Taiwan under pressure to address offshore finance risks

Taiwan’s government has been handing out initial environmental approvals for wind farms planned in its waters.

And, on 30 March, it is set to start the selection process proper, in which it will award the all-important feed-in tariffs and grid links.

It is due to award support for 3.5GW of projects this May (500MW to be operational by 2020 and 3GW by 2025); and 2GW more, also to be completed by 2025, in July.

It won’t be short of bidders. Major players such as Copenhagen Infrastructure Partners, EnBW, Macquarie, Northland Power, Ørsted and Wpd are all in the mix, as are local firms such as Asia Cement and China Steel Corporation. In total, Taiwan has granted initial environmental approval to projects totalling around 11GW.

This is twice the Taiwanese government’s goal of 5.5GW offshore wind farms in its waters by 2025, and may encourage the island's leaders to increase their target. Until then, developers will have to compete hard on cost to win government backing.

The developers of the projects that are successful in this allocation round are set to be awarded 20-year power purchase agreements with Taipower, which is 97% owned by the Taiwanese government, at a non-negotiable level set by government.

But this is where the process gets more complicated – and where financial uncertainty enters the mix. Investors are worried about the terms of these PPAs, and whether they give enough certainty.

A 27-page guide by law firm Jones Day about legal and regulatory issues for offshore wind in Taiwan recently highlighted problems with the PPAs from an investor’s perspective. For example, the feed-in tariff is not indexed to take inflation into account, so it becomes worth less over the course of the agreement.

There are also worries that the PPAs appear to give Taipower the ability to cut the amount of electricity it is committed to buy from the projects; the fact it only has to pay for the electricity it receives; and that they do not contain provision for compensation for project owners if the PPAs are terminated. All major concerns.

This plays into a wider discussion about how Taiwan’s leaders can give more certainty to investors, both local and international.

The Ministry of Economic Affairs has come in for criticism from industry onlookers for being too passive, and not doing enough to reduce the risks that would prompt local and overseas banks to invest. It is looking to fix this by changing its Renewable Energy Development Act so it can give loan and credit guarantees.

This would be an important step for reducing risks and spurring investments. It would give MEA greater ability to provide state-backed guarantees, similar to export credit agencies like EKF in Europe, and to invest on commercial terms.

The MEA has said it would invest $22.7bn by 2025 in order to achieve its onshore and offshore goals, and use this to stimulate $15.9bn of private investment. Done right, we think it could bring in far more investment than that, as developers and investors have both shown great desire to get into this nascent offshore market.

The Taiwanese government has ambitious plans for offshore wind and the money to back them up. It has shown an ability to adapt before. We believe it will do so again.

Taiwan’s government has been handing out initial environmental approvals for wind farms planned in its waters.

And, on 30 March, it is set to start the selection process proper, in which it will award the all-important feed-in tariffs and grid links.

It is due to award support for 3.5GW of projects this May (500MW to be operational by 2020 and 3GW by 2025); and 2GW more, also to be completed by 2025, in July.

It won’t be short of bidders. Major players such as Copenhagen Infrastructure Partners, EnBW, Macquarie, Northland Power, Ørsted and Wpd are all in the mix, as are local firms such as Asia Cement and China Steel Corporation. In total, Taiwan has granted initial environmental approval to projects totalling around 11GW.

This is twice the Taiwanese government’s goal of 5.5GW offshore wind farms in its waters by 2025, and may encourage the island's leaders to increase their target. Until then, developers will have to compete hard on cost to win government backing.

The developers of the projects that are successful in this allocation round are set to be awarded 20-year power purchase agreements with Taipower, which is 97% owned by the Taiwanese government, at a non-negotiable level set by government.

But this is where the process gets more complicated – and where financial uncertainty enters the mix. Investors are worried about the terms of these PPAs, and whether they give enough certainty.

