Taiwan’s offshore turbines navigate geopolitical turbulence

In the days after Taiwan’s new president Lai Ching-te took office in May, China launched military drills in the Taiwan Strait and waters surrounding the island.

The exercises were nothing Taiwan had not seen before; in 2022, China launched missiles into the waters in response to a visit to Taiwan by then US House of Representatives speaker Nancy Pelosi.

The Taiwan Strait has long been a scene of political turmoil, but it is also fast becoming a sea of turbines that holds significant sway over Taiwan’s energy transition.

As of 2023, Taiwan has 2.1GW of offshore wind installations connected to the grid, including 692MW commissioned in 2023 alone, according to the Global Wind Energy Council.

With 283 turbines installed by the end of 2023, and the government setting a target of up to 374 installations by the end of 2024, Taiwan has become the largest offshore market in Asia-Pacific outside of China.

Such momentum behind the industry seems to suggest a lack of concern about developing and investing in assets within the contested strait.

Yet while Taiwan has a strong pipeline and ambitious targets that make its offshore wind sector attractive to international investors, it also has some of the strictest policy on local content, which could be a hurdle to the roll-out.

A wave of opportunity

Copenhagen Infrastructure Partners was among the first wave of firms to see an opportunity in Taiwan’s offshore wind.

At the end of May, CIP celebrated the completion of its first set of wind farms, the 600MW Changfang and Xidao projects off the coast of Taichung.

Taiwan’s new vice-president Bi-khim Hsiao’s presence at the projects’ inauguration – just days after the presidential inauguration – reflects the immense value of offshore wind for the Taiwanese government.

“As you can imagine, on the third day following our inauguration, we have many responsibilities,” Hsiao said. “But at the same time, the energy transition is important as it contributes to Taiwan’s commitment in meeting global climate and carbon reduction goals.”

Hsiao says the transition will also be crucial to meet the growing renewable energy needs of Taiwan’s major companies.

Those include its largest, the Taiwan Semiconductor Manufacturing Company, which will require increasing inputs of renewable energy to continue on its current growth trajectory while also supporting the net-zero goals of its largest shareholder – the Taiwanese government.

Taiwan has a target of 5.7GW installed offshore capacity by 2025, and a further 15GW by 2035.

The targets would see Taiwan’s offshore capacity comparable to that of the US, which will have a forecast 14GW by 2030.

Mads Skovgaard-Andersen, CIP partner, says one of the driving forces behind Taiwan’s industry has been the stability of its policy since it launched the sector just over a decade ago.

“From the beginning, the government was very ambitious, and they have followed through,” he says. “As a developer, we very much appreciate consistent frameworks. In many countries across the world, you see things start and stop, which is difficult when you do infrastructure projects; here in Taiwan, they have been very consistent.”

Skovgaard-Andersen says such consistency has allowed many other players to enter the Taiwanese market.

A joint venture between Macquarie Capital, Ørsted, JERA and Swancor was the first to do so with its 128MW Formosa 1 wind farm, which became fully operational in 2019.

“In many countries across the world, you see things start and stop… here in Taiwan, they have been very consistent”

Mads Skovgaard-Andersen
CIP

The scale of offshore wind farms has ramped up since then: in April, Ørsted announced the inauguration of its Greater Changhua 1 and 2a wind farms, with a total installed capacity of 900MW, and investors including Canada’s CDPQ and Cathay Private Equity.

The success of early projects gives investors certainty that there will be buyers on hand when the time comes to divest.

CIP’s flagship funds CI-II and CI-III are majority owners of the Changfang-Xidao project, but CIP has already executed partial divestments, including selling a 25 percent stake to Global Power Synergy Public Company, a subsidiary of Thailand’s state-owned utility company PTT.

Establishing a market

When CIP entered Taiwan in 2017, the government was at the beginning of its journey away from fossil fuel reliance.

In 2018, then-premier Lai Ching-te directed government agencies to streamline applications to accelerate the build-out of offshore wind farms, pointing to the “international heavyweights lining up to invest in prospective wind farm sites”.

Skovgaard-Andersen says although Taiwan needed to work through its permitting process, once established, it rolled out capacity “at pace”.

Initially, Taiwan implemented a feed-in tariff, providing 20-year PPAs with state-owned power company Taipower, which Skovgaard-Andersen says helped to attract early investors.

“There needs to be something for the investors to create confidence and certainty that you can actually do the projects.”

The value of these FiTs has since dropped, from NT$5.0946/kWh ($0.16/kWh; €0.14/kWh) in 2020 to NT$4.5085/kWh in 2023-24, but the rate is still significantly higher than FiT rates in Europe of NT$2-3/kWh, reflecting the relative immaturity of the Taiwanese offshore market.

