8 Years of Offshore Wind Development in Taiwan: Localization Policy's Meaning Hinges on International Competitiveness

People seem to forget, and it appears that amidst discussions surrounding Taiwan's localization policy, there is a notable oversight regarding its fundamental objective: bolstering the nation's supply chain capabilities to compete on the global stage. However, the present state of the localization policy reflects a scenario dominated by either a single supplier (monopoly) or a limited number of suppliers (oligopoly) within each localized industrial sector (or item).

In mid-April, I seized the opportunity to visit Singapore for a Southeast Asian cross-regional forum and exhibition focused on energy and carbon reduction technologies. The forum drew participants from Malaysia, Singapore, the Philippines, India, Thailand, and Vietnam, representing industries spanning petroleum and natural gas, coal, hydrogen, energy storage, and electric vehicle applications. It is an honor to engage with foreign experts and leaders as a Taiwanese media member on Taiwan's energy transition and the development of offshore wind during the event.

It's somewhat proud that Taiwan's image abroad isn't just about semiconductors anymore. When energy comes up, the first thing that springs to mind now is offshore wind. This shift in perception was unimaginable just a few years ago. Taiwan took a bold leap with this decision, from administrative legislation to industrial supply, but considering the current global trends, it's the right path to take.

The tumultuous progress of Taiwan's offshore wind industry has reached the Zonal Development stage (commonly known as Phase 3) amid a buzz of activity. As an observer and reporter of this industry, I have interviewed and conversed with nearly a hundred stakeholders in the domestic and international renewable energy sector. This includes developers, supply chains, officials, diplomats, researchers, scholars, seasoned media professionals, and consultants who have long been immersed in the energy sector.

Taiwan's struggles developing renewable energy and offshore wind power industries are vividly evident under numerous pioneers. Even though many of these individuals have moved on from their original roles or shifted within the industry, they deserve our utmost respect. From demonstration projects and potential sites to zonal development, I believe many pioneers have shared their insights and learning experiences regarding Taiwan's industrial development in their respective areas of expertise. Upon reviewing these discourses, it's evident that critical industry discussions revolve around the controversy of "localization," touching upon aspects such as strategy, technology, finance, engineering, talent, and the socio-economic and ecological environment.

I penned a thesis on the issue of "localization obstacles (referred to Industrial Relevance Plan in Taiwan)" regarding offshore wind development and supply chain in the past, aiming to dive into Taiwan's predicament and how to tackle it. Back then, the industry was still feeling its way around the concept of local content and its potential ramifications. At that time, the foundation was laid on the premise of pioneering and innovative renewable energy industry in Taiwan. Reflecting on the industry's trajectory over these years, I believe the discourse among pioneers who have been involved for several years has shifted from mere development to the industry's "Existence & Sustainability." The enthusiasm once held by these familiar faces from the industry, as well as colleagues from institutions and officials, is gradually waning. Why has Taiwan's offshore wind industry experienced such a stark decline in less than 8 years? What has transpired in the realm of "sustainability" for Taiwan's offshore wind industry?

The Endless Dispute Over "Local Content"

In 2019, Taiwan's offshore wind sector garnered significant global attention, largely attributed to the contentious discourse surrounding "Local Content," coinciding with the inaugural Global Offshore Wind Summit in Taiwan. By 2022, as the fourth iteration of the summit unfolded, the industry's fervor had somewhat abated, although discussions surrounding "Local Content" endured. This occurred with the government's impending announcement of the 3.1 auction results, against the backdrop of a cycle of escalating global interest rates.

A common industry joke describes Taiwan's offshore wind sector as a beautiful coat, with "Local Content" as the first button. When that first button is mismatched, the subsequent efforts to rectify it seem like an uphill struggle.

People seem to forget, and it appears that amidst discussions surrounding Taiwan's localization policy, there is a notable oversight regarding its fundamental objective: bolstering the nation's supply chain capabilities to compete on the global stage. However, the present state of the localization policy reflects a scenario dominated by either a single supplier (monopoly) or a limited number of suppliers (oligopoly) within each localized industrial sector (or item).

