Coal Procurement in Taipower
I. Coal demand
Currently Taipower's annual coal demand is around 28 million MT. Coal-fired generation is the lowest cost and base-load electricity generation. Electricity generated from coal-fired power plants in 2019 accounts for 37% of Taipower’s total electricity generation.
To meet Taiwan's future power demand with improved electricity generation efficiency and reduced CO2 emission, Taipower has built advanced Ultra-Super Critical (USC) coal-fired units to replace old ones. After commissioning of Linkou and Talin new coal-fired units, Taipower’s annual coal demand will range from 21Mt to 28Mt in the future.
Taipower's coal supply is mainly from Indonesia and Australia. A smaller portion is also supplied from countries such as Colombia, Russia and the U.S.
II. Coal Procurement Policy
As a state-owned company, Taipower's procurement 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. The qualified bidder with lowest CFR price yet also doesn't exceed the ceiling price will be awarded.
To screen and facilitate the coal procurement process, Taipower has set up "Coal Procurement Review Taskforce", with supervising Vice Presidents and Directors of Departments of Fuels, Power Generation, Material, Accounting, Civil Ethics and in-house Legal Affairs. In addition, 5 external experts and scholars in the field of energy, economics and legal affairs were consulted to provide expertise and professional suggestion. The aim of the taskforce is to formulate flexible and dynamic coal procurement strategies for securing supply, ensuring coal-fired plants operate with high performance in compliance with environmental regulation and reducing the procurement cost.
III. Coal Procurement Strategy
A. Secure coal supply
Term contracts as main supply source
Like other Asia Pacific power utilities, Taipower procures coal mainly from term contracts to guarantee supply. Taipower's term contracts account for 70~80% of total procurement and the rest is supplemented by spot purchase.
Diversify supply source
To achieve supply diversification, Taipower will establish an upper limit for each supply region and each supplier for term contracts each year.
Maintain appropriate level of stockpile
Coal-fired generation is low-cost based load generation. If coal supply is not sufficient, Taipower will incur expensive alternative fuel cost for replacing coal-fired generation. Furthermore, due to the fact that variation in vessel voyage time is out of Taipower's control, it is necessary to build up an appropriate level of coal stockpile.
B. Reduce procurement cost
Adjust term/spot contract ratio every year in response to volatile coal market
Taipower adjusts term/spot contract procurement ratio every year 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 to reduce procurement cost.
Exercise +/-20% buyer's quantity option
The nominal annual quantity of each term contract is 500,000 mt with +/-20% buyer's quantity option. For example, if spot price is lower than term contract price, Taipower could exercise minus option to lower the delivery quantity of term contracts and increase spot purchases to reduce overall procurement cost.
Conduct procurement tender on a suitable timing
Taipower obtains market insight and perceives market trend through market information from various sources. Therefore, Taipower could conduct procurement tender on a suitable timing.
Increase tendering competitiveness
Taipower closely monitors the trend of available coal quality from main supply regions and reviews the coal quality specification regularly to meet the environmental requirements of power plants.
Furthermore, Taipower keep an eye on developing coal projects from main supply countries, encourages coal suppliers to participate in tenders, and explores new supply sources to increase tendering competitiveness and reduce coal procurement cost.
C. Advance quality of purchased coal
Dedicated to environmental protection
Taipower has revised coal quality specifications regularly. The specification revisions include addition of maximum limit of Mercury, reduction the Ash and Sulfur content etc., so that coal-fired plants can operate with high performance and remain comply with the stricter emission standard.
To procure premium coal suitable for each power plants
To ensure full operation of each coal-fired units which still comply with different quality requirements for each units which are installed with different environmental equipment, Taipower has established the coal specifications of higher calorific value, lower ash and lower sulfur content suitable for each power plants.
IV. Procedures for Coal Procurement
The procurement procedures for term tenders and spot tenders are stated as follows respectively:
A. Procedures for term tenders
To enhance coal supply security, Taipower has set up a series of criteria to review and pre-qualify suppliers and supply regions. Taipower invites coal mine owners, coal mine producers, its wholly-owned sales company or an exclusively duly authorized international sales company of the proposed mine to submit application documents. After pre-qualifying procedure and establishing the pre-qualified suppliers list, Taipower will invite pre-qualified suppliers to submit bids when conducting term tenders. The aforementioned pre-qualified suppliers list will be reviewed and updated annually by Taipower.
