Taiwan has been a front-runner in the Asia-Pacific offshore wind market since 2018, with a transparent business selection mechanism and localization requirements, compared with South Korea, Japan, and Vietnam. But can Taiwan sustain its leading position? Concerns have been building as to whether project delays will affect achievement of the national target. Meantime, Ørsted’s absence in the first auction of Round 3 Zonal Development suggests changes in the supply-demand relationship of global offshore wind industry. This article combs through the development of Taiwan’s offshore wind energy sector, the result of Zonal Development auction, and localization requirements in 2022.
Progress of wind farms in Taiwan
At the beginning of 2022, Taiwan planned to connect five wind farms to the grid. The five wind farms, together amassing 2,010 MW of capacity, include Yunneng (640 MW), Formosa 2 (376 MW), Greater Changhua 1 (605 MW), Greater Changhua 2a (295 MW), and Changfang Phase-1 (95 MW). Among these, Greater Changhua 1 was originally scheduled for grid connection in 2021.
However, none of the above wind farms was connected to the grid by the end of 2022. For now, there are no more than ten turbines yet to be installed in Formosa 2, which may be connected to the grid by February after pilot running and UPS testing. In mid-2022, the grid connection of Yunneng and Greater Changhua were postponed to 2023. Greater Changhua is expected to be connected to the grid by the second quarter of 2023.
At the end of 2021, wind farm constructions were expected to return on the right track as Covid-19 outbreaks abated. However, actual progress fell behind expectation due to the following reasons:
- Vessel shortage: Russia’s war in Ukraine sent prices for oil and natural gas surging. Consequently, vessel construction costs increased, whilst the two industries took up vessels that used to be available for the offshore wind industry, which has been growing rapidly. As a result, vessel supply ran short for the global wind energy sector.
- Controversies over localizing the marine engineering industry: The “Reviewing Mechanism for Industry Relevance of the Vessel Industry” sparks controversies. According to the mechanism, developers may use foreign vessels, if no access to the local vessels, which they must prove by a certification from the T-Wind Marine Association. However, due to the asymmetry of rights, obligations, and information between buyers and sellers, vessel demand and supply are sometimes staggered, affecting construction schedules.
- Limited assembly area: In Taiwan, only four wharfs of the Taichung Port are available for the pre-assembly of wind turbines: Wharf #5A, Wharf #5B, Wharf #36, and Wharf #37, which should be enough. However, the pandemic-induced project delays result in congestion, even when Wharf #107 was put to use. Developers had no choice but to wait and negotiate with each other. To add to that, the heavy-load bridge at Taichung Port is not strong enough. However, taking the sea route will take a day to transport just tone nacelle. Therefore, the transportation capacity is very constrained.
Yunneng wind farm, in particular, has made lackluster progress. Besides two pile-running incidents, wpd sold equity of the wind farm to TotalEnergies, then the entire offshore wind business to GIP to overcome financing gap. Against these backdrops, the project was delayed. Developers seized weather windows amid adverse sea state after September.
This year is a crucial period for developers to achieve the target capacity of 5.7 GW by 2025. Throughout this year, only one wind farm, Changfang Phase-2, is scheduled for grid connection, so the timetable is more flexible. Additionally, the scarcity of vessels and port capacity sees no sign of improving and will only get worse when construction of Zhong Neng, Taipower Phase 2, Hai Long, and Greater Changhua 2b begins, making it more challenging for Yunneng to attain the goal.
Zonal Development auction result
On December 14, Taiwan announced the result of the first auction of Round 3 Zonal Development (Round 3.1 auction), selecting six developers and ten offshore wind farms. According to the rules, a developer will be awarded one wind farm (500 MW). Therefore, developers can win tenders easily as long as it meets requirements in terms of EIA, contractual capacity, supply chain localization, and bonus point benchmarks. But ultimately, the government is the biggest winner as it gets zero-subsidy bids and sees localization making headways.
When project sites overlap, which developer gets the right to proceed with construction decides the payback of its investment in preliminary surveys. The cost of preliminary survey is completely afforded by developers.
