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Taiwan’s energy crunch could throw a wrench into global chip industry

A chip manufactured by Taiwan Semiconductor Manufacturing Company

TSMC

Taiwan, the world’s semiconductor powerhouse, is facing an energy crisis, and this could spell trouble for chipmakers.

Chip manufacturing requires a lot of energy and electricity, and the government is struggling to meet the island’s energy needs.

“Concerns about potential power outages and deteriorating power quality and reliability could pose operational risks to the semiconductor industry,” Chen Jong-Shun, assistant researcher at the Chung-Hua Institute for Economic Research, told CNBC.

There have been three major blackouts in Taiwan in the past seven years, and the island experienced a series of minor outages last year.

As recently as April, multiple power outages were recorded over three days in northern Taiwan alone, according to local reports.

In 2022, there were 313 incidents of power outages. A major blackout that year affected more than five million homes, while another massive blackout in 2017 affected nearly seven million homes.

“Taiwan has an energy crisis and, even more importantly, an electricity crisis,” said Joseph Webster, senior fellow at the Atlantic Council’s Global Energy Center.

Electricity squeeze

More than 97% of Taiwan’s energy needs are imported and come mainly from coal and gas. Heavy dependence on other countries makes the island vulnerable to power supply disruptions, experts told CNBC.

While the outages are partly due to the aging grid, the electricity shortage is largely the result of Taiwan’s undervalued electricity bills, which increases demand and causes supply shortages, Webster added.

While Taiwan recently increased electricity rates by 15% for large industrial users, rates for residential consumption remain unchanged.

Today’s electricity bills are cheaper than 20 years ago, according to Taiwan’s Ministry of Economy. Meanwhile, global commodity prices have soared.

As a result, Taiwan Power Company, or Taipower, has been racking up losses. The state-owned company reported a pre-tax loss of $6.3 billion in 2023, after an even larger loss was posted in 2022.

“Taipower has been losing money, which also raises concerns about potential power disruptions for both the semiconductor industry and the broader Taiwanese economy,” said Michelle Brophy, research director at market intelligence platform AlphaSense.

On the one hand, with electricity prices rising for semiconductor companies, higher costs are expected to be passed on to consumers, according to Brophy.

chip giant Taiwan Semiconductor Manufacturing Company has revealed that it will pass on cost increases to customers to protect the company’s profit margin.

Implications for the chip sector

Taiwan’s industrial consumers accounted for more than 55% of its electricity consumption in 2023, according to the Atlantic Council’s Webster. These consumers, including semiconductor companies, often need constant, reliable access to electricity.

“If Taiwan is forced to ration electricity more frequently in the future due to limited supply, its semiconductor companies will be affected,” he added.

Any energy disruption will slow chip manufacturing and drive up global semiconductor prices, Webster said.

“Electricity shortages in Taiwan could impact global semiconductor markets,” he said, adding that disruptions could ripple across the global industry.

TSMC, the world’s largest maker of advanced chips, accounts for about 60% of the foundry’s global revenue. The company is an integral part of the current generative AI boom and has technology giants such as Apple and NVIDIA as clients.

The global semiconductor manufacturing industry is estimated to double its market size in revenue by 2030, and is set to consume 237 terawatt hours (TWh) of electricity by then, according to a Greenpeace report.

If Taiwan is forced to ration electricity more frequently in the future due to limited supplies, its semiconductor companies will be affected.

Joseph Webster

Atlantic Council Global Energy Center

Electricity consumption by Taiwan’s semiconductor manufacturing industry is expected to increase by 236% between 2021 and 2030, according to the same report.

“The global electricity industry has been surprised by the pace and scale of electricity demand from AI data centers,” Webster said, adding that Taiwan’s future electricity consumption is subject to “considerable uncertainty.” .

Taiwan’s government plans electricity supply based on the needs of a few major companies, said Chen of the Chung-Hua Institution.

Still, meeting Taiwan’s energy needs is an arduous task.

“Taiwan has struggled to meet its energy infrastructure goals due to land limitations, overly ambitious and rigid policies, and a lack of understanding and capacity to address energy shortages,” Chen added.

This raises further concerns among companies about the reliability of future power supply commitments with major technology companies.

“Power is a constant issue in the sector,” especially given Taiwan’s enormous influence in the semiconductor industry, Brophy said.

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