A 27-page guide by law firm Jones Day about legal and regulatory issues for offshore wind in Taiwan recently highlighted problems with the PPAs from an investor’s perspective. For example, the feed-in tariff is not indexed to take inflation into account, so it becomes worth less over the course of the agreement.

There are also worries that the PPAs appear to give Taipower the ability to cut the amount of electricity it is committed to buy from the projects; the fact it only has to pay for the electricity it receives; and that they do not contain provision for compensation for project owners if the PPAs are terminated. All major concerns.

This plays into a wider discussion about how Taiwan’s leaders can give more certainty to investors, both local and international.

The Ministry of Economic Affairs has come in for criticism from industry onlookers for being too passive, and not doing enough to reduce the risks that would prompt local and overseas banks to invest. It is looking to fix this by changing its Renewable Energy Development Act so it can give loan and credit guarantees.

This would be an important step for reducing risks and spurring investments. It would give MEA greater ability to provide state-backed guarantees, similar to export credit agencies like EKF in Europe, and to invest on commercial terms.

The MEA has said it would invest $22.7bn by 2025 in order to achieve its onshore and offshore goals, and use this to stimulate $15.9bn of private investment. Done right, we think it could bring in far more investment than that, as developers and investors have both shown great desire to get into this nascent offshore market.

The Taiwanese government has ambitious plans for offshore wind and the money to back them up. It has shown an ability to adapt before. We believe it will do so again.

Taiwan’s government has been handing out initial environmental approvals for wind farms planned in its waters.

And, on 30 March, it is set to start the selection process proper, in which it will award the all-important feed-in tariffs and grid links.

It is due to award support for 3.5GW of projects this May (500MW to be operational by 2020 and 3GW by 2025); and 2GW more, also to be completed by 2025, in July.

It won’t be short of bidders. Major players such as Copenhagen Infrastructure Partners, EnBW, Macquarie, Northland Power, Ørsted and Wpd are all in the mix, as are local firms such as Asia Cement and China Steel Corporation. In total, Taiwan has granted initial environmental approval to projects totalling around 11GW.

This is twice the Taiwanese government’s goal of 5.5GW offshore wind farms in its waters by 2025, and may encourage the island's leaders to increase their target. Until then, developers will have to compete hard on cost to win government backing.

The developers of the projects that are successful in this allocation round are set to be awarded 20-year power purchase agreements with Taipower, which is 97% owned by the Taiwanese government, at a non-negotiable level set by government.

But this is where the process gets more complicated – and where financial uncertainty enters the mix. Investors are worried about the terms of these PPAs, and whether they give enough certainty.

A 27-page guide by law firm Jones Day about legal and regulatory issues for offshore wind in Taiwan recently highlighted problems with the PPAs from an investor’s perspective. For example, the feed-in tariff is not indexed to take inflation into account, so it becomes worth less over the course of the agreement.

There are also worries that the PPAs appear to give Taipower the ability to cut the amount of electricity it is committed to buy from the projects; the fact it only has to pay for the electricity it receives; and that they do not contain provision for compensation for project owners if the PPAs are terminated. All major concerns.

This plays into a wider discussion about how Taiwan’s leaders can give more certainty to investors, both local and international.

The Ministry of Economic Affairs has come in for criticism from industry onlookers for being too passive, and not doing enough to reduce the risks that would prompt local and overseas banks to invest. It is looking to fix this by changing its Renewable Energy Development Act so it can give loan and credit guarantees.

This would be an important step for reducing risks and spurring investments. It would give MEA greater ability to provide state-backed guarantees, similar to export credit agencies like EKF in Europe, and to invest on commercial terms.

The MEA has said it would invest $22.7bn by 2025 in order to achieve its onshore and offshore goals, and use this to stimulate $15.9bn of private investment. Done right, we think it could bring in far more investment than that, as developers and investors have both shown great desire to get into this nascent offshore market.

The Taiwanese government has ambitious plans for offshore wind and the money to back them up. It has shown an ability to adapt before. We believe it will do so again.