Taiwan’s Renewable Energy Gambit Could Bring Outsized Benefits

Taiwan’s increasing use of green energy has been advantageous to its economy. As investment in renewables continues to grow, more gains are expected down the line.

Renewable energy adoption is quickly becoming a priority for a growing number of businesses and governments. In 2019, assets under management in which institutional investors employed Environmental, Social, and Governance (ESG) criteria for evaluating their portfolios stood at slightly over US$1 trillion, according to fund rating agency Morningstar. By Q2 this year, that amount had more than doubled to nearly US$2.3 trillion.

In Taiwan, the increasing use of renewable energy is already benefiting the economy in ways that are often overlooked. Companies such as Taiwan Semiconductor Manufacturing Co. (TSMC) have seized on the Taiwan government’s commitment to renewable energy in order to enhance its international appeal and their efforts have begun to pay off. Credit rating agency S&P Global gave TSMC an ESG rating of 87, much higher than many other large international companies, such as Intel at 71, Microsoft at 58, and Apple, which scored a mere 29. Given the significant recent investments in sustainability-focused funds, TSMC’s impressive ESG ratings stand to greatly benefit the company.

Source: S&P Global Ratings, Compiled By Cross Pacific Partners

TSMC’s ratings mainly derive from purchases of Renewable Energy Certificates (REC) and carbon credits. In 2020, TSMC purchased 1,230 gigawatt-hours (GWh) of RECs, carbon credits, and renewable energy, equivalent to 7.5% of its power consumption. Its ESG ratings are likely to continue improving in the coming years as it purchases more renewable energy directly generated by wind farms, exemplified by its agreement to offtake the full production of the Greater Changhua 2b & 4 offshore wind farms.

That project is expected to be fully operational in 2026 and will directly supply 920 megawatt-hours (MWh) of renewable energy to TSMC, which has set the ambitious target of reaching 40% renewable energy use by 2030. TSMC’s chairman Mark Liu stated in the company’s annual report on climate change that TSMC is committed to achieving net-zero emissions by 2050. In addition, he said, the company has “deeply embedded green manufacturing, green products, green innovation, and green management into our daily operations.” 

“Taiwan’s economy benefits from the development of renewable energy in various ways,” says Paul J. Cassingham, senior legal consultant at Eiger Law, which has been involved in solar and wind projects since 2015. He points to the development of component manufacturing and services, as well as the potential for Taiwan to develop renewable energy products and services for export, following in the footsteps of its semiconductor industry.

For the financial sector, a recent webinar organized by business news organization The Asset showcased the benefits of green energy. The event, which was supported by AmCham and other organizations, highlighted the role of Taiwan’s increased use of wind power and other renewables in improving its ESG ratings and spurring the growth of ESG funds in Taiwan.

Renewable energy and green energy are relatively new and broad concepts. As a general rule, any business that is working to or plans to decrease its energy use and carbon emissions, including those companies involved in wind power, solar power, energy efficiency, energy conservation, and electric vehicle (EV) production, can fit the green energy category. Such companies would likely score more points on the environmental portion of their ESG ratings, which often leads to higher share prices.

Banks and insurance companies such as Taiwan Life Insurance initially played a key role in helping to jumpstart Taiwan’s renewable energy industry through the financing of the Formosa 1 wind farm in 2018 and then of Formosa 2 in 2019. Taiwan Life also owns a minority stake in the Changfang and Xidao projects owned by Copenhagen Infrastructure Partners.

Now, as Taiwan’s renewable energy industry grows, these financial institutions are involved in other aspects of green energy, such as developing financial products to ensure that retail investors can easily participate in the green energy boom.

Cathay Securities Investment Trust launched a US$600 million Exchange Traded Fund (ETF) in June to play the dual growth areas of green energy and EVs. It is now one of the world’s largest ETFs for these areas.

Taiwan has seen a dramatic increase in the number of ESG funds in the last two years. In 2019, Taiwan had only two such funds, according to the quasi-governmental Taiwan Depository and Clearing Corporation. This year, 30 new ESG funds with assets under management totaling US$4.4 billion have been set up on the island.

Photo: Formosa 1 Wind Power Co. Ltd.

Green energy and ESG ETFs are expected to get an additional boost as Taiwan’s renewables industries move toward localization. Taiwan intends to derive 20% of its electricity from renewable energy by 2025 and to do so in part through increasing its local wind farms and other domestic renewable energy projects.

While many major foreign wind power developers have claimed that localization can hamper the rollout of wind projects, it generally has positive effects on domestic component suppliers and financial firms. Nevertheless, Cassingham of Eiger Law warns that in the long term, Taiwan should be striving to create a globally competitive domestic renewables industry.

“If local content requirements create Taiwan component markets that are separate from their respective global markets, the Taiwan markets are likely to be less efficient and more expensive,” he says. “Those protected competitors may benefit in the short term from a captive market in Taiwan, but their higher costs will make renewable energy more expensive here and will make it more difficult for them to compete successfully elsewhere in the region.” 

Today, green energy ETFs are mainly focused on larger companies, and their portfolios of equities often contain a mix of primarily international companies and only a few Taiwan companies. But as more Taiwanese companies enter the renewable energy supply chain, this creates potential to develop ETFs that include more small and medium-sized companies. Prospects for new green energy ETFs involve those that mainly contain local companies or those that focus on smaller companies with rapid growth.

Meanwhile, as Taiwan’s renewable energy industries grow, local manufacturers will benefit from increased demand for solar cells, renewable energy control systems, wind turbine parts, power storage, and other components.

Taiwan-based Swancor Holding Co. has grown its wind blade materials and carbon fiber businesses along with the boom in Taiwan’s wind power. Its sales revenue from wind turbine material grew from NT$2,511 million in 2016 to NT$5,467 million last year. Now, Swancor aims to be the world leader with a wind blade market share of over 25% and an over 30% share of the carbon fiber market by 2025.

Swancor Chairman Robert Tsai noted at a 2019 signing ceremony that the Formosa 2 offshore wind farm project, in which Swancor is a key investor, involved contracts with over 60 local partners. Today, Swancor and other renewable energy companies can first introduce new products to the domestic Taiwan market before expanding globally.

Photo: Formosa 1 Wind Power Co. Ltd.

Diverse interests

Other companies that are already global leaders in other electronics industry sectors also benefit from the growth of Taiwan’s domestic market for renewable energy.

Local firm Delta Electronics Inc. is transitioning from being a global supplier of computer power systems to a leader in green energy. The company has been involved in the renewables industry since at least 2004 when it founded DelSolar, a subsidiary that specializes in the production of solar cells. Four years later, it built a 1MW solar rooftop project for the 2009 World Games in Kaohsiung.

Today, Delta’s focus on green energy has branched out into other areas such as energy storage systems and EV. The company currently derives about 5-8% of its revenue from products used in the control and use of renewable energy, while another 3-4% is generated through sales of EV products such as charging stations and automotive electronics.

The EV area is seen as having big potential for Delta. Its EV business is expected to grow more than 40% annually between now and 2025 and will represent 15% of the company’s total revenue by 2025, according to estimates from Morgan Stanley.

The government’s support for green energy has also made important contributions to the growth of Taiwan’s domestic EV industry, notably through its subsidization of electric scooters. The amount of such subsidies, which are provided by the Ministry of Economic Affairs, the Environmental Protection Administration, and the local Environmental Protection Bureau, varies between counties, with the biggest offered by Nantou County. Customers registered in Nantou can receive up to NT$24,000 per scooter.

One of the beneficiaries of this policy is Taiwan’s first unicorn startup, Gogoro Inc., a privately owned electric scooter manufacturer with a value of more than US$1 billion. Gogoro is now growing into a global leader in its industry with plans to expand into new markets. Gogoro entered a joint venture with Delhi-based Hero Moto Corp. Ltd. – the world’s largest scooter and motorcycle manufacturer by the number of vehicles sold – in March this year to develop battery swapping stations and electric scooters and export scooters globally under the Hero brand. The deal opens the door for Gogoro to the market in India, which currently has more than 225 million gasoline-powered scooters on the road.

Gogoro is a prime model for how Taiwan can strengthen its export competitiveness and increase its brand recognition by developing its renewable energy industry. The company plans to go public on Nasdaq in the first quarter of 2022 via a special purpose acquisition company (SPAC) with a value initially set at US$2.35 billion. It will be a watershed event that will help promote global awareness of the Taiwan brand for green energy.

Everyone wins

The increased use of renewable energy also benefits Taiwan’s economy as a whole. Global credit rating agencies such as S&P, Moody’s, and Fitch incorporate ESG ratings as part of their country ratings. A higher rating for Taiwan would raise the “sovereign limit” for banks and companies in Taiwan. This could in turn lower the cost for those banks and companies to issue bonds, as no corporation can have a credit rating higher than the country where it is incorporated.

As Taiwan’s use of renewable energy rises from its 2019 level of 2.51%, there is room for its ESG rating to increase as well. Germany, which derives 17.58% of its energy from renewables, has a country rating of 82.48, according to the Sustainable Development Report, slightly higher than Taiwan’s rating of 80.42.

However, Taiwan’s ESG rating is higher than that of Singapore, which has a rating of 69.89 and uses far less renewable energy; renewables only account for 0.24% of the city-state’s energy supply.  As Taiwan moves towards its ambitious target of 20% renewable energy use for electricity by 2025, the island’s ESG ratings are likely to rise in tandem, says Ying Bai, ESG lead for Greater China at global index provider FTSE Russell. The firm is the world’s largest provider of financial indexes. It has also been a leader in ranking companies and countries according to green energy benchmarks. Speaking at The Asset webinar, Bai noted that “we are definitely confident to see more improvement of Taiwan’s environmental score.”