Offshore policy reform is overdue

Taiwan's offshore wind development is currently experiencing literal and metaphorical rough sea conditions. Without adapting to the situation and adjusting policies accordingly, there is a risk of a further loss of market confidence and the relinquishing of Taiwan’s position as a trailblazer in the Asia-Pacific region.

By Jason Wang and Raoul Kubitschek
 

The announcement by a large European utility with a significant global footprint in offshore wind in the late afternoon hours of 12 May 2023 of its reported departure plans from the Taiwanese market to focus on other markets has caused a stir in the offshore wind industry in Taiwan. This decision comes not long after last year’s announcements by two other large developers that they did not participate in the offshore wind Round 3.1 auctions. While one of the leading Asian developers divested from its Round 3 projects, the other, a global leader in offshore wind, is likely awaiting changes to the auction regime before considering further investments in new projects in the market. Most developers and other industry players started as early as the beginning of last year to express their doubts about Taiwan's current offshore wind energy policies. Meanwhile, Taiwan's Bureau of Energy (BOE) has also extended the deadline for the signing of the administrative contract for Zonal Development Round 3.1 from 17 May 2023 to 30 June 2023. This reflects global and local market developments as well as market reports suggesting that at least two developers awarded three projects are reluctant to sign with the current conditions. While the market has seen some positive developments, there are now stronger and stronger signals that there is a need to adjust the auction regime going forward to keep offshore wind developments in line with Taiwan’s 2050 net zero goals.

Has Taiwan reached a turning point in its offshore wind development?

Taiwan is no longer the sole offshore wind energy market in the Asia-Pacific region outside of China, as Japan, South Korea, Australia, Vietnam, and the Philippines are rapidly catching up. Currently, apart from Taiya Renewable Energy, Shinfox and Taipower, the state-owned utility, offshore wind developers in Taiwan are all international players that compare their global portfolios and outlooks constantly. This implies that wind developers will strategically evaluate all potential targets in the global market. As Taiwan enters a zero-bid market, without acceptable returns and higher risk profiles compared to other markets, developers consider factors such as Taiwan's challenging localisation policies, restricted domestic financing conditions, and the geopolitical situation. It is understandable for developers to redirect their limited resources to other markets in the Asia-Pacific region and their home markets. The lack of local developers entering the offshore wind market is also signalling that there are structural issues in the market. After all, compared to Taiwan, South Korea's localisation policy is more encouraging, and Japan incorporates local-friendly and feedback-related factors into its evaluation criteria, without strict localisation requirements, in contrast to Taiwan. Therefore, it is not surprising that developers are reallocating their assets in the Asia-Pacific region. Authorities in Taiwan have shown flexibility in the past and Taiwan is still an active market, which is its strongest argument to turn the tide.

The Taiwan government should seize this opportunity to re-evaluate

Nevertheless, as we discussed in our previous article, Taiwan still has the potential to become a significant hub for offshore wind in the Asia-Pacific region and we are still positive on this prediction. However, the advantage of being the frontrunner is rapidly diminishing. With Taiwan facing a presidential election next year, it should take advantage of the time when developers are announcing their withdrawals and doubts to reassess policy planning and quickly adapt. The overall macro-economic but also local conditions of the original Round 3 zonal development policy have changed dramatically since last year. Not only have various Asian countries accelerated their offshore wind plans, but Taiwan also faces challenges such as insufficient international vessel capacity, high interest rates, and inflation. This means that the cap rates or financial models taken into consideration by the government during the initial planning from the end of 2021 to mid-2022 may no longer align with the current reality. This is also clearly demonstrated in Taipower’s own balance sheet of 2022 and outlook for this year. Since the cost of producing energy has skyrocketed, zero bids or caps of NT$2.49 per kWh are clearly no longer sustainable.