Bids must be firm and valid for acceptance by Taipower for at least 1 months after the bid due date. The successful bidder shall deposit a performance guarantee bond of USD 400,000 per contract which shall remain valid until 6 months after the last delivery date of the last delivery year.
The main provisions of term tenders are as follows.
The qualification of suppliers
All suppliers listed on pre-qualified suppliers list.
Annual Supply quantity
The nominal annual quantity of each term contract is 500,000 mt with +/-20% buyer’s quantity option.
The layday at loading port.
The annual shipping schedule is negotiated and mutually agreed by Taipower and suppliers. Considering the uncertainty of loading and unloading time at ports and voyage time at sea, the layday for Indonesia (including Chinese Mainland, Russia) is 10 days, and 14 days for Australia.
Determination of annual price (FOB Price)
After reviewing bidder’s technical and commercial proposal, Taipower will open price proposals of qualified suppliers. The bid with the lowest evaluated CFR price yet also doesn't exceed the ceiling price will be awarded. The calculation of Evaluated CFR Price includes FOB price proposed by suppliers, estimated ocean freight for loading ports listed on the bidding documents and coal quality specifications proposed by suppliers.
i. The price for the first year
The FOB price proposed by bidder will be the price for the first year.
ii. The price for subsequent years
In accordance with the contract, the annual price for the subsequent years shall be determined by mutual agreement referring to market price for long term contracts in Asia Pacific regio.
In addition to the typical price mechanism mentioned above, 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 shall be supplied from single mine with following certificate.
- The bidder shall provide a copy of bill of lading (B/L) and a copy of certificate of analysis for a shipment supplying at least 32,000 MT previously exported within the past five years from the mine offered, and the quality items (shall at least include gross calorific value, total moisture, ash content and total sulfur content) shown in the said certificate shall meet Taipower’s coal quality specifications.
- The bidder shall provide supporting documents to demonstrate the coal mine shall be legal for mining.
Bids must be firm and must remain valid for acceptance by Taipower for at least 15 days after the bid due date. On or before bid due date, each bidder shall cause Taipower to receive a bid bond of USD 80,000 per shipment which shall be valid for at least 2 months after the bid due date. The successful bidder shall, within 14 days after its receipt of the notice of award, deposit a performance guarantee bond of USD 320,000 per shipment which shall be valid until 6 months after the last day of the delivery period applicable to the shipment in question.
The main provisions of spot tenders are as follow.
The qualification of suppliers
In addition to those mentioned coal mine owners, coal mine producers, its wholly-owned sales company or an exclusively duly authorized international sales company of the proposed mine, applicable to term contracts, traders and agents are also allowed to submit bids.
The procured quantity for each spot tender
Taipower's spot tender is awarded shipment by shipment, and each shipment constitutes one contract. Each spot tender contains 5 to 10 shipments in principle. Each shipment shall be 80,000 metric tons with 10% more or less at shipmaster's option.
The layday at loading port
Considering the uncertainty of loading and unloading time at ports and voyage time at sea, the layday for Indonesia (including Chinese Mainland, Russia) is 10 days, and 14 days for Australia
Determination of price and delivery term
After reviewing bidder's technical and commercial proposal, Taipower will open the price proposals of qualified suppliers. The bid with the lowest evaluated CFR price, yet doesn’t exceed the ceiling price will then be awarded. The calculation of Evaluated CFR Price includes FOB price, ocean freight and coal quality specifications proposed by suppliers. After having awarded the contracts, TPC has the right to choose delivery term to be FOB or CFR.
V. Characteristics of Coal Sources and Coal Allocating Method
Most coals procured by Taipower are from Indonesia and Australia and a few of coals are from Russia. The coals from Australia and Russia are bituminous coals that can provide higher heating value. On the other hand, the coals from Indonesia are sub-bituminous coals with extremely low ash content (about 5% in average).
To achieve lower pollutant emissions and higher operation efficiency, optimal operation performance can be achieved by blending Australian coals and Indonesian coals with proper ratio. For each coal-fired unit, Taipower has established an optimum ratio operating mode of bituminous coals and sub-bituminous coals to satisfy both environmental emission standards enforced by the government and full power operation demand.