Coal Procurement in Taipower
I. Coal Demand
Currently Taipower's annual coal demand is around 27 million MT. Coal-fired generation is the lowest cost and base-load electricity generation. Electricity generated from coal-fired power plants in 2020 accounts for 36% 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. After commissioning of Linkou and Talin high-efficiency coal-fired units, Taipower's annual coal demand will range from 21Mt to 27Mt in the future, subject to the amount of power from gas and renewables.
Taipower's coal supply is mainly from Indonesia and Australia. A smaller portion is also supplied from countries such as Colombia and Russia.
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 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. More importanatly, 5 external experts and scholars in the field of energy, economics and legal affairs have been consulted to provide expertise and professional suggestions. The aim of this taskforce 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. 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 enhance coal supply security, 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 reviewed and updated annually by Taipower.
Bids must be firm and valid for acceptance by Taipower for at least 1 month after the bid due date. When awarded, 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 contract year.
The main provisions of term tenders are as follows.
The bid qualification of suppliers
All suppliers listed on pre-qualified suppliers list.
Nominal Annual Supply quantity of each 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, the layday, based on shipping industry practices, 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 with the lowest valuated 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 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 region.
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:
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 (shall at least include gross calorific value, total moisture, ash content and total sulfur content) which 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 deposit 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 procurement quantity for each spot tender
Taipower's spot tender is awarded shipment by shipment, and each shipment constitutes one contract. Each spot tender contains 10 shipments at most in principle. Each shipment shall be 80,000 metric tons with 10% more or less at shipmaster's option. The 10% more or less is based on the practice of the shipping industry, and is the discretion of the captain in accordance with the size of the ship and port conditions.
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, the layday, based on shipping industry practices, 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 bidder 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 proposed by suppliers, estimated ocean freight and coal quality adjustments based on the specifications proposed by suppliers. After having awarded the contracts, TPC has the right to choose delivery term to be FOB or CFR.
IV. Coal Procurement Strategy
A. Secure coal supply
Diversify supply sources
To achieve supply diversification, Taipower establishes an upper limit, in terms of supply region and each term supplier, which is reviewed each year.
Term contracts as main supply sources
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 procurements.
Maintain appropriate inventory level
Coal-fired generation is low-cost base load generation. If coal supply is not sufficient, Taipower will incur expensive alternative fuel cost for replacing coal-fired generation. 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
- Achieving the maximum power output
In order to balance the different equipment and operating conditions of each unit, grasp the quality of coal and the characteristics of the unit, so as to provide suitable high-quality coal.
- Dedicated to environmental protection
Taipower has revised 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.
- Fly ash removal
(i. After coal is burned in a boiler to generate electricity, the lighter dust particles will be carried by the flue gas to the electrostatic precipitator (ESP), which is adsorbed on the dust collecting plate by high-voltage direct current to achieve the flue gas purification function and collected The dust particles are 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 to replace part of the cement to achieve energy saving and carbon reduction.
C. Implement environmental friendliness
- Dedicated to environmental protection
Taipower has revised coal quality specifications regularly, including the addition of maximum Mercury, reduction of the Ash and Sulfur content, etc., so that coal-fired plants can operate with high performance and remain complying with the stricter emission standard.
- Improve coal quality
As coal-fired power plants currently play a base load role, to balance full-power output, environment regulations and different conditions for operating equipments is a very challenging task. In order for coal-fired plants to achieve maximum power output, Taipower increases the number of coal specifications by adding higher CV, lower ash, and lower Sulphur specs., which are more suitable for each power plant.
D. Reduce procurement cost
- 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.
- Exercise +/-20% buyer's quantity option in response to volatile coal market
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.
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 and Columbia. The coals from Australia, Russia, and Columbia 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 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 higher CV coals and lower ash coals to satisfy both environmental emission standards enforced by the government and full power operation.