Financing Offshore Wind Power

The Formosa-1 offshore windfarm as seen from the coast of Miaoli County. Photo: Timothy Ferry

Most of the funding for this portion of Taiwan’s energy development is coming from international banks, with much of it guaranteed by foreign export credit agencies.

Taiwan’s ambitious program to promote offshore wind power as a major energy source – installing over 700 turbines in the Taiwan Strait by 2025 – will require an estimated investment of US$20 billion. Lacking experience in the industry, Taiwan is relying heavily on the participation of global players by making a firm policy commitment, offering attractive subsidized rates, and adopting new financing models.

Last month’s reelection of President Tsai Ing-wen of the Democratic Progressive Party, a strong proponent of renewable energy, reinforces that government commitment. The losing candidate, Han Kuo-yu of the opposition Chinese Nationalist Party (Kuomintang), had expressed skepticism of offshore wind power and would likely have slowed down the industry’s development if elected.

“The election is a mandate to see the energy transition through to a conclusion, and we expect the sector to move forward significantly this year,” says Taipei-based Raoul Kubitschek with international energy consultancy Renewables Consulting Group.

In 2019 alone, global investors pumped some US$5 billion into Taiwan for offshore wind financing. The first commercial-scale offshore wind farm was formally commissioned last November. The US$636 million, 128-megawatt (MW) Formosa-1 project in the Taiwan Strait off the coast of Miaoli County in north-central Taiwan is jointly owned by Danish power developer Ørsted, Macquarie Capital’s Green Investment Bank, Japanese consortium JERA, and local industrial firm Swancor Holdings.

In adjacent waters, construction began during the same month of the even larger US$2 billion, 376MW Formosa-2 windfarm project, owned by Macquarie and Swancor. Last May, German energy developer wpd.AG and Japanese consortium Sojitz reached agreement to develop a US$3.14 billion, 640MW windfarm off Yunlin County in south-central Taiwan.

Innovative project financing models that were pioneered in the European offshore wind sector but were unknown in Taiwan before the Formosa-1 project have been crucial to the industry’s progress. Largescale infrastructure projects in Taiwan have typically been financed directly by the government or, in the case of electrical-power projects, by the state-owned monopoly, the Taiwan Power Co. Of the proposed 5,700MW (5.7 gigawatts) of offshore wind capacity, however, Taipower is taking charge of only 410MW, with the rest being developed by the private sector.

What is known as limited or “non-recourse” project financing has been the key to mobilizing private capital for offshore wind investment by distributing risk. According to the Investopedia definition, “non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project the loan is funding and not from any other assets of the borrower.”

In this scenario, the project is designated a “special purpose vehicle” and the SPV serves as the entity for borrowing funds and generating cash flow. The risk is on the SPV rather than specific investors, and the collateral is the tangible asset of the wind turbines plus the Power Purchase Agreement (PPA) that guarantees the rate to be paid for the generated power over a 20-year period. 

President Tsai and other dignitaries attend the inaugural ceremony for the Formosa-1 offshore windfarm. Photo: Timothy Ferry

“Formosa-1 was the first limited-recourse project financing of a commercial-scale wind farm in Asia,” an insider with ties to the deal noted by email. “Macquarie’s Green Investment Group was able to leverage its global experience and networks in offshore wind to guide both local and international financing institutions through this ‘first-in-market’ process…which has paved the way for the offshore wind industry in Taiwan.”

Banks that have participated in the funding of the various projects include ANZ Banking Group, BNP Paribas, Crédit Agricole Corporate and Investment Bank, DBS Bank, ING Bank, MUFG Bank, Société Générale, Standard Chartered Bank, and Sumitomo Mitsui Banking Corp. Copenhagen Infrastructure Partners, which has a Danish pension fund as a major investor, has also put billions of euros into Taiwan offshore wind.

Much of these loans and investments are backed by national export credit agencies (ECAs), public entities that provide government-backed loans, guarantees, and insurance to support their countries’ export sales. Reportedly, among the prominent ECAs active in Taiwan’s offshore wind market have been Denmark’s EKF, Germany’s Euler Hermes, the Netherlands’ Atradius, and South Korea’s K-Sure. Through the ECAs, in other words, foreign governments are taking a big stake in Taiwan’s offshore wind initiatives.

