Taiwan has a unique opportunity to become a leader in the offshore wind industry and benefit from an investment boom, but proposed changes to feed-in tariffs and their structure have led to developers hitting the pause button
Figures from the Global Wind Energy Council (GWEC) suggest that, if a solution can be found to problems now facing Taiwan’s nascent offshore wind industry, that industry could bring some NT$880Bn (US$28Bn) of inward investment to the country by 2025 and create 20,000 jobs. However, if that is to happen, said GWEC, Taiwan first needs to build critical mass in offshore wind and create a local supply chain. Only then can it achieve European price levels.
In the meantime, a proposed reduction in the feed-in tariff (FIT) in the country of 12.7% and unexpected changes to the FIT structure put the offshore wind target of 5.5 GW at risk and undermine the investment climate for Taiwan’s economy. Data provided by GWEC indicates the potential impact of retrospective changes to FITs in other markets and the costly consequences that could face Taiwan.
GWEC stepped into the controversy after Ørsted, the world’s leading developer of offshore wind projects, said it would revisit commitments it made to build offshore windfarms in Taiwan amid concern about delays and retrospective changes to feed-in tariffs.
In April 2018, Taiwan’s Ministry of Economic Affairs awarded Ørsted the right to install 900 MW of offshore wind at its Changhua 1 and 2a projects in 2021. In accordance with the Taiwan Civil Code, a deadline for signing the 2018 power purchase agreement (PPA) was extended to 2 January 2019. However, because Taiwan’s Bureau of Energy did not issue an establishment permit for the projects in time, it was not possible for Ørsted and the Taiwanese utility Taipower to sign a 2018 PPA for Changhua 1 and 2a. Other developers found themselves in the same situation.
Ørsted Offshore chief executive Martin Neubert said the company was “very concerned” about the suggested feed-in tariff level for 2019 and a newly proposed cap on annual full-load hours. “The proposed retrospective changes jeopardise the creation of a local offshore wind supply chain, harm the planned transition to renewable energy and cause significant uncertainty among international investors looking to Taiwan,” he said. “Only with a stable and predictable policy framework does Taiwan have the potential to develop large-scale projects while creating thousands of local jobs, becoming a hub for offshore wind in the Asia Pacific region.” In mid-January it was reported to have told its local supply chain to stop executing contracts, despite work being well under way.
Put simply, PPAs were not agreed because the process was held up by Taiwanese counties in which projects are planned. The feed-in tariff for 2018 was therefore missed and the proposed 2019 tariff is lower and not sufficient given the need to establish a supply chain
GWEC called on the government of Taiwan to rethink proposed changes to the FIT to avoid what it described as “costly lessons made by other markets that pursued a similar approach.” It released data with supporting examples from the French and German offshore markets that show the impact of changes similar to those currently being considered by Taiwan. For example, in France, a retrospective reduction to the FIT of 30% contributed to projects that had been contracted through auctions stalling and a current installed capacity of just 2 MW. None of the planned production and assembly hubs have been inaugurated and job-creation expectations have not been met.
Speaking to OWJ, Ben Backwell, chief executive of GWEC said, “Taiwan has done an extraordinary job of establishing one of the world’s most exciting new offshore wind markets in a very short period of time. The competitive prices achieved in European tenders in recent years – where it is now lower than gas and nuclear – have sparked global interest in the industry, and Taiwan is well placed to benefit from that. We are on the cusp of something very exciting happening in Taiwan – bringing an influx of foreign investment, local job creation and the creation of clean competitive power generation capacity. However, Taiwan must stick to its plans and allow the industry to establish itself, or there is real risk of developers and investors exiting the market.”
Taiwan must stick to its plans and allow the industry to establish itself, or there is real risk of developers and investors exiting the market
Mr Backwell, who was due to lead a GWEC mission to Taiwan in late January, said “A change in the FIT for 2019 was foreseen, but not as deep as has been proposed. Structural changes to the tariff such as the limit on load hours also took developers by surprise. But despite recent developments, it’s not too late. There is still time to choose a way forward based on consensus and informed by the experience of other markets in the past so that Taiwan can avoid making the same errors and instead reap the benefit of a booming offshore wind industry.”
The proposed changes to FITs are of two types. Firstly, a much steeper than expected reduction of 12.7% in tariffs which will sharply reduce project revenues. And secondly, two unexpected structural changes: a limit of 3,600 annual full load hours; and removal of the so-called ‘ladder tariff’.
The cap on load hours constitutes, in GWEC’s view, a perverse disincentive for the efficient growth of Taiwan’s industry, as developers will not be rewarded for using the most efficient turbine models. Removal of the ladder tariff closes off an effective way of helping developers attract project finance at the most competitive possible costs. Taken together, the proposed changes could reduce project revenues by approximately 20% and so make the projects non-investable, thwarting growth in the sector.
