW) started from 2020. B. Long-term objective: 200MW and 0.24% of total power generation by 2025. 11

13. III. Renewable Energy Promotion Policy 3. New Energy Policy Framework (2011.110.03) (5) Geothermal power A. Development strategy: from shallow to deep ground (EGS). B. Coordinating with FIT for renewable energy and ”MOEA Biogas Power Generation System Subsidy Scheme” to encourage the industrial participation in the installation. In December 2012, a demonstration project of 50kW enhanced dual cycle geothermal power generation system with autonomous technology was built in Qingshui, Yilan county. C. Short-term objective: 1 MW Renovate-Operate-Transfer (ROT) Qingshui project completed in 2013. 23MW in Qingshui area completed by 2018. D. Long-term objective: 100MW in Datun Mountain area and 0.24% of total power generation completed by 2025. 12

14. III. Renewable Energy Promotion Policy Promotion Target Set up development fund Grid Connection And Power Purchasing Obligations Renewable Energy Development Act Feed-in Tariff mechanism Subsidy for Demonstration project Land-use deregulation 4. Renewable Energy Development Act (23 articles) Promotion target, mandatory grid interconnection and power purchasing obligations, FIT for different renewable energy with reasonable profits, and development fund for subsidies are four pillars of CT’s power purchasing system. FIT mechanism is the core.

15. III. Renewable Energy Promotion Policy 4. Renewable Energy Development Act (1) Feed-in Tariff Rate *Every year, “Renewable Energy Feed-in Tariff Rate Review Committee” will review the technical improvement, cost change, achieved target and relate factors of each type of renewable energy to examine Feed-in Tariff Rate and calculation formula. * To secure reasonable investment return for the industry, renewable electricity generated by the industry and the public will be fully purchased with fixed rate for 20 years, with WACC rate of 5.25% (discount rate). Fixed Feed-in Tariff, FIT Deliberate the suggestions from industry Share the initial risk of Industry Rate-setting review Renewable energy power-purchasing system

16. III. Renewable Energy Promotion Policy 4. Renewable Energy Development Act (2)Set up Promotion target The “Renewable Energy Development Act” is aimed to increase dramatically CT’s renewable energy use in the next 20 years. *Concrete target of installed capacity: 9,952 MW by 2025 12,502MW by 2030 (3)Set up renewable energy development fund The establishment of renewable energy development fund is aimed to internalize the external cost of traditional fossil fuel. * Power enterprises are required to pay the fund for power generation from non-renewables. * Upon approval, the amount paid to the fund can be reflected in the power price to meet the principles of users/polluters charge.

17. III. Renewable Energy Promotion Policy 4. Renewable Energy Development Act (4) Elimination of development restriction Related acts and laws have been amended in coordination with REDA

18. III. Renewable Energy Promotion Policy 4. Renewable Energy Development Act (5) Grid interconnection and power purchasing obligation Power enterprise is obliged to purchase power generated from renewables and to provide grid interconnection. (6) Demonstration subsidy Renewable energy with development potentials are entitled to receive subsidies for a period in the initial development stage. Currently demonstration projects of offshore wind power, geothermal and methane gas can receive subsidies. (7) Other supporting measures Other promotional measures include duty exemption of imported renewable energy power generation equipment, deregulation of related acts, and specific offices for each type of renewable energy.

19. III. Renewable Energy Promotion Policy 4. Renewable Energy Development Act Financial Mechanism of the Act • Renewable Energy Development Fund (Article 7) Provide for the funding sources needed and purposes of use for developing renewable energy • Feed‐in tariffs (Article 9) Constitute a committee for stipulating the buy wholesale rate and formula of calculation for power generated by renewable energy facilities • Subsidy (Article 10) Subsidize power utilities for purchasing or self‐use generating of renewable electricity • Rewarded demonstration (Article 11) Be reward for renewable energy facilities with potentiality in an early stages of technical development • Incentives to thermal applications (Article 13) Subsidize thermal applications of solar energy and biofuels 18

