Harnessing the Wind

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BY Timothy Ferry – Taiwan Business Topics ON 

Amid progress on major projects, the sale of shares by pioneering local offshore wind-power developer Swancor underscores the challenges facing Taiwanese companies.

With the scheduled completion next month of the installation of twenty 6-megawatt (MW) turbines off the coast of Miaoli County, Taiwan’s offshore wind-power development program enters a new stage. When the 90-meter-tall masts with 75-meter-long blades are all mounted on foundations pinned deeply into the bedrock beneath the mud of the Taiwan Strait, the NT$18.7 billion (US$603 million) Formosa 1, Phase 2 venture will be the first large-scale offshore wind project to start operations.

Big as it is, this project is just the vanguard of what will eventually be a trillion NT-dollar sector that is expected to eventually supply at least 8% of Taiwan’s total power needs. The industry brings the potential to reduce greenhouse gas emissions, generate some 20,000 jobs, and provide huge business opportunities.

Taiwan is planning on 5.5 gigawatts (GW) of installed capacity by 2025, requiring roughly 1,000 turbines built in selected zones in the Taiwan Strait generally 30-50 kilometers offshore. An additional 5 GW of capacity is anticipated to be built between 2026 and 2030, and the Bureau of Energy (BOE) under the Ministry of Economic Affairs (MOEA) allows for the possibility of even more capacity to be added after 2030.

Offshore wind power is only now undergoing a kickstart in the East Asia region, but is expected to see tremendous growth over the next decade. With Taiwan ahead of most other nations in developing its local industry, the local supply chain should be well-positioned to capture market share in the upcoming Japanese, Korean, and Vietnamese offshore wind industries.

To attract global industry players to help it develop this sector, Taiwan has guaranteed project owners subsidized rates (called Feed-in-Tariffs or FiTs) that are among the highest in the world. This inducement has attracted many of the big players in the global industry, including Danish offshore wind power developer Ørsted Asia Pacific; Macquarie Group Taiwan, the local subsidiary of the Australian investment bank Macquarie Group Ltd.; Japanese energy consortium JERA; and EnBW Asia-Pacific, a subsidiary of Germany’s Energie Baden-Württemberg AG.

Copenhagen Infrastructure Partners also has a significant stake in the local industry, as does Northland Power from Canada and Yushan Energy, invested in by Singapore’s Enterprize Energy and Mitsui & Co. of Japan. State-backed Taiwanese firms are also competing in the market, including China Steel and Taiwan Power.

Given that progress, the industry was shocked on June 24 when the private Taiwanese company that founded the Formosa 1 project, Swancor Holding Co. Ltd., announced that it was selling a 95% stake in its subsidiary Swancor Renewable Energy Co. The buyer was New York-based investment firm Stonepeak Infrastructure Partners.

Swancor, primarily a manufacturer of fine chemicals, is among Taiwan’s original offshore wind-power players, having entered the industry first as a maker of epoxy resins for wind-turbine blades and then forming Swancor Renewable in 2013 to get directly involved in Taiwan’s nascent offshore wind sector. The decision to reduce its stake in the market is particularly surprising as the Formosa 1, Phase 2 wind farm is set to be commissioned by year’s end, when it will begin earning income for its owners based on a subsidized rate for the power it generates.

The sale set off a spate of speculation in the industry, with many seeing it as a vote of no confidence in Taiwan’s politics.

“Why would Swancor give up on this project after spending so much money for so many years, just as it was about to reap the rewards of the FiT?” asks an insider close to the Formosa projects who needs to retain anonymity. “This decision makes no sense, unless they think that the next president will pull the plug on the industry.”

Kuomintang representatives told Taiwan Business TOPICS that a government under the KMT would continue to support the offshore wind sector, though conceding that contracts could be renegotiated.

Other sources say that another factor in Swancor’s decision is likely to have been the company’s loss of talent to its European partners and competitors, who can offer much better salaries and working conditions.

And ultimately, Swancor’s move might be nothing more than a business opportunity based on market timing. News reports said the company earned from between US$21 million (NT$660 million) and US$101.4 million (NT$3.18 billion) from the sale. Explained a company representative in an email to Taiwan Business TOPICS: “Selling at the best time and best price is the wining point!”

An oyster farmer works in front of windmills in the Changhua Coastal Industrial Park. Photo: Pichi Chuang

Catching Up

Political speculation aside, Swancor’s journey through Taiwan’s offshore wind sector and its ultimate difficulty in competing with foreign firms raises significant questions over Taiwan’s competitiveness regionally. If Taiwan’s highest profile and largest market player can’t make it in its own market, how will Taiwanese firms compete in the regional and global markets?

The offshore wind sector has become key to President Tsai Ing-wen’s drive to transform both Taiwan’s power supply and its industrial base. The Industrial Development Bureau (IDB) sees Taiwan’s offshore wind sector as offering immense opportunities for the nation’s industrial sector in accordance with the Tsai administration’s 5+2 Innovative Industries plan, and offshore wind is expected to drive some NT$962 billion (US$31 billion) in investment into the local economy.

Equally important, it will expand Taiwan’s capabilities in an industry that is forecast to grow by15% annually between 2019 and 2030, according to Bloomberg New Energy Finance (BNEF). Global capacity in offshore wind power currently stands at around 23GW, concentrated almost entirely in northern Europe, but BNEF sees the total as reaching 142GW by 2030, with the bulk located in Asia. Taiwan’s early entrance into the market potentially gives it a head start.

Unlike most countries have entered the offshore wind sector on the strength of experience in offshore oil and gas exploration or other expertise in marine engineering, Taiwan has little capacity in these fields.

“Taiwan is quite unique with regard to the development of its offshore wind industry” in that it had no substantial offshore oil and gas industry, notes Edgar Kerkwijk, a board member of Asia Wind Power, a trade organization.

“The original plan was to slowly build out capabilities over 20 or 30 years, but the new administration has dramatically increased the timeline,” explains a source involved in testing and certification who asked not to be identified by name. “We lack the experience in such industries and the requirements are quite high.”

Overcoming this deficit has entailed substantial investment to attract foreign companies with offshore wind expertise.

A presentation by IDB Deputy Director-General Yang Chih-ching at the Global Offshore Wind Summit in Taipei in April, noted that Taiwan is focused on building the necessary infrastructure by establishing industrial parks, providing incentives to attract international wind-industry manufacturers, and helping domestic companies build partnerships with foreign companies to jointly supply the needed wind turbines, submarine foundations, and marine-engineering ships.

The government is investing at least NT$8.3 billion (US$266 million) to renovate industrial and port facilities at the Port of Taichung and Hsingda Harbor in Kaohsiung to cater to the offshore wind sector. In addition, government-affiliated corporations including China Steel and shipbuilder CSBC are investing billions of NT dollars in new manufacturing capacity for the industry. Formosa Heavy Industry and Century Steel are among the many other domestic firms involved in the industry, while global turbine supplier Siemens Gamesa Renewable Energy is constructing an assembly plant in Tai-chung to assemble nacelles, the housing cover for wind turbine components.

The first 3.5GW of Taiwan’s offshore wind sector is being developed under the FiT program – in which developers are guaranteed a subsidized rate for the power they generate over the course of a long-term Power Purchase Agreement (PPA). The offshore wind FiT was set at NT$5.5 (US18 cents) per kilowatt hour (kWh) for a 20-year PPA, compared to as low as US7.2 cents in the UK. China, which already has 2.8 GW of offshore wind installed in the Taiwan Strait off the coast of Fujian, has reduced its FiT rates to the equivalent of US12 cents per kWh.