As outlined in the timeline pertaining to the Phase 3 Offshore Wind Zonal Development Stage 1 (commonly known as 3.1), developers aiming to connect to the grid as early as 2026 should have commenced construction preparations this year (2024). However, the Taiwan Offshore Wind Industry Association (TOWIA) has submitted a formal communication to the Ministry of Economic Affairs (MOEA) citing unforeseen challenges. These include global inflation, interest rate hikes, and geopolitical tensions such as the Russia-Ukraine conflict, prompting European nations to revise their offshore wind targets, consequently escalating international construction costs. Furthermore, there is a shortage of large-scale working vessels, and various raw material prices are on the rise. Consequently, TOWIA earnestly requests MOEA to consider postponing grid connection. It's noteworthy that, among the successful bidders in 3.1 auction, plenty had amassed some development experience either worldwide or at least in Taiwan. Nonetheless, the harsh realities persistently hindered developers from progressing with wind farm projects in Taiwan.

Once again stressing the most contentious point of 3.1, is the stringent localization requirements. The policy of zero-biding is being adopted along with the replacement of FIT with CPPA (Corporate Power Purchase Agreement). It's worth noting that the current discourse on localization focuses solely on costs. In other words, localization is just one facet among many costs for developers, who face colossal expenditures in other realms such as development, construction, operations, and maintenance.

For companies to stay afloat, without sufficient profit margins, they must resort to stock issuance as a lifeline for raising funds to avert financial crises, particularly in the capital and tech-intensive offshore wind farms. Developers must secure necessary funds in stages based on development outcomes, with a substantial portion stemming from international funds. The success of project financing hinges heavily on developers' practical experience and adept management bridging finance and engineering technology.

It's important to note that developers are responsible for all costs and risks associated with the wind farm project, from the planning phase up until the point when the wind farm is fully operational and connected to the grid. It's only after the wind farm is connected to the grid that developers can start recovering the huge upfront costs through electricity revenue. This process generally takes at least 7 years, and in some regions, it may take over 10 years. Consequently, the wind farm itself and the developer's proficiency in managing it become akin to valuable commodities. Factors such as the scale of the wind farm and even the safety records of workers during construction represent tangible and intangible assets for developers, and they are key evaluation points for international investment banks, funds, or large multinational infrastructure conglomerates when selecting investment targets.

Shifting gears from FIT to zero-bidding indicates developers are now procuring wind energy directly from enterprises, marking their entry into the realm of the "global green supply chain." Under a path of learning due to many years’ experience of in offshore wind development, zero-bidding has been popular in Europe for years. Germany's wind farms ventured into zero-bidding in 2017, leading Europe's collective shift. With over 20 years of offshore wind farm development, Europe embraced zero-bidding due to several conducive factors, including a well-established liberalized electricity market, robust financial markets, matured supply chain technologies and capacities, and ongoing government subsidy programs.

The bidding prices for Phase 2 "Potential Sites" in Taiwan range from NTD 2.2 to 2.5 per kWh, as there's no need to bear the burden of localization. Over the past few years, the industry has repeatedly advised the government on various occasions about factors such as the economy and supply chain not yet fully mature, coupled with stringent localization requirements and overly short grid-connection schedules, rashly embarking on zero-bid auctions has not only led to domestic capacity falling behind international demand but also forced developers and even Tier 1 upstream suppliers to rely on imported components. This has added further pressure to the already soaring development costs of wind farms.

Shortage of Wind Turbines and Working Vessels
Developers and Supply Chains Withdraw Taiwan Market

The financial stability, technical expertise, and developmental track record of developers stand as the cornerstone trio dictating the potential success of establishing a wind farm. This will tangibly manifest in the wind farm's Internal Rate of Return (IRR), serving as a pivotal factor in attracting foreign investment to Taiwan.

The discourse on Taiwan's energy, particularly its offshore wind industry, is heavily politicized, oversimplifying and magnifying the issue of localization excessively. This overlooks the critical impact of developers' technological and financial capabilities on establishing wind farms. The performance of the offshore wind farm is tightly intertwined with the development of renewable energy industry, not only determining Taiwan's international competitiveness in the offshore wind power market, but also determining that whether the domestic manufacturing sector has opportunity to penetrate the global green supply chain.