20. IV. Renewable Energy Pricing Mechanism 1. Power Purchasing Mechanism for Renewable Energy(1) Characteristics Basic idea • *Adoption of FIT system • *Renewable energy power are guaranteed to be purchased with a preferential rate in a 20 period Taipower Company Electric current User Electric current Renewable energy power generation facility installer Cash flow Cash flow Subsidy for cost difference Electricity surcharge RE Development Fund Characteristics • 1.Fixed tariff over 20 years period enable the industry to control cash flow of each stage, facilitating investment decision planning and reducing operational risks. • 2.Adoption mode of energy rate and cost benchmarking to encourage regions with competitive renewable energy resources and enterprises with better operational efficiency to enter the market with priority, and enhance the economic benefits of renewable energy. • 3.FIT rate is calculated based on signing day rate, but for Solar PV specifically, completion date rates and bidding system is adopted, is an improved FIT system with Taiwanese characteristics。

21. IV. Renewable Energy Pricing Mechanism 1. Power Purchasing Mechanism for Renewable Energy (2) RE Feed-in Tariff rate Validation Committee According to REDA: A. Central competent authority (MOEA) should invite all relevant ministry, scholars and experts, and organizations to form a committee, to validate the Feed-in Tariff rate and its calculation formula of renewable energy power generation facility. B. Tariffs and formula should be reviewed or revised annually by referring to technical improvement, cost change, target achievement status and related factors of each type of renewable energy. C. Tariff shall not be lower than the average generation cost for thermal-fired (fossil fuel) power of domestic power utilities.

22. IV. Renewable Energy Pricing Mechanism 1. Power Purchasing Mechanism for Renewable Energy(2) RE Feed-in Tariff rate Validation Committee Vice minister of MOEA as convener invites all ministry, scholars, experts and organizations Legal basis Article 9 of REDA Central competent authority should invite all relevant ministry, scholars and experts, and organizations to form a committee , to validate the Feed-in Tariff Rate and its calculation formula of renewable energy power generation facility, and, if necessary, hold a public hearing before official announcement. Vice minister of MOEA FARR CEPD Committee formation Bureau of Energy, MOEA 2013 Committee IDB, MOEA CNFI CPC, Executive Yuan Consumer’s Foundation Scholars and experts

23. 1. Power Purchasing Mechanism for Renewable Energy(3) Calculation formula of Feed-in Tariff rate IV. Renewable Energy Pricing Mechanism (Initial Installation Cost × CRF) + Annual O&M Cost Feed-in Tariff Rate = Annual Power Sold WACC × (1+WACC)Tariff Payment Duration Capital Recovery Factor (CRF) = (1+WACC)Tariff Payment Duration-1 Annual O&M Cost = Initial Installation cost× ( Annual O&M Cost / Initial Installation Cost ) • ◎ Adopts the international best practice: investment and O&M Cost + “Reasonable” rate of return, to reflect the capital cost and investment risk to ensure a reasonable profit return to the investors. • ◎Feed-in Tariffs are fixed tariff payments over a long operating period (20 years) based on actual power sold. In principle, the FIT rates must Renewable energy resources that are locally abundant and operate with high economic efficiency are prioritized. 22

24. IV. Renewable Energy Pricing Mechanism 1. Power Purchasing Mechanism for Renewable Energy (4) Calculation parameter and content A. According to REDA: “Technical improvement, cost change, target achievement and related factors of each type of renewable energy will be reviewed or revised annually.” B. Current Feed-in Tariff calculation parameter for renewable energy power is as follows:

25. IV. Renewable Energy Pricing Mechanism 1. Power Purchasing Mechanism for Renewable Energy (5) Current Feed-in Tariff rate of renewable energy power A. Feed-in Tariff except solar PV 註*：未加裝低電壓持續運轉能力(LVRT)者，則費率為2.5924元/度(101年度為2.5971元/度) 。 (2)太陽光電發電設備電能躉購費率

26. IV. Renewable Energy Pricing Mechanism 1. Power Purchasing Mechanism for Renewable Energy (5) Current Feed-in Tariff rate of renewable energy power B. Feed-in Tariff for solar PV

27. IV. Renewable Energy Pricing Mechanism 2. Solar PVs bidding mechanism • (1) Origins of bidding • Considering short construction period and reduced set-up costs due to rapid technical progress, completion date rates and bidding system was discussed and adopted in 2011 to avoid delay in construction work of the enterprises seeking excess profits. • According to REDA and subsidiary acts, the bidding system aims to truly reflect cost changes of solar PV installation through market mechanism, making the FIT for solar PV more fair, reasonable and effective. • Supporting measures of bidding mechanism • (A) Bidding quota is set up for each period. • (B) FIT for solar PV is regarded as Ceiling rate of the bidding price. • (C) Submission discount rate as quotation of the bidding. The rate of the winner is ceiling rate announced at completion date×(1-discount rate).

