Taiwan has recently emerged as an exciting new investment destination for international investors and financiers in the energy sector

A recent groundswell of interest in Taiwan as an international energy investment destination may present new opportunities for Taiwanese companies far beyond the energy sector.

The regional energy context

Asia's thriving economies need energy — and plenty of it. The sector continues to transform itself as seismic market forces fundamentally alter the landscape for investment. The increasing cost- effectiveness of renewable energy and the emerging viability of battery storage technology have created a critical reflex point. In addition, the shifting market dynamic in the oil & gas sector has seen LNG-to-Power emerge in Asia as a viable alternative to coal-fired power.

Lower barriers to entry in renewables have given rise to a new breed of more nimble developers and investors, who compete confidently against the traditional energy utilities and drive innovation in technology, development strategy and capital.

Yet a gap remains between ambition and practical delivery in the region. A flourish of government policy momentum may initially attract interest from international investors and financiers, but is often tempered by the familiar challenges in the region:

  • Slow and opaque approval processes
  • Lack of coordination among government authorities and
  • A disconnect between perceptions of fundamental market practice and the risk allocation acceptable to relevant government entities

Enter Taiwan and its ambitious plans to shake off its reliance on nuclear power.

Taiwan emerges as a key market for energy investors

By 2025, Taiwan is aiming to be nuclear-free, with 20 percent of its energy mix from renewable energy and 50 percent from natural gas. Offshore wind is a key component of this goal, with ambitions for 5.5 gigawatts of offshore wind capacity by 2025.

Interest from international investors and financiers in the Taiwan offshore wind sector has been intense, with market participants enthusiastically jockeying for position. A number of key factors that differentiate the Taiwan offshore wind sector from other markets in Asia have buttressed international interest:

  • The investment-grade creditworthiness (AA-) of the offtaker (Taipower) is an important foundation for the industry
  • Strong government commitment and drive
  • Large-scale projects and a transparent pipeline of opportunity
  • Attractive feed-in-tariffs
  • The potential for Taiwan to be a foothold for establishing a presence in other emerging offshore wind markets in Asia, including Japan and South Korea
  • A legal system with a degree of familiarity to European players — the Taiwanese legal system is a civil law-based system that was influenced by the German and Japanese legal systems (which itself was influenced by the German and French legal systems)
  • No competition from mainland Chinese firms (the largest offshore wind market in Asia and the third largest in the world)

A key consequence of international involvement in the Taiwan offshore wind sector is the pursuit of limited-recourse project finance. This means that financiers lend solely on the basis of the project and its cash flows, without additional financial guarantees from the project developer. This type of financing had not been widely practiced in Taiwan previously, and its techniques and structures are broadly unfamiliar in a Taiwanese context. Implementing limited-recourse project finance in Taiwan is being driven by specialized teams of financial advisors, bankers and lawyers, and supported by export credit agencies (ECAs) — mainly from Europe (driven by government policy initiatives to support their national technology providers, developers and contractors).

As with any new jurisdiction for project finance, Taiwan faces challenges. For example:

  • The traditional approach to power purchase agreements (PPAs) in Taiwan lacks key elements that are important for project finance, and the extent of Taipower's willingness to negotiate PPA terms remains an open question.
  • Obtaining Taiwan dollar-dominated financing from local financial institutions is important, since PPA revenues are also denominated in Taiwan dollars. However, local financial institutions are relatively new to limited-recourse project financing, and they will need to partner with international commercial banks and ECAs to drive successful outcomes.
  • The participation of international financiers and ECAs means that the international environmental safeguards known as the Equator Principles will be applied to the projects in addition to Taiwanese environmental laws.

International project finance is not one size fits all. Creativity and flexibility will be required in adapting international benchmarks to the local conditions and expectations of participants in Taiwan.

Implications for other sectors in Taiwan

Pursuit of opportunities in the Taiwan energy sector has required the investment of significant resources from international investors and financiers to better understand the Taiwan market and its legal and regulatory system, build out teams on the ground and investigate structures to facilitate viable limited-recourse project finance in Taiwan. Many of these market participants have interest and appetite beyond the energy sector, and the principles of limited-recourse project finance are adaptable to other sectors. Once international project finance has taken hold in Taiwan offshore wind, its participants and methods can then be adapted to benefit other sectors where infrastructure investment is required.

With upfront market entry costs now sunk, there will likely be appetite for the pursuit of broader opportunities in Taiwan. For Taiwan developers and investors, this means there will be new opportunities to be seized.