Sustainability & CSR
Taiwan's offshore wind round 3.1: Signs of hope?
The first batch of allocated projects for Taiwan’s offshore wind Round 3.1 concluded at the end of June 2023 with two project owners having signalled that they signed administrative contracts by the deadline and three further project owners obtaining an extension of two months, until the end of August to find a solution to sign off. This will mean that the capacity of the first projects to be connected to the grid by 2026/27 will fall somewhere between 995MW and 2,335MW, short of the 3,000MW that had been awarded at the end of last year. Taiwan’s shortage of renewables and the challenge of achieving its short and midterm net zero targets will thus continue. A timely Round 3.2 will offer a new opportunity to catch up by 2028/29 but there is still work to do to attract bidders.
By Jason Wang and Raoul Kubitschek
Taiwan's goal to install 27GW of renewables by 2025 now looks highly unlikely to be achieved. As of April 2023, Taiwan had installed 15.2GW – with 10.4GW stemming from solar energy, 1GW from offshore wind, while onshore wind (851MW), geothermal (5MW), biomass (83MW) and waste to energy (632MW) have seen no growth to speak of over the last four years. By the end of 2025 Taiwan might reach around 22GW. Hitting 27GW would only be possible if solar installations increase to a pace of 3.4GW per year from 2023-2025, a close to impossible scenario given the regulatory and grid challenges the sector is facing. The current delays in offshore wind Round 2 (2021-2025) projects will make it impossible to achieve the envisioned 5.6GW by 2025. They are likely to only hit between 2.7GW and 3GW by 2025 with the outstanding projects coming online between 2026 and 2027, at the earliest.
Offshore wind energy will play a vital role in Taiwan’s short- and medium-term energy mix. The current auction round that concluded at the end of last year for 3GW for 2026 and 2027 was imperative to supply industries in Taiwan with green energy. However, the market design for those auctions did not reflect the priority of achieving the sustainable and speedy development of projects, emphasising instead the government’s desire to extend its localisation policy, as well as an unwillingness to use Taipower, the state-owned utility, as it was intended, to serve the role as a wholesaler and supplier of electricity. Instead, the design of the auction pushed everything into a private energy wholesale market – a mechanism that doesn’t even exist yet for such large projects.
This is reflected in the prolonged tug of war between developers and the government to iron out some of the unfeasible items in the administrative contracts for Round 3.1. According to the news release from the Bureau of Energy (BOE) from 30 June, a total of five wind farm owners expressed their intention to sign the contracts. Overall, there were seven wind farms qualified to sign the contracts, meaning that two have decided not to sign. The press release alludes to the reasons for projects to be abandoned. In one of the cases, the allocated wind farm size was deemed to be too small and not economically viable, and in the other, the developer has prioritised its financial planning and focus on existing projects. However, the BOE has also stated that the necessary documents for all five wind farms are not yet complete, so an additional two-month extension has been granted for the developers to prepare the required documents. This means that the signing of the administrative contracts has been extended by four months from the original deadline of 30 April 2023. This will also have a knock-on effect on Round 3.2 – as those are only able to kick-off after Round 3.1 has been settled. Until Round 3.1 has been finalised it is unclear how much capacity will have to be moved from Round 3.1 (somewhere between 995MW and 3GW, depending on how many contracts are signed) to Round 3.2 (an originally planned 3GW) and which wind farm areas might become available again. Valuable time to speed up on Taiwan’s pathway to net zero has been lost. According to the Liberty Times (30 June), the timeline for the development of floating wind energy demonstration projects has been shifted by an entire year into the third quarter of 2024, instead of starting this summer.
What is the main barrier to signing off Round 3.1?
While there is a glimmer of hope that there is still an interest in investing in Taiwan's offshore wind market, in the face of high inflation and high interest rates globally, there remain major impediments to making Round 3.1 work. According to statements from the BOE, some developers have yet to submit complete documentation, and it is unclear which specific documents are incomplete and whether they can be prepared within the two-month extension period. One of the core issues remaining concerns finding bankable offtakers (Corporate Power Purchase Agreements, CPPAs) and whether these problems can be resolved within two months.
Next steps to building a reliable wholesale market for renewable energy
The government had decided to steer offshore wind into CPPAs – by offering a far too low guaranteed cap of NT$2.49 per kWh (around US$83 per MWh) by Taipower for projects bidding for 2026/27. All successful bids have thus chosen a zero bid, meaning they would only be able to generate income in the private market. Due to the reliance on CPPAs, the insufficient international credit ratings for most Taiwanese companies have become a significant hindrance to the financing process of these projects to satisfy the requirements of lenders, especially considering the long-term duration of projects (usually between 15 and 20 years). In response to this issue, the Taiwan government is currently considering three approaches to address the situation:
1. Credit Guarantee and National Financing Guarantee Mechanism: The government is formalising regulations for a National Financing Guarantee Mechanism managed by the National Development Council. Under this mechanism, if companies covered by this mechanism fail to fulfil their long-term power purchase contracts, compensation will be provided by domestic banks that offer those credit guarantees. The National Financing Guarantee Mechanism will partially bear the compensation burden of the banks. However, companies that do not meet the credit rating requirements will need to purchase credit guarantee documents and the fee structure for such documents has yet to be determined. This implies an increased costs for companies with insufficient credit ratings and thus a higher procurement rate for green energy.
