Green Energy – Challenges and Opportunities

Taiwan aims to provide 20% of electrical power generation from renewable energy sources by 2025.

In recent months, Taiwan has made significant strides towards achieving its goal of developing large-scale offshore wind-power resources. The government’s plans call for installing as many as 500 giant wind turbines in the Taiwan Strait in order to reach 3 gigawatts (GW) of offshore wind-power capacity by 2025.

On April 30, the authorities awarded nearly 2 gigawatts (GW) of grid allocation to two developers, Danish firm Ørsted with 900 megawatts (MW) and Germany’s wpd with 1GW of capacity. The allocation assures the two firms of eventual ability to connect the offshore wind farms they are developing to the Taiwan Power Co. (Taipower) grid for distribution to Taiwanese consumers.

Ørsted and wpd are only two of the many foreign players that have entered the Taiwan market – along with a slew of international investment funds to provide the financing – as Taiwan seeks to transition to a nuclear-free, low-carbon future based on offshore wind power and solar energy to replace its nuclear reactors and reduce reliance on coal.

The elimination of nuclear power has been enshrined in national law. All six of Taiwan’s nuclear reactors are scheduled to be retired when their 40-year licensures expire between the end of 2018 and 2025.

Under the government’s energy plan, renewables are to supply 20% of Taiwan’s power supply, up from the current 5%. Such a massive increase will require the installation of 20GW of solar power and 3GW of offshore wind-power capacity by 2025. As of the end of March, the total renewable energy capacity stood at 5.5GW, according to the Bureau of Energy (BOE) under the Ministry of Economic Affairs.

To help meet its goals, the administration has initiated a number of policies and programs in support of renewable energy, viewing it both as a clean energy source and a potentially valuable export industry. Green energy is included as one of the strategic industries for development as part of the Tsai administration’s 5+2 Industrial Innovation program.

Kok Leong Toh, the vice president in charge of private infrastructure in Taiwan for Swiss investment firm Partners Group, cites attractive power rates and strong government support as among the key factors in the firm’s 2016 decision to invest US$200 million into Taiwan’s burgeoning solar-energy sector.

For investors, however, the most compelling feature is business opportunity. “It’s not often in a developed economy where the renewable market is still relatively young and offers opportunity,” Kok says.

The transformation is still in early days, however, and the nation has a long way to go to reach the 2025 goals. The government says Taiwan now has around 2GW of installed solar power capacity, but this figure is met with skepticism by industry insiders. Offshore wind is even earlier in its infancy, and though government plans call for some 500 massive, 120-meter-tall wind turbines to be installed in the Taiwan Strait, only two are currently in place. Those two are in the Formosa 1 offshore wind farm, now owned by a consortium led by Macquarie Investment with a 50% share, Ørsted with 35%, and its original developer, Taiwanese firm Swancor Renewable Energy. The 8MW system (two Siemens 4MW turbines) is already generating power.

Yet the still underdeveloped state of the market means that the island continues to lure foreign and domestic players. With budget outlays estimated to come at least NT$1.4 trillion (US$38 billion) by 2025, investors see great opportunity.

Research and development

Under the 5+2 program, Taiwan has begun construction of its first research center/community devoted to green energy R&D, the Shalun Smart Green Energy Science City, located in Tainan. The 5+2 plan is also promoting increased research into green energy by the BOE, the Ministry of Science and Technology, the Industrial Technology Research Institute, and others.

Through the plan, Taiwan aims not only to dramatically expand its deployment of renewable energy in its power sector but also its footprint in global supply chains. Taiwan is already home to the world’s second largest solar cell and wafer manufacturing industries, with some 11GW of industrial manufacturing capacity owned by such powerhouses as NSP Power, Motech, and AU Optronics.

NSP has merged with local firms Gintech and Sinotech to form a new firm, United Resource Energy Co. (UREC). Since these companies have struggled with competition from China’s massive solar manufacturers, they expect that demand generated through Taiwan’s energy transformation will be instrumental in fostering growth.

Offshore wind is another strong sector for growth. Premier Lai Ching-teh has stressed that offshore development of wind power can bring opportunities to systems developers, materials makers, and electromechanical companies. Localization of the offshore wind power supply chain is at the fore of the US$33 billion dollar investment budget allocated by the government, and all of the central players, including Danish firms Ørsted and Copenhagen Infrastructure Partners (CIP), are in deep discussion with local partners. Globally the offshore wind-power industry is centered in northern Europe.

Holger Grubel, head of offshore wind-power development for German utility EnBW (Energie Baden-Wurttenmberg AG), which recently entered the Taiwan market, says that the government has made a number of crucial moves that are bolstering the market.

