Gale force momentum in Taiwan’s offshore wind sector
After many years of careful planning the Taiwan offshore wind sector is gaining traction, but challenges remain
The success of the offshore wind sector in Taiwan is also encouraging activity in other new offshore wind markets in the region, including Japan, Korea, India, Vietnam and Australia.
This year is proving to be a threshold year of achievement for the Taiwan offshore wind sector, with many years of careful planning and development activity starting to deliver results.
German developer wpd's 640 MW Yunlin offshore wind project reached financial close in June 2019, becoming the first large-scale offshore wind project to reach financial close in Asia- Pacific. A strong pipeline of projects follows hot on the heels of Yunlin's success, including Macquarie/ Swancor's 378 MW Formosa 2 project, Copenhagen Infrastructure Partners' 600 MW Changfang and Xidao project, Ørsted's 605 MW Changfang 1 project and wpd's 350 MW Guanyin project. A string of further planned Taiwan offshore wind projects are forming an orderly queue.
This impressive rollout of development activity promises to keep Taiwan's offshore wind market participants busy for many years to come.
In addition, the success of the offshore wind sector in Taiwan is also encouraging activity in other new offshore wind markets in the region, including Japan, Korea, India, Vietnam and Australia. The offshore wind sector took its first cautious steps off the coast of Denmark in 1991, and it is now making confident strides around the Asia-Pacific region.
YUNLIN AS A KEY STEP FORWARD
The Yunlin project was an important milestone in the offshore wind sector for many reasons:
- Although the earlier 128 MW Formosa 1 project proved the concept, the much larger Yunlin project rigorously tested the international and local New Taiwanese Dollar debt capacity for offshore wind power in Taiwan
- It attracted the support of three export credit agencies (ECAs)—from Denmark, Germany and the Netherlands—together with further cover provided by IPEX-KfW Bank. Broad ECA support is critical to the continuing viability of this sector in the near term
- It was the first to test the market's acceptance of the complicated "Grid Contract" concept introduced by Taiwan's Ministry of Economic Affairs
- It reaffirmed the basic bankability of the risk allocation dynamic of the Taiwan offshore wind sector, centered around a pragmatic analysis of Taipower's power purchase agreement
The successful equity sell-down process on Yunlin was an equally important step forward for the market. A consortium of Japanese investors led by Sojitz Corporation acquired a 27 percent stake, emerging victorious from a hotly contested auction process involving a number of large players in global infrastructure investment.
CURRENT CHALLENGES TO RESOLVE
The Taiwan offshore wind sector has been a key catalyst in attracting the attention of many of the world's largest infrastructure fund investors to the Asian infrastructure market. The exceptionally deep pools of global infrastructure fund capital are increasingly focused on infrastructure in the region.
This trend is certain to have important consequences both for Taiwan specifically and for the Asian infrastructure market more broadly. If well-structured projects can tap into this interest effectively, it will fundamentally improve the prospects for addressing the region's huge gap between infrastructure demand and development.
Still, important challenges remain to be addressed for the Taiwan offshore wind project pipeline to prove itself sustainable in the medium term:
- Step-in rights—Discussions with Taiwanese authorities continue as to the nature of direct step-in rights that can be accommodated for the benefit of finance parties. Direct step-in rights are widely accepted internationally as fundamental for limited recourse infrastructure financing, and it is critical to the near-term sustainability of the Taiwan offshore wind sector that these rights be accommodated.
- Taiwanese bank participation—Taiwanese authorities ask project developers to commit to a minimum of 20 percent Taiwanese bank debt funding, yet the appetite and capacity of local banks remain a challenge. In particular, only privately owned Taiwanese banks participated in the funding of the Formosa 1 and Yunlin projects, with the large state-owned Taiwanese banks remaining on the sidelines. The participation of Taiwanese state-owned banks would be a significant boost to the sustainability of the project pipeline, and developers are eagerly seeking this. In addition, there are also prospects of funding from Taiwan life insurance companies in the sector. Achieving this milestone would be a similarly important step forward.
- ECA coverage and local content requirements—To attract Taiwanese bank funding, developers are seeking to maximize the available debt guarantee coverage from ECAs. Therefore, a conundrum is emerging for developers: Taiwanese authorities are also driving a strong local content agenda for construction of the projects. This has the inherent impact of reducing international content, which is the necessary pre-condition for the support of international ECAs. A pragmatic and flexible approach by the authorities to the application of local content requirements is necessary. We expect the range of ECAs active in the Taiwan offshore wind sector will continue to increase in the near term, as developers seek to manage these competing priorities.
- Environment and community—The ECAs active in the offshore wind market focus intently on the treatment of local communities—including, importantly, fishing communities—as well as the protection of local habitats and wildlife. These responsibilities are at the forefront of developers' minds, including effectively managing compliance with a convergence of local regulation and international standards.
- Insurance market capacity—An expanding offshore wind project pipeline in Taiwan depends on the insurance market having sufficient capacity to absorb the key risks involved in the construction and operation of the projects.
Although challenges remain, the Taiwan offshore wind sector is surging forward. Other offshore wind markets around the region will follow in its wake.
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP