Taiwan has ambitious plans to auction contracts for another 10 GW of offshore wind, but it needs to reconcile a desire for cost reduction with an aspiration for much more local content
When Taiwan’s President Tsai Ing-wen secured a second term with a sweeping victory in January 2020’s general election, it gave a huge boost to the offshore wind industry in the country and plans to press ahead with the construction of much more offshore wind capacity.
Until late 2019, Taiwan’s stated offshore wind goal had been 5.7 GW by 2025, but at the inauguration ceremony for Taiwan’s first commercial scale offshore windfarm – Formosa 1 – in November 2019, the President unveiled a new, more ambitious long-term goal of another 10 GW of offshore wind by 2035.
But if that goal was not ambitious enough, the authorities in Taiwan are now talking about the possibility of zero-subsidy bids in Round 3, the next round of auctions for offshore wind in the country.
Getting to zero-subsidy bids will not be easy in a country in which the supply chain is only in the early stages of development. It will be made more difficult still by regulations expected to be enshrined in Round 3 that will specify a much higher level of localisation than in Rounds 1 and 2, and by reform of the electricity market there that has only recently been initiated. That complicated, complex process will enable power purchase agreements (PPAs) to be introduced for renewable energy and will see state energy company Taipower restructured, separating its power generation, transmission and distribution functions while opening up the sector to private investment.
Speaking to OWJ in late January 2020, Global Wind Energy Council Asia director Liming Qiao says it is impossible to over-emphasise the importance of President Tsai’s re-election. “President Tsai is very closely associated with developing the offshore wind industry in Taiwan,” she tells OWJ. “The topic had become a political one given that President Tsai’s party, the DPP, advocated strongly for offshore wind, whereas the opposition party, the KMT, was pro-nuclear.
“Had the KMT unseated President Tsai, it is likely that offshore wind development in Taiwan would have been re-evaluated and its future would now be much less certain. With President Tsai’s victory, that uncertainty has disappeared, at national level and regionally, in parts of the country where elected officials had become vocal critics of the DPP’s policy on offshore wind, questioning, in their words ‘why Taiwan was paying so much money to European developers to build projects in the country.’
“With that uncertainty removed, all of the projects in Round 1 and 2 are moving forward and the industry has real impetus behind it,” says Ms Qiao. “But for Round 3, the government needs to be really smart and get the right policy implemented with the right balance between cost reduction and localisation.”
Just how important localisation is to Taiwan is clear from statements the President made when the new 10-GW goal was announced, when she spoke not just of Taiwanese companies providing more content for projects in the country, but of “attracting foreign companies to set up operations in Taiwan, making firms in the domestic supply chain more comfortable about investing,” and of “becoming a link in the international green energy supply chain, marketing Taiwanese products worldwide… using the domestic market to develop expertise and using international capital to become part of global green energy supply chains.” That is, enabling domestic vendors to become exporters.
“Zero-subsidy is an ambitious goal, it is not impossible, but it is extremely ambitious,” says Ms Qiao. “Taken together with more ambitious goals for localisation, it could be really challenging. Using much larger, new-generation turbines would be a pre-requisite. There is no target as such for the level of localisation however; that is one of the things being discussed at the moment.”
RCG director Raoul Kubitschek urges caution about the idea of zero-subsidy projects in the country. He tells OWJ, “I would be careful with the term zero-subsidy bid. Taiwan has not deregulated its energy market yet, there is no energy trading platform. The first steps towards deregulation are only very slowly bearing fruit and there is still a lot that needs to change.
“We have seen a first – and very small transaction for a corporate PPA – but there is a long way to go. The earliest possible date that we could see a truly deregulated market would be 2026, which means any zero-subsidy bids now are a bet on the future.
“You can make the case for a grid allocation bid without a PPA, but with the right to connect and then take it to the market. The way I see it, it is more likely the first 4.5-5 GW will be based on a combination of a localisation plan and price-based bid. Localisation will play an important role and will probably be extended to areas it did not feature in in earlier rounds.”
