Taiwan’s offshore wind debacle

After an unexpected feed-in-tariff cut, investors and developers ponder whether they have overlooked political risks in a seemingly promising market.

Winds of change are blowing over one of the most exciting opportunities in the Asia-Pacific region: Taiwan’s nascent offshore wind industry.

The Taiwanese government and the industry recently became locked in a battle over prospective cuts to the 2019 feed-in-tariffs for the sector, with major developers threatening to scrap their projects on the island.

Although Taipei ended up settling for a subsidy that should enable continuity for most projects, the fiasco has become yet another reminder of how vulnerable the renewables sector still is to unexpected political decisions.

“In Taiwan, people have ignored the political risk for the past 18 months, and now they realise that there is a quite meaningful local political risk,” a foreign investor involved in the island’s renewables sector tells Infrastructure Investor.

In the case of Taiwan, it’s easy to forgive investors for overlooking the risks and getting carried away by the opportunity – even if this is far from the first time investors have been caught flat-footed by government mood swings.

After her sweeping presidential victory in 2016, the Democratic Progressive Party’s Tsai Ing-Wen rolled out an ambitious plan to increase the share of renewable energy in the country’s energy mix from 4.8 to 20 percent by 2025. Under her energy policy guidelines, the installed capacity of solar PV is set to reach 20GW by 2025, while the practically non-existent offshore wind industry is aiming to hit 5.5GW that same year.

The government not only saw renewables as a sustainable source of energy, but also as one of the industries that could revitalise the island’s economy.

“Taiwan was brilliant in terms of positioning itself as a hub for international offshore wind developers to attack the rest of Asia,” David Sanders, managing director at FTI Consulting’s Clean Energy Practice, tells Infrastructure Investor. “If you make a project work in Taiwan, and create your supply chain there, you can leverage that to enter Japan and South Korea,” he adds.

According to estimates from the Global Wind Energy Council, an association for the wind power industry, the sector has the potential to catalyse $28 billion in inward investment and add around 20,000 jobs to the Taiwanese economy by 2025.

Taiwan allocated most of its intended offshore wind capacity during the first half of 2018, attracting developers and investors from around the world to the auction process.

“There was a huge sense of excitement about Taiwan’s offshore wind market,” recalls Ben Backwell, chief executive of the Global Wind Energy Council. “The fact that they managed to license 5.5GW and attract companies like Orsted, Macquarie or wpd made people think that it was a great opportunity.”

An important incentive to head into the country was the generous feed-in-tariff scheme offered by the government, which supported around 70 percent of the offshore wind power projects auctioned. As European markets started looking into zero-subsidy projects, Taiwan was offering a 20-year FiT scheme of 5.850 New Taiwan Dollars ($0.18; €0.16) per MWh to back 3.8GW of capacity.

Just how generous is Taiwan’s FiT scheme is up for discussion. Several industry pundits we spoke to defended that a high feed-in-tariff was necessary to balance the costs needed to enter a new market while creating a local supply chain to comply with the government’s localisation requirements.

“The FiTs in Taiwan are significantly higher than the current price level in European markets, but that’s part of what an emerging market needs to offer to get a first wave of projects going,” Backwell says.

In a written response to Infrastructure Investor, Chun-li Lee, spokesman for the Bureau of Energy of the Ministry of Economic Affairs of Taiwan, explains that a committee of experts established the 2018 FiT regime taking into consideration, among others, “the average installation cost, operation period, and operation and maintenance costs”, while setting “reasonable incentives” for investors.

Growing headwinds

Despite this, the political will behind offshore wind seemed to falter after Canada’s Northland Power and Denmark’s Orsted won a second offshore wind auction of 1.6GW in June. Both companies competed with bidding prices between 2.2 and 2.5 New Taiwan Dollars per MWh, significantly lower than the original 2018 feed-in-tariff.

“Taiwan was brilliant in terms of positioning itself as a hub for international offshore wind developers to attack the rest of Asia” Sanders

Orsted defended the pricing, saying that the initial projects backed by higher tariffs would carry the burden of creating an efficient local supply chain, improving EPC processes and the possibility to use the transmission assets built for earlier projects.

But the auction raised eyebrows across the island. The Kuomintang, the main opposition party, denounced the 2018 feed-in-tariff as fraudulent, filing charges for profiteering against minister of economic affairs Shen Jong-chin, local media reported.

And in November, the DPP suffered a major political setback. After intense economic and political pressure from China, the Taiwanese pro-independence party faced a crushing defeat against the conservative Kuomintang in local elections.

One week after the defeat, the Taiwanese government proposed a 12.7 percent cut on 2019 offshore wind tariffs.

The proposal also tightened PPA conditions, removing a ladder scheme that allowed developers to receive a higher tariff during the first 10 years of the PPA, and a lower one during the second half of the agreement.

