Hsin-Lan Hsu’s major practice areas are banking, capital markets, mergers and acquisitions, investment, asset management and corporate, and she specialises in securities, banking, financial, M&A and corporate and data protection laws and regulations.
Sarah Wu has been recognised by Chambers and Partners as one of the World’s Leading Lawyers for Business (2007–2012) as an experienced banking and finance attorney, specialising in project finance deals involving international clients. She has advised on numerous project finance cases, including concerning the Fong-Der gas-fired power plant, the Chiahui gas-fired power plant, the Miaoli (Infravest) Wind Power Park, the Formosa I Wind Power, the Taiwan High Speed Rail project and the Kaohsiung Rapid Transit System Project.
Odin Hsu advises local and international banks, securities firms, securities investment trust enterprises, securities investment consulting enterprises, financial holding companies and other financial institutions on the drafting and review of relevant transaction documents, regulatory compliance issues and applications and permits for relevant businesses. He also has extensive experience in syndicated loans, securitisation and mergers of financial institutions.
Andrea Chen’s practice focuses on the financial services sector, with a wide range of cross-border finance experience, particularly in financing renewables projects, acquisition finance and bilateral and syndicated lending. In the energy and infrastructure sectors, Andrea has extensive expertise in the regulatory aspects of renewable and conventional energy projects, with a focus on the financing of onshore and offshore wind projects. Clients include investors, sponsors, borrowers, banks and insurance companies.
1 What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?
Green energy projects have been a hot topic of project finance in recent years in Taiwan. The following are the ongoing solar power projects and onshore and offshore wind farm projects:
- the Formosa 1 Offshore Wind Power Project (F1), the first offshore wind farm project in Taiwan, which closed in 2018;
- the Formosa 2 Offshore Wind Power Project (F2), which closed in 2019;
- the Yunlin Offshore Windfarm Project (Yunlin), which also closed in 2019;
- the Changfang and Xidao offshore wind farm projects, which closed in February 2020;
- the Greater Changhua projects, which closed in November 2021; and
- the Zhong Neng offshore wind farm project, which reached financial close in December 2021.
Currently, the Foxwell offshore wind farm and the Hai Long offshore wind farm projects are in the process. In addition, as solar power plants have been the primary source of green energy and their target output set by the government accounts for nearly 70 per cent of green energy in Taiwan, project financing for solar plants is also blossoming in the market. Our firm has actively participated in various offshore wind farm and solar power projects, acting as Taiwan counsel to the sponsors, borrowers and lenders, advising on various issues in relation to foreign investment, government permits and authorisation, project due diligence, financing structure, foreign exchange, hedging and the creation of security interest under local laws, and reviewing and commenting on the relevant project and finance documents.
2 In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?
In Taiwan, there is no general or industry-specific law for project finance, and the general body of commercial law is applicable. In various project financing engagements in recent years for onshore and offshore wind farm projects, solar power plants and otherwise, the relevant participants have followed the international project finance practices.
In the past decade, project finance has not frequently been seen in local syndicated loan markets, most of which applied to infrastructure projects developed by the private sector or through a public–private partnership. The major legislation that governs private participation in infrastructure projects is the Act for Promotion of Private Participation in Infrastructure Projects (the PPP Act), last amended in 2018. The PPP Act provides 14 categories of public works for private sector participation, including, among others, transportation facilities, sewerage treatment facilities, water supply, flood control and drainage facilities, hygienic and medical facilities, recreation and tourism facilities, power supply facilities, sports facilities, industrial, commercial, technical and agricultural facilities, and government office buildings. The latest amendments to the PPP Act were enacted on 2 December 2022, pursuant to which the scope of public works expanded to green energy and digital infrastructure.
A project company under the PPP Act may apply for medium- and long-term loans from domestic banks at preferential interest rates. Foreign banks may also participate in the syndication of loans. In addition, there is further deregulation regarding the issuing of new shares and corporate bonds to facilitate the project company’s financing.
