The rules are still being finalised but it’s worth highlighting a few key changes from previous rounds. The first is that all capacity will be awarded through an auction process compared with most of the capacity in previous rounds being allocated through a selection process. This puts inevitable pressures on pricing.
Second, sites will be independently selected by developers rather than be restricted to a list of government mandated sites, which points to a greater degree of site and permitting risk being assumed by developers.
Next, there is the cap of 500MW to 600MW that can be awarded to any single project or single developer in each sub-phase of 3GWs to be awarded on a two-year basis. Finer details on how to calculate this for co-venturers are still yet to be worked through but in previous rounds where there were several developers and consortiums bidding for licences, they were able to secure a much higher share of the overall capacity awarded.
Finally, we wanted to flag that the Ministry of Economic Affairs (MOEA) has also indicated it will look more closely at the equity structure and planned divestments by shareholders in the construction period as part of its assessment.
One further point of note is that there is no local financing requirement as part of the draft rules. And this is particularly interesting since, despite the highly liquid domestic New Taiwanese dollar lending market, local banks have made up only a small proportion of existing financing to date in Taiwan. This contrasts with international lenders, which are facing constraints as to the availability of funding for new projects.
Therefore, we expect increasing focus on ways to free up capital for new projects including refinancing, the wider use of the capital markets and tapping into different sources of funding.
Positively, there are indications that MOEA has at least recognised some of the issues affecting existing projects. So, for example, the Bureau of Energy (BOE) has made some commitments and comments around coordinating with various agencies and potentially streamlining the permitting process. And, in terms of localisation and supply chain management, the draft rules do differentiate between what is characterised as key categories of procurement, where there are strict localisation requirements, and other categories that are recognised as being more challenging to source domestically but which the government nevertheless wishes to encourage investment in. These will not be subject to strict rules but will be incentivised through a scoring system.
There will inevitably be questions raised and questions have already been raised on whether these rules and some of these changes introduced by the MOEA will go far enough to attract the kind of continued investment on the scale that’s needed to meet such ambitious targets. Or, if it will be necessary for developers to look at things like corporate off-take solutions to maximise returns and make these investments worthwhile.
This is particularly relevant given the growing demand among industrial energy users in the market.
Rod Morrison: Just to put you on the spot, Ying, do you think the changes represent a step change or an evolution?
Ying Fu: I think it’s evolution, personally. There are clearly quite dramatic differences in the auction processes, for example, but that is very much consistent with the trajectory of other markets as they become more developed and move towards an auction process.
There is recognition that the MOEA is recognising the challenges facing projects and appear to be doing something to address them, although I’m sure that others will argue that they’re not doing enough. Depending on whether you’re a financier, a developer, a local supplier, or other entity, you’ll have very different views on what the government needs to do to attract further investment.
There is certainly recognition of that and, beyond the actual hard regulations, when we talk about the market with local developers, financiers and other stakeholders, there is a sense that the MOEA, BOE and the Industrial Bureau are at least recognising the challenges and are demonstrating some element of flexibility in how they apply the rules
Rod Morrison: Great. So, moving on to Gordon, what are your views on whether the market is slowing down or speeding up?
Gordon White: I won’t go over similar points to Ying but there may be some overlap. I think slowing down/speeding up is quite an interesting question and there are arguments on both sides. Certainly, from the government side, there’s an ambition to speed things up or at lease maintain the current rapid pace of development. So, the latest announcement setting out a very clear pipeline of capacity coming online over the next period is a demonstration of its aspirations.
From a project financier’s perspective, the last three years have been particularly hectic, and everybody’s been very busy. There’s a bit of a natural lull right now due to the previous allocation and auction rounds coming to an end but we’ve had five projects over three years. This year we’ll probably see one more project financing and maybe one more next year.
Business is going to pick up again when the Round 3 projects come through and have been allocated. So, speeding up/slowing down . . ? I guess we’re experiencing some issues on projects that are in construction, but in some ways it’s quite helpful to have a little bit of a natural lull in activity to let these issues resolve themselves. That clears the way for enthusiasm to return.
Given my history in Europe and seeing that market gradually evolve from subsidised through to auctions and/or subsidy-free projects, your question as to whether Taiwan’s situation is step-change or evolution is interesting. I think it’s quite amazing as to how fast Taiwan has moved from regulated tariffs to price-based auctions. That reflects there being models in other markets that Taiwan has been able to use. It’s informed them as to how they would like to see their own market develop.
