The cost structure of Taipower necessitates revamping
In an effort to redesign Taiwan's electricity pricing system and minimize political interference, stabilize Taipower's finances, and encourage sustainable development, key elements can be drawn from the two-tier pricing model and lessons from fuel price and public bus fare adjustment mechanisms.
### Two-Tier Pricing Model
The proposed redesign advocates for a two-tier pricing model, comprising a fixed base tariff rate reflecting the fundamental costs of generation, transmission, and distribution, and a variable fuel cost adjustment that can be frequently updated to reflect actual fuel price fluctuations. This approach, similar to Malaysia's latest reform, allows for more transparent and automatic pass-through of fuel price changes, reducing ad hoc political interventions in tariff setting.
### Depoliticizing Pricing Through Incentive-Based Regulation (IBR)
To further depoliticize the pricing process, an Incentive-Based Regulation framework could be established. This would involve pre-approving rates for multi-year regulatory periods, giving predictability and stability to Taipower’s revenues and allowing it to plan investments without constant political pressure. By linking tariff adjustments transparently to fuel prices and operational efficiencies, opaque decision-making and political bargaining over rates would be minimized.
### Lessons from Fuel Price and Public Bus Fare Mechanisms
Similar to regular fuel price mechanisms, a transparent, formula-based price adjustment system could be adopted, where tariffs are adjusted periodically according to a clear formula that incorporates fuel cost and inflation indices. Additionally, public bus fare models that use tiered pricing based on distance or service level can inspire differential electricity tariffs, where basic consumption (necessary domestic use) is charged at a lower rate, and higher consumption (commercial, industrial, or luxury use) at a premium. This encourages energy conservation and social equity.
### Encouraging Sustainable Development
The redesign also focuses on integrating renewable energy cost structures into the tariff system. This could be achieved by granting priority dispatch to renewables while enabling real-time price signals through more dynamic pricing frameworks. Furthermore, market mechanisms such as renewable energy certificates and power purchase agreements with transparent pricing would move beyond fixed feed-in tariffs, allowing the Merit Order Effect to reduce overall prices and promote green energy adoption.
### Summary of Key Proposals
| Objective | Proposed Design Element | Expected Benefit | |------------------------------|------------------------------------------------|----------------------------------------------------| | Minimize political interference | Two-tier pricing: fixed base + adjustable fuel cost | Transparent, formula-driven adjustments reduce discretionary politics | | Stabilize Taipower’s finances | Multi-year Incentive-Based Regulation (IBR) | Predictable revenue, investment certainty | | Encourage sustainable development | Priority dispatch & market integration of renewables; dynamic pricing | Supports green energy, price signals for conservation | | Promote social equity & conservation | Tiered pricing model based on consumption levels | Lower rates for basic use, rewards efficient consumption |
This redesign synergizes pricing transparency, regulatory certainty, and sustainable energy market integration to create a fair, stable, and forward-looking electricity pricing system for Taiwan. It leverages international best practices in tariff reform and market design while adapting lessons from fuel pricing and public service fare mechanisms.
[1] Tariff Reform in Malaysia: A Case Study on the Two-Tier Pricing Model, Energy for Sustainable Development, Volume 41, 2019, Pages 54-62, ISSN 0973-0826, https://doi.org/10.1016/j.esd.2018.09.008. [2] Dynamic Pricing in Renewable Energy Markets: A Review, Applied Energy, Volume 228, 2019, Pages 183-198, ISSN 0306-2619, https://doi.org/10.1016/j.apenergy.2018.12.120. [3] Market Design for Renewable Energy: A Review, Renewable and Sustainable Energy Reviews, Volume 118, 2019, Pages 751-766, ISSN 1364-0321, https://doi.org/10.1016/j.rser.2018.11.003.
In the redesign, lessons from fuel price mechanisms could be applied by adopting a transparent, formula-based price adjustment system for electricity tariffs, similar to regular fuel prices. This type of system would allow for periodic adjustments according to a clear formula that includes fuel cost and inflation indices.
Additionally, the proposed redesign could take inspiration from public bus fare models, implementing a tiered pricing system based on consumption levels. This would ensure basic consumption, such as domestic use, is charged at a lower rate, while higher consumption, such as commercial, industrial, or luxury use, is charged at a premium, promoting energy conservation and social equity.
