Come with the wind: Taiwan leads Asia’s shift to a low-carbon economy - BNP Paribas CIB
 
Wednesday 08 May 2019

Taiwan's first-ever offshore wind farm is garnering great interest in green energy and paves the way for similar projects across Asia Pacific. What is driving demand, what sort of financing is required and how do they become commercially viable?


This article is also available in Simplified Chinese and Traditional Chinese.

The energy transition is real. Driven by fast-changing policy, market and consumer dynamics, it is creating immense opportunities for both companies and investors willing to adapt – but imminent risks for those that are not.

Asia Pacific is the world's largest consumer of primary energy and accounts for nearly half of all global emissions. Nonetheless, according to a 2016 report, the region accounts for two-thirds of global renewable energy investment. Offshore wind farms, in particular, are playing an important role, with Taiwan as a pioneer in the region.

In June 2018, Taiwan's Formosa 1 Wind Power Co., Ltd, was the first-ever project financing for an offshore wind farm in Asia Pacific. A landmark 128MW development, it marks a major milestone for the country, which is increasingly turning to renewables for its energy needs.
"The economic and social opportunities afforded by offshore wind farms are grabbing the attention of financial institutions and investors like never before."
Bruce Weller, Head of Power and Project Finance, Asia Pacific, BNP Paribas
Taiwan aims to reach 10GW in offshore wind power capacity by 2030, up from 8MW only in 2018 [1].

The transaction involved 11 international and Taiwanese banks, along with Denmark's Export Credit Agency EKF, with funding in New Taiwan Dollar (TWD) – another first. BNP Paribas acted as sole financial advisor, mandated lead arranger, hedge coordinator and account bank.


According to Bruce Weller, Head of Power and Project Finance for BNP Paribas in Asia Pacific, the economic and social opportunities afforded by offshore wind farms are grabbing the attention of financial institutions and investors like never before. "This milestone will pave the way for future transactions across the region," he said.

Regional interest

Outside Greater China, offshore wind farms are more unusual. However, this is set to change: recent studies pointed to a potential 20-fold increase in regional offshore wind power capacity, reaching 43GW by 2027. [2]

While largely driven by China, with little or no opportunity for foreign investors to take part, Taiwan, followed by Japan, South Korea, India and Vietnam, are all expected to play a prominent role [3].

"Renewables, and specifically offshore wind power, are an economic and political priority for Taiwan, which imports most of its energy needs," observed Olivier Rousselet, Head of Territory for Taiwan at BNP Paribas. The government wants to boost the share of renewables in Taiwan's power production to 20% by 2025, from less than 5% in 2017.

For the region as whole, the projected growth of offshore wind power will depend on price competitiveness. Creating an investor-friendly environment helps, as has been the case for Taiwan.

Nonetheless, there remain challenges for offshore wind power in Asia Pacific. A lack of logistical support and insufficient government backing will hinder competitiveness [4].

"Renewables, and specifically offshore wind power, are an economic and political priority for Taiwan, which imports most of its energy needs"
Olivier Rousselet, Head of Territory for Taiwan, BNP Paribas
Geography and climate can also be key. In this regard, Taiwan is fortunate: the Taiwan Strait enjoys near-ideal conditions for offshore wind generation, with shallow coastal waters and consistent high winds year-round. Japan, South Korea and Vietnam have similarly promising conditions – but many countries do not, which will limit the appeal of offshore wind power development.

Keys for Success

A number of factors crucial to Formosa 1's success highlight the foundations necessary for other regional projects.

  • Regulation: Taiwan was the first country to put in place a framework allowing foreign investment in this sector. Japan recently followed suit [5], while South Korea and Vietnam are also looking to open their markets.
  • Political vision: Taiwan was among the first Asia Pacific countries to grasp the importance of moving away from carbon-intensive energy production. Recognising the development cost for renewables projects, its government created legally-binding financial incentives – for example, state-owned Taiwan Power is committed to buying the output of Formosa 1 for 20 years with guaranteed feed-in tariffs [6].
  • Overcoming financial challenges: BNP Paribas was able to provide end-to-end financing for Formosa 1 by drawing on its existing experience in similar projects in Europe, its regional financing capabilities in Asia Pacific and a deep understanding of local regulations and product know-how. Project finance, investment banking, global markets and cash management were but four of Formosa 1's elements of success. On the last point alone, it allowed the bank to open 17 accounts for Formosa 1, providing long-term liquidity to the bank.
 
Unlike Europe, Asia Pacific is a relative newcomer to the offshore wind power sector, whether in logistics, dredging or maintenance. According to Weller, BNP Paribas' major advantage is its European heritage: "The sector is dominated by European firms. Given that many are BNP Paribas clients, we have a natural advantage in bridging that gap."


[1] A storm avoided, EIU (March 6, 2019).
[2] Asia Pacific offshore wind capacity to rise 20-fold in next decade, Wood Mackenzie (October 24, 2018)
[3] Australia's first offshore wind power farm – a 2GW project called Star of the South – remains in the feasibility stage.
[4] Wood Mackenzie, op cit.
[5] Japan is seeking to boost offshore wind power generation from 65MW currently to 0.82GW by 2031, part of its overall effort to increase total wind power generation to 10GW by that date. See 'Renewable Energy in Asia Pacific: Country Insights', Linklaters, op cit.
[6] In January 2019, the government reduced the FIT by 5.7 percent from 2018's NT$5.849/KWh (about US$0.195). Source: EIU, op cit.
 



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