Taking the Yunneng Wind Farm in Yunlin (640 MW) as an example. The Yunneng Wind Farm faced myriad unforeseen challenges during its preparatory stages, including the outbreak of COVID-19. This two-year global trade standstill hindered the arrival of skilled technicians, raw materials, and construction vessels to Taiwan. Subsequently, it endured the eruption of the Russo-Ukrainian conflict, among others. wpd sold its global offshore wind business to Global Infrastructure Partners (GIP), with Yunneng Wind Farm changing hands to Skyborn. Under GIP's restructuring, the Yunneng Wind Farm secured new financing, ensuring the continuation of construction. However, the turbulence of the past six years has significantly heightened the risk considerations for both existing and potential developers and international investors evaluating Taiwan's investment environment.

The withdrawal of offshore wind developers from Taiwan, ranging from EnBW and RWE to the announcement of JERA, who have declared their intention not to pursue new projects in Taiwan, indicates a significant decline in the attractiveness of Taiwan's offshore wind market as a target for international investment. This is far from being welcomed by existing foreign or local developers. This is certainly not an optimistic scenario for existing foreign or local players.

A more specific illustration lies in the decision to withdraw from 3.2 bidding on Spain's national electricity company Iberdrola, as stated in a press release: "Iberdrola is dedicated to ensuring commercial resilience and prioritizing high-quality projects for sustainable capital investment. Following a thorough assessment of the bidding landscape across different markets, we have made a significant decision to abstain from participating in the candidate selection process for the second phase of the Taiwan zonal development of offshore wind."

Casting a gaze across the globe, the market preferences of international developers hold sway over the course of supply chains, particularly for wind turbine system providers. Wind turbines account for nearly 50% of the overall cost of wind farm development. Vestas' recent announcement of ceasing new orders in Taiwan reflects a cautious stance toward the Taiwanese market. While Siemens Gamesa Renewable Energy S.A. (SGRE) has not followed suit, but its order delivery schedule must still consider the production capacity of components subject to rigorous localization requirements. The burden on developers is undoubtedly exacerbated under the dual pressures of cost and time.

With a multitude of challenges on all fronts, experienced developers find themselves treading risky waters, while newcomers lacking experience in offshore wind farm projects are venturing into unfamiliar territory, fraught with additional uncertainties.

Another significant factor of the localization policy influences wind farm development, especially concerning working vessels. So far, the primary large-scale vessels (Foundation Vessels, Wind Turbine Installation Vessels, and Cable Laying/Installation Vessels), which boast ample energy resources and experience in wind farm installation, still rely on foreign working vessels and international shipbuilders for technical expertise. However, under the policy of localization, if the local-constructed vessels in Taiwan not yet matched the quality and quantity required for timely wind farm construction demands, this has resulted in a detrimental crowding-out effect. In other words, the cultivation of infant industries[1] is at the expense of the construction progress of the entire industry.

The biggest hurdle for the Taiwan team of international developers lies in persuading their board of directors and shareholders that Taiwan is a solid investment market. Over the past 2 years, various controversies have arisen, including issues such as parts supplied exclusively by a single or limited number of vendors and related services. The concept of Local Content has pushed the risk for foreign investment in Taiwan perilously close to or beyond the edge of profitability. International developers with financial and technical capabilities are withdrawing or pausing their investments in the Taiwanese market. This phenomenon will profoundly impact the development of renewable energy in Taiwan, the overall investment environment, and progress towards achieving net-zero carbon emissions.

The Conundrum of Offshore Wind CPPA

The primary ramification of high localization is the direct impact on CPPA prices. Last year (2023), during a forum discussing Taiwan's CPPA, attendees from domestic and international developers, supply chains, banks, life insurance companies, and renewable energy consultants unanimously voiced that Taiwan's CPPA prices for wind farms are among the highest globally.

