Taiwan’s offshore highs and lows

Global Energy Report 2023
12 min read

Taiwan was among the first countries in Asia to dump nuclear energy and focus on renewable energy. It is now leading the region in developing offshore wind energy projects and growing pains are part of this. By Minerva Lau

Taiwan’s offshore market has been lively, with the winning bidders in the first two tender rounds from 2018 providing the buzz and fuzz in the project finance community. However, the arrival of the Covid pandemic dampened the mood and slowed down project construction progress significantly. In addition, the learning curve has been steep as the country has no existing offshore oil and gas infrastructure.

Six consortia of developers have so far raised some NT$370bn, or more than US$12bn, since 2018 and two are currently in the market seeking a combined total of about NT$225bn, or US$7.33bn. However, the appetite for Taiwan’s offshore wind market has subsided due to a few factors.

One concern is the availability of Taiwanese dollars, as many banks provided financing for the earlier set of projects due for completion in 2025. Taiwanese insurance companies are now expected to play a key role in future lending.

A further concern is related to the problems faced by Yunneng Wind Power, the project company developing the 650MW Yunlin offshore wind project, which is experiencing serious delays. The project requires more funds but the the lenders have put the disbursement of project finance loans on hold following monopile problems.

The sponsors are currently in discussions with its lenders on the restructuring of an 18-year US$2.75bn loan raised in 2019 and a €190m facility secured in 2021. The sponsors are Skyborn Renewables, Thailand’s Electricity Generating (Egco), TotalEnergies and Japanese consortium Starwind Offshore, which comprises Sojitz, Chugoku Electric Power (CEP), Chudenko, Eneos and Shikoku Electric Power.

The somewhat better news is that Taiwan’s Investment Commission under the Ministry of Economic Affairs (MOEA) has approved a new investment in project company Yunneng Wind Power. The project is expected to receive a new equity injection of NT$29.2bn (US$960m) in Germany registered Yunlin Holding, which is believed to be from Skyborn Renewables.

“This month [April] is very critical, or else construction could not be completed on the new COD date,” an observer told PFI. The urgency is related to the monsoon weather in Taiwan, which shortens the window for construction, and to the limited availability of vessels as these get contracted in different places. A delay of three months could end up being a delay of six to nine months or even longer, unless sponsors are willing to pay more. And that again will lead to higher costs.

One challenge in developing offshore wind projects in Taiwan is the absence of one main engineering, procurement and construction (EPC) contractor, which is usually the case in conventional projects. Not just one but a number of contractors ranging from three to as many as 20 or more can be involved in turbine supply, water transmission, monopile installation and piling.

“A lot can go wrong, and a delay by Contractor A could lead to a delay by Contractor B, and so on,” said one lawyer.

The whole supply chain situation is indeed delicate and complex. For Yunlin, the delay started with an accident in one of its hired vessels, resulting in a domino effect on other work. A second delay and a more serious one, was the case of monopiles that collapsed and went missing. The soft soil on the seabed is said to be the culprit, making observers wonder about how soil surveys will be conducted in future.

The two parties – sponsors and lenders – have hired respective advisers for the debt restructuring and the lenders themselves have separate internal teams that negotiate debt restructurings. Options are said to include an extension of the maturity, which was 18 years after financial close in 2020. The PF loan was supposed to mature in 2038, but an estimated 2-1/2 year to 3-year delay may see the loan maturity pushed back by the same period, or to 2041. Other options include changing the loan repayment profile or lowering the margins, and the worst option could be a debt haircut. SMBC and E Sun Bank were the financial advisers, while the legal advisers were White & Case and Tsar & Tsai for the lenders, and Linklaters and Lee & Li for the borrower.

The other challenge faced by developers involves the localisation requirement of the Energy Bureau. The tender requirements for the projects allocated under the feed-in tariff (FiT) system require developers to use local Taiwanese equipment and services for the construction of their projects.

As Taiwan is new to the offshore wind industry, it does not have an existing local industry and the local offshore wind supply chain is fairly limited. The absence of a significant local supply chain has been a thorny negotiation issue, and meeting the localisation requirement has been challenging and costly. A number of the developers such as Orsted and turbine manufacturers such as Siemens have set up plants in Taiwan, to help meet that requirement.

However, one report says related local supply chains are emerging. Wind turbine component manufacturers and a number of underground and underwater foundation steel structure factories have began to supply local projects. Although steps have been taken to develop the local supply chain, it remains fairly limited and an expected global shortage of ships will add to the problems.

Costs are going up but feed-in tariffs (FiTs) are down, to zero to be exact, as seen in the first phase of Round 3 of the bidding. There is a heavy reliance on direct or corporate power purchase agreements (CPPAs), and the assumption that many big corporates would require clean energy and sign up CPPAs. Taipower, however, remains the “offtaker of last resort”.

