A retrospective reduction in subsidies for offshore wind power development by Taiwan could take the wind out of international developers’ sails, and erode some of the sector’s attractiveness relative to Japan, mainland China and South Korea as an investment destination.
The Taiwan government had proposed an aggressive cutback in subsidies for offshore wind power projects in November 2018, after the ruling Democratic Progressive Party suffered a major election setback at the hands of the opposition Kuomintang Party, which has criticised offshore wind subsidies previously given as too generous. It initially proposed a 12.7 per cent cut in tariffs and the restriction of subsidies to output within 3,600 hours of operation in a year.
But it was forced into a climb down after affected industry players voiced their concerns. On January 30, when the reduced subsidies were announced, the cut in tariffs was trimmed to 5.7 per cent and the cap on subsidies was replaced with a less punitive limit of 4,200 hours.
The subsidy cutback, and related tariff mechanism changes also announced last month could increase policy risks attached to infrastructure investment, which will raise financing costs, said industry watchers.
“Everyone expects subsidies to fall over time … but having retrospective changes is a big shock that hits both confidence and the cost of debt, which will be as big a deal as power revenue reduction,” David Sanders, a managing director at FTI Consulting’s global clean energy practice, said in an interview. His team advises European and Asian clients.
And to make the situation worse, international developers that won tendered project development rights in April 2018, were unable to benefit from higher tariffs last year because the government failed to issue their permits by January 2, 2019, a prerequisite for the signing of power sale and project financing agreements.
One of the winners, Denmark-based Orsted, the world’s largest offshore wind farms developer, said early last month it was disappointed with the delay, and said it would pause and revisit all its project activities, supply chain commitments and contracts.
The Taiwanese government needs to be very careful with its approach to supporting infrastructure investment … with the international investment community
James Knight, partner, Augusta and Co
Orsted said it would renegotiate with suppliers and see if any adverse impact from the tariff cut and subsidy cap could be mitigated so that its projects were still investible.
The 5.7 per cent tariff cut will lead to a 10-15 per cent reduction in a project’s after-tax cash flow, which could be cut further if its cost of debt is raised as a result of lenders’ perception of higher policy risk in Taiwan, said James Knight, a partner at renewable energy financial consultancy Augusta & Co.
“The Taiwanese government needs to be very careful with its approach to supporting infrastructure investment, or regulated assets, with the international investment community,” he said. Knight is also an adviser to Singapore-backed Yushan Energy on its Taiwan joint venture wind farm project with Canada-based Northland Power.
A retrospective cut by the Spanish government in solar power subsidies in 2010 dented the appetite of international investors for years, and was a case in point that Taipei should heed, he added.
The ministry of economic affairs said on January 30 the offshore wind tariff reductions were “fair and reasonable” as they were based on costs at real project cases in the UK, Germany and Denmark, and were adjusted for local operational circumstances in Taiwan, and took into account views expressed in public hearings.
Qiao Liming, the China director of Global Wind Energy Council, which represents equipment manufacturers, project developers, suppliers and financiers from more than 80 countries, said she was cautiously optimistic about Taiwan’s offshore wind sector following Taipei’s climb down.
“Taiwan’s offshore wind [sector] is still very much an emerging industry … to see any significant cost reduction, we need to see the construction of several hundred or even 1,000 megawatts of capacity,” she said. “Right now, real mass production has yet to begin.”
FTI Consulting’s Sanders said he expected most of the developers that won tendered projects last year would go ahead with them, as Taiwan was still the most attractive offshore wind market in Asia for western developers, even as they will give Japan and mainland China a harder look.
The mainland China market has been dominated by state-backed energy giants and is difficult for foreign developers to break into, said Sanders. Japan’s market, while attractive in the long term due to its long coastline and good wind resources, has been hampered by the fishing industry’s rights to block wind farm development.
But this has not stopped Orsted from signing an agreement last month to explore the feasibility of co-developing offshore wind projects with Japan’s largest power company, Tokyo Electric Power, in Japan and abroad.
Asia’s offshore wind capacity is forecast to surge twentyfold to 43,000MW in the decade to 2027, led by growth in mainland China from 2,000MW to 31,000MW, followed by Taiwan’s rise from 8MW to 8,700MW, according to natural resources consultancy Wood Mackenzie.
Taipei is targeting for half the island’s electricity generation to be fuelled by natural gas, 30 per cent by coal and 20 per cent by renewable energy – primarily wind and solar – as it seeks to phase out nuclear power, which makes up 19 per cent of output, by 2025.
East Asia will need about US$37 billion in investments in the next five years to meet the nascent industry’s growth, according to Wood Mackenzie.