Taiwan’s Phase 3.3 Auction: Sparse Bids and the Localization Dilemma

Intro (00:00):
Welcome to PowerPod, the renewable energy podcast from TGS 4C, a leading provider of offshore wind intelligence. In each episode, we explore the key developments shaping the offshore wind market and bring clarity to the biggest trends shaping the industry and the wider energy transition.

Dan Wiseman (00:15):
Hello and welcome to another episode of PowerPod with me, your host Dan Wiseman, market analyst here at TGS 4C. So, we're a little break from the norm here with this episode, we're looking at Taiwan and moving further into our APAC areas. And I'm joined by my colleagues James and Chao to talk about the auctions and the participation in Phase 3.3 over in Taiwan. So, before we get into that, how about you guys introduce yourself and let us know what do you do here within the company?

James Payne (00:41):
All right, I'll go first. I'm James Payne. I'm a market analyst for offshore wind for the Greater China area and Vietnam here at TGS 4C.

Chao Guo (00:48):
Yeah, hello, I'm Chao. I'm a senior analyst at TGS 4C, in charge of Taiwan and the Chinese market in here.

Dan Wiseman (00:54):
So, the main news is that the bids for Taiwan's latest auctions are in. There were two developers bidding for a project each. Now obviously they overlap each other, so only one could get built. And from my understanding, this is very different from what the government announced, which was that over five companies were willing to participate in Phase 3.3. So, this episode is just going to be going over what happened. Now before we talk about Phase 3.3 and its auction, it does look like offshore wind in Taiwan has been regarded as quite successful in the APAC region. So, James, why has Taiwan taken to offshore wind so well?

James Payne (01:28):
Yeah, thank you, Dan. It's an interesting question. I mean, Taiwan, I mean, when you think of Taiwan, you think of semiconductors, AI, and it's become really one of the most important economic entities in the world right now. Everyone's paying attention to it. But those semiconductors and AI, they use a lot of energy and a lot of electricity. And TSMC, the Taiwan Semiconductor Manufacturing Company, one of the most important companies in the world, making all those chips that go to data centers in America and around the world right now, that takes a lot of electricity. They consume roughly 9% of Taiwan's electricity. It's huge. And the bull case scenarios from places like S&P Global, they're having it go up to a quarter in a few years, by 2030s. So, this is a huge thing for Taiwan electricity generation and security.

Taiwan is quite vulnerable in a way, since it's quite reliant on non-renewable sources. Liquid natural gas is the main one at the moment, has been for some time. It's all shipped in from Australia, Middle East, United States. And those ships could in certain situations get blockaded in certain situations, which Taiwan might be worried about. So renewable energy is important.

Nuclear power was or could be an option, but the current ruling political party, the DPP, that's the Democratic Progressive Party, they were, well, they were founded in the mid-80s when Chernobyl happened and then got into power a few years after the Fukushima disaster, which means that their anti-nuclear policy kind of goes hand in hand with how Taiwan has progressed. And the previous president, Tsai Ing-wen, actually made a policy to phase out nuclear completely. So, the four, well, there were three up and running nuclear power plants that eventually got decommissioned in her tenure. And well, I think the last one was actually just last year. But a fourth one was also mothballed, started shortly after Fukushima as well.

So, now I believe that nuclear is kind of making a comeback. Is that right, Chao, since things are not really being, renewables aren't really doing as well as they'd hoped? But yeah, so there's been, there may have been a recent U-turn on that, since there's only about 16% of electricity has been generated by renewables now. So offshore wind is going to be a, is a natural choice for Taiwan. The Taiwan Strait, which is the area between the west coast of the island and mainland China, it's almost as serves as a huge wind tunnel. So that's why so many European developers want to get in on that area to develop there, traditionally over the years, but as we'll see, there's, it's not so simple.

The offshore wind plans were rolled out in three phases. We're now on to Phase 3.3, as you mentioned. Phase 1, mostly demonstration with some small scale projects with big subsidies. Phase 2, we're talking about projects like Greater Changhua, also came with 20-year fixed subsidies. So, Phase 3 has been not so simple. This is where the government has phased out subsidies, and we've moved on to corporate power purchasing agreements, which, which have made things a struggle, as we can see from the results of the latest tender.

