Global Chip Hub Taiwan Hammered By Triple Blow Of Drought, Blackouts And COVID Surge

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by Tyler Durden
Wednesday, May 26, 2021 - 07:20 PM

The calm of a sunny May afternoon in Taiwan was broken by what the Nikkei describes as a crescendo of smartphones buzzing due to a national emergency alert: electricity blackouts were coming due to a malfunction at a power plant in the south of the island. People had no time to prepare. There were more than 30 reports of people being trapped in elevators half an hour after the warning in the capital city.

"I was talking to my clients... but our building suddenly blacked out. The air conditioning as well as WiFi crashed completely, so I went home early," a manager with the surname of Lin working in the Neihu Science Park in Taipei, where many top tech companies have offices, told Nikkei Asia. "Many traffic lights on my way home were out and my home was dark too."

"We could only use candles and have instant noodles for dinner, and there was no hot water for showers," a resident in the southern city of Tainan told Nikkei. "It's been like living in ancient times." Or Texas during a cold blast.

More than four million households on the island, which has a population of 24 million, were affected by six rounds of rolling one-hour power suspensions on May 13 before power was fully restored around 8 pm. Taipower, the state-owned electricity operator, said human error at Hsinta Power Plant in the southern city of Kaohsiung caused a malfunction in the power grid, tripping four generators and cutting about 13 megawatts of electricity supply. This dragged Taiwan's total power supply below a critical security level and triggered the outages.

The nation's phones buzzed again just four days later with another blackout warning. That evening, up to 659,000 households had their power cut. Taipower said that, with temperatures warmer than usual, there was a shortage of electricity supply because they had not anticipated demand for electricity to be so high.

"Power demand at 2:09 p.m. broke another historic record in May and the demand around 7:30 p.m. was far higher than usual in the evening," Taipower said in a statement.

The two blackouts did not affect Taiwan's crown jewel semiconductor industry. But they still put production continuity at risk because chipmakers like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp said they experienced a sudden voltage dip, which could have a small impact on semiconductor production, industry sources said.

After the two massive power outages, Taiwan endured another small-scale power suspension in Taipei City on Friday and experienced temporary power generator malfunctions at two separate coal-fired power plants on Sunday and Monday respectively.

Maintaining production is crucial at a time of global chip shortage, with political tensions and pandemic-induced lockdowns affecting supply chains and remote working increasing demand for electronic devices.

People in Taipei eat using the light from their phone while experiencing a blackout due to an outage at a power plant on May 13.  

The outages have triggered serious concerns over whether the island's electricity infrastructure is sufficient to sustain its booming economy.

Taiwan's economy grew more than 8% in the January-March quarter from a year earlier. National Development Council Minister Kung Ming-hsin said the island could see economic growth of more than 5% in 2021, the highest in more than a decade, if "all industrial production can stay intact."

The power problems come as Taiwan sees a surge in local COVID cases, after being a model of COVID control in 2020.

The government has raised the alert level for the whole island, demanding that all schools close for two weeks and urging businesses to adopt contingency plans such as asking employees to divide into groups and work from home. The administration of President Tsai Ing-wen said on Monday it is considering extending the two-week level 3 alert -- one stage below a de facto lockdown -- after reporting more than 3,000 local cases in just nine days.

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Another headache is Taiwan's worsening water shortage. The island is suffering its most serious drought in more than five decades -- another factor that may stymie economic growth.

As of Thursday afternoon, the water reserve rate at the Nanhua Reservoir only stood at 10.6%, suggesting the water supply from this reservoir could last only 23 days if without any more rainfalls. 

Ministry of Economic Affairs officials on Wednesday described the drought as the "worst ever," saying they planned to implement a new round of water-reduction plans from June should rainfall be insufficient. The affected cities include Hsinchu, where top chipmakers Taiwan Semiconductor Manufacturing Co. and United Microelectronics have headquarters. Taoyuan, a major hub of print circuit board production sites and home to Taiwan's biggest memory chip maker Nanya Technology, is also included in water rationing plans.

The government also plans to impose stricter water supplies for major industrial users in the southern Taiwanese cities of Tainan and Kaohsiung, where TSMC operates its most cutting-edge plant. It has ordered several central cities, including Taichung, to suspend residential water use for two days a week since early April.

"It never rains but it pours," a chip industry executive told Nikkei Asia.

"We suddenly face a chain of crises: we are short on water, and then we are short of electricity, and we are also short of vaccines amid surging local COVID cases," the executive said. "The only thing we are not short of is business orders that are full and bright at least until the year end and beyond thanks to surging demand across sectors. But those orders cannot be fulfilled without sufficient water and electricity."

Powertech Technology, the world's biggest memory chip packaging and testing house, is based in Hsinchu, and some of its plants will be subject to a planned two-day suspension of water use for industry and residential use starting in June.

CFO Evan Tseng said the company stored water in its basement and could transfer some water between plants. "We now only offer bento boxes in our cafeterias and we don't serve soup or noodles with soup as that could consume more water," Tseng told Nikkei Asia. "So far we think production could still run normally."

Powertech's CEO told Nikkei in an interview that he expected the robust orders to last at least until the end of this year.

