Taiwan in August confirmed its offshore wind round 3 auction policy. The announcement underlined Taipei’s ambition to build on previous successes and its desire to keep its front-running position in the Asia Pacific region. However, among the rules outlined in the so-called zonal development round, the ceiling bid price is one that has evoked worries among some developers.
The Ministry of Economic Affairs (MEA) is expecting the corporate power purchase agreement (CPPA) mechanism to replace the feed-in tariff (FiT) as the key driving force for renewable energy project development. Faced with the government’s ambition for an accelerated energy transition, offshore wind developers need to have a new mindset and preparation for the competitive zonal development auction – an opportunity expected to be in the 9GW range – but there is now a new critical question: who are the offtakers?
The MEA is keen to leverage the investment from international developers to gear up the energy transition and the liberalisation of the energy market. Inspired by the recent deal between developer Orsted and Taiwanese semiconductor giant TSMC – the world’s largest CPPA deal at 920MW – the ministry has seen its confidence bolstered in pushing offshore wind development to follow this paradigm.
The policy just announced set a bid ceiling price at 2.49NTD/kWh ($88/MWh) in the 2022 auction to encourage developers towards a CPPA instead of relying on bidding for a FiT. Furthermore, the 2023 auction will take the weighted average bid price of the 2022 auction winner as the new bid price ceiling, and so forth in 2024.
The extreme low ceiling is a new challenge for all experienced developers. Zero subsidy renewables development is not only a topic ‘under discussion’ in Taipei, it is becoming a cornerstone for the success of offshore wind in Taiwanese waters.
CPPAs are key to achieving zero-subsidy renewable projects. However, it is Pandora's box for offshore wind projects, with developers, corporate entities and governments needing to deal with what is clearly both an opportunity and challenge.
The FiT secures the financial feasibility for the project, but CPPAs have the potential to bestow a great fortune in the misty sea. The CPPA mechanism looks substantial from the perspective of economics – letting the demand and supply sides have the agreement directly – but this means both sides need to make further efforts to assess the best solution/options for their benefit.
It is fair to say there is a huge gap between the government’s hope and the developers need to secure financial feasibility in the current Taiwan market. Some developers are arguing against the trilemma of the ceiling bid price, auction allocation cap, and localisation requirements that will require them to plan meticulously around engagement with CPPA offtakers.
Realising the government's ambition for CPPAs will not be an easy task. Firstly, the supply and demand parties are still not familiar with each other. Many Taiwanese corporates are unclear about the concept of ‘developer’, while international developers are often not familiar with all of the industries in Taiwan that may engage in a CPPA. For example, at the time that the Orsted-TSMC agreement was announced, several developers did not know TSMC and their low-carbon strategy. This level of familiarity may stall opportunities.
Secondly, international developers ignore (or have not yet considered) engaging with local offtake industries apart from the offshore wind supply chain. This vacuum of experience and capability will delay progress to identify the potential offtakers of sufficient scale to benefit offshore wind.
Price is another critical issue for CPPAs. Taiwan’s energy market is semi-liberalised, that is, assessment frameworks from mature liberalised markets may not be helpful. Taiwan doesn’t use terms such as ‘wholesale’ and ‘retail’, on the other hand, the ‘avoided cost’ and ‘average sale price’ may be important references to assess the price for a CPPA. Furthermore, developers should be asking meaningful questions like, ‘what are the factors for the green energy premiums’?
Finally – and probably the most important consideration, developers need to understand the regulation, risks and sunk costs to adopting a CPPA. The offshore wind development procedure is different from PV and onshore wind, and the policy and market are changing continuously. Developers must be prepared to monitor and assess the policy to ensure the best outcome for their project.
The government’s ambition for CPPAs could provide a construction way forward for developers and corporate offtakers, while the government may also benefit from an internal review of the existing regulations and practice, to make sure the CPPA is desired for corporates. As for the situation for offshore wind development in 2017 and 2018, it was the beginning of the learning path for CPPAs - developers need to go through the mist to reach the low-hanging fruit.
The Orsted/TSMC CPPA deal is not only a special case, it also becoming the new paradigm for offshore wind development.
· Ching Wen Huang is a principal in the Renewables Consulting Group’s office in Taipei