Dan Wiseman (04:12):
Of course, yeah. And like you were saying, with the subsidies ending with Phase 3.1, I mean, this was a big change. So, since that, since the subsidies ending, Chao, I mean, how have these phases done so far?

Chao Guo (04:23):
Thanks, Dan. Thanks, James. Thanks, thank you for introducing the background of Taiwanese offshore wind. Yeah, yes, you're right. Subsidies ended with Phase 3.1, and since then, the progress has been quite slow. And only one project in Phase 3.1 is currently under construction. And only one project in Phase 3.2 has reached the financial close. So even the significant development potential, just a few projects have been made real progress.

And as we know, one of main challenge in Taiwan is the localisation. And the previous requirements have limited developers' choice of suppliers. And particularly when it comes to equipment and installing services, they have made project smore expensive and put addition, additional pressure on their financial returns. And the second one, the financing also, has also become a major issue. Without subsidies, you know, developers in Taiwan, they need to rely on the CPPAs to secure their revenue. Yeah, but, but finding buyers willing to sign very long term contract like 25 or 30 year contract at a price that make project financially viable is very, very difficult now. So, developers are facing very high cost and more uncertain revenues and greater difficulties securing financing. This is why so many projects struggle to move forward.

Dan Wiseman (05:43):
Yeah, and like you said, mean in 3.1, only one was under construction, and the same with 3.2 with only one with any sort of financial backing. That's, those aren't positive numbers for a country that's looking to move forward with offshore wind. So James, what did the government do then to set things back on the right path for the 3.3 auction?

James Payne (06:03):
Okay, yeah, so localization was the huge issue, the big front and center issue that everyone was talking about. Foreign developers, like Chao was mentioning, with the first few couple of phases, if you're looking to get a turbine component built for your wind farm, you had to do it in Taiwan. That was, that was the rule, those were the rules. And because Taiwan didn't initially have a supply chain at the outset, like there was in, like there was in Europe who had the economies of scale to get things cheaper, these prices were just too high. And so, the projects had very much, had a lot of difficulty getting financed.

So the government decided in, well, before 3.3 rules, before the 3.3 rules actually came out, the European Union actually put a challenge out to the WTO where they said these localization rules that you've got here are not fair on, not fair on European developers, and the Taiwanese government agreed with that. They got rid of them, at least in part for Phase 3.2, where you could in theory use European suppliers if you needed to, I believe was the, I believe was the rule there.

But for 3.3, they've actually removed them formally, these localization requirements, but they've actually reincorporated them again in the form of the, in the point system. So now there's ESG points where developers have to bid based on how many, like how much benefit they're going to have to the local economy and the local supply chain. And it's difficult for the Taiwanese government as well, because canceling these localization measures, that's a huge issue. You don't want to make all of these factories that have set themselves up and they're fledglings, they're getting into the industry, they've been banking on these localization measures continuing on for the foreseeable future to, because they've already invested a lot of money in these things. And once you take that away, all of a sudden foreign developers don't want to use you, and you get shut down. And who are you going to take aim at with your criticism? It's the government. So, the government doesn't want to do it. That's why it's done in this roundabout way of getting rid of localization, but in a way not really.

Dan Wiseman (07:44):
Yeah, and I guess it has a a knock-on, like you were saying, with the government putting money into localization, and you know, then outsourcing it elsewhere is a huge loss in the money that they could have invested, but I guess also it's a huge potential loss of money into Taiwan as well, because opening the doors to European suppliers that may seem a more viable option is always there, and it kind of limits the, well not limits, it widens the scope of what developers can look at. And in terms of developers as well, the bidders in the auction, Chao, who exactly is it that's bidding and where are they planning on putting their wind farms?

