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Taiwan offshore wind: opportunities for investors

Out-Law Analysis | 04 Dec 2019 | 1:02 pm | 4 min. read

Taiwan is fast becoming a hub for offshore wind energy in the Asia-Pacific region, with many large global energy companies having recently acquired interests on the island.

The offshore wind industry may have started in Europe but Asia is catching up fast and has the potential to overtake the project pipeline in Europe by 2023. Geographically, Taiwan is also well-positioned to capitalise on projected investments in offshore wind in Southeast Asian countries such as Japan, Korea and Vietnam.

In addition to investment in new Taiwanese offshore wind farm projects, there are considerable opportunities for investors to be involved in existing projects and projects at the development stage. We expect this to be driven by:

  • amendments to local regulations, which give acquirers increased flexibility in the permitted offerings to the shareholders of a target company in M&A transactions, for example by way of share exchange;
  • developers of existing Taiwanese offshore wind farm projects, including recent M&A activity in the Yunlin, Formosa I, II & III projects, indicating that they will divest their equity interests as the projects mature, and
  • a general increase in financial investors participating in the Taiwanese M&A markets.

Add in the increasing interest in renewables investment globally, and we see considerable opportunities for both domestic and foreign investors to the Taiwanese offshore wind market.

Opportunities for developers

The post-2026 offshore wind licensing round

Currently, development zones for offshore wind farms in Taiwan have been issued on a 'proof of concept' basis and are limited to areas with water depths of less than 50m. The intention behind Taiwan's 'Phase 3 - Zonal Development Round' in 2026-30 is that offshore wind farms will be developed on a self-sustaining and commercial scale. As a result, the Bureau of Energy and the Ministry of Economic Affairs will make zones with water depths of 50m or more available for development.

Geographically, Taiwan is also well-positioned to capitalise on projected investments in offshore wind in Southeast Asian countries such as Japan, Korea and Vietnam.

This will provide investors, developers and contractors with significant opportunities in the medium term in relation to:

  • an increase in suitable and profitable development areas as the offshore potential and feasible wind capacity of deep water exceeds shallow water zones; and
  • the ability to leverage expertise and build upon competitive advantages in more complex offshore wind farm projects involving deeper waters.

Direct sale and purchase of electricity

Following amendments to Taiwan's Electricity Act in 2017, developers are now permitted to directly engage with consumers - including companies - for the sale and purchase of wind-generated energy. Previously, developers were required exclusively to enter into a standard form of power purchase agreement (PPA) with Taipower, a government-owned entity that has been granted the power to offtake electricity in Taiwan under the Electricity Act.

Developers can now reduce the risk of their offshore wind farm project by guaranteeing the sale of electricity before the completion of the project; and potentially increase profitability by selling electricity to corporate consumers at rates that may be higher than the feed-in tariff under the Taipower PPA.

These potential benefits are significant in the context of major global corporations becoming increasingly conscious of the purchase and use of renewable energy. A number of multinational corporations have committed to source 100% renewable energy to power their operations as part of the RE100 initiative. In particular, many global companies with industry interests in the Asia Pacific region are turning to sustainable solutions for energy consumption in their manufacturing and industry processes.

Related supply chain opportunities

There will also be opportunities for developers, contractors and investors to capitalise in the supply chain process as the Taiwanese renewable energy market matures. The supply chain consists of onshore and offshore infrastructure; ports and vessels; manufacture of cables, turbines and generators; and operation and maintenance.

Increased economic viability in the supply chain

Although new entrants in the Taiwanese market are focused on educating and improving the capability of the local supply chain, Taiwan's current project pipeline may not yet be commercially viable for these companies. As an example, the establishment of a blade factory requires 300-350 workers, whose hiring and training takes 6-12 months, and presents a significant upfront cost. It would need to be supplying a number of projects to achieve satisfactory levels of profitability. Similarly, building a factory to make cable for just 1GW of capacity may not be economically viable.

With the entry of experienced developers and manufacturers from the European markets, the fledgling Taiwanese market could experience similar progress.

As the Taiwanese market moves into the third zonal development round, there will be an increase in domestic opportunities for supply chain participants to develop economies of scale and achieve commercial viability.

Less risk at the construction and development phases

In the European markets improvements in technology, greater project experience and more effective leverage of competitive advantages have significantly reduced the construction and development costs of offshore wind farms. With the entry of experienced developers and manufacturers from the European markets, the fledgling Taiwanese market could experience similar progress. There will be opportunities for investors to obtain satisfactory returns from the construction/development phases of offshore wind projects, in addition to investments in the operational assets.

Taiwan as an Asia Pacific offshore wind hub

Access to broader Asia Pacific project opportunities and deals would also increase the commercial viability of businesses across the supply chain. For industry participants, project clusters reduce costs, especially in relation to maintenance and marine logistics.

One particular opportunity is in relation to maintenance operations coming out of Taiwan. A regional maintenance hub could be established in Taiwan, and maintenance costs spread over multiple projects in the region. Repair, operations and maintenance are long-term services that could provide jobs and revenues that last 20-25 years on any particular project, as opposed to construction which is estimated to last 1-2 years.

Floating offshore wind farms

Until recently, full-scale turbines with floating foundations were purely prototypes with commercial potential. However, the increasing viability of floating offshore wind farms has the potential to unlock even more development areas in Taiwan.

In order to take advantage of this opportunity, it is important to note that the scope of a floating offshore project is different to that of a fixed-bottom project in a number of critical respects:

  • integration of the wind turbine tower with the floating foundation will need to be considered by developers at an early stage to ensure that contracts will provide the expected degree of protection;
  • the more modular approach to construction that is expected for commercial scale floating offshore wind along with the need to consider O&M requirements could drive further differences when comparing floating with fixed bottom projects; and
  • whilst design risk is not new to offshore projects, there is additional risk of new WTG models not being certified at the time expected, or not performing in the expected way.

If you would like further information on the Taiwanese Offshore Wind market, including a more comprehensive legal/commercial Update Paper, please contact: [email protected].

James Harris, Melanie Grimmitt, Bernard Ang, Nick Carlin are renewable energy experts at Pinsent Masons, the law firm behind Out-Law.