Among the above-mentioned 15 categories, transportation facilities have the lion’s share of the project finance projects. The most high-profile project financing transaction was the Taiwan High Speed Rail project (a NT$323.3 billion multi-tranche syndicated loan) in 2000, which was restructured to NT$381.06 billion in 2009. Project financing was also adopted for other large-scale projects, such as:
- Taipei 101 Tower (NT$35.3 billion), which opened in 2004;
- Taipei Port Container Terminal (NT$16 billion), which began operation in 2009;
- Kaohsiung Kuo Min Container Terminal (NT$16.2 billion), which began operation in 2011; and
- Taipei Dome Complex (NT$15.4 billion), which consists of a main dome building used as a baseball ground and for other sporting and cultural activities (construction commenced in 2012 but was suspended from 2016 to 2020) and shopping malls, cinemas and hotels nearby.
Beyond these, project financing was also adopted for some other construction projects such as for a waste incineration plant and a power plant.
However, green energy has been the industry focus in recent years. The relevant amendments to Taiwan’s Electricity Act and Renewable Energy Development Act have simulated the project sponsors’ interest in Taiwan’s green energy industry. See question 5 for further details in this regard. Since project finance in relation to green energy has been the main focus of project finance in Taiwan recently, we will depict the current situation in the green energy industry in subsequent questions.
3 Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?
In terms of the recent dynamic development of offshore wind farm projects, internationally renowned developers (eg, WPD, CIP, Swancor, Macquarie, Ørsted, Northland Power, Stonepeak, JERA and GRSC) have all been active as project sponsors in Taiwan. China Steel Corporation has also joined the market since its participation as the major shareholder in Zhong Neng.
With respect to banks, in the past, as project finance features non-recourse or limited-recourse, which goes against the risk-averse mindset of Taiwanese banks, which are used to following commercial banking business models and relying heavily upon the creditworthiness of the borrower and its sponsor, most Taiwanese banks did not actively participate in project finance. Compared to international banks, local banks were generally less active in project financing, and state-run banks were even more conservative about funding large-scale projects, especially after the high-profile loan fraud involving Ching Fu Shipbuilding Co in 2017.
While, by and large, most of the project financing was arranged or funded by foreign banks (including but not limited to Mizuho Bank, MUFG, CACIB and DBS, through its Taipei branch or otherwise), large local banks (such as CTBC Bank, Taipei Fubon Bank, Cathay United Bank, E.SUN Bank and SinoPac Bank) and state-owned banks have also been active in project finance relating to renewable energy. A case in point is the Zhong Neng offshore wind farm project financing led by local bank CTBC Bank and participated in by several state-owned banks.
4 What are the biggest challenges that your clients face when implementing projects in your jurisdiction?
In recent offshore wind farm projects in Taiwan, the lenders usually require step-in rights via assignment or direct agreement to the power purchase agreement or other major project documents. The relevant counterparty’s consent will be required for entering into either an assignment or a direct agreement. If the counterparty to a project contract is a Taiwanese government or state-run entity, this would be a problem as these types of entities would tend to be reluctant to grant such step-in rights. To date, the Taiwan Power Company has agreed on the pledge arrangements made over the rights under the power purchase agreement and limited step-in rights in some offshore wind farm projects.
In addition, some local governments and certain associations might ask for ‘tributes’ or ‘compensation’ from developers if the project would negatively impact the local residents or otherwise. This might also create uncertainty in the negotiation and planning of the projects.
In terms of solar energy projects (including those under the newly implemented structure of fish farm or electricity symbiosis plant), the major difficulty would be the environmental issues to be resolved among the relevant stakeholders, including the farmers, developers, environmentalists, and any changes to regulations that might impact the investment decision from the developers. Take land use, for example: owing to the concerns from the agricultural authority of Taiwan, the relevant regulation was amended in July 2020 such that any land parcel under two hectares, if intended to be used for solar power plants, would now be prohibited from changing the land use. This amendment complicates obtaining land for solar power plants.
5 Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?
The drive behind the rise of project finance relating to green energy has been article 95 of the Electricity Act, passed by the Taiwanese government on 26 January 2017, which stipulated that all nuclear power plant operations in Taiwan should be ceased by 2025. This has stimulated the demand for alternative energy sources in the Taiwanese market. In addition, to accelerate investment in renewable energy technologies, Taiwan law also offers the ‘feed-in tariff’ policy mechanism. This also acts as an incentive for foreign investors to develop green energy in Taiwan. Article 95 of the Electricity Act was removed from the Electricity Act on 7 May 2019 as a result of the results of the referendum held in 2018, which showed that the majority of Taiwan citizens were in favour of deleting the rule.
