Opinion: Taiwanese local content laws could strangle its nascent offshore wind industry

Since 2016, Taiwan has pursued the energy transition with the aim of increasing renewable energy to 20% of all power generation by 2025.

Taiwan's offshore wind sector has several hurdles to overcome in order to be viable, argues Scott Hsu

A key element of this transition is the rapid acceleration of its offshore wind programme, with a long-term target of 40-55GW of installed capacity by 2050.

Propelled by a strong government mandate and record high feed-in-tariffs, Taiwan’s first round of offshore wind development was hugely successful, attracting large global developers and suppliers from established markets.

However, despite its recognition as one of the leading East Asian markets for offshore wind, we continue to see decisions being made that could impact the industry and which – if not addressed – could set Taiwan’s progress back several years.

Local content requirements and auction caps

In the next offshore wind auction, due to take place in 2023, significant local content requirements, and a cap on project sizes will both heavily impact the commercial viability of future offshore wind projects and may push developers to favour other regional markets. And despite the Taiwanese government’s ambition to create a local manufacturing supply chain for renewable energy; the heavy industry, which could support the energy transition, hasn’t developed at a similar pace. Competition with Taiwan’s leading information and communications technology industry for skilled technicians has affected the emergence of domestic foundation fabricators, impacting scalability.

This has resulted in a 500MW cap on the upcoming Round 3 auctions in a bid to cater to the maximum outputs of in-country fabrication facilities.

Industry insiders, therefore, remain sceptical that Taiwan can both rapidly and cost-effectively build large offshore wind farms while simultaneously developing an entirely new industry from scratch.

So, with 2025 fast approaching, the relatively small number of local fabricators that do support the Taiwanese renewable energy industry are facing a steep learning curve in their attempts to hit quality standards and deadlines.

Impacted by local supply chain bottlenecks and increased costs, developers will inevitably look abroad to mitigate risks rather than investing locally, further stymieing the potential for Taiwan to become a hub for windpower manufacturing.

Ultimately, rigorous local content rules coupled with an ambitious development timeline and a local industry lacking technical experience, may result in a lose-lose situation for Taiwan’s long-term energy goals.

Ensuring bankable PPAs

Although competing with the wind industry for talent, Taiwan’s ICT companies are also intricately linked to the development of its offshore wind assets. A recent Wood Mackenzie report highlights an increase in the popularity of corporate renewable power purchase agreements (PPAs) in the region due to improving prices, with Taiwanese chipmaker TSMC highlighted as one of the region’s biggest buyers of renewable energy.

With PPAs particularly popular among organisations looking to achieve environmental, social and governance (ESG) commitments, the Taiwanese government has prioritised the sale of renewable energy projects’ electricity to private companies over that of utilities. While this is promising – as demand from the likes of TSMC is set to continue – their consumption and appetite for PPAs is currently the exception rather than the rule.

Despite the desire of Taiwanese corporates to meet green commitments, government-subsidised, low industrial electricity prices are resulting in limited demand for wind energy, which is limited in supply and carries high developer premiums. As a result, PPAs remain relatively complex and, owing to multiple cost drivers in the market, currently only make economic sense for large energy users.

Not only do local content rules add pressure on local providers, but competing government initiatives are increasing the risk of projects not reaching a financial close, with a knock-on effect on the bankability of PPAs. Without long-term partnerships with utility companies in place, future tariffs will continue to be closely connected to demand from Taiwan’s private sector which, under current policies, leaves the rollout of offshore wind in a precarious position.

Cause for optimism?

Ultimately, we hope that the restriction on local content is eased to ensure an upward trajectory for Taiwanese offshore wind, particularly with nascent markets in Australia, Korea and Japan attracting investment and developers.

The benefits of doing so would be far-reaching and range from improving supply chain competitiveness to lowering Capex, offering renewable energy as an affordable power source for the private sector as it strives to meet ESG commitments.

While this may sound like a daydream, I need to remind myself that I am writing this while heading back to Taipei on our high-speed rail line which, despite being the backbone of our country in 2022, struggled to find its feet in its early days.

And so I am confident that, if we allow the offshore wind industry to continually improve through open competition, naturally, success will follow.

Scott Hsu is country director for Taiwan & Philippines at K2 Management