28. IV. Renewable Energy Pricing Mechanism 2. Solar PVs bidding mechanism • (2) Subjects suitable for bidding

29. IV. Renewable Energy Pricing Mechanism 2. Solar PVs bidding mechanism (3) International application A. Peru is implementing bidding system respectively in 2008 and 2010. Bidding subjects were biomass, wind power, solar and small hydro. B. To develop Solar PVs, India has included 5-20MW into the bidding mechanism, and specified that each bidder can bid a maximum of 50MW. Also, solar heating is also purchased through bidding. C. French government promulgated an administrative order on Mar 2011 to solve the excessive solar PV applications through setting a maximum capacity and bidding operations. On Feb 2012 the bidding for offshore wind power has begun. D. In Jan 2013, Italy begun to implement a new renewable energy purchasing system. Bidding mechanism was applied to certain levels of renewable energy including onshore and offshore wind power, hydro, geothermal and biomass. E. Thailand: wind, solar, small hydro and biomass. F. Brazil: small hydro, wind power, biomass (bagasse cogeneration) G. China: onshore and offshore wind power, and solar PVs. Internationally, bidding system is mainly applied to solar and wind power

30. IV. Renewable Energy Pricing Mechanism 2. Solar PVs bidding mechanism (4) Benefits from the 2012 Solar PV Bidding Scheme An estimated amount of 561.41 million NTD saved from renewable energy development fund over 20 years (on average 28.07 million NTD saved annually) as a result of implementing the 2012 Solar PV Bidding Mechanism. 29

31. 3. Renewable Energy Development Fund IV. Renewable Energy Pricing Mechanism • Purpose of Renewable Energy Development Fund • Subsidy for renewable energy power prices • Subsidy for renewable energy equipment • Demonstration incentive and promoting the utilization of renewable energy • Other uses related to renewable energy development approved by the central competent authority • Sources of Renewable Energy Development Fund • Over a certain installed capacity • Government funding through budget process • Interest income from the Fund • Other related incomes • Funders with certain installed capacity • Taipower Company • Private-owned power generation enterprises • Industry with self-use power generation equipment installed

32. 3. Renewable Energy Development Fund IV. Renewable Energy Pricing Mechanism Operational process of Renewable Energy Development Fund --income based on expected expenses to balance revenue and expenditure-- Grid interconnection and power purchase Taipower Company Renewable energy power generation installer surcharge consumer Fossil energy Power grid surcharge Cost difference subsidy payment Private power enterprises,IPPs Payment Fund Equipment subsidy surcharge payment Self-use power generation equipment with certain capacity 31

33. 3. Renewable Energy Development Fund IV. Renewable Energy Pricing Mechanism Fund rates are composed by 2 parts: jointly shared responsibility rate and climate change responsibility rate. Jointly shared responsibility rate is for reaching the goal of energy security and industrial development; climate change responsibility rate is for achieving the purpose of environmental protection. Calculation formula: i represents each type of power generation equipment, t represents duration, R represents fund rates, A represents jointly shared responsibility rate, B represents climate change responsibility rate, C represents CO2 emission coefficient. Changes happen according to technical development, so CO2 emission coefficient is the function of climate change obligation rate. 32

34. V. Conclusion 1. “Renewable Energy Development Act” is the foundation Act for promoting renewable energy. By the end of 2012, total installed capacity of renewable energy increase approximately 551MW, reaching 3,697MW, installed capacity accounted for 6.8%. • As for promotion targets, CT’s currently uses total installed capacity as basis. It is targeted to reach total installed capacity of renewable energy of 12,502MW by 2030, accounting for 16.1% of total power installed capacity. “Thousand Wind Turbines and Million Solar Rooftop PVs” project is the main policy to promote Solar PV and wind power. • Regarding promotion policy, currently main core mechanism is FIT, and the Renewable Energy Development Fund is used to pay for the wholesale renewable power. Since the cost of solar PV has declined rapidly in recent years, to reflect exact costs and encourage companies to complete work as soon as possible, rate applicable on the basis of completion date in coordination with bidding mechanism is adopted, and double phase rate is announced within each year as supporting measures. • CT’s electricity market is slowly reforming to become more liberalized, and by reflecting the true cost of energy, in the long term as conventional energy prices rise, renewable energy will be a key factor to bring prices down.

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