An enterprise looking to seal a CPPA with developers must not only be capable of committing to a power purchase agreement for a minimum of 20 years but also possess a credit insurance from international credit rating agencies (such as Standard & Poor's, Fitch Ratings, and Moody's) for certain years. While Taiwan's bidding regulations do not specifically stipulate, the National Development Council has proposed a credit guarantee mechanism to ensure the purchasing ability of enterprises. Under this mechanism, purchasing companies must have local or international financial institution credit guarantees for over five years to qualify for national electricity purchase guarantees. The National Development Council aims to encourage more involvement from state-owned banks, given that in Taiwan, the liquidity of foreign banks is far inferior to that of local banks. However, the Yunneng case has led many Taiwanese state-owned banks to adopt a more conservative stance toward the wind power industry.

Under the looming threat of global warming, achieving net-zero carbon emissions and adopting green supply chains has become inevitable. More and more businesses are recognizing the significance of corporate governance and financial transparency. For these companies to perceive wind power as an ideal green energy option or a qualifying criterion for purchase, the developers' financial and technical expertise during wind farm development is indispensable. After all, bank financing will also take this into account. Companies entering into CPPAs with developers will have their financial stability and ability to purchase electricity assessed by banks. It must be acknowledged that the current purchasers of wind power CPPAs are primarily led by TSMC (Taiwan Semiconductor Manufacturing Company Limited). However, can TSMC handle the entirety of wind farm production? Furthermore, in a scenario where there's only 1 buyer in the market but multiple suppliers, how can one ensure a fair market price for CPPAs?

The price unilaterally controlled by buyer is not a free competition market, and the above-mentioned factors such as skyrocketing costs have led to situation while winning developers in the 3.1 allocation struggle to sign CPPAs for steady revenue streams, banks balk at financing without a clear future status, leaving development and funding deadlocked once more.

Rapid Growth of Renewable Energy in the APAC Region
Is Taiwan's Supply Chain Capability Adequately Aligned with Global Trends?

There was a time when Taiwan was hailed as the "model" for offshore wind farm development in the APAC region, this marks the developer's first foray into a training ground beyond the European domain. It's true that Japan didn't drag its feet in planning offshore wind farms compared to Taiwan, but it wasn't until last year that Japan unveiled the results of its inaugural bidding round. The Japanese government, cognizant of the country's intent to predominantly pursue floating wind farm construction, took a leaf out of Taiwan's book regarding wind energy development policies. Japan acknowledged the hurdles posed by technology, raw material imports, land requisition, port infrastructure, and fishermen's opposition, prompting them to kick off development in remote deep-sea areas.

Even though former South Korean President Moon Jae-in strongly promoted the introduction of hydrogen energy, South Korea adopted a similar game plan, prioritizing the development of floating wind farms. When Taiwan announced Phase 2 potential sites without plans for floating wind farms, some developers and supply chains promptly redirected their efforts to Korea.

Honestly speaking, Taiwan's energy policy is steadily advancing compared to Japan and South Korea, with some projects even gaining international recognition, like Floating Solar Photovoltaic (FSPV). However, as Japan and Korea dive into offshore wind industries with more competitive supply chains and prices, Taiwan must hasten its strides if it aims to foster an investment climate that exerts a magnetic pull-on international tech capital as its vision of becoming the hub in the APAC region.

The policy of local content must continue to prioritize fostering stable growth within Taiwan's offshore wind industry as a whole. Only then can local manufacturers' production capacity and pricing stand a chance to develop competitive strength along an appropriate learning curve, enabling them to compete in the APAC and even global markets.

Consequently, this would pave the way for numerous export-oriented industries in our country, fostering conditions for a green supply chain. Against the backdrop of the global net-zero trend, offshore wind, as the most significant renewable energy technology, has been integrated into many developed nations' major decarbonization policies and budgets. For instance, the United States' nationwide "The Inflation Reduction Act" of 2022 includes provisions for bolstering supply chains related to offshore wind power.

As more countries join the race, Taiwan's Round 3 offshore wind projects are at a "strategic window of opportunity." The ability to seize the moment hinges on the new government's adept management, transforming adversity into an advantage. A more realistic and credible mechanism for offshore wind implantation will facilitate Taiwan to overcome the throes of energy transition.

[1]The concept of "infant industry" denotes sectors within a nation's economy that are in their nascent stages of development, often lacking the economies of scale possessed by established foreign counterparts. Consequently, governments typically extend protective measures until these fledgling industries attain comparable economies of scale.