Taiwan has beefed up the amount of electricity to be generated by offshore windfarms from 2026 to 2035, but has taken a long time to arrive at a regulatory framework for the auction process
In July 2021, after many months of deliberation and two years of public discussion about the context for Round 3, the Taiwanese authorities finally began to provide clarity on the regulations that will apply to the next round of offshore wind auctions in the country.
Then, on 19 August 2021, the authorities promulgated the final framework for the auction process, allowing developers to begin applications for up to 15 GW of offshore wind capacity to be built under Round 3, the Ministry of Economic Affairs (MoEA) having earlier promulgated the ‘Offshore Wind Zone Application Regulation,’ a mechanism that developers will use to identify potential sites with the authorities.
At the same time, the Ministry also published a map of Taiwan, laying out environmental and social constraints on development. The map indicates areas that could be available for planning, and some that might not. Critically, the Ministry of Transportation and Communication used the map to insert shipping lanes that are already in use or are planned. During the application process, developers have an option to enter into dialogue with government stakeholders on these constraints, in the hope they might allow some leeway. However, the map might prove to be a game-changer for some projects because some of them are partly or wholly overlain with constraints.
Back in May 2021, the Bureau of Energy confirmed it was seeking capacity additions of 15 GW between 2026 and 2035, rather than the 10 GW originally anticipated. However, although that sounds like good news, there are some riders: the government will only award 500 MW – plus a 100 MW buffer – per bid and owner, which will adversely affect the economies of scale that would have been possible with larger projects.
The regulator will also allow for multiple applications at sites, which means developers would not be assured they could develop further projects at a site – it could mean that, at a later date, a competitor could use the remaining development potential at a site for its own project.
The motivation for this approach is probably to spur competition and but also to fragment the independent power producer market to avoid competition for state-owned utility Taipower – which is currently undergoing a half-hearted deregulation process that should be finished by 2025.
Another very important element of the Taiwanese Government’s approach to Round 3 is that it wants to help keep electricity costs down to help domestic manufacturers, who accounted for 60% of energy use in 2020. The government would like to push prices for renewable energy below those for fossil fuels by 2026.
If this is to be achieved, the bid price for connection to state-owned Taipower’s network can only be as high as TW$2.49 (US$0.09) per kWh for the first auction. This is only slightly higher than the auction prices from 2025 that had no localisation demand and – in Ørsted’s case – will actually move to the corporate power purchase agreement (CPPA) market with a deal signed with TSMC last year. The ceiling for the following auctions will be the average bid price from the first auction, which will put a lot of downward pressure on the grid allocation bid prices.
The other option available for participants would be to enter a ‘zero bid’ and sell the renewable energy generated on the ‘free’ market directly to an end-user or a wholesaler. This would come with the caveat that there is currently very low visibility on the road to market after 2026.
While the CPPA market in Taiwan is developing, it is not yet robust enough to give risk-averse investors the confidence to make a call on it. The combination of a lack of economies of scale and an uncertain price environment could make it difficult to back-up financing for project development.
The Taiwanese Government will also aim to ensure as much technology as possible is transferred to Taiwan. Round 2 saw a rigid, escalating localisation demand of up to 26 items by 2024. Suppliers were either asked to open subsidiaries, find a joint venture partner or work through a Taiwanese company to provide their products and services.
However, it has proven difficult to quickly bring arrangements such as these into operation, as has clearly been the case with jacket foundations, where orders have ended up being reassigned to other countries.
Negotiations with the Industrial Development Bureau regarding Taiwanese manufacture of wind turbine components and those with vessel providers have also been protracted. They have been partially successful, but the process has also led to delays, bottlenecks and cost overruns.
Some international market participants – and some European countries – have also questioned the legality of this approach under World Trade Organization agreements but have so far shied away from actually filing a complaint.
In a move that is probably intended to avoid any potential problems and find common ground, the MoEA has reformulated the localisation requirements for Round 3 and made them more flexible – 60% of the content of a project will have to be provided locally, mainly relying on existing localisation items.
In a further move that is probably intended to avoid international trade scrutiny, there are also extra points to be won in Round 3 auctions if 100% of localisation is achieved. Should all or some developers choose a zero bid in the auction, they will be judged on their localisation efforts and apportioning 60% of contracts to Taiwanese companies is unlikely to have much effect.
New localisation items for Round 2 include, among other items, foundations for offshore substations, electrical parts thereof as well as engineering services for windfarms. To achieve 100%, a developer will have to work on 33 items that need to find the approval of the IDB.
Experience of localisation during Round 2 suggests it is very unlikely that new items identified for Round 3 will be internationally cost competitive – rather, they will increase costs – even though doing so is counter to the government’s desire to provide cheap energy.
The question also remains, will Tier 1 suppliers agree to the transfer of technology and be prepared to invest in manufacturing facilities in Taiwan, especially as other offshore wind markets – such as Korea and Japan – also have a strong localisation drive?
So far, Taiwan has been the only robust and accessible offshore wind market for overseas companies in the Asia Pacific region, but Japan’s offshore wind industry is about to take off, Vietnam is awaiting the outcome of its Power Development Plan 8, expected in Q4 this year, and the market in South Korea is heating up.
In contrast, however, Taiwan is already a working market and as it demonstrated in Round 1, it has high-level regulatory flexibility to remove roadblocks, if necessary. In fact, the Taiwanese Government still has ‘wriggle room’ to accommodate smaller changes to the auction process, either now or during the next 12 months.
There are other factors that also play into the process – Taiwan is a leading manufacturer of semiconductors and needs renewable energy to produce them. Customers for the products the semiconductor industry produces are pressurising the supply chain to become part of the global energy transition and rely less on power from fossil fuels.
Taiwan has also decided to phase out nuclear power, with the last nuclear plant due to go offline in 2025. All of the nuclear power that has been so important to Taiwan in the past has to be replaced by renewable energy if the country is to become a net-zero economy by 2050.
Taiwan has decided to allow Round 3 developers to propose their own zones and not prescribe any areas. Thus, over the course of the last 12 months, in anticipation of Round 3 auctions, developers have started to apply to Taiwan’s Environment Protection Administration with environmental impact assessments.
These are either for new developments or adjoining development areas, ballooning the potential capacity that could be bid in Round 3 to more than 40 GW.
As of late August 2021, there were 10 projects that already hold an EIA and 28 projects that will now start to negotiate for an EIA, so they can participate in auctions next year. This means the 15 GW on the table for the period 2026-2035 will be oversubscribed.
But the question remains, with the new constraints, if 15 GW is really feasible. And for Taiwan to fulfil its targets, it needs to integrate floating wind, as fixed-bottom offshore wind will not provide enough capacity for 15 GW.
If Taiwan manages to balance the demand for affordable energy and create local value while maintaining the interest of leading developers and utilities, it will remain comfortably ahead of the curve compared with other markets in the region, at least for the next decade.
*Raoul Kubitschek is Managing Director, Tawian, Niras