JK Capital: Understanding climate-related risk is not only about forecasting the worst, it is also about knowing what to do when it happens

June 4, 2021

Many of the island’s water reservoirs are currently at less than 20% of their capacity, with water levels falling below 10% for some, including reservoirs that are the primary sources of water for science parks.

The water shortage also impacts hydropower generation. Although hydropower only accounts for 2% of Taiwan’s energy generation mix, it is the most ideal energy source to meet sudden increases in energy demand. As the water-power nexus has partially led to rationing, hydropower can no longer be counted on to make up for the excess demand of both commercial and residential users who are now witnessing rolling blackouts across the island.

As Taiwan is one of the rainiest places in the world, historically water supply has never been an issue. This was an advantage for chipmakers as advanced semiconductor manufacturing is heavily dependent on a stable supply of high-quality freshwater. As this historical drought hits, the Taiwan government has decided to shut off irrigation across tens of thousands of acres of farmland, in order to prioritise precious water supply for its most important industry, semiconductors. In some cities, the government even started rationing water use by suspending water supplies for two days a week.

Meanwhile, the island top chipmakers including TSMC, United Microelectronics and Winbond have also initiated their own contingency plans to deal with the water shortage, including mobilising water trucks. TSMC has ordered over 100 water trucks for USD30m, which may just be the start of an inevitably rising water cost for the company. TSMC’s other contingency plan includes a wastewater treatment plant capable of treating industrial water so it can be reused to make semiconductors.

According to the company’s latest sustainability report, it currently uses 156,000 tons of water a day and the treatment plant would be able to generate 67,000 tons of water that would flow back into the chipmaking process by 2024, about 43% of its need. However, the demand for water supply may increase significantly in the future and this may only bring marginal relief. A 200W EUV (Extreme Ultraviolet Lithography) system, which is required for manufacturing 7nm or below chips, requires 1,600 litres of water per minute for cooling down, whereas a conventional DUV (Deep Ultraviolet Lithography) machine which manufactures less advanced chips requires only 75 litres per minute.

Therefore, as production focus shifts towards more advanced chips (14mn or below), so will the chipmakers’ needs for water, and in a dramatic way.

Despite offering an advanced level of disclosures in terms of ESG (environmental, social & governance) matters, TSMC nonetheless fails to thoroughly assess the potential water supply risk that could lead to operation disruption. In its 2020 CDP Water Security questionnaire, the company found “drought is the primary potential water risk although the likelihood of drought is ‘unlikely’” even though the WRI Aqueduct Water Risk Atlas reveals that many of the company’s foundries are located in medium to high water stress areas.

This would certainly not be unique to TSMC as other chipmakers and electronics manufacturing companies in Taiwan may soon experience operation disruptions due to water supply shortages and other climate-driven events. The matter may be worse for them as they have fewer resources and competencies to resolve the issue.

This is one of the examples where understanding and analysing a company’s ESG related disclosures is critical as it reveals a significant operational risk. We will continue monitoring the Taiwan drought situation and the contingency plans chipmakers are putting in place for the inevitable future occurrences of similar situations.