GWEC believes that the proposed changes could also jeopardise the financial viability of a second tranche of projects procured under the competitive tender, as the prices offered there were contingent upon the revenues from, and investments associated with, projects procured under the current feed-in tariff.
“On one hand, one can understand the authorities’ desire to reduce the costs of the FIT going forward due to the competitive prices achieved in the first tenders; but it must be understood that those tender prices were contingent upon the revenues from those initial projects,” said Mr Backwell. “That revenue would also finance the build-out of local infrastructure, help train a skilled labour force, and build a local supply chain. Without that initial investment, the competitive prices in the tenders will not be viable. Taiwan is trying to achieve what took more than 20 years in Europe, and seemed well on the way towards doing so, but this is one short cut that won’t work.”
Ben Blackwell: “the Taiwanese government seems to be willing to listen to concerns that have been expressed by developers about FITs”
GWEC said the proposed cap of 3,600 full-load hours for which a project can receive the feed-in tariff would limit project production and revenue and was inadvisable for a number of reasons. Firstly, it further skews project economics, not just for the projects in question, but for projects awarded in the tender rounds. It also limits the revenues which can be invested from the early projects which would otherwise be invested in the local supply chain, infrastructure and labour force, and furthermore undermines investor confidence in the market.
Secondly, it does not consider the natural annual variability of the wind resource. While some years may average well above 3,600 full load hours, ‘off years’ may be less, and will result in a revenue penalty which was not included in the project’s financial planning.
Thirdly, while projects in Europe generally run at around 3,800 full-load hours, this includes many projects built 5-10 years ago with smaller, less efficient machines. Full-load hours estimated for the Taiwan market are closer to 4,000 hours a year, as a result of plans to use the latest, largest and most efficient turbines on the market.
Last but not least, one of the objectives of Taiwan’s offshore wind development programme has to be producing the largest quantity of carbon-free electricity at the lowest possible price. This measure will hinder both goals.
Offshore Wind Consultants director John MacAskill said a public hearing in the country in mid-January 2019 heard calls from Taiwanese companies demanding higher levels of localisation in offshore projects after 2025 and a prohibition against made-in-China products. They also expressed concern about the proposed changes to the 2019 FIT that they said might result in disinvestment by developers and lost orders.
The Ministry of Economic Affairs was requested to take steps to encourage investment and industrial development, including localisation, advanced technology, and FIT rates that would encourage them.
Renewables Consulting Group managing director new markets Gareth Lewis, director Michael Chang and Todd Hsu, a senior associate in the company’s Taiwan office, said it was hoped that, following the consultation process, the Taiwanese Government will “give some positive movement” in relation to localisation, FITs and tariff cap hours and allow developers to get back on track with what is a globally ambitious programme.”
“Whatever the outcome,” they said, “there will be lessons learned for next year all round, including considering what is a fair price for offshore wind in today’s market, compared with the potential in five or six years’ time following year-on-year supported investment in the local supply chain, technological advances, deeper understanding, an enhanced skills base, and improving infrastructure. It is hoped that investor confidence in the vital lending community is not dented by this very public negotiation and that Taiwan maintains a long-term and sustainable offshore wind industry.”
Mr Backwell told OWJ he believed the Taiwanese Government was willing to listen to concerns that have been expressed by developers about the level of FITs for 2019 and the structural changes that are being proposed. He said he was also hopeful that localisation issues could be addressed and said the industry needed to engage with all of the players in the market in Taiwan to find answers.
The situation is further complicated by the fact that 2020 will see a general election take place in the country and that president Tsai Ing-wen’s Democratic Progressive Party (DPP) suffered a significant defeat in local elections in late 2018.
As reported at the time by OWJ, the DPP lost ground significantly to the opposition Kuomintang party in the local elections.
Until then, Taiwan had been making good on longstanding plans to close nuclear power plants and invest heavily in offshore wind energy. The president had proposed to end the country’s dependence on nuclear power by 2025 while sourcing 20% of Taiwan’s electricity from renewable sources, five times the level in 2015.
Natixis Corporate & Investment Bank managing director Ranjan Moulik said that for developers, the political situation in Taiwan could be “challenging” because of the two-party system. He said policy changes were not out of the question as a result of the dramatic shift in sentiment among voters in the local elections.
Speaking at the time the local election results became known, he said, “It’s possible that we could see a slowdown in the rate at which nuclear power is decommissioned. In turn, that could affect the rate of rollout of renewable energy.” Nuclear power and the rate at which it should be decommissioned was one of a number of referendum questions posed to the electorate at the same time as the local elections.