“The Taiwanese government has prepared the framework and surroundings for a very attractive investment,” Grubel says. “And with the ambition to have more energy from offshore wind, there’s a fair amount of trust and belief that this will continue to be the case.”

FiT fits?

A primary driver of market interest has been Taiwan’s Feed-in-Tariffs (FiTs), the above-market prices paid for renewable energies such a wind and solar to compensate for the higher upfront costs and intermittent generation. So far these rates in Taiwan are resisting global trends by remaining comparatively high.

The FiT methodology originated in Germany in the late 1990s and is regarded as key to jumpstarting Germany’s – and the world’s – mass market for solar and wind power. But as the enlarged supply led to plummeting costs, countries around the world have been either reducing or eliminating FiTs. Although Taiwan has been decreasing its FiTs biannually, it has done so in smaller increments, leaving the island with some of the highest FiTs in the world for renewable power.

Taiwan currently offers an FiT as high as NT$7.1177 (US$0.23) per kilowatt hour (kWh) for offshore wind for the first 10 years of a 20-year power purchase agreement (PPA), dropping to NT$3.5685 (US$0.12)/kWh for the second decade. Small-scale rooftop solar projects of 20kW or less developed in the first half of 2018 will receive NT$5.8744 (US$0.19)/kWh, declining to NT$5.7493/kWh (US$0.186) for projects in the second half of 2018, according to BOE figures.

Solar FiTs can receive a 15% bonus for development in the north of Taiwan, where demand for power is highest but insolation (the amount of available sunlight) is lower, and a 6% bonus for using high-efficiency solar panels made in Taiwan.

The FiT scheme has come under fire from both supporters and detractors of renewable energy. Detractors see them as saddling Taiwan with expensive energy bills for decades to come. Renewable energy advocates such as U.S. technology firms operating in Taiwan are frustrated by the slow pace of development in Taiwan, and see the high FiTs as slowing down the market. As costs internationally have dropped precipitously over the past decades, in many markets FiTs are no longer regarded as needed. Other incentive mechanisms, such as tax credits, are now viewed as enabling faster development of renewable energy.

Grubel observes that offshore wind power projects are already being bid on without any incentives, but cautions that incentives are still needed in a highly underdeveloped market such as Taiwan’s. “It’s obviously a very young market,” he says. “There’s nothing there that we can rely upon. There is no supply chain there. There is no reliable system there. We have to build the export cable to the wind farm ourselves.”

In Northern European markets, much of the infrastructure required to transmit power generated by offshore wind turbines, including subsea cables and transformers, is supplied by the government utilities, thereby dramatically lowering costs for private developers. In Taiwan, in contrast, the developer is expected to build all of the necessary infrastructure to connect to Taipower’s grid.

Although very little offshore wind capacity is yet in place, and only seven years remain to install massive infrastructure in a marine environment, it would perhaps be unfair to say the plan is behind schedule. The sector is completely new to Taiwan, and regulators have experienced a steep learning curve. Gaps in regulations are disconcerting lawyers (although apparently not investors), and while few observers feel confident that the sector will meet its short-term goal of 1GW of installed capacity operating in the Taiwan Strait by 2020, there is greater confidence about reaching the longer range of 3.5GW by 2025.

With regard to solar deployment, the slow progress stems largely from the simple fact that Taiwan lacks large areas of land available to be developed into solar farms. Taiwan plans to have 17GW of ground-mounted solar installations, which together with 3GW on rooftops would meet the target of 20GW in total. Yet ground-mounted systems account for very little of the estimated 2GW of solar installations currently in place.

Taiwan will struggle to add 1GW of installed solar capacity this year. Industry sources say the total may come to only 600MW. Partners Group, which in cooperation with local solar power developer and operator Sino Green Energy is among the largest producers in Taiwan of solar energy, has only about 50MW of capacity in its network, mostly on barn roofs in Chiayi, Yunlin, and Changhua Counties in south-central Taiwan. The partnership had expected to have 10 times that amount developed by this time.

Most of Taiwan’s landholdings are small, requiring developers to negotiate with numerous stakeholders. Environmental Impact Assessments (EIA) are often difficult in Taiwan’s ecologically sensitive and crowded landscape, and agriculture advocates, including the ministry-level Council of Agriculture, are loathe to see agricultural land turned into solar farms.

Investors remain optimistic, though. With almost zero natural resources, Taiwan imports nearly 90% of its primary energy supply, putting it at risk of supply disruptions caused by extreme weather or even naval blockade.

“Taiwan needs power, and renewable is better because solar and wind are something that Taiwan has, so supplying power from those sources makes a lot of sense,” says Partners Group’s Kok.

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