According to the Directions for Allocating Installed Capacity of Offshore Wind Potential Zones, the order is based first on bidding price, and then localization score. Therefore, developers attempt to reduce bidding price and raise localization score. Ørsted, at the last minute, announced that it will not submit a bid in Round 3.1 auction. By then, developers had already completed the submission. Therefore, the competition was still heated although it seemed to be an uncontested auction.
Additionally, it is advised to loosen the regulation that wind farms prior in order shall be connected to the grid by 2026. Otherwise, given current inflation level and vessel shortage, developers with higher localization score are put under greater time pressure for grid connection, contradicting the government’s intention to boost local supply chain.
As previously expected, all developers in Round 3.1 auction offered to sell electricity through Corporate Power Purchase Agreement (CPPA). Since NT$2.49/kWh of electricity price is far lower than the market price, developers bid at NT$0/kWh to secure project sites, then seek to sign CPPAs. Only Northland and Skyborn bid at NT$0.01/kWh for its Beineng and Datian, Youde wind farms, respectively.
InfoLink analyst points out that Northland bid at NT$0.01/kWh for Beineng because it wants to win the tender with Jianeng. Skyborn, on the other hand, bid at NT$0.01/kWh for Datian and Youde, hoping Haixia will win the tender. This way, Haixia’s 300 MW in Round 2 and Round 3.1 can make up a 600-MW wind farm. However, Datian only won 200 MW and has to share the No. 16 project with the second-place 500-MW Haiding, putting it in a relatively awkward position and the long distance away the coast will increase the construction cost.
The auction went well, but backlash against the punitive clause concerning localization in the administrative contract could be the last straw that broke the deal. In the second and third meetings of Round 3 offshore wind zonal development draft contract convened on September 26 and November 4, authorities gave in, removing the most touted “mandatory sell of 20% of electricity generation” and “full performance bond requirement,” adding “reasons not imputable to developers” to mitigate penalty risks. The NT$30 million fine was replaced by the “demerit point system.” Developers will not be fined as long as their projects pass checkpoint reviews. However, the penalty damages remain unlimited.
Understandably, the Bureau of Energy needs deterrent rules to maintain fair competition and prevent developers from making empty localization promises and making up excuses for not keeping them. Therefore, besides requiring developers to cooperate with local supply chain through purchases or co-investments and a legally binding contract and a penalty system is even more necessary.
Meantime, the Control Yuan has been pressuring the Bureau of Energy. In July 2022, the Control Yuan proposed a corrective measure, holding the Ministry of Economic Affairs responsible for the dissatisfactory localization progress for not fully aware of supply chain capacity. The Bureau of Energy will be tougher and more cautious to prevent similar circumstances.
Indeed, an uncapped fine affects project bankability, making it difficult for developers to reach financial close and make final investment decisions. It also affects the supply of clean energy, putting developers, the government, and the people all at disadvantage. Secondly, an uncapped fine may put off developers and banks, forcing them to work on localization positively feasible projects, while giving up on local suppliers with potential. Thirdly, despite being subject to the initial business contract, suppliers have the bigger say during negations, knowing that developers are faced with the risk of unlimited losses.
The second and third concerns will play down the pressure of industrial competition, allowing suppliers, already protected under current policy framework, to raise prices at will, deviating from the initial goal to establish fair market competition and boost the industry. Therefore, InfoLink believes that there should be an upper limit for fines, and the amount must be high enough to have a deterrent effect, affecting the return on investment of a project. This way, developers cannot solve problems with money, whilst projects are not exposed to too many risks, thus remaining bankable and financially healthy.
For now, Taiwan is still leading the Asia-Pacific offshore wind industry. However, infrastructure bottlenecks and other external factors derail the progress of grid connections, whilst strict regulations set the bar high, holding back the development of wind power in Taiwan. Still, the government struck a balance in Round 3.1, where localization requirement is not so strict that it left no competing opportunity for developers, despite reduced profits making the market less attractive for them.
However, offshore wind power is a global business. As economic landscape shifted, the U.S. market emerged with generous subsidies, whilst the European market resurged with CPPAs underpinned by high electricity bills. Doubled with the rising cost of capital due to rate hikes and the above-mentioned vessel shortage, Round 3.2 auction will take place in a completely different market environment, testing the wisdom of those at the helm.