Headwinds in Offshore Wind Financing

High costs and stringent local content requirements are causing delays and plummeting profitability for Taiwan’s offshore wind projects.

When President Tsai Ing-wen took office in 2016, she announced a bold plan to set Taiwan on a path of energy stability while simultaneously phasing out nuclear power by 2025. With land use concerns limiting solar energy in Taiwan and onshore wind limited by “not-in-my-backyard” opposition, she turned to offshore wind to provide renewable energy in bulk.  

The Taiwan government eventually announced an ambitious plan to achieve 5.5GW of installed capacity in offshore wind power by 2025. This clear policy direction caught the attention of the world’s top offshore wind power developers. They were also attracted by Taiwan’s offer of some of the world’s highest feed-in tariffs (FITs). FITs guarantee renewable energy producers an above-market price for what they deliver into the grid during a certain period. They are generally employed as a sweetener to support a nascent industry until it develops economies of scale.  

The timing of these developments was fortuitous, says Anton Ming-zhi Gao, a professor at National Tsing Hua University’s Institute of Law for Science and Technology.  

“The European offshore wind market was seeing FITs being gradually withdrawn around 2015 in favor of more competitive auction mechanisms,” says Gao. “Developers felt the push to look elsewhere around the world for development, and Taiwan was offering very attractive terms. It’s like gravity.” 

This “market gravity” attracted many of the world’s top offshore wind developers to Taiwan, including Denmark’s Orsted and Copenhagen Infrastructure Partners (CIP), Germany’s wpd, RWE, and EnBW, and Canada’s Northland Power.  

Then, in 2018, the Ministry of Economic Affairs (MOEA) announced a 12.7% cut to its offshore wind FITs. In 2019, it once again set lower FITs with a tiered production cap. After 2025, all new construction projects will be completely  free from the FIT scheme.  

Amid speculation about the potential impact of this change in policy, Orsted and Taiwan Semiconductor Manufacturing Co. (TSMC) in 2020 announced a 20-year Corporate Power Purchase Agreement (CPPA). The blockbuster deal – the largest CPPA in the world at the time – was seen as a vote of continued confidence in the development of offshore wind in Taiwan. It also heralded the adoption of CPPAs by more and more of Taiwan’s major tech companies as a mechanism for supporting massive wind farm projects despite the reduction in FITs.  

As of April, 200 turbines are spinning off the western coast of Taiwan, which incidentally hosts some of the world’s best sites for offshore wind farms in terms of wind resources. In total, they represent 1.5GW of installed capacity and are capable of meeting the electricity needs of 1.2 million households for a year.  

On the surface, it appears to be a remarkable success story. In fact, however, industry insiders are on edge, many projects are facing delays, and an atmosphere of uncertainty prevails. Worst of all, projections as to the profitability of future projects are plummeting due to the high cost of made-in-Taiwan components as mandated by the government.  

“I’m concerned that the current turmoil might cause Taiwan to become the world’s first offshore wind bubble,” says Gao.  

Anton Ming-zhi Gao, a professor at National Tsing Hua University, says Taiwan is losing its attraction for foreign offshore wind developers.

Project financing problems 

The 640MW Yunlin Offshore Wind Farm, slated for completion in 2021, was considered a marquee project when it was launched in 2018. Today, only 16 of the 80 planned turbines are in operation, and the project is at risk of becoming a monetary black hole due to epic cost overruns. The project delivery date is now likely 2024 or even beyond, according to industry insiders.  

While Covid-related hurdles contributed to the delay, few in the industry expect a swift turnaround for the troubled project. Yunlin’s developers sent shockwaves through the industry in January by asking the banks to restructure their loans.  

The woes surrounding Yunlin could have repercussions for Taiwan’s offshore wind industry far beyond its immediate stakeholders because of how offshore wind projects are financed, explains Raoul Kubitschek, managing director of NIRAS Taiwan, a sustainable engineering consultancy.  

“Offshore wind projects are largescale infrastructure projects that are very capital intensive, and they also have a long development timeline,” he says. “This is why project owners usually provide around 20% of ‘seed’ equity and seek 80% in loans.” Typically the loans have maturities ranging from 17 to 25 years. 

In the case of Yunlin, 19 international and Taiwanese banks and three export credit agencies participated in assuring financing for the US$3 billion project in 2019. The prospect that a deal of such magnitude could sour has made lenders wary of financing new Taiwanese projects, according to industry insiders.  

