When The Chips Are Down: Taiwan’s Water and Energy Conundrum

Executive Summary:

• Taiwan’s heavy reliance on energy imports, coupled with high energy demands, poses significant challenges, with semiconductor manufacturing being a major consumer.
• Environmental concerns such as droughts, exacerbated by climate change, and Taiwan’s fossil fuel-heavy energy mix raise serious alarm bells for the island’s energy security.
• TSMC, Taiwan’s semiconductor giant, faces water scarcity issues, which are forecasted to impact its production capabilities.
• The People’s Republic of China (PRC) poses additional threats, with potential military actions targeting Taiwan’s energy supply routes heightening concerns over the island’s security and economic stability.

Earlier this month, the Taiwan Center for Security Studied (TCSS) hosted 170 experts to participate in an annual tabletop exercise (TTX) (TaiwanCSS, March 15). The theme of the TTX was “Gray Zone Strategy and Crisis Management,” which was analyzed across eight scenarios set in the year 2032. One highlighted as being particularly vulnerable was the island’s energy supply (Digitimes Asia, March 26). Energy security, and resource scarcity more generally, is an increasing problem for Taiwan. It is made all the more acute by the exorbitant needs of its most valuable industry, semiconductor manufacturing, and of its most valuable company, Taiwan Semiconductor Manufacturing Corporation (TSMC; 台積電). As the island prepares to transition to a new government, environmental and policy problems at home, an uncertain external context, and the looming threat of a blockade instituted by the People’s Republic of China (PRC) conspire to push Taiwan into a precarious position. While progress is being made, short- and medium-term fixes do not seem readily available or politically viable. This is a situation that most of the rest of the world has substantial interest in resolving, not least because 90 percent of advanced chipmaking capacity is based in Taiwan, as well as 18 percent of total global capacity.

Taiwan is home to around 24 million people and is one of the most densely populated countries in the world. As a small island with relatively few natural resources, it is constrained in terms of its capacity for autonomy in the production and generation of electricity. Currently, Taiwan imports almost 98 percent of its energy in various forms and from a variety of sources (Taipower, accessed March 29). In 2022, almost 80 percent of total generation came from fossil fuels, of which natural gas constituted 43 percent, coal 35 percent, and oil 1.4 percent. Nuclear contributed 9.1 percent, renewables 8.6 percent, and hydro 1.2 percent. A lack of available land is a contributing factor to the low level of solar and wind power on the island, though offshore wind in the Taiwan Strait has been steadily growing since 2017 (FOW1, accessed March 29).

Despite Taiwan’s high dependence on energy imports, it has unusually high energy demands. It ranks 17th in the world in terms of CO2 emissions per capita (the PRC ranks 35th) (Our World in Data, accessed March 29). The average person in Taiwan uses an equivalent amount of electricity as their American counterpart despite the United States having a per capita GDP that is twice as large. Taiwan’s per capita energy and electricity demand are three times higher than the average across Asia (Baker Institute, December 21, 2023). The surge in demand has outpaced population growth by orders of magnitude. This is largely down to industry, which accounted for 56 percent of power consumption in 2022. Electronic components manufacturing constituted over half of this figure.

Taiwan’s fossil fuel-heavy energy mix and rapidly rising demand raises serious concerns, particularly as the effects of global warming take their toll. Fewer typhoons reaching the island have led to four droughts in the last decade, of which two were the most severe since 1947; and government estimates suggest rainfall could decline a further ten percent by 2050 (S&P Global Ratings, February 26). Rolling blackouts have had to be implemented in both 2017 and 2021 (Center for American Progress, January 19, 2022). If such occurrences become more common during extended periods of extreme heat, there would be severe costs to human life and to Taiwan’s economy. Moreover, Taiwan imports much of its carbon-based energy from parts of the world that are themselves less stable, or could be influenced by the PRC, such as Russia, Qatar, and Indonesia (Qianhai Institute of International Affairs, September 27, 2023). The PRC has a track record of starving Taiwan of diplomatic allies. It is not inconceivable that it could also make it difficult for the island to source its energy.

The 2022 “National Electricity Resources Supply and Demand Report (全國電力資源供需報告)” explicitly revised projections for the proportion of renewable energy in the island’s mix down from 20 percent to 15 percent in 2025 (TWReporter, July 22, 2022). Even this number seems somewhat ambitious, given that renewables only rose from 6.0 percent to 9.9 percent of the island’s generated energy between 2019 and 2023. Experts have diagnosed problems in “finding space,” the “lack of a national white paper on spatial development,” and “grid technology” (“尋找空間”、”缺乏全國空間發展白皮書”、“電網技術”三大面向) (TWReporter, May 25, 2022).