As competition has increased between wind farm developers, and more large Taiwanese companies seek renewable energy to meet their commitments under the Renewable Energy Development Act to meet 10 percent of their capacity needs by 2026, the model has shifted toward corporate PPAs.

However, firms like CIP have benefited from the early incentives which fuelled progress in the sector.

Strictly local

While its early feed-in tariffs spurred investment into offshore wind, Taiwan has also implemented some of the strictest rules on local content requirements, which could serve as a dampener.

Bidders in Taiwan’s 2022 tender needed to secure local development items including turbine components and underwater foundations services for at least 60 percent of a project’s capacity.

According to the Global Wind Energy Council, such requirements can lead to constraints around offshore vessels and other parts of the supply chain, meaning higher costs and sometimes delays.

Skovgaard-Andersen says in Taiwan, the localisation requirement meant the entry of many inexperienced local suppliers into the industry.

CIP’s approach was to team up local suppliers with international suppliers who could lend their experience.

“Most of the ‘marriages’ went well, but there have also been a couple of marriages that have been difficult,” Skovgaard-Andersen says.

Although it comes with a set of challenges, the local content requirement is partially a response to current geopolitical concerns.

Marina Hsu, regional managing director for CIP’s exclusive service provider Copenhagen Infrastructure Service Company, says although Taiwan may be “extreme” in its requirements, it is not alone in enforcing a measure of localisation. “Every country is ramping up their energy security and their energy independence. With that logic, local content actually provides sustainability because you don’t need to rely on others. One of our mitigations for geopolitical risk is having robust local supply chains which back us up.”

She says Taiwan’s rigidity is partly a backlash to its historic over-reliance on importing energy, depending on Australia for about two-thirds of its coal and one-third of its natural gas needs, and relying on Russia for coal and gas – although Russia’s invasion of Ukraine prompted a shift.

“Suddenly we cannot get supply from Russia, and therefore need to find other sources. Overall, Taiwan has not that many options, so we must have our indigenous energy.”

With limited pockets of land available for onshore wind, much of the growth in that “indigenous” energy must come from offshore.

Higher risk, higher reward

Geopolitical risk is front of mind amid a growing number of conflicts around the world, yet CIP’s investors do not appear overly concerned about what tension in the Taiwan Strait means for their investment.

Copenhagen-based pension fund PensionDanmark helped to establish CIP in 2012 and remains one of its largest investors, committing to each of its flagship funds.

Incoming PensionDanmark CEO Peter Stensgaard Mørch says although a project like Changfang-Xidao makes up a sizeable allocation from CIP’s funds, the firm is always developing multiple projects at the same time, which provides diversification.

“When [CIP starts] each fund, they have a project pipeline that is more than double the size of the fund, and that makes it possible for them to have strategic choices on the way,” Mørch says. “It has a track record giving us two things: attractive returns and a real impact on the green transition.”

He says CIP and its investors can make a more significant difference to the energy transition in places like Taiwan compared to countries that are further along their energy transition journey, such as Denmark.

In 2022, crude oil, petroleum, coal, and natural gas accounted for 92.5 percent of Taiwan’s energy mix, nuclear 4.9 percent, and renewable energy just 2.6 percent.

“A wind park like this one is pushing out so much black energy in the grid, and the climate impact is stronger than in most places.”

Mørch is cognisant of the geopolitical risk of investing in the Taiwan Strait but says the expected returns on investment reflect this risk: “They must be higher. Always, risks should be levelled with higher returns.”

Should the worst-case scenario arise, PensionDanmark also has political insurance to cover its investments in projects like Changfang-Xidao.

However, Mørch also puts such a scenario in perspective, saying that any given project comes with political risks.

“In Vietnam, for instance, if there’s a change of government, and they have new priorities, what happens to your project? If you had a lot of development costs, and then a project is cancelled, that would be a political cost.

“You could find the same thing in the US – what happens after presidential elections?”

Mørch said CIP handles risk through dialogue with local partners and government officials.

“Of course, the big risk about what China does to Taiwan at some point in time, that’s hard to mitigate, but then we have insurances on that. There’s no point in wondering much about it now. We still expect it to be a worst-case scenario, and nobody has an interest in destroying energy infrastructure.”

CIP is certainly betting on Taiwan’s offshore future, with its 300MW Zhongneng and 500MW Fengmiao projects expected to be operational in 2025 and 2027, respectively.

Assuming other investors remain optimistic about the industry despite its risks and challenges, Taiwan could prove to be a hotbed of opportunity for years to come.

The author attended the opening of the two wind farms in Taiwan at CIP’s invitation; all expenses paid.