Chao Guo (08:21):
Oh yeah, I think the two developers taking part are Orsted and CIP, and Orsted is bidding for the 924 megawatts, it's Dadu project. And CIP is bidding for the 1.15 gigawatts Fengmiao 3 project. I think the key issue is that the two proposed wind farms sit overlap significantly. So, it means only one developer may be able to win the bid. And I just saw recently in Taiwanese media, they report Orsted recently has confirmed plan for two additional wind farms. It's Dadu 1 and Dadu 2. And Dadu 1 in this phase proposal, probably Dadu 2 to the future one. And Orsted just says it is confident about securing approval and could start work immediately.

And however, but I think the thing is there is still a key question. If one developer wins the bid, how about another one? They will consolidate or they just will extend to other site? We don't know the answer. And even, and the thing is even if a developer is willing to expand its project by up to 50 percentage, I mean if Orsted or CIP won the bid, the total capacity could still fall well short of the 3.6 gigawatts originally expected from the auction.

Dan Wiseman (09:41):
I mean, and Orsted, I mean, that's a big name, and I think we've seen it with emerging European markets where just a major developer like Orsted is enough to really boost that economy. And if they're, like you said, they're looking at committing to more projects as well in Taiwan, that's a huge boost for Taiwan as an offshore wind market. But like you were saying, I mean you also said they're looking to build straight away, there's that potential to kind of keep going. So, there's this potential snowball effect that's coming on, especially with the government saying that they're looking to hold Phase 3.4 sometime early next year. I mean, we're we're only just into October at this point, is that too soon, James, for them to be looking at another auction?

James Payne (10:24):
Uh, probably, yes. A lot of the complaints about the auction this time were that it was a bit of a rush, wouldn't you say? And we were expecting 3.4 to be held a bit later on. And they're even talking about 3.5 being held, I think, in two years after that. Is that right, Chao? So, yeah, this is all a bit soon. We thought it would be about four years between, so that there would be plenty of time, plenty of time for the industry to consult with the government about what went wrong this time. But yeah, next year seems way too soon to bring this back to where it should be.

Dan Wiseman (10:56):
Yeah, I say, I mean, is there a danger of Taiwan maybe putting all their eggs in one basket and losing out? I mean, are there any outside of potentially Orsted, I guess, if they're that interested, is there any other developer that you feel may be interested in following suit for next year?

James Payne (11:12):
Well, Taiwan has kind of limited itself, well, this whole 3.3, this Phase 3.3 auction was based on pragmatism, really. The government really wanted to get steel in the water, that's what it's been focusing on doing, because 3.1 and 3.2, all of these projects passed, or they all submitted bids, they got passed, and now one by one, they've just been dropping out, until now we've just been left with one from 3.1 and one from 3.2. So things just aren't getting built, and the Taiwanese government is getting a bit fed up, it wants results.

And so what’s done this time for 3.3 is really emphasized, first of all, financial capabilities, that was a huge part of the scoring system, and also just previous experience. So that's why they've chosen these two reliable juggernauts, Orsted and CIP, that's why they're in the auction. But with 8 gigawatts lined up for 3.4, and potentially even more if they include some of the missed capacity in this round, we got they've got to find some more able developers who think who are up to the job if they want to actually reach the targets.

Dan Wiseman (12:08):
Yeah, and I guess, I mean, you can't just bank on one developer to do it all for you. I mean, with 3.3 being kind of as imminent, and 3.4 coming soon after, I mean, how fleshed out is Phase 3.4? Do they have kind of defined areas that they're looking to lease? Is it a full plan, or they kind of going in a bit half-cocked?

Chao Guo (12:28):
Oh, I think they don't have a full plan for the site. They just, I think the policy change now, and the government wants developers to select whatever they want over the over the sea. So, it means they don't have an overview plan of "okay, which area we will develop". So, I think it depends on what actually happened now. If it's going well, probably the international developer, they have more interest in Taiwan project. But if still not going well, only one developer get a bid, and the cost not decline too much, I think in the future probably still, the market still stay the same as now.

Dan Wiseman (13:16):
Okay, and I mean, how is Taiwan in terms of their timelines? Is it a case of if the stars don't align for the auction early next year, are they prepared to maybe push it back, or is it a case of they're willing to kind of go forward with it, and if it succeeds it does, if it doesn't succeed then it doesn't, they just move on to the next?