Offshore Wind Consultants analyst Howard Hu agrees there are a lot of issues ‘in the mix’ as Taiwan formulates policy for Round 3.
“At the moment, we still do not know what the rules and criteria for Round 3 will be or what level of localisation will be required. We will not know until later this year,” Mr Hu says*. “We also do not know what effect deregulation of the power sector and the Electricity Act will have, or what the full effect of the Renewable Energy Development Act, which encourages the use of renewable energy, will be.
“Will the electricity market in Taiwan have matured by the time decisions have to be made about Round 3 projects? Will the right framework really be in place for developers to break with Taipower, the state-owned off-taker and finance a project via a corporate PPA? Will local financial institutions accept a corporate PPA or will they prefer to work with Taipower, which is a known quantity?
“All of these questions will have an impact on developers and the framework within which they submit bids for projects in Round 3. A lot will depend on how these various parts of the puzzle develop. Reviewing the criteria for Round 3 and bidding for contracts at the same time could limit the opportunities for cost reduction somewhat.”
It has been reported in Taiwan that an announcement about the criteria for Round 3 could be made later in Q1 2020, but Mr Hu said he believes much work remains to be done to bridge the gap between the government’s ambitions and what developers regard as realistic. Q2 2020 therefore seems more likely. Ms Qiao tells OWJ GWEC is hopeful the Ministry of Economic Affairs (MOEA) might make an announcement at its Global Offshore Wind Summit, which takes place in late April in Taiwan.
Mr Kubitschek says, “We were originally expecting something in March, but let’s see how the Corona virus problem plays out and whether the government really has enough capacity to make decisions about the next round now.
“Then there is the Taipower II project (2024, 300 MW), which still does not have an engineering, production, construction, installation contractor/co-developer. Taipower reissued the tender for the sixth time on 22 January and will open bids on 23 February.
“Hailong 2A (2024) does not have settled localisation plan yet either and might not have one until July. You could argue that only when the localisation plans for all of the projects already running between now and 2024 have been finalised, can the plan for post-2024 and Round 3 be finalised. The counter argument is this could all be settled relatively quickly and should not stop the MOEA from moving ahead.
“The most sensible way forward might be a transitional round, with most of the EIA-approved projects in that, and then a new auction system afterwards. The Taiwanese Government has taken a liking to the UK’s contract for difference system and to the Dutch approach, but that would place more responsibility on the government to prepare the areas in which development would take place.”
Mr Hu says he believes if, like Round 2, around six months elapse between details of the regulatory framework being announced and the first auction being held, the first Round 3 auction could take place in late 2020 or early 2021. However, given that the first Round 3 projects are not due to come online until 2026, there is less time pressure than in Round 2. An auction could take place later than this and not affect the timeline and the government’s ambition of 1 GW of offshore capacity per year from 2025 onwards.
“Overall, Round 3 should see 10 GW come online between 2026 and 2035,” Mr Hu explains. “We believe the auction process will take place in two phases, but exactly how this will work is not clear yet. Only two things are certain at the moment; more local content will be required and the projects chosen will be selected on the basis of price.
“Greater localisation could take a number of forms, ranging from grouting for foundations to construction of offshore substations or components for the turbines. But a lot of other factors will come into play, including the availability or not of a grid connection in some of the areas under consideration, the level of facilities available in ports and harbours that will be used to stage projects, and the capacity of the local supply chain.”
Mr Kubitschek highlights that jacket-type foundations feature prominently in some of the projects that secured EIAs and did not go forward, so manufacturing them might be expected to feature heavily in localisation in Round 3.
“Around 5 GW of projects secured approval for their environmental impact assessments (EIAs) in Round 2 but were not selected to go forward,” says Mr Hu. “That is about 50% of the total capacity to be released in Round 3, so the MOEA and Bureau of Energy are grappling with how to reach a consensus between existing developers and those that submit new proposals for Round 3.
“Will having obtained approval for an EIA in Round 2 be a plus point for developers bidding the same project again in Round 3? Will those who already have an EIA approved and new entrants go through the same review process or should they be divided into two groups for separate review?