Hesitancy by local banks

Taiwan’s own financial institutions, especially the state-owned banks, have mostly stayed on the sidelines. The exceptions include Cathay United Bank, Taipei Fubon Commercial Bank, EnTie Commercial Bank, Taiwan Life Insurance, E.SUN Commercial Bank, CTBC Bank, and KGI Bank. But industry insiders estimate that 90% of the financing has come from international investors.

“Local banks lack expertise in the offshore wind sector and are not familiar with the non-recourse financing structure,” explained a representative of Fubon Financial Holding Co. who asked not to be identified by name. 

Mark Liu, Global Country Head in Taiwan of investment bank Société Générale, says that his company has tried to help local banks get up to speed. “We’ve given a lot of training to the local banks. We even run seminars, pay visits to them, and offer some in-house training courses in regard to project financing, focusing on offshore wind.” Still, “they feel uncomfortable financing these larger projects,” he says.

While the election of Tsai Ing-wen has mitigated the political risk to the industry, other issues may give local banks some pause, even if international investors don’t seem bothered. According to a study by British scholars Charles Yates and Mark Leybourne, “the standard Taipower PPA does not provide investors with enough confidence that the revenue from offshore wind projects is low-risk.” The main issues pertain to curtailment of generation during times of grid congestion and step-in rights in the event of project failure.

Many renewable energy markets have “priority dispatch rules” that obligate power transmission networks to prioritize renewable energy in the interest of promoting sustainability and security of supply. Although Taiwan’s Renewable Energy Development Act gives such priority to renewable providers, it doesn’t distinguish between solar and offshore wind energy.

Taiwan’s feed-in-tariff (FiT) rates for offshore wind are as high as NT$6.27 per kilowatt hour (kWh), while the 2020 FiT for ground-mount solar fell to NT$3.93/kWh. As wind and solar energy availability is difficult to predict, the system runs the risk of generating too much power at certain times.

In regional markets such as Europe, excess power can be dispatched to other locations, but Taiwan’s isolated power grid doesn’t have that option. To prevent overwhelming the system, some generators would have to be blocked from transmitting their power. Considering the substantial difference in FiT rates, Tai-power would have an incentive to transmit cheaper solar over expensive offshore wind power.

With installed solar capacity totaling less than 3 gigawatts (GW) and offshore wind 128MW, grid congestion is not yet an issue. Also, solar power is generated during the day while there is generally more wind at night. Nevertheless, if Taiwan were to achieve its goals of 5.7GW of offshore wind and 20GW of solar power, it could have a significant impact on the project revenues over the course of a 20-year PPA. Y.D. Chang, wpd’s manager for public affairs, said by email that the company has insurance coverage for such an eventuality.

A further issue is that the Taipower PPA contains no provisions to extend the duration when a damaged turbine is out of commission for a substantial period. Considering that the Taiwan Strait is in an earthquake and typhoon zone, such downtime is a real possibility. Yates and Leybourne note that Taipower may have “signed side letters with projects which give sufficient certainty that projects will receive the PPA price,” as that has been a common practice in other markets.

Edgare Kerkwijk, board member of the Asia Wind Energy Association, notes that the banks that have entered the market have “taken quite an optimistic view with regards to the lending terms.” He sees the likelihood of “issues with grid capacity and availability which will lead to disputes regarding the interpretation of the PPA.”

Step-in rights allow lenders to take over a struggling SPV and are considered crucial to managing risk. Under Taiwan law, however, if an SPV fails, the lender only has the right to auction off the physical assets. The valuable PPA isn’t included, potentially enabling Taipower to renegotiate it for better terms at the expense of the lenders.

The biggest challenge for the industry, however, is thought to be the 7.6% cut in the FiT announced at the end of last year. The rate was reduced to NT$5/kWh for a 20-year PPA, or NT$5.8 for the first 10 years, falling to NT$3.8 for the second decade. The reduction brings Taiwan closer in line with other markets where rates are being cut to reflect falling CapEx costs.

In Taiwan, government pressure for more local content by the industry has kept CapEx costs from falling (some insiders say CapEx costs will actually increase). The future economics of the industry are therefore uncertain.

Following the rate cut, the Taiwan Offshore Wind Industry Association stated that “the actual development cost of the wind farm before 2025 has not changed, and there should be no reason for the adjustment of the rate.” The Association noted that despite the progress, the offshore wind industry in Taiwan is still in its infancy, with much of the necessary infrastructure still to be completed. It said that since developers signed contracts with suppliers on the basis of the higher 2019 FiT, the reduction has put their business plans in doubt.