2. Green Power Procurement Insurance Mechanism: To address the potential problem of the gap between the period when companies default and finding a new buyer within the 20-year+ contract duration, the government plans to establish a Green Power Procurement Insurance mechanism provided by state-owned banks. Companies in need of green power will be able to purchase this insurance. In the event of a company's default and inability to procure green power, the state-owned bank responsible for the insurance will compensate the offshore wind developers. This mechanism will also incur fees to cover the risk of the insurers and thus be reflected in a higher procurement fee for green energy.
3. Taipower takeover in cases of buyer defaults: In the event of a CPPA default and during the period between the default and finding a new buyer, Taipower will act as the ultimate purchaser. This would reflect Taipower’s role as a utility and its core business mission.
These planned measures aim to address the challenges posed by the lack of international credit ratings of Taiwan companies for energy procurement from Independent Power Producers (IPP). By providing credit guarantees, insurance mechanisms, and a backup purchaser, the government intends to mitigate the risks associated with the financing and development of offshore wind projects, to ensure the stability and progress of Taiwan's renewable energy sector.
One of the clearest solutions, however, should be obvious: Taipower, as the state-owned utility, could act as a wholesaler and supplier of energy. Taipower is best equipped to distribute electricity efficiently to the market no matter the size of the user, from a small convenience store or to a global ICT leader. Taipower also still enjoys a very good credit rating, as it is owned by the government. It would also help to resolve another issue that is currently blocking CPPA developments: reserve power regulations. The current interpretation of the Electricity Act by government authorities seems to be that renewable energy providers will need to provide a guaranteed 15% reserve power. This is an impossible feat for single market participants and counter-intuitive to the nature of renewable energy developers, as it could mean that they would need to procure or invest in fossil fuel power – something only Taipower is allowed to do. Over the last seven years, Taipower has avoided liberalisation efforts, that were part of the Electricity Act reform. As a trade-off for maintaining its monopoly, it should act as one of the main drivers to decarbonise Taiwan’s electricity supply by working with IPPs to facilitate the rapid development and adoption of renewables. Nearly 60% of energy demand derives from Taiwan’s industry. By adding more renewables, those companies, Taipower and its ultimate owner, the Ministry of Economic Affairs, would greatly strengthen Taiwan’s position as a manufacturing and investment hub by offering RE100 companies the opportunity to achieve their goals.
Taiwan needs to speed-up it’s offshore wind energy buildout
The rules and regulations for the planned 3.2 round of offshore wind farms and floating offshore wind farm demonstration projects have not been announced yet. But both will now be delayed – Round 3.2 by at least two months and floating wind demonstration projects by a full year, according to press reports. In addition to accelerating measures to create a workable renewable energy trading market, the Taiwan government should also consider the additional costs associated with their current guarantee and insurance mechanisms. These costs have the potential to reduce even further the willingness of green power purchasers, which will be unfavourable to accelerating Taiwan's net zero transition and ensuring a stable investment environment for new offshore wind projects. To lower the cost for green energy buyers, policy makers need to also revisit the current localisation policies, which have added a large cost escalation element, and last but not least, the potential cost increase resulting from the unclear rules for reserve capacity.
Taiwan has been on a path to an energy transition since 2016. Installed renewable energy capacity has increased from 4.3GW at the end of 2015 to 15.2GW by April 2023. Over the same period, the CO2 emission intensity of the energy sector dropped by 5.7%. However, the pace of Taiwan’s decarbonisation and energy transition is far too slow to satisfy the requirements of the UN Paris Agreement as well as Taiwan’s own energy transition goals.
Renewable energy is essential to Taiwan’s future development and the government can’t afford to treat renewables simply as a nice to have. As Taiwan’s 2024 presidential and legislative election campaigns go into full swing, energy policy will be a key element that all major parties need to think about. The challenge will be how to achieve a good energy mix. No one technology will be sufficient on its own but the speed of the renewable energy buildout will be the decisive factor in improving Taiwan’s energy security, reducing air pollution, enhancing Taiwan’s reputation as a responsible global player in the fight against climate change, attracting foreign direct investment and creating attractive job opportunities.
Jason Wang is a Senior Economist for NIRAS, a Danish multi-disciplinary engineering company, focused on energy policy and market forecast consultancy for clients and supporting NIRAS’ efforts in Environmental Social and Governance (ESG) offerings in the APAC region.
Raoul Kubitschek has worked in Taiwan’s renewable energy sector since 2008 and is currently the Taiwan Country Manager for NIRAS. He is concurrently Co-Chair of the ECCT’s Energy and Environment committee.