However, despite this change to the Electricity Act, the latest amendments to the Renewable Energy Development Act issued by the Executive Yuan in December 2022 provided that buildings under certain conditions must install solar power plants on their roofs. These amendments appeared to further stimulate investors’ interest in continuing the development of green energy in Taiwan. The Taiwanese government is focused on achieving the 20 per cent renewable energy consumption target in 2025. This target has been incorporated into the amended Renewable Energy Development Act by setting out the aim for the total amount of electricity generated by renewable energy power generation facilities by 2025 to be at least 27 million kilowatts. According to the latest assessment by the Ministry of Economic Affairs, the 20 per cent target will be postponed to be achieved by 2026, while the total amount of electricity generated by renewable energy power generation facilities by 2025 will not change. Aside from this change, according to the amended Renewable Energy Development Act, for the distribution of the generated electricity, the investors’ choices are no longer restricted to either selling this electricity entirely on the free market (wheeling) or to the Taiwanese electricity retailing utility enterprise (ie, Taiwan Power Company) wholesale. Under the amended rules, investors may use two channels for the distribution of the generated electricity, offering project sponsors a certain level of freedom and variation for the handling of the generated electricity. In addition, another important change under the amended Renewable Energy Act is that new construction, expansion or reconstruction of public infrastructure or buildings established by Taiwanese government institutions, public schools and state-run enterprises are required to instal a renewable energy power generation facility as a priority. As the preferential policies under Taiwan law offered for renewable energy are still in place, it seems that this interest has not entirely diminished, as green energy project sponsors continue to invest in Taiwan. We are still approached by lenders aiming to participate in relevant project finance.
Additionally, the political party endorsing the amendment of the Renewable Energy Development Act continues to control the legislature and the presidency after the election held in Taiwan on 11 January 2020, and the third round of grid allocation had been announced by the authority in late 2019, and its application period expired in September 2022. With 11 new offshore wind farms projects being applied for in the third round of grid allocation, to reach the goal of accumulating 10GW in 2026–2035, and correspondingly, there is further need for project financing.
6 What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?
Although Taiwan’s renewable energy project finance market is still in its earlier stages in terms of development, secondary markets in the finance debt market should be a matter of course. As commonly seen in large-scale financing, the conditions of a lender transferring its participation would usually be subject to a ‘white list’ agreed by the obligors that sets out all acceptable lenders. Credit rating requirements would also be imposed upon such new lenders.
In the Taiwanese market, export credit agencies are heavily relied on as a major source of debt financing, as 60–70 per cent of the facilities are covered by export credit agencies. The latest nationalisation policy, which affects the guarantee ratio of offshore wind farms projects from export credit agencies and was approved by the National Credit Guarantee Mechanism in 2020, may facilitate domestic green energy industries’ financing and the development of related industries by providing guarantees for project sponsors to procure nationalised products and services. The dominant players in the Taiwanese market are international financial advisers and banks, adopting the international norms and practice in transactions.
Aside from banks, insurance companies’ and global institutional investors’ participation are worth noting in project financing. A case in point should be the announcement by Ørsted in late December 2020 that it had signed agreements with a consortium comprising global institutional investor Caisse de dépôt et placement du Québec and Taiwanese private equity fund Cathay PE, which acquired a 50 per cent ownership share in Ørsted’s 605MW Greater Changhua 1 Offshore Wind Farm in November 2021. The reason behind this trend is the lending limit. For the banks currently active in providing debt finance to renewable energy project sponsors, the respective maximum dollar amounts that such banks are legally permitted to lend to their respective borrowers are all almost exceeded; these banks are therefore unable to further participate in later renewable energy projects. Project sponsors, therefore, would have to seek other sources of funding. Recently, banks in Taiwan would issue green bonds as the project sponsors’ alternative sources of funding. See further explanation in question 7.
