The Blog - Wind energy market analysis

Posted 07/08/2018

Ilaria Valtimora

    

What are the risks of investing in offshore wind in Taiwan?

The offshore market in Taiwan is becoming an increasingly popular choice for investors and developers, as falling prices and tough competition make Europe less attractive. However, are the risks associated with the country worth the potentially high returns? Ilaria Valtimora reports. 

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Offshore wind farm

The Asian island nation of Taiwan is currently among the most promising emerging markets for offshore wind, if not the most, and European developers and investors have been competing to secure a piece of the action for themselves.    

Companies including Ørsted, Copenhagen Infrastructures Partners and Wpd were the biggest winners. European firms have been lured by excellent wind resources – speeds in the Taiwan Strait are around 12m/s – and high guaranteed power prices. As profit margins in their home markets have been squeezed by falling prices and competitive auctions, we understand why these companies have been looking at Taiwan as a very attractive investment opportunity.

In April and June, the government awarded the right to connect offshore wind projects totalling 5.5GW to the national grid. You can find out more about the winning projects in our Q3 Finance Quarterly report.

All in all, Taiwan would seem to present a golden opportunity to investors and developers alike.

However, beneath the seemingly alluring surface lurks a darker side to the story.

 Typhoons, earthquakes, soil liquefaction and war. These are just some of the risks that wind developers and investors are set to face in Taiwan.

Such risks might be considered too high a price to pay for investing in the country’s offshore wind sector. However, as falling prices and tough competition in Europe have squeezed profit margins, some may have been forced into taking risks they otherwise wouldn’t, in order to secure higher returns.

Natural disasters 

“There are quite a few risks involved in Taiwan that you won’t see elsewhere”, says Robert Bates, offshore wind underwriter at GCube Insurance. This is because Taiwan has a peculiar natural catastrophe exposure, which includes typhoons, earthquakes and soil liquefaction. Bates explains that soil liquefaction occurs following an earthquake in sandy and clay environments, including the Taiwan Strait. This means that, after an earthquake, the seabed could rapidly transform in quicksand, sucking in wind turbine foundations.
 
Typhoons are also a big issue. They are generally stronger on the east side of the island. However, off Taiwan's west coast, where these first offshore wind farms are going to be built, wind speeds can reach up to 80m/s. There are big questions about how current offshore wind turbines would survive that. 

Political and economic issues
 
On top of that, Bates argues that investors must be aware of emerging political risks in the country. Current political tensions with mainland China could expose offshore wind investors to war and asset expropriation risk.  
 
The victory of the Democratic Progressive Party in Taiwan's presidential elections of 2016 has promoted the idea of an autonomous and independent future for Taiwan and challenged the policy of rapprochement with mainland China that was undertaken by the previous ruling party, the Kuomintang. Since then, cross-strait tensions have been rising. The deterioration of Taiwan’s relationship with China has been weighing on private investment, both domestic and foreign, and damaging investors’ confidence.

On top of that, as exports account for two thirds of Taiwan’s trade-reliant economy, it is also highly vulnerable to protectionist policies from the US and increasing competition from Chinese manufacturers.

Lack of infrastructure

Finally, French insurance company Compagnie Française d'Assurance pour le Commerce Extérieur has argued that Taiwan lacks infrastructure compared to other advanced Asian economies, and is increasingly isolated on the international diplomatic scene. These are among the major barriers facing investors in Taiwan.
 
How will these risks impact the development of this nascent offshore wind market?
 
First, wind developers and investors could come under pressure when seeking to attract the investment of up to $22bn that is needed to fully build Taiwan’s offshore pipeline. The presence of state bank support is good, though.
 
Second, where turbines are concerned, some manufacturers have been taking steps to overcome the barriers that the country presents. For example, MHI Vestas said in May that its 9MW offshore turbine platform would be typhoon-resistant for the Taiwanese market by 2020. The manufacturer is also working with DNV GL to ensure its turbines are suitable for the island's harsh offshore conditions.

The main challenge for European developers is that their 20 years' experience of building offshore wind farms thus far is in Europe. That now has to be translated to a very different market, where some may very easily come unstuck.

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