A whopping 70 percent of Taiwan’s offshore wind farm projects are being built off the coast of Changhua County in the mid-western part of the island. Government regulations stipulate that the Changhua Fisheries’ Association must agree to any offshore wind farm development.

Developers feel exploited as “the fisheries’ association’s wishing well”

Since the Changhua Fisheries’ Association effectively yields the power to make or break wind farm projects, it has repeatedly raised compensation demands with foreign developers. Most recently, the association has come up with yet another demand for “co-prosperity funds”, which are supposed to help fishermen transition to business models that allow for co-existence between fishery operations and offshore wind power generation. The association is reportedly asking for up to NT$5 billion. This would come on top of fishermen compensation negotiated earlier and so-called power development assistance funds, which projects must contribute under rules by the Bureau of Energy under the Ministry of Economic Affairs to promote local community development and welfare.

“The developers are seen as a wishing well,” is how one executive with a developer describes the situation.

This could be one of the reasons why Ørsted, the global leader in offshore wind projects, decided against submitting a bid in the first auction of the Round 3 Zonal Development Phase last year.

Other possible reasons include the government putting a cap on bidding rates, hiking the mandated share of locally made content, and limiting projects to a size that makes it difficult to achieve economies of scale. When pulling out of Round 3, Ørsted pointed to limitations set by the current regulations and concluded that “we cannot make the projects investable at this stage.”

Highlighting these woes, administrative contracts were signed as scheduled at the end of June for only two of the seven projects that were confirmed after the first auction of Round 3 in December. For three projects, the developers asked for an extension, while the two remaining projects will reportedly not be signed at all.

According to government plans, the Round 3 wind farms will be connected to the grid between 2026 and 2035, adding a total 15 GW of installed offshore wind capacity. If they generate maximum output, they could provide nearly 40 percent of Taiwan’s peak electricity demand. After the phasing out of nuclear power plants and coal-fired power plants, wind power will become Taiwan’s most important alternative energy source.

Taiwan’s transition to a low-carbon economy also hinges on the success of Round 3.

Given the challenges, old and new, that wind energy developers are facing in Taiwan, the dispute about compensation with the fisheries’ association could be the straw that breaks the camel's back.

Some fishermen in Changhua are dissatisfied because there is no deep water port in Changhua, so they have to park their larger tonnage vessels in Taichung harbor, and they are not receiving compensation from the Changhua Fishery Association for fishing off Changhua. (Source: Pei-Ying Hsieh)

Factor 1: Plummeting electricity purchase prices

The first major factor is that electricity purchase prices will fall markedly.

Taiwan’s offshore wind development policy follows the three phases of Demonstration, Transition, and Zonal Development. During the first two phases, which aim to foster wind industry development, state utility Taipower guarantees electricity purchases for 20 years at an average rate of NT$5.5 per kWh, although it sells electricity to industries at a rate of just NT$2.6 per kWh. This has triggered controversy over what some perceive as wasting taxpayers’ money to subsidize green energy. With the amendment of the Electricity Act by the DPP administration in 2017, renewable energy producers were allowed to directly sell power to commercial users so that Taipower is no longer forced to conclude loss-making contracts.

But Taiwanese companies that are used to artificially low, subsidized electricity prices will for the first time feel the actual cost of energy when purchasing green electricity directly from the wind farm projects.

Danish developer Copenhagen Infrastructure Partners (CIP) has won a Round 3 wind farm project. Marina Hsu, managing director of the CIP Taiwan Office, is currently in talks with potential green energy buyers. But since the companies are used to an industrial electricity rate of around NT$2 per kWh, finding customers is difficult.

Moreover, the offshore wind farms have ample capacity to sell. Yet corporate customers are shying away from the long-term commitment that comes with the signing of a 20-year corporate power purchase agreement.

Robert Tsai, chairman of Taiwan’s leading wind energy developer Synera Renewable Energy Co. Ltd. (formerly known as Swancor Renewable Energy), estimates that the purchase prices companies are willing to pay will reach only 60 percent to 80 percent of the Taipower feed-in tariff, which would be between NT$4 and NT$4.5 per kWh. As a result, the wind farm developers’ internal rate of return would fall from 12 percent to 8 percent or even below 6 percent.

According to engineering consulting firm 4C Offshore, the average wind farm project cost per MW stands at around NT$165 million in Taiwan. This ranks Taiwan 7th out of 26 countries, making the island more expensive than Britain, Germany, South Korea, Vietnam and Australia.

Factor 2: Concerned banks don't dare lend

The second factor affecting wind farm development is uncertain financing. Costs have soared over the past years due to pandemic-related construction delays. Further fueling concern is the perceived higher risk of a potential military conflict in the Taiwan Strait.

Recently, CIP’s Hsu’s workday has been filled with video conferences to prepare for the visit of more than 100 bankers from some 20 financial institutions in Europe and Asia to check on the progress of Taiwan’s offshore wind farm projects.

“This is the first time,” she explains. “Each member bank of the syndicated loan consortium is here, and they all want to inspect the onshore transformer stations and the operation and maintenance centers.”

One indirect cause for the visit is that several offshore wind farms could not be connected to the grid as scheduled due to pandemic-related delays, which means that the banks are still waiting to get their money back. The Haineng wind farm (Formosa II) is three years behind schedule. A full-blown effort is under way to complete construction of Greater Changhua 1 and Greater Changhua 2 wind farms by year’s end, but even that would be two years later than originally planned. Yunneng Wind Power Co. Ltd.’s Offshore Yunlin Wind Farm was slated to be completed last year, but it is currently not known when it might start to operate.

More than 70 percent of the project costs of an offshore wind farm – typically NT$100 billion - is usually financed by international and domestic banks. Wind farm developers and banks sign project financing agreements. In such arrangements, the loans are not secured through collateral from the parent company but serviced and repaid from revenues that the wind farms generate through power purchase agreements. Due to the project delays, prospective revenues are delayed as well. As long as the wind farms are not producing electricity, the banks are not able to recoup their investment.

Taiwan is no longer foreign banks’ favorite destination

A more direct reason for financial institutions losing interest is the perception of rising geopolitical risk shrouding Taiwan.

Tiffany Huang, partner at the Taipei office of international law firm Baker McKenzie, says it is the first time in a career spanning more than 30 years that she has encountered clients inquiring about Taiwan’s geopolitical risk. And this is not all. During a trip to Japan earlier this year where Huang gave a briefing about Taiwan’s offshore wind industry, Japanese bankers told her that the Taiwan market no longer has top priority.

Ethan Tsai, PwC New Energy Business Service vice director, notes that transnational banks care about their return on investment. They ask themselves where their money is safer, in Taiwan or in other areas. As Tsai put it, the money goes where the higher returns are.

Taiwan's offshore wind power has entered the third stage of large-scale wind farm development, but the higher nationalization requirements have overwhelmed manufacturers. The picture shows the offshore wind turbine underwater foundation of CIAS in Taipei Port. (Source: Chien-Tong Wang)

Factor 3: Wind farms and fishing grounds in conflict

Factor 3 concerns the conflicting interests between wind farm operators and fishermen in Changhua County, which drive up development costs and add uncertainty.

Before wind farm operators can obtain an “establishment permit”, they must pay compensation to the fisheries’ association so that the Fisheries Agency approves the development project. The compensation goes directly into the pockets of the affected fishermen. One fisherman, Shih Hsuan-hsin, says he received around NT$2 million.

Once a wind farm is connected to the grid and produces electricity, the operator is legally required to pay NT$0.018 per kWh in development assistance funds for 20 years. Based on projections, the Changhua Fisheries Association can expect to receive more than NT$100 million in development assistance funds per year.

Yet the association also wants the operators to pay “co-prosperity funds”, which are supposed to be used to promote oyster farming, net cage aquaculture and fishery training centers.

Chen Chu-tsan, secretary general of the Changhua Fisheries Association, points out that the operators already agreed to paying co-prosperity funds during past negotiations about compensation.

But one operator who did not want to be named retorts, saying the association threatened at the time that they would break off negotiations if the operators did not agree.

“In the future, the sea off Changhua’s coast will be dotted with wind turbines. The co-prosperity funds are necessary to help the fishermen to make the transition,” says Wang Ginn-wang, director-general of the Fisheries Agency, in defending the demands.

In mid-April, the Fisheries Agency convened a meeting of more than 20 wind farm developers. According to preliminary planning, future wind farms will cover a wider area and will be closer to popular fishing grounds, so operators will have to pay rising co-prosperity funds. According to preliminary agency calculations, a wind farm off the Changhua coast covering an area of 50 square kilometers would have to pay more than NT$60 million in a single payment.

Fisherman Shih told CommonWealth Magazine that he has not heard of co-prosperity funds. But as he sees it, the waters off Changhua are not suitable for net cage aquaculture because of high turbidity and the strong Northeast monsoon. “The fishermen are not willing to do this,; it would take a lot of money, and what if it fails?” he asks.

Shih Hsuan-hsin, a fisherman in Changhua. (Source: Pei-Yin Hsieh)

Key factor: Wind farm development gaining steam in Europe and North America

The final push factor stems from developments abroad. As nations adjust their energy mix due to the war in Ukraine and to meet carbon reduction goals, more and more countries are turning to offshore wind farm development. With new projects becoming available closer to home, wind farms in the Taiwan Strait are no longer such an attractive proposition.

“After the war in Ukraine started, offshore wind got a boost in Europe, which is why the operators are all returning to their comfort zone,” says Hsu. According to a report by the Renewables Consulting Group (RCG), the installed capacity of offshore wind farms that have been approved for development in Britain is already twice as much as in Taiwan. Poland, Germany, and the Netherlands have also been catching up over the past year.

As the largest buyer of green energy in Taiwan, chip foundry Taiwan Semiconductor Manufacturing Company (TSMC) is keenly aware of the changing competition landscape. The company notes that “after the war in Ukraine began, global demand for renewable energy increased. If we want to enable renewable energy companies to continue to invest in development in Taiwan, a new approach is needed to compete for resources with markets around the world that also have renewable energy demand.”

The future of offshore wind farms depends not only on energy demand; it also pertains to nations’ zero carbon targets, corporate competitiveness, and the development of a green electricity industry. In any case, there is not much time left.

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Translated by Susanne Ganz
Edited by TC Lin
Uploaded by Ian Huang