There are questions for the future about the speed of development. For example, moving to 15GW auctions supported by corporate PPAs before any project has yet been financed under a corporate PPA in Taiwan, is potentially moving very fast. It raises some concern as to whether the rest of the market and supply chain will be able to keep pace with the rate at which the government is pushing things along.
What we have seen in Taiwan, which I think is positive, is that the government is very clear about what it wants to achieve, and it has set out a structure as to how it wants to get there. But even then, there is still a process of consultation with the industry, which allows for the odd adjustment here and there.
I think we’ll see how the detail behind the ambition pans out and how exactly those projects will look. From a bank perspective, if we’re going from five projects that have been financed on a fixed tariff basis to 15GW financed on a corporate PPA basis, then that’s an enormous change. From a bankability perspective, it raises a lot of questions that will need to be answered.
Whether we’re slowing down or speeding up then, to some extent, the government is setting the pace. It has the power to regulate how quickly it takes for the industry to work through issues.
Rod Morrison: Are you surprised, Gordon, that local banks are still not participating, given the levels of liquidity in the Taiwanese banking sector?
Gordon White: Am I surprised? Yes. When we first started looking at the market, there was uncertainty as to whether Taiwanese banks would be able to take offshore-wind risk which, to be fair, it has taken 10 to 15 years for the international banks to gradually understand and appreciate. So, to suddenly land an offshore wind structure on the desk of a group of Taiwanese banks that haven’t had to consider the risk before, then it’s understandable that for some banks it was a challenge too far. If you overlay that with limited recourse project financing structures, which are not particularly common in Taiwan, then that doesn’t help either.
What’s maybe a little bit disappointing is that, despite the number of projects which have now achieved financial close, we haven’t seen a great unlocking of additional liquidity coming in. There has been a gradual increase in the amount of liquidity from local Taiwanese banks as each project has progressed, but it’s largely been the same group tending to participate. They won’t be able to finance everything as, like any bank, they will have exposure limits and constraints to cope with. Nevertheless, we’ll see more local bank involvement in the next projects coming through this year. Whether that helps encourage wider participation remains to be seen.
I think a lot also depends on the approach of the sponsor, the identity of the sponsor and whether a bank is willing to take a long-term view on providing the financing if the sponsor isn’t prepared to do the same themselves.
Rod Morrison: Okay, moving onto a sponsor, Thomas?
Thomas Poulsen: I just want to first talk through one of the points that you mentioned, the push in Taiwan towards an auction structure, which is basically a push for corporate PPAs. In many ways it’s quite extraordinary that Taiwan has gone from 5GW of projects to a push towards many more gigawatts of power in what can be interpreted as a corporate PPA push. It’s not only a corporate PPA push, it’s basically also a structure with localised super requirements.
It’s going to be a very challenging exercise but, of course, we’re interested to be part of this whole thing.
If you look at the existing projects, there are only very few parties in Taiwan with localisation experience. But with the new structure and restrictions MOEA has placed on developers – awards of 500MW with an auction of 3GW every year – it means there will be six new parties allocated to projects through the auctions but relatively few with experience working with the localisation requirements.
Rod Morrison: Thomas, do you expect to see a lot more competition in Taiwan going forward?
Thomas Poulsen: Everyone participating in Taiwan is in a very good position because, to be able to take part in the upcoming auctions, you will already need to have secured your environmental impact assessment (EIA) for a specific site. Even knowing what is required, you would still have to get started today to be able to participate in the 2023 auction. If you’re not active on sites today the auction in 2022 is too late.
There are a good range of participants in the market today, but in the longer run, there is no reason why the oil majors would not get involved. We’ve seen them moving into other markets and I’m sure they will also do so in Asia.
Rod Morrison: Just a couple more points for you Thomas. Ying mentioned the government is looking at refinancing and selling down stakes during construction, the ideas they came up for Round 3, are they significant for you?
Thomas Poulsen: If there’s clarity and you know the rules of the game, then it’s perfectly fine. It’s a matter of understanding and knowing what it is that you are participating in. Of course, as a developer and investor, we like to have as much flexibility as possible. But if the rules are clear and we know which way the direction is, it’s generally not a problem for us. If we know what we are getting into, then it’s more a matter of getting the structures in place to be able to manage the process.
Rod Morrison: My last point was on the supply chain. How do you see the growing pains being addressed? Is it just a question of more projects, more activity, more demand for services will lead to better understanding or is there a path to a more stable industry on the supply chain side?
Thomas Poulsen: First, Taiwan has the right idea in setting ambitious targets. It is the right thing to do if you want to create the supply chain required, because the current 5GW is probably too small to really get the scale needed. But with the new targets, we can build up the infrastructure to deal with supply chain issues. As to growing pains, it’s a live issue. In Taiwan now, local suppliers are rising the learning curve to supply to these projects. It will get better in the future for sure.