James Payne (13:34):
Yeah, I mean, the past few or the past couple of auctions, it may have just been a case of bad timing. I mean, for everyone, it's been difficult, what with COVID prices, steel, and all this kind of thing. So, you know, it's really a case of time that will tell whether things will pick up or not.

Dan Wiseman (13:50):
Yeah, I mean, because it's been a kind of a nightmare for a lot of things related to the industry. We've seen the prices of steel fluctuate massively over the years.

James Payne (14:01):
Strait of Hormuz, this kind of thing.

Dan Wiseman (14:02):
Yeah, I mean, geopolitical issues have caused a lot of different problems, especially with kind of fuel prices and supply and demand and ships. So, it's going to be, like you say, it's going to be a case of kind of waiting and seeing how it plays out. Now, on top of this, there is also a floating auction set to take place soon. So, what's the latest on that, Chao?

Chao Guo (14:20):
Oh yeah, that that's good, a good question. I think last month Taiwanese government announced draft plan for the floating offshore wind develop demonstration programs. I think the plan's aim is to select two demonstration projects with option to add one more if needed. Each project would have around 6 to 12 floating platforms with a total capacity of about 100 to 200 megawatts. This means the total capacity could reach up to 600 megawatts across the three projects.

And similar as the fixed auctions, the selection process will focus on the technical feasibility, financial strength, and the ability to work with the local suppliers and the community. Even if they cancel the localization in fixed one, I think in the future Taiwanese government still want the local companies or local suppliers that they can involve in the floating development.

Yeah, and the government hopes to announce the formal selection process by the end of this year at the earliest time, and with the result expected around the third quarter of 2027. But the floating offshore wind is quite different from the fixed bottom market. Although Taiwan has a good potential in deep waters, they have very good resource for these to develop this industry, and but the cost remain very high. And there are still challenges and technology issue, installation capabilities, and all other ports issue. Yeah, I think if you want to install a floating, probably the port is a big issue because it's total different with the fixed one. So, I think while the demonstration program is an important step forward, it is still too early to see whether floating offshore wind in Taiwan can become commercially available.

Dan Wiseman (16:11):
And I think, I mean, that's the same globally. We see it in European markets, we see it in the Americas as well, where offshore wind is, I mean, floating offshore wind is still a very nascent industry and not really a lot of markets have got a good foothold on how they're going to progress with it. So, it seems like Taiwan is in the same boat asmany other markets as well.

James Payne (16:30):
It does seem like a lot of a lot of markets around the world have kind of not met their expectations. Perhaps COVID got in the way, but many in the past few years have tried the CPPA system to try and actually make the economics work, like on a fundamental level, but costs just haven't come down the way they thought they would. And that's really thrown a spanner in the works. Everything is maybe not even gone down, but gone up. So, yeah, it's going to take some time to actually find out if this is going to work for Taiwan. They really need to do it because I mean, the alternative is a big lack of energy security.

Dan Wiseman (17:02):
So, it seems like there are quite a lot of unanswered questions still, and I guess it's going to be interesting to see how the market develops over the coming months. Of course, from the sounds of it, Taiwan still has kind of significant offshore wind potential, but it's the same as everywhere else: it's turning that potential into actual projects. And I think that's going to depend, by what you guys are saying, on what happens and what decisions are made today.

James Payne (17:28):
Absolutely.

Dan Wiseman (17:29):
So, I think that's about all the time we have for today. So it's been interesting to to get a bit of information on a market that personally I know very little about outside of talking to you guys. I have absolutely no idea what goes on in Taiwan and China, so I feel like I've learned a little bit here today, and hopefully our listeners have too. But thank you, James, and thank you, Chao.

James Payne (17:49):
Thank you.

Chao Guo (17:49):
Thank you.

Dan Wiseman (17:50):
For joining me today and thank you for listening. And I'm sure we'll have much more to talk about next time here at TGS 4C.