Not everyone agrees on the role local politics played on the decision, but several industry sources believe the cut was influenced by the electoral defeat and the political criticism received by the initiative, which left the government “feeling exposed”.

In a written response, the Taiwanese government said its decision was made through a “fair, just, transparent and rigorous procedure,” taking into account “credible and provable costs and expenses information”. Importantly, it added that the pricing difference with the Northland Power and Orsted projects did not influence its decision.

Outdated calculations on the production capacity of the island’s wind farms might have, though.

According to the answers provided by Taiwan’s Bureau of Energy, the government calculated the 2018 FiT scheme assuming a production of 3,600 full load hours, based on the performance data of wind farms from local utility company Taipower.

“An estimation of 3,600 full load hours per annum would be fairly low for typical offshore wind farms using the latest wind turbine generation hardware,” argues Tom Whittle, senior engineer at Offshore Wind Consultants. “The wind conditions in Taiwan are favourable, so I would expect the projects there to have a much higher number.”

Tellingly, the government’s first draft for the 2019 FiT tariffs included a production cap of 3,600 full-load hours per annum.

Mounting protests

The cut took investors by surprise.

“The rate was always going to be revised, since [the previous FiT] was specifically for 2018, that was understood by the developers,” Whittle says. “The main issue was that the revision of the rate was severe, which caught a lot of developers by surprise.”

The situation was also made worse by the fact that some developers, such as Orsted, hadn’t been able to sign PPAs for some of their projects in 2018 after failing to obtain the necessary local permits. That became problematic in light of the government’s proposed changes because “the economics of the projects were based on the 2018 PPA prices,” Whittle explains.

The proposed subsidy changes sent jolts across the offshore wind industry, which immediately mounted a fierce lobbying campaign against them, in some cases threatening to leave the market altogether if the cut was not revised.

In December, Orsted warned Taiwan that the FiT cuts could influence their “final investment decision” on the country. A few weeks later, local media reported that the firm was asking local partners to halt the execution of contracts.

Similarly, German developer wpd told us in January that, were the lower tariffs to go ahead, the firm would scrap its 35MW Guanyin project. “If there is no change [in the FiT regime], we can’t build it,” Achim Berge Olsen, member of wpd’s management board, said at the time.

“The rate was always going to be revised. The main issue was that the revision of the rate was severe” Whittle

Finally, after two months of behind-the-scenes negotiations with stakeholders, the government backpedalled and revised its FiT cut to 5.7 percent at the end of January. The new 2019 FiT also loosened the proposed production cap, establishing that any output above 4,200 hours per annum will receive 75 percent of the FiT, with production above 4,500 hours receiving only 50 percent of the tariff rate.

In addition, the new proposal re-introduced the ladder FiT scheme, offering a tariff of 6.27 New Taiwan Dollars per MWh during the first 10 years of operation, and 4.14 New Taiwan Dollars per MWh during the second half of the agreement.

“For the 2019 final FiT, we fully considered the cost gap derived from differences in the foreign and domestic markets, and other costs faced by developers,” Chun-li Lee, from Taiwan’s Bureau of Energy, explains in the written response to Infrastructure Investor.

Lee points out the new calculations took into account, among other factors, the seabed characteristics of the country, the costs of compensating fisheries, strengthening the power grid, differences with international markets in costs of initial surveys and connecting projects to the grid.

Lee adds Taipei will “assist the industry to communicate and negotiate” with local governments to “complete relevant administrative procedures” and receive the necessary permits “as soon as possible”.

Most experts consulted by this publication agree that developers will be able to move on with their projects but will have to enter a tough renegotiation process with their local suppliers.

“The main challenge now will be whether the local industry in Taiwan is able to build these projects at a competitive price, while still complying with localisation requirements,” says Backwell.

Industry estimates shared with Infrastructure Investor indicate that the 12.7 percent cut would have trimmed offshore wind farm revenues by around 20 to 25 percent, making projects uneconomical. A 5.7 percent cut, however, reduces revenues by a more manageable 7 percent.

But the final FiT compromise can hardly be considered a happy ending.

FTI Consulting’s Sanders believes that the uncertainty generated by this episode will hit developers’ borrowing capacity. “It will affect the cost of finance, unless the Taiwanese government comes up with a creative way to reduce the risk for developers going forward,” he says.

Furthermore, investors’ confidence in the stability of the island has been shaken, a fact that can have serious consequences for Taiwan in years to come. And while investors say they remain “bullish” about the island in the short term, the FiT episode might affect their long-term calculations on whether to stay in the market.

“Even if the [final] results are positive, a ‘saga’ like this will always dent investors’ confidence,” one of our sources says. In that sense, Taiwan offers a stark reminder of how high political risk needs to be on investors’ agendas.