The DPP government’s approach to nuclear power over the last eight years has exacerbated the situation. President Tsai Ing-wen (蔡英文) has pursued an agenda labeled “Nuclear-free Homeland 2025 (2025非核家園),” which has sought to decommission the island’s remaining nuclear power plants (New Bloom Magazine, January 11). Although her successor, Lai Ching-te (賴清德), did not specify a specific timeline for nuclear energy to go during his campaign, the aspiration to be “nuclear-free” is still part of his agenda—in contrast with that of the candidates whom he defeated in February’s election. The policy is also in contrast with other countries, such as Japan, South Korea, India, and even the PRC, who are currently expanding their use of nuclear power. (Together with Taiwan, these countries constitute the five largest importers of liquefied natural gas (LNG).)

These adverse conditions will affect TSMC to some extent. S&P Global Ratings published a report in February titled “TSMC And Water: A Case Study Of How Climate Is Becoming A Credit-Risk Factor,” which was picked up by local news outlets, but received little attention in western media (S&P Global Ratings, February 26; C114 February 29; CTEE, March 1). Water scarcity has long been a problem in Taiwan. A 2005 study by the World Economic Forum ranked the island as 18th lowest in terms of freshwater availability per capita among 146 countries (Commonwealth Magazine, May 30, 2023). The situation is acute for TSMC, whose fabs are largely located in the south of the island, where shortages are most serious.

The report’s headline conclusion was that poor execution of water supply management “could cause TSMC’s output to drop as much as 10 percent” from their forecast for 2030. This is because of increasing water scarcity coupled with skyrocketing demand. TSMC’s water consumption per unit grew over 35 percent after 2015. The company’s demand for feedwater could double from 2022 levels by 2030. As processing technology advances, more steps are required in the process; and as wafers must be rinsed between each step in the process, more water—in the form of “ultra-pure water” (to which water is converted in an energy-intensive process)—is needed (Semiconductor Digest, October 24, 2022). To put this in perspective, Taiwan’s industry required 10 billion liters of water annually in 2022. Every day, TSMC alone used the equivalent amount of water as 170,000 US households. This level of demand, in a deteriorating climatic environment, will impact the company’s ability to maintain stable production levels. In fact, this has already occurred. In 2021, a drought forced officials to require the industry to cut water usage by up to 20 percent (S&P Global Ratings, February 26).

The S&P Global Ratings report describes TSMC’s water security issues as “meaningful, but modest relative to its peers.” The company itself is reported to have estimated that a serious drought could impact its revenues by between 0.7 and 1.1 percent (Commonwealth Magazine, June 30, 2022). However, some experts fear that droughts in consecutive years would be intolerable (Commonwealth Magazine, May 30, 2023). Others, meanwhile, believe that the issue of water and electricity supply are key factors in TSMC’s decisions to set up overseas factories in Japan and the United States (ETToday, March 27, 2023; TSMC, February 6; TSMC, August 8, 2023).

All these concerns are compounded by potential actions that the PRC might take towards Taiwan. The People’s Liberation Army (PLA) has conducted live-fire exercises for the apparent purpose of “blocking the country’s important energy supply routes”—systematically encompassing Taiwan’s eastern, northern, and southwestern regions (TWReporter, August 2, 2022). Given that Taiwan maintains only seven or eight days of LNG reserves, a blockade would not have to be long-lasting before its impact would be felt (Storm.mg, August 19, 2022). One report calculates that Taiwan’s oil reserves can support military and civilian needs for four to five months and coal reserves for one further month. It also suggests that a total shutdown of the manufacturing could allow the island to sustain itself for six months (Storm.mg, August 17, 2022). This is, of course, contingent on the PLA not targeting fuel reserves, many of which are relatively exposed.

The PRC is well aware of the problems Taiwan faces. Official media has responded to droughts on the island with schadenfreude and Beijing has attempted to leverage previous water crises to increase dependance on the mainland through integrating Taiwan’s outlying islands with its own water, electricity, and gas supplies—the “Four Mini-Links (小四通)” (China Brief, July 2, 2021). While the PRC remains reliant on Taiwan’s semiconductor industry to an extent, this dynamic will likely lessen as it grows its indigenous industry. TSMC has done much to mitigate risks, including dramatically improving its wastewater recycling, conservation, and efficiency. But some factors are simply beyond the company’s control. Taiwan’s incoming government could raise its ambitions in energy policy and reduce the contradictions in its current trajectory, bringing its approach in line with similar countries in the region. The wider community could also do with a better understanding of Beijing’s strategic framing of Taiwan’s energy and water troubles, and how that informs its own calculus.