TSMC spokesperson Nina Kao told Nikkei Asia that the latest water-reduction plan would not affect the company's production, but the company would "mobilize more water trucks" to support manufacturing to overcome the stricter water rationing. TSMC said in April that the global chip shortage could last until 2022 based on robust demand.

A woman walks past a closed open-air gym in Taipei on Friday following the recent rise in COVID-19 in Taiwan

The water and power issues highlight some key vulnerabilities in basic infrastructure for Taiwan, one of the world's most important sources of the advanced chips that power everything from cars to smartphones, computers and servers to games consoles.

Lin Faa-Jeng, dean of the college of electrical engineering and computer science at National Central University and adviser to the Executive Yuan, Taiwan's administrative organ, told Nikkei Asia that Taipower had not anticipated the impact of climate change in making the weather so hot at this time of year.

"The power company has to adjust all the planning for annual maintenance and take into account some new factors that they had not considered... But I think the power supply will be alleviated when some annual maintenance on power generators is completed from next week."

Chen Chao-shun, chair professor at I-Shou University and a specialist on power infrastructure, told Nikkei Asia the two massive blackouts were both due to a sudden loss of power supply that triggered the system's automatic under-frequency load shed to protect the power grid.

"The two power outages were all related to the supply and the incidents highlight that Taipower needs to improve its capability to schedule backup generators to quickly support the system," Chen said. "Taipower also has to readjust the system to keep vital equipment such as traffic lights and elevators operating. You can't unexpectedly cut off the power and trap people in elevators."

"Before Taipower can improve its agility to schedule power generation and respond to any sudden supply loss, we are likely to face a power suspension triggered by the automatic under-frequency load shed again this summer," Chen said.

By way of contingency plans, the government has been drilling wells and building new water pipes to draw water from the north of the island to the south. But, while suppliers in the science parks are minimizing their use of water, the change is far from sufficient.

The water level is extremely low in the Nanhua Reservoir in the mountainous area of southern Taiwan -- one of the key water reserves for Kaohsiung and Tainan Science Park. Areas of sand that used to be under water have been exposed under the tropical sun and are now sand dunes.

"It's really too hot...the temperature can reach more than 40 Celsius around noon now and we haven't seen a drop of rain in months," a local resident told Nikkei Asia. "We are all worried that the water reserves here can only last for about a month."

Multiple cities across Taiwan welcomed heavy rain on Monday afternoon, however, as of evening, the water reserve rate at the Nanhua Reservoir stood at just 8.8%, suggesting the water supply from this reservoir could last only 19 days without any rainfall, according to open data provider Taiwanstats, citing data from the Water Resources Agency.

Soldiers in protective suits disinfect a metro station in Taipei on May 20.  

Tsengwen Reservoir, another key water resource for Tainan Science Park and the largest in Taiwan, had a water reserve rate of just 6% as of Thursday, the data showed. The rate at Shihmen Reservoir, one of the key reservoirs that supplies northern Taiwan, dipped to 11.1% as of Thursday.

Wu Ray-shyan, executive vice president of the National Central University and a hydrology and water resources expert, said if the monsoon season did not bring sufficient rain this month, then Taiwan would have to wait until the typhoon season, which generally starts in July, to ease the drought.

"I don't mean to be alarmist, but if typhoons are delayed, as they were last year, we will have to rely on groundwater resources," Wu told Nikkei Asia. "Water supply not only needs management and conservation measures, but also an increasing capacity of storage facilities to meet demand, which is rising in tandem with economic growth.

"Taiwan is not like Israel, where the rainfall is really scarce. We [in Taiwan] sometimes on the one hand deal with floods in typhoon season and on the other hand deal with droughts...Taiwan's problem is that we don't have enough storage capacity to really store this rainfall," Wu said.

Taiwan’s First Nuclear Power Plant in New Taipei City used to be one of the pillars for Taiwan’s power generation. The plant was retired in 2019.

On power infrastructure, the administration of President Tsai Ing-wen plans to phase out nuclear power by 2025 and to use natural gas and coal-fired power to fill the gap before the planned installation of solar and offshore wind power comes online.

The government is building a third and large natural gas terminal off the coast of Taoyuan to increase the use of liquefied natural gas as a key source of electricity. Local environmental groups, however, oppose the plan, meaning it could be delayed by years or forced to locate elsewhere on the island.

In 2020, Taiwan's power usage reached 271.1 billion kilowatt-hours, up 2.1% from the previous year, while total power generation was 279.8 billion kilowatt-hours, according to Economics Ministry data released this month. Coal-fired electricity contributed 45% of the total power generated last year, while natural gas accounted for 35.7% and nuclear power 11%. Renewable energy, however, contributed a mere 5.4%.

The government forecasts that electricity demand will grow by 2.5% each year from 2021 to 2027, after factoring in inbound investments amid the U.S.-China trade war and the massive investment plans by semiconductor companies.

National Central University's Wu said Taiwan needed better infrastructure planning for the long run.

"The last time Taiwan built large infrastructure for either power plants or reservoirs was a very long time ago," Wu said. The last time a large reservoir was created was in 1994 when the Nanhua Reservoir, which supplies the Tainan Science Park, was dug, he added.

"Large infrastructure takes 10 or even 20 years from planning to completion," he said. "What Taiwan needs is long-term development planning -- undisrupted by the rotation of political parties -- for utilities over the next 30 to 50 years."