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LCI green finance seminar for offshore wind

On 7 November, the ECCT's Low Carbon Initiative organised the "Taiwan-Europe Green Finance Seminar for Offshore Wind" in conjunction with the Dai Yan-Hui Foundation. The co-organizer was Hua Nan Bank. The seminar featured opening remarks by Wu Tang-chieh, Chairman of Hua Nan Financial Holding Corporation and Hua Nan Commercial Bank and ECCT CEO Freddie Hoglund and presentations by Achim Berge Olsen, Managing Director of wpd offshore and Peter Schafer, Team Head, Wind Power, KFW IPEX Bank. The speakers gave an overview of how renewable energy projects, especially offshore wind projects, are financed in Germany and elsewhere in Europe. It was attended by close to 180 people.

 

In his presentation, Achim Berge Olsen said that 2016 had been a great year for offshore wind. Many countries have been adding offshore capacity, including the US and Taiwan, where the first two turbines have been installed. There are a lot of developers and contractors now involved and momentum is in favour of further development. Offshore wind supports a large supply chain. In Taiwan, everything (with the exception of manufacturing) from green field development, construction and financing and operations (including maintenance) is done in Taiwan, creating a lot of jobs. Taiwan has the potential to become the biggest market outside Europe given ideal conditions, especially off Taiwan's North West coast.

Offshore wind will be a key market for renewable energy in the future because of size advantage. Unlike onshore sites, offshore allows for large areas with strong winds to be used for wind turbines. All the technical risks associated with offshore wind have been overcome and risks are now comparable with onshore wind. Insurance companies and pension funds are investing in offshore wind today given the stable income stream. If connected with a feed-in tariff (FIT), such as in Germany and Taiwan, offshore wind can provide very attractive returns on investment. The offshore wind industry has been helped in Germany by strong political support from government as well as the shipping industry and harbour authorities. Shipping and installing wind terminals has provided many jobs and helped to offset job declines from the decline in the global shipping industry.

The challenges facing offshore wind include higher costs given the need for specialized technical solutions and accessibility. Special components and foundations are needed as well as offshore substations and cables. Equipment is more expensive. For example installation vessels are specially designed to install offshore wind turbines. The type of vessel depends on the depth of water. The vessels have to be able to survive very harsh weather conditions and carry up to eight turbines. In addition, transformer stations are not yet standardized (all are individually made), which increases costs. Once they are standardized, this will result in competition and Taiwan could play an important role in this aspect of development. Nevertheless, prices are declining as the industry becomes more mature and