Analyzing the Effect of Floating Electricity Price and Energy-Saving Tax Incentive to Industry Sector 

Abstract:

Recently, the growth of energy consumption in energy-intensive industries of Taiwan has been slowed down. From 1998 to 2008, the energy intensity of energy-intensive industrial sectors declined 2.33% annually (0.91% declined in the overall economy); however, the energy-intensive industries’ energy intensity reducted 7.24% (2.35% decline in the overall economy) during 2008-2013. It showed that the energy-intensive industries continued to improve energy efficiency and the rate was significantly higher than the overall industry. One of the key factors that promote the energy efficiency improvement is implementation of energy price rationalization policy in 2008. However, the domestic new version of the electricity price formula has hit the road in April 2015. On average, it cuts the price 7.34% in April and 2.33% in October owing to decreaing international fuel price. Falling industrial cost and increasing household disposable income would be beneficial for economic growth in Taiwan. But the electricity consumption would increase, even making the power efficiency improvements slow down or even worse. During the second quarter of 2015, electricity intensity rose 0.65% compared to the same period last year. It would reduce families and businesses’ energy-saving incentives. In particular, Taiwan energy policy is uncertain, and power supply plan for Nuclear Four sealed up and three nuclear plants decommissioning on schedule would easily face electricity shortage crisis. Therefore, implementing energy saving measures for industry to respond to the situation of insufficient power supply is an important issue. Reasonable electricity price adjustment mechanism and energy-saving tax incentive policy are both important energy-saving policy tool. The purpose of the study is to analyze the implications for new version of the electricity price formula and energy-related preferential taxation policies for industrial sector in Taiwan. 

Concretely, we mainly discuss the following questions: 

1. Update and maintain Dynamic General Equilibrium Model of Taiwan, and build the new industrial sector’s intermediate inputs sub-models and petroleum sub-models. From calculating the shares, coefficients and elasticities of the model, we could facilitate the assessment of domestic energy price changes’ influence on energy demand or other production factors. 

2. Gather and organize the international energy-related conservation systems on taxation experience as a reference, and evaluate the effects and possibilities for us. 

3. Collect and compare the international floating electricity price mechanism, and analyze the impact of different scenarios for electricity price adjustment on Taiwan’s industrial sector. 

Additionally, we also assess the results when Taiwan’s industrial sector faces power supply shortage. 

Up to research purposes, summary of the research results in order as follows: 

1. The short-term price elasticity of other oil products, diesel oil, gasoline and fuel oil in manufacturing is -2.12, -1.30, -0.99 and -0.49. When other oil products, diesel oil, gasoline and fuel oil’s price rise 1%, the short-term consumption in manufacturing would decline 2.12%, 1.30%, 0.99% and 0.49% respectively. Based on elasticity of substitution, others have positive substitute relationship except for diesel oil and fuel oil. 

2. The short-term price elasticity of agriculture, transportation, industry, import and service product intermediate inputs in manufacturing is -1.00, -0.68, -0.62 -0.29 and -0.28. Except for import products and transportation service intermediate inputs, import products and service product intermediate inputs, other intermediate inputs have substitute relationship. 

3. International energy-saving tax incentives are mainly accelerated depreciation and tax credit. America, the Netherlands, England, Ireland and Japan have 30-100% preferential treatment on accelerated depreciation. America, the Netherlands and Japan even have 7-41.5% tax credit discount. Taiwan took small and limited measures on energy-saving tax incentives in the past, and there are not definite tax incentives focused on energy-saving. Therefore, we should learn from international experiences, and institute valid energy-saving tax incentives to encourage national enterprises to invest energy-saving equipments and achieve carbon reduction targets. 

4. Based on IEK “2009-2014 manufacturing energy users’ data,” we evaluate the effect that energy-intensive industry, food industry and electronics industry’s energy-saving investment expenditure could be totally credited to profit-seeking enterprise income tax. We show that taking advantage of energy-saving tax measures would increase potential energy-saving incentives. Manufacturing’s saving rate improves from 1.08% to 1.22% (12% of original saving rate); in addition, output price declines 0.40% and GDP growth increases 0.42%. 

5. Taiwaness new version of the electricity price formula has reasonably reflected incontrollable cost changes. Adjustment frequency and method could slow down the influence on domestic price. The formula even takes reasonable rate of return into account and establishes the measures to lessen domestic economic strike from the variation of electricity price. It is similarly in Japan and Korea. However, reasonable rate of return is 3-5% now couldn’t make up for future power utility investment. We suggest that the rate of return rise to 6% to cover the cost of power transmission, power distribution and energy exploitation. 

6. Electricity price cut 7.34% in April 2015 would make manufacturing electricity consumption increase 8.63%, output price decrease 0.49% and GDP growth increase 0.14%. In October 2015, Electricity price more cut 2.33% making manufacturing electricity consumption increase 2.76%, output price decrease 0.16% and GDP growth increase 0.05%. Furthermore, international oil price would go up to ＄88.3/barrel in 2025 based on World Bank’s prediction in July, 2015. It would make electricity price rise to 13.27%, oil price rise to 32.80%, manufacturing electricity consumption decrease 15.48%, output price increase 0.88% and GDP growth decrease 0.24%. 

7. According to Taipower’s power source development plan in May 2015, we evaluate electricity shortage effect on industrial sector. We adjust higher electricity price to lower electricity demand and avoid electricity shortage. The result is that electricity consumption decreases 14.68%. The effect on output price and GDP growth is 0.84% and -1.23% respectively. Moreover, based on past studies, the industrial cost of electricity shortage was NT ＄ 87/kWh, and then manufacturing’s electricity shortage loss would be NT＄2,080-13,740 billion.