The other offshore wind projects awarded in 2018 in bidding rounds one and two are moving forward but all at different paces with varying reasons and issues.

There are two offshore wind projects currently raising funds in the market. One is for the development of the 1.044GW Hai Long offshore wind farms of Northland Power International (NPI), Yushan Energy and Mitsui.

With interest rates and funding costs going up, sponsors and financial advisers Cathay United Bank and MUFG have raised the pricing of the 22-year NT$153.14bn (US$5bn) PF loan facility for the project. The financing pace has been slow and lenders remain generally cautious due to the Yunlin effect.

The revised terms apparently includes higher coverage from the export credit agencies – up to about 85% of the debt from the previous 80%. From the risk perspective, this makes it more attractive to lenders, one banker told PFI. The Hai Long loan had cover from export credit agencies that included Atradius, Credendo of Belgium, EDC, EKF, Export Finance Australia, JBIC and NEXI.

In addition, the project has attracted a new formidable partner in Petronas via its subsidiary Gentari International Renewables. It has acquired a 29.4% stake in Hai Long while Northland remains the single largest shareholder with 30.6%. The sponsors have continued with preparation for construction, with the first steel cutting ceremony for foundation pile fabrication conducted in early April.

The confidence in Taiwan’s offshore wind sector was boosted by good news from Orsted with its final investment decision (FID) to go ahead with its 337MW Changhua 2b and 583MW Changhua 4 offshore wind farms. Referred to as Project Trinity, the wind farms will be funded by capital provided by Orsted and by bank debt sourced from the domestic Taiwanese market backed by an Orsted guarantee.

The company has appointed CTBC Bank and HSBC as financial advisers to put together bank financing estimated to be about NT$72bn (US$2.36bn) that includes an equity bridge loan and a standby facility, but not the performance bond portion. Similar to its other loans, the PF portion is said to be about US$1.6bn or 50% of the share of Orsted’s new partners in the project. HSBC is the adviser on the sale of the shares, which is expected to be concluded before year-end.

The two current Changhua wind farms were awarded to Orsted in June 2018 under Taiwan’s first competitive price-based auction that did not require a mandatory local content. Orsted won Changhua 2b at NT$2.548/kWh (US$0.0835/kWh) and Changhua 4 at NT$2.5481/kWh.

“This final investment decision is a major step forward for our mission to accelerate Asia-Pacific’s decarbonisation journey,” said Orsted Asia-Pacific president Per Mejnert Kristensen.

Orsted has signed a CPPA with Taiwan Semiconductor Manufacturing Company, described as the largest contract of its kind in renewable energy. Onshore construction is set to commence in 2023 with fabrication of components in 2023–24 and completion of offshore construction by end-2025.

The Energy Bureau held the Round 3 tender at the end of last year and selected six bidders with seven projects with a combined capacity of 3GW. Two of these – the 600MW Haiding 2 project of Corio and the 300MW Haixia offshore wind farm of Skyborn and Lealea Group – are to be operational by 2026 and the other five – the 500MW Fengmiao project of CIP; the 500MW Canwind being headed by NPI; the 495MW Formosa 4 being developed by SRE; the 440MW Huanyang wind farm being developed by EDF and Taiya; and the 165MW Datian project of Skyborn, by 2027.

All the projects awarded so far are bottom-fixed and the government is seeking demonstration projects for floating offshore wind farms. It has not indicated a submission date yet for demo project proposals but it aims to select before the end of 2023.

More positive news came from JERA, Macquarie's Green Investment Group, and Synera Renewable Energy, formerly Swancore Renewable Energy, which completed the installation of all the 47 wind turbines of their 376MW Formosa 2 offshore wind project in March, which is now connected to the grid.

The project, located off the coast of Miaoli County in north-west Taiwan, becomes the third offshore wind project that has commenced operation in Taiwan following two demo projects – a 109MW offshore wind project by Taipower and the 128MW Formosa 1 project of Orsted, JERA, Seagull and Swancor.

The sponsors of Formosa 2 raised an 18-year NT$60bn (US$2bn) loan package in September 2019. The lenders included international banks BNP Paribas, CA-CIB, Societe Generale, Natixis, ING Bank, DBS, OCBC, MUFG, SMBC, ANZ Bank and HSBC; and domestic banks CTBC, E.Sun, Fubon Bank and KGI Bank. Taiwan Life Insurance joined as an institutional lender.

The export credit agencies on the deal are Credendo of Belgium, EKF of Denmark, K-Sure, and UKEF. Legal advisers were Linklaters for the lenders and Clifford Chance for the sponsors.

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