Meanwhile, another offshore wind farm, located near Mailiao in Yunlin, is also being delayed. Agreement on financial backing for the 1,044MW Hai Long project was initially expected in 2022, but has been postponed repeatedly. A project news release on January 18 this year stated that the vast majority of the financing would come from export credit agencies from the countries of supply, which would be “expected to greatly reduce the exposure of financial institutions.”  

“Therefore, we are very confident of reaching financial close,” said the release. The funding had not yet been secured as of publication of this article, however, meaning that Hai Long is preparing for construction with funds from its seed equity.  

Taiwan’s offshore wind farms are turning out to be the most expensive in the world, says a top industry professional in Taiwan. “If Hai Long can’t get over the line, none of the other projects can.” 

Raoul Kubitschek, managing director of NIRAS Taiwan, believes Taiwan remains a top market for offshore wind projects
in the Asia-Pacific region.

The cost of “Made In Taiwan” 

In the March edition of the Taiwanese journal Public Law, Professor Gao attributed the current woes surrounding Taiwan’s offshore wind development to the “lack of a well-formulated policy and legal framework.” He wrote that “owing to endless red tape and local content requirements, project delays and cost overruns are inevitable.”   

In an interview with TOPICS, Gao said it was clear as far back as 2018 that Taiwan’s local content policy – requiring the production of a large number of components to be made in Taiwan – would drag the offshore wind industry down. “The government was unclear whether it was trying to enact energy policy or industrial policy,” he says.  

Creating a whole new supply chain for wind turbines and foundation components such as blades, towers, jackets, and pin piles is a gargantuan task. Moreover, requiring developers to purchase at least 60% of these parts from local developers means the cost would be significantly above international market rates. The government’s stated intention is to create a new export sector for Taiwan – one initially supported by protectionist policies but eventually becoming globally competitive.  

“In Taiwan, we’ve seen again and again the failure of top-down protectionist policy to foster a new industry,” says Gao. “We tried to do it with mass transit, gas-powered power plants, and automobiles. The results are not internationally competitive.”  

Despite the government’s support for the development of 5G-related products in the ICT field – an area of strength for Taiwan – these initiatives failed to gain traction, says Gao. He considers TSMC, which was backed by the government in its early days, as the exception that proves the rule.  

“The United States had a strategic reason to treat Taiwan as a partner in chip manufacturing because they would not want to do the same kind of technical transfer to Japan or Korea,” says Gao. “There’s no similar level of technical transfer in offshore wind. Although we can mandate that components are made in Taiwan, it brings us no closer to being able to manufacture the whole turbine the way they do in China.” 

Meanwhile, the “market gravity” that brought developers worldwide to Taiwan has changed directions yet again. 

“In the wake of the war in Ukraine, European countries are bringing out new incentives for offshore projects again,” says Gao. “The United States has also matured into a hot new market. Meanwhile, here in Taiwan, we’ve seen the rapid withdrawal of the FIT, skyrocketing costs due to localization, and an unclear regulatory environment. You can say we got the developers here on a bait-and-switch, but now the generous FITs are gone and there are more lucrative markets elsewhere.”  

NIRAS’ Kubitschek is among those who disagree with Gao’s dire assessments. “While we’ve seen a lot of growing pains, Taiwan is still the top market for offshore wind in the Asia-Pacific region outside of China,” he says. “It is one of the best-paid sectors and has attracted billions of US dollars in overseas investment.”  

From paying one of the world’s highest FITs, Taiwan has transitioned to a zero-subsidy market, with developers working directly with large tech companies that are facing increasingly pressing commitments to purchase renewable energy.  

“The government will not need to subsidize any of the projects from now on,” says Kubitschek. “However, Taiwan can still enjoy the economic benefits of localization, as well as fees for ports and land leases. State-owned Taipower will also greatly benefit as it receives funding for grid upgrades and transmission from those projects.” 

If developers, bankers, and tech-industry off-takers continue to play ball, a significant part of Taiwan’s energy transition will come at no cost to taxpayers. But Kubitschek acknowledges that the Taiwan government hasn’t “won” yet.  

“The decision of the government to transition from a support scheme to a free-market approach has likely come too early,” he says. In last year’s offshore wind auctions, six developers or consortiums bid and were awarded projects. Yet none of them have signed an administrative contract as of this writing.  

The time when Taiwan was seen as one of the most lucrative markets for European developers is over. The withdrawal of FITs, the need to fulfill onerous localization requirements, and global factors such as the rise in commodity prices and shortages of offshore wind installation vessels continue to erode the business case.  

If the offshore industry continues to sustain pain in Taiwan, developers will pass on the cost to their customers – leaving Taiwan’s strategically important tech industry to suffer – or even exit the market, further impacting Taiwan’s progress on energy security and decarbonization.