Industrials

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

I was having dinner with a friend in downtown Taipei on Tuesday night when the electricity went off for the second time that day.

Workers accidentally shut off the supply of natural gas to a single power generator just a few hours earlier, immediately tipping the scales of Taiwan's tenuous electricity supply/demand balance into a blackout in some areas.

Running on Empty
Taiwan's electricity operating supply margin fell precipitously last week, and has regularly dropped below 4 percent this year
Source: Taiwan Power Co.

"I really hope these power outages hurt TSMC," my Taiwanese friend said, referring to Taiwan Semiconductor Manufacturing Co., the world's biggest custom chipmaker, whose clients include Apple Inc. and Qualcomm Inc.

Confused, I asked why anyone would wish harm on Taiwan's most important company.

"If they had even one second of power shortage, that'd be something and maybe that'd push the government" into action.

There was "no impact on our product lines," TSMC spokeswoman Elizabeth Sun told me a little later. Advanced Semiconductor Engineering Inc., which tests and packages chips for a client list similar to that of TSMC, and its smaller rival ChipMOS Technologies Inc., weren't so lucky.

Taiwan dodged a bullet that it saw coming at least a week ago, when state-owned Taiwan Power Co. issued a red alert that the operating margin between supply and demand was dangerously low.

Overheating
While industrial uptake tends to be stable and is the largest user of electricity, demand peaks in the sweltering third quarter as residential usage spikes
Source: Bloomberg Intelligence, Taiwan Ministry of Economic Affairs

A 0.1 percent decline in the benchmark Taiex stock index Wednesday morning indicates investors believe either that this blackout was a one-time event, or that one of the world's most technology-dependent economies can survive its rickety power situation.

They're wrong on both fronts. For years, analysts have been warning that a shortage is coming. Taiwan's decision to do away with nuclear energy, which once accounted for one-third of generation capacity, hasn't been met with any credible alternatives to fill the pending gap.

Energy Source
Taiwan's decision to phase out nuclear power has forced it to rely more heavily on fossil fuels, notably gas and oil
Source: Bloomberg Intelligence

It's been 17 years since former President Chen Shui-bian came to power with "no nukes" among his campaign platforms. But bickering through three administrations and multiple legislatures; the political impossibility of TaiPower raising prices; a failure to adequately open up the electricity market to local and foreign players; and a utopian belief that renewable energy will be a silver bullet, have all resulted in a glacial pace of reform and capacity increases. 

Bloomberg Intelligence analyst Joseph Jacobelli, who predicted this crisis, found a positive spin when he wrote last month about the possible upside.

Taiwan's power crunch is likely to persist in 2017-18, yet is a possible opportunity in disguise ... A crisis may eventually force the government to liberalize the market, and allow greater foreign investment.

Maybe. But even if that's so, any new supply will take a long time to come on stream, leaving those invested in Taiwan to swelter through further power shortages. 

It will be at least seven years before Taiwan gets significant new power supply
Bloomberg Intelligence, Taiwan Bureau of Energy

Taiwan's Planned Installed Capacity Through 2028

Another observation from a local: TSMC will be the last company allowed to suffer in a power shortage.

That might be true. But do you really want to bet on it?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net