While large local banks in Taiwan and foreign banks are open-minded about project finance, with good finance models and technical advice, most of the local banks (notably state-run banks) take a conventional view toward the financing model and still turn to the creditworthiness of the sponsors or value of collateral made available to the lenders. As project finance features non-recourse or limited-recourse, no special considerations come from the project sponsors. In some structures, the project sponsors do not invest in the special purpose company (SPC) established specifically for the investment in Taiwan’s renewable energy directly and a separate holding company (holdco) will be incorporated to hold the SPC directly. Usually, the financial institutions’ utmost concern is how to ensure that the holdco and sponsors will inject funds (by equity or shareholder loan) into the SPC in the construction phase as they committed. In this regard, the financial institutions may require a corporate guarantee or a letter of support from the sponsors’ financially sound parent or a bank guarantee to cover the funding risks of the sponsors.
Moreover, regarding the bankability issue in Taiwan, for finance documents and security documents, the Asia Pacific Loan Market Association form is regularly used in financing deals in Taiwan. The governing law of the finance documents is not an issue under Taiwan law as Taiwan courts normally respect the governing law chosen by the parties. In addition to Taiwan law, some projects choose English law as the governing law for the finance documents.
7 What are the major changes in activity levels or new trends you anticipate over the next year or so?
After the United Nations Climate Change Conference in Glasgow (COP26), environment, social and governance (ESG) is undoubtedly the hottest topic not only in the world but also in Taiwan’s project finance market. Cooperating with several public sectors, associations in the financial sector and non-profit organisations in Taiwan, the Financial Supervisory Committee of Taiwan (FSC) issued and promulgated the Green Finance Action Plan 3.0 to achieve its objectives, such as guiding financial industries, promoting the understanding of greenhouse gas emissions by financial industries and its investment and financing positions, promoting active responses to climate-related risks and opportunities, and supporting sustainable development and carbon emissions reduction. In 2022, the FSC introduced the Programme to Encourage Lending by Domestic Banks to Enterprises in Six Core Strategic Industries to encourage domestic banks to actively extend loans to six core strategic industries (including green energy and renewable energy) under the precondition of conducting proper risk control, and providing rewards to banks for participating in the Programme. As mentioned, there has been a rise in global institutional investors’ participation in project financing. The reason behind this trend is that banks and insurance companies currently active in providing debt financing to or investing in renewable energy projects have almost reached their respective limits. Project sponsors, therefore, would have to seek other sources of funding. For instance, green bonds and sustainability bonds are the project sponsors’ alternative sources of funding.
In addition, complying with international standards such as the Principles for Responsible Investment and the Equator Principles, lenders gradually incorporated ESG concepts into their internal policies. Sustainable and responsible lending in ESG-related industries (eg, solar photovoltaic and wind power generation) has become prevalent. This trend also corresponds to the policy promoted by the governing political party, the Democratic Progressive Party. We anticipate that the policy for electricity generation from green energy will remain in place and even dominate, and that project financing will continue to be of keen interest to the relevant market players.
The Inside Track
What three things should a client consider when choosing counsel for a complex project financing?
Counsel must have adequate experience in the relevant project financing. Moreover, as this is a relatively new field in Taiwan, the standard norm for project finance relating to renewable energy has yet to be established. Therefore, it is important for the project sponsor to choose counsel who has sufficient resources to liaise with the Taiwanese government and be able to hold negotiations with the government. Lastly, the counsel must be familiar with the local laws and regulations.
What are the most important factors for a client to consider and address to successfully implement a project in your country?
In Taiwan, various permits and approvals must be obtained from the Taiwanese government to successfully implement a green energy project. Therefore, it is important for the project sponsors to have a team and outside counsel that are capable of managing the timeline for the applications for such permits and approvals, so that they can be obtained in a timely manner to avoid any delays in such projects.
What was the most noteworthy deal that you have worked on recently and what features were of key interest?
Our firm participated in various offshore wind farm projects, in which we acted as teh Taiwan counsel to the sponsor and borrower as well as the lenders. Most of the deals involve not only complicated financing structure but also foreign exchange and hedging issues with multiple parties, addressing local law issues by giving solid legal advice and seamless communication with government authorities, which are features of key interest to the relevant participants.