For his part, Mr Kubitschek says he believes projects that secured EIAs but did not get awards in earlier rounds will probably have ‘preferred entry’ status.
“There are many issues to be resolved,” Mr Hu concludes, “but the big question is how to reach a balance between making localisation requirements realistic, benefiting Taiwanese renewable energy development and the local industry, while achieving significant cost reduction.”
*The latest information from Taiwan suggests that details of the proposed regulatory regime will be released later in Q1 2020 that they will come into force by late 2020 or early 2021.
A two-phase approach to Round 3 is now expected. Round 3-1 windfarms would be implemented in the period 2026-2030, and will comprise 5 GW in total, of which 2-3 GW of capacity will be prioritised from EIA-approved projects that were not successful in Round 2.
A second auction round, Round 3-2, for a further 5 GW of offshore wind, to be built in the period 2031-35, will take place subsequently.
Local institutions find an appetite for funding
In the first round of offshore wind development in the country, Taiwanese institutions were hesitant about financing projects, largely because they were unfamiliar with the industry. But that is changing, and a much greater level of Taiwanese investment is expected in Round 3.
“Taiwanese banks did not understand the market in Round 1,” says Ms Qiao at GWEC. “But after two highly successful rounds, with Formosa 1, Taiwan’s first offshore windfarm now operational and performing well, they can see the numbers, and the numbers tell a story they feel confident about. For domestic institutions the risk profile of offshore wind has changed for the better and they will be much more active in some of the Round 2 projects and in Round 3.”
That is a sentiment Mr Hu at Offshore Wind Consultants agrees with. “In 2020, offshore wind-related financing will become much more important to Taiwanese financial institutions, particularly syndicated loan facilities. Recent investment by domestic insurance companies in projects led by Copenhagen Infrastructure Partners indicates it is not only banks in the country that now have the confidence to support local offshore wind development,” he says.
In fact, says Mr Hu, there is already a growing roster of Taiwanese institutions involved in the industry. Formosa 1 Phase 2 (120 MW), a NT$18.7Bn (US$617M) project finance initiative dating from June 2018, saw four local and seven overseas institutions involved. Yunlin, a 640-MW, NT$94Bn (US$3.1Bn) offshore windfarm secured project finance from four local and 18 foreign institutions in May 2019; Greater Changhua, a much larger, 1.82-GW project, secured a NT$25Bn (US$825M) revolving loan from 13 local and two foreign institutions in June 2019; and in October 2019, Formosa 2, a 376-MW windfarm, secured NT$62.4Bn (US$2.06Bn) project finance from a consortium of six local and 14 overseas institutions.
“Going forward, I think Taiwanese financial institutions will definitely play a greater role in some of the later projects in Round 2 and in Round 3, now that they better understand how offshore wind works and what the risks are,” Mr Hu tells OWJ.
RCG’s Mr Kubitschek agrees. “We will definitely see a maturing of local finance,” he says. “Taiwan Life participated in financing for Formosa 2 and Taiwan Life Assurance and Taiwan Life are participating in Changfang and Xidao. This is a very important development, because life insurance companies are heavily regulated and are in need of good long-term projects.
“Now we need government-owned banks to come in. So far, they have been reluctant. There are two local developers in the race for Round 3, but I do not see life insurance or local funds taking a leading role there because of the risk profile and effect of regulation, but I imagine that overseas pension funds could well be looking for a way to break into the market.”
Potential role for PPAs
Opening up a market for corporate PPAs for renewable energy is a significant development for renewable energy in Taiwan because it could, in the long-term, provide an alternative financing mechanism for offshore wind developers.
The move comes approximately 12 months after Google signed a long-term PPA for power from a small-scale solar project in the country. That deal could be a sign of things to come in the offshore wind industry, but for the time being how much potential corporate PPAs might have supporting growth in the market is unclear.
It could become an important driver – and PPAs could help cushion the impact on developers of gradually falling feed-in tariffs – but industry analysts say it is too early to tell how quickly and to what extent PPAs might penetrate the market in Taiwan.
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