The key way to deal with this right now is to make sure that we spend an enormous amount of time with local suppliers, sharing our knowledge and experiences from Europe, to develop significant counterparties in the market. In the long run the supply chain for Asia projects should be based in Asia, not in Europe. That will happen for sure.
Rod Morrison: Great. Moving on to Jørgen. You’ve heard about Round 3 coming up. For you as EKF, do you see the market slowing down or speeding up?
Jørgen Kragh: In the long run it is speeding up and will continue to do so as the government has set very ambitious targets. To put it into perspective, there is 1.5GW coming up in Taiwan in the next couple of years and then, with Round 3, the ambition for 15GW by 2030. It means that Taiwan is auctioning close to three major deals every year for 10 years in a row. It’s a very ambitious plan for offshore wind in Taiwan. It is good for Taiwan, and we can make it the hub for the sector in Asia.
It’s also good for ECAs as it will mean more exports from Europe, although that will recede over time. Our involvement is necessary now but, going forward, local banks will come in and the demand for ECAs might be less.
Rod Morrison: Moving on to Quentin. You’re excited about what’s coming up.
Quentin Slight: Yes, absolutely. In answer to the earlier question: yes, the market is speeding up. Nevertheless, the government has encountered several issues, which has caused delays on some projects and there have been pinch points on some local supply chains. For instance, the cancellation of Guanyin because of permitting issues. So, the government is rightly taking a bit more time to think about the best framework.
The other issue with the first allocations of Round 2 was that the capacity per years was almost random. In some years there were huge amounts of capacity allocated, in other years, less. That raised concerns as to how the industry could plan if allocated capacity jumped from feast to famine, one year to the next.
The government has rightly taken time to talk with all the stakeholders before announcing rules for the next round of auctions. That is time well spent and it will set the framework for a very successful third round.
It is a very good point around corporate PPAs, and that’s something on which we’re working with a particular client at the moment, looking at how those PPAs might be structured. There are currently few corporate PPAs in Taiwan and the few that have been signed are large scale ones, something like TSMC, the world’s largest semi-conductor producer. TSMC has credit worthiness that can support long-term off-take, but in most cases you can’t rely on one company to off-take all the power that’s required, so you’re going to have to go beyond and look at a number of potential off-takers with different credit profiles.
Now, we’re exploring structures whereby you aggregate demand from different power users and then look at terms by which lenders would be prepared to provide debt to finance offshore wind projects supported by that kind of off-take structure.
That’s an important challenge for the market, both from a developer’s perspective and from a lender’s perspective.
Rod Morrison: It’s interesting about corporate PPAs. Thomas, are you in contact with corporates about PPAs and trying to arrange the structures that Quentin is talking about?
Thomas Poulsen: We are in contact with corporate PPAs across the globe. Specifically for Taiwan, I think it’s something everyone is aware of and something we are trying to deal with but it’s at a very early stage.
Rod Morrison: Do you think it’s something for round 4 and 5, not for round 3?
Thomas Poulsen: It’s a good question. With the ceiling they have put on the price for Round 3 and the localisation requirements, I think it will be an element for Round 3 as well.
Rod Morrison: Okay. Gordon, do you think offshore corporate PPAs are bankable now or on the horizon?
Gordon White: It’s a new structure for Taiwan and I think people are still wrapping their heads around exactly what it might look like and who the off-takers might be. That is an important bankability consideration.
There are examples of corporate PPAs that have been used in other markets, whether in Australia, the US, or Europe. So, as a concept, there are some templates that can be used to inform what a bankable structure might look like in Taiwan. That only gets you so far because, unlike with a government-owned entity like Tai Power where you can take a long-term view based on certainty that it will be there in the future, with corporate PPAs it’s more difficult to do.
A lot of the analysis needs to focus on what the downside case looks like, notwithstanding a robust initial structure for a corporate PPA - conservative bankers like to look at downside cases. Understanding the regulations for what exactly that will look like is still evolving.
We will probably see a couple of projects seeking to raise financing off corporate PPA before we get to Round 3. From a banking perspective it’s a bit of a stepping-stone and it’s going to be very interesting to watch how those first steps evolve. Conceptionally, corporate PPAs can be bankable depending on the tenure and the size you’re looking to raise, the identity of the off taker, the debt sizing basis that you’ve applied and what the case might look like if the corporate or group of corporates were not to be quite as creditworthy as initially hoped for.
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