Technology advances open up new frontiers for Asian offshore wind

As investors continue to channel funds into the Taiwanese offshore wind farm sector, major industry energy players are seeking new opportunities amid technological breakthroughs

Daniel Mallo, managing director and head of natural resources and infrastructure for Asia-Pacific at Societe Generale
Daniel Mallo, managing director and head of natural resources and infrastructure for Asia-Pacific at Societe Generale

Advances in technology are opening up new geographical prospects within Asia in the offshore wind farm sector, with both Japan and South Korea viewed by energy analysts as offering solid long-term potential. Soon it won't be just Taiwan offering investment opportunities in this form of renewable energy in the region.

"Both Japan and South Korea, which have relatively dense populations, are constrained by land size, so they need to go offshore for their wind farm projects," Daniel Mallo, managing director and head of natural resources and infrastructure for Asia-Pacific at Societe Generale CIB, tells The Asset.

What should help these countries seek offshore solutions for electricity generation are advances in technology. "Offshore wind turbines are getting bigger, so the economics between building offshore and building onshore are narrowing," adds Mallo.

Machines as big as 8 megawatt (MW) or 9MW are now being developed for the offshore wind sector; so, while it is costly to build offshore, these higher specification machines generate more power and improved financial viability through economies of scale.

Although the Japanese and South Korean offshore energy markets are still in their early stages, the Taiwanese market is taking off with alacrity. Project sponsors, investors and lenders are piling into Taiwan – described as one of the fastest growing markets globally for offshore wind farms.

In June, a group of 11 banks successfully closed a 16-year financing facility amounting to NT$18.7 billion (US$609.32 million) for the 128MW Formosa 1 offshore wind project.

The facility included a tranche guaranteed by Danish export credit agency Eksport Kredit Fonden (EKF), its first participation in a project financing in Taiwan. This is the first offshore wind project in Asia, with Macquarie Capital, Orsted and Swancor acting as the sponsors. Construction of the project is expected to be completed by late 2019.

"This is the beginning of a new asset class in this part of the world," Mallo points out. "It has been a successful industry in Western Europe and it is now taking roots in Asia."

The attraction of Taiwan is being driven by the Taiwan government's strong push to shift its energy matrix toward renewables. The Taiwanese plan to exit both coal and nuclear as sources of energy over the next few years and substitute them with renewables, with offshore wind viewed as the main alternative energy source.

Taiwan has ambitious plans to develop 5.5gigawatt (GW) of offshore wind capacity by 2025. The government conducted the first round of offshore wind capacity allocations in April this year, in which several major international developers such as Orsted, Macquarie Capital, wpd, Copenhagen Infrastructure Partners, DGA-Mitsubishi, Northland Power and Yushan Energy, as well as local players, including China Steel and Swancor, were allocated capacity.

Orsted, a Danish state majority-owned energy company and hugely successful player in European markets, seeks new opportunities further afield to add growth momentum. Taiwan is viewed as a prime opportunity, and Mallo anticipates the company to consider other Asian markets as equally ripe for development.

Taiwan's offshore wind farm potential also entices the German power producer wpd, and this attraction is underpinned by the strong signals that the government is sending to the investor market.

In the first round of offshore wind capacity allocation in April, the Taiwan ministry of economy awarded 1GW of grid connection capacity to wpd for the implementation of the offshore wind projects Yunlin and Guanyin. The Yunlin project will be commissioned in 2020-2021, with a capacity of between 650MW and 700MW, while the Guanyin project will be commissioned in 2021, with a capacity of 350MW.

A string of favourable factors are at play explaining the attractiveness of offshore wind farms in Taiwan. The wind resource from the Strait of Taiwan is favourable, and from a technical standpoint, it is manageable since it is relatively shallow water, according to Mallo. These factors are aided by closeness to the shore, so the technical operation is not as complex as in other regions, most notably the North Sea.

Funding the offshore wind farm projects coming on stream appears manageable, as the Taiwanese banks have sufficient liquidity. However, one consideration is that this is a new asset class for many Taiwanese banks. This means some will have to rely on the expertise of the international banks for a better understanding of the technical elements of the projects.

Indeed, the international mix inherent within many offshore projects is substantial. For instance, for the Formosa 1 project, only four of the 11 participating banks are Taiwanese – Cathay United Bank, Entie Commercial Bank, KGI Bank and Taipei-Fubon Commercial Bank. However, it is expected that more domestic banks will participate in the forthcoming transactions as they become more familiar with the asset class.

On the other hand, the international banks can gain succor from the domestic banks in terms of the local environment, the regulatory framework and how the government is looking at the industry.

To fund the projects, international banks that do not possess branches in Taiwan need to source the local currency requirements and may have to tap the New Taiwan dollar bond market to raise capital.

Societe Generale, for instance, has obtained regulatory approval to issue New Taiwan dollar bonds, the proceeds of which will be deployed to finance the offshore wind farm projects.

Date

27 Aug 2018

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