4/8/24
Coal Procurement in Taipower
I. Coal Demand
Currently Taipower's annual coal demand is around 27 million to 28 million Metric Tons ("MT"). Coal-fired generation is the lowest cost electricity generation. Electricity generated from coal-fired power plants in 2023 accounts for 37% of Taipower's total electricity generation.
To meet Taiwan's future power demand with state-of-the-art power generation technology (high efficiency and CO2 reduction), Taipower has built advanced Ultra-Super Critical (USC) coal-fired units to replace old ones.
Taipower's coal supply is from Australia, Indonesia, Colombia, South Africa, United States, Canada and Kazakhstan etc..
II. Coal Procurement Policy
As a state-owned company, Taipower’s procurements of thermal coal are governed by the Government Procurement Act of the Republic of China (the "Act") and conducted through international tenders in a fair and transparent manner. Subject to a required ceiling price, tenders are awarded to the qualified bidder with lowest CFR price.
To screen and facilitate its coal procurement process, Taipower has set up "Coal Procurement Review Taskforce," consisting of supervising Vice Presidents and Directors of Departments of Fuels, Power Generation, Material, Accounting, Civil Ethics and in-house Legal Affairs. More importantly, 5 external experts and scholars in the field of energy, economics and legal affairs have been included to provide expertise and professional suggestions. The aim is to formulate flexible and dynamic coal procurement strategies for supply security with low costs, on the premise that operation requirements and environmental regulations are met.
III. Coal Procurement Strategy
A. Secure coal supply
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Term contracts as main supply sources
Like other power utilities in Asia Pacific, Taipower procures coal mainly from term contracts to guarantee supply. Taipower’s term contracts account for 75~85% of total procurement and the rest is supplemented by spot procurements.
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Diversify supply sources
Taipower establishes an upper limit, in terms of supply region and each term supplier, which is reviewed each year.
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Maintain appropriate inventory level
Coal-fired generation is low-cost generation. If coal supply is not sufficient, resulting in less power from coal, Taipower will incur expensive alternative fuel cost for making up the shortage. Furthermore, due to uncertainty of shipping voyage time, it is necessary to build up an appropriate level of coal inventory.
B. Meeting the requirements for power generation
- Meeting the environmental requirements
In order to operate each unit and its ancillary equipment in a balanced manner, grasping the match between the quality of coal and the characteristics of the unit can ensure suitable high-quality coal to power plants.
- Fly ash removal
(i) After coal is burned in a boiler to generate electricity, the remaining lighter dust particles will be carried by the flue gas to the electrostatic precipitator (ESP), where the said dust particles are adsorbed on a dust collecting plate by high-voltage direct current. Therefore, the PM of the emission has been greatly reduced. The collected dust particles are so-called fly ash.
(ii) Fly ash can be added to concrete to avoid cracks and strengthen the structure. It can also be directly mixed with cement as part of the cement to achieve energy saving and carbon reduction.
C. Implement environmental friendliness
- Dedicated to environmental protection
Taipower reviews coal quality specifications regularly, including the addition of maximum Mercury, lowering the Ash and Sulfur upper limits, etc., so that coal-fired plants can operate in high performances and remain complying with stricter emission standards.
- Improve coal quality
Taipower increases the number of coal specifications by adopting higher CV, lower Ash, and lower Sulfur specs., which are more suitable for each power plant.
D. Reduce procurement costs
- Increase competition in tendering
(i) Exploring new supply sources
(ii) Reviewing the coal quality specification regularly
(iii) Conducting procurement tender on a suitable timing
- Adjust term/spot contract ratio in response to volatile coal market
Taipower adjusts term/spot contract procurement ratio based on market situation. For example, if market is oversupplied and as a result spot price is lower than term contract price, Taipower will reduce the ratio of term contract procurement to secure more cargoes from cheap spot market.
IV. Procedures for Coal Procurement
As Taipower is a state-owned company, thermal coal procurement is governed by the Act. The procurement procedures for term tenders and spot tenders are stated as follows respectively:
A. Procedures for term tenders
Taipower conducts term tenders by “Selective Tendering” procedures. To ensure stable coal supply, Taipower has set up a series of criteria to review and pre-qualify (“PQ”) suppliers and supply regions. Taipower publicly invites coal mine owners, coal mine producers, its wholly-owned sales company or an exclusively duly authorized international sales company of the proposed mine for PQ process where Taipower will establish the pre-qualified suppliers lists. Taipower will invite pre-qualified suppliers on the lists to submit bids when conducting term tenders. The aforementioned pre-qualified suppliers list will be established annually by Taipower.
The main provisions of term bidding documents are as follows:
i. The bid qualification of suppliers
All suppliers listed on pre-qualified suppliers list.
ii. Nominal annual supply quantity of each contract
is 500,000 MT with +/-20% buyer’s quantity option.
iii. The layday at loading port
The annual shipping schedule is negotiated and mutually agreed by Taipower and its suppliers. The layday, based on shipping industry practices, is 10 days for Indonesia, while 14 days for Australia.
iv. Determination of annual price (FOBT Price)
After reviewing bidder’s technical and commercial proposal, Taipower will open price proposals of the qualified suppliers. The bidder with the lowest Evaluated CFR price that is not exceeding the ceiling price will be awarded. The calculation of Evaluated CFR Price includes FOBT price proposed by bidders, estimated ocean freight as stated in the bidding documents and coal quality adjustments based on the specifications proposed by bidders.
(i) Negotiable contracts
a. The price for the first year
The FOBT price proposed by the successful bidder.
b. The prices for subsequent years
In accordance with the contract, they shall be determined by mutual agreement referring to widely-accepted market price (usually annual Japanese Reference Price) for long term contracts in Asia Pacific region.
(ii) Index-Linked contracts
In order to diversify the price risk, Taipower has adopted index-linked price mechanism for some term contracts since 2016.
B. Procedures for spot tenders.
Taipower conducts spot tenders by "Open Tendering" procedures. Coal proposed by a bidder shall be supplied from single mine with the following certificates:
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The bidder shall provide a copy of bill of lading (B/L) (at least 32,000 MT previously exported within the past five years from the proposed mine) and a copy of certificate of analysis (at least including gross calorific value, total moisture, ash content and total sulfur content) which shall meet Taipower's coal quality specifications.
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The bidder shall provide supporting documents to prove the coal mine is legal for mining.
The main provisions of spot bidding documents are as follows:
i. The qualification of suppliers
(i) Those mentioned applicable to term tenders (i.e., coal mine owners, coal mine producers, its wholly-owned sales company or an exclusively duly authorized international sales company of the proposed mine);
(ii) Traders and agents are also allowed to submit bids.
ii. The procurement quantity for each spot tender
(i) Each spot tender contains 10 shipments at most in principle, subject to coal demand, inventory, and market conditions.
(ii) Taipower’s spot tender is awarded shipment by shipment, and each shipment constitutes one contract.
(iii) Each shipment shall be 80,000 ±10% MT. The 10% is based on the practice of the shipping industry, and is not only the discretion of the captain, considering the size of the vessel, port conditions, and navigation safety, but also the obligation of the bidder to comply with the contract.
iii. The layday at loading port
The layday, based on shipping industry practices, is 10 days for Indonesia, while 14 days for Australia.
iv. Determination of price and delivery term
After reviewing bidder’s qualification, technical and commercial proposals, Taipower will open the price proposals of qualified suppliers. The bidder with the lowest Evaluated CFR price that is not exceeding the ceiling price will then be awarded. The calculation of Evaluated CFR Price includes FOBT price proposed by bidders, estimated ocean freight as stated in the bidding documents and coal quality adjustments based on the specifications proposed by bidders. After having awarded the contracts, Taipower has the right to choose delivery term to be FOBT or CFR.
V. Characteristics of coal sources and coal blending method
Coals procured by Taipower are from Australia, Indonesia, Colombia, South Africa, United States, Canada and Kazakhstan etc. The coals from Australia, Colombia, South Africa and Kazakhstan are bituminous coal with higher heating value. On the other hand, the coals from Indonesia, United States and Canada are sub-bituminous coal with extremely low ash content (about 5% in average).
To lower pollutant emissions and achieve higher operation efficiency, Taipower blends Australian coals and Indonesian coals with proper ratio. For each coal-fired unit, Taipower has established an optimum ratio of higher CV coals and lower ash coals to satisfy both environmental emission standards enforced by the government and achieving higher operation efficiency.