The final 2GW, however, are being developed under an auction system in which developers bid against each other for a fixed-rate PPA. The winners in the auction round of development offered rates as low as NT$2.22 (US7.1 cents) to NT$2.54 (US8.1 cents) per kWh. Taiwan has already held two rounds of auction for different zones in the designated areas of the Taiwan Strait, and a third round will reportedly be held at the end of 2019.

The dramatic decline in auction rates compared to the FiT has led critics to contend that Taiwan is overpaying for the FiT. But developers counter that the auction rates anticipate the buildup of industrial capacity and increase in scale under the FiT regime that will allow them eventually to slash costs. A report by WindEurope, a trade association of wind-power developers, found that development costs have plummeted in Europe by 45% since 2015 as technology has advanced and economies of scale have been achieved.

It was in the auction phase, however, where Swancor faltered.

Struggle in the open sea

Swancor has been involved in three major offshore wind development projects, called Formosa 1, 2, and 3. The company was the original developer of the Formosa 1 project, Taiwan’s first, but in 2017 sold large stakes to Ørsted and Macquarie, leaving it with only 15% of the project. The stake was further reduced to 7.5% in early 2019 when Japanese energy consortium JERA bought into the project. Ørsted currently holds a 35% stake, Macquarie 25%, and JERA 32.5%. The remaining 7.5% will be held mainly by Stonepeak, with Swancor retaining a small share.  Swancor is also partnering with Macquarie on the 378MW Formosa 2 project adjacent to Formosa 1, and construction is expected to begin in 2020.

However, the Formosa 3 project – owned by a consortium of Swancor, Macquarie, and German developer EnBW – failed in the July 2018 auction to obtain grid access. In the closed-bid auction, Formosa 3’s bid came in too high. In a widely quoted post on Facebook, Swancor chairman Robert Tsai said that this failure “seriously damaged the team at Swancor Renewable, and left the most painful and permanent mark in my heart,” adding that “this newly formed unicorn just cannot find what it needs for future growth in its own country.”

Swancor is not the only local firm to struggle in the offshore wind industry, and while the government has strictly required foreign firms to help develop local manufacturing and construction capacity, few of Taiwan’s companies would be competitive in an open market.

Taiwan’s steel makers are reportedly struggling to meet industry requirements for foundations, pin piles, and masts. Production of the highly specialized installation vessels will also be a big challenge for Taiwan’s shipyards, which lack any experience with the necessary technologies. Further, trained workers for these highly technical positions are in short supply in Taiwan.

“Looking at some of the suppliers who say they can do the job, they have maybe 5 or 15 welders who can do it, but what they need is 200,” says Matthias Bausenwein, general manager for Ørsted Asia. According to Bausenwein, “They say ‘we will make it happen,’ but that’s not how you plan a multibillion-dollar investment.”

Moreover, the failure of Taiwan’s only brand name in the offshore wind sector, Swancor, raises concerns again that Taiwan will be left in the middle of yet another supply chain.

China already has 2.8 gigawatts (GW) of offshore wind power installed in the Taiwan Straits off the coast of Fujian Province, as well as some of the world’s largest wind power firms, including Goldwind, Sewind Shanghai, and Sinovel. Japan and South Korea, meanwhile, have lagged on the development of the domestic offshore wind power generation, but already have strong marine engineering and shipbuilding capabilities and several of their companies are already well ensconced in the global offshore wind sector, including Korea’s CS Wind, Wind Power Korea, and Samsung Heavy Industries, as well as Japan’s MHI (Mitsubishi Heavy Industries) Vestas and Hitachi.

“Taiwan doesn’t have a national brand for developers or for components makers in fact, and will continue to operate on the OEM model that it has operated on forever,” says this analyst.

Ørsted’s Bausenwein, however, believes that the local suppliers have made progress and that in some sectors, particularly the grid connection and substation infrastructure, Taiwanese firms have actually exceeded expectations. “Now the Taiwanese suppliers are willing to invest and be successful and if they become competitive why should they not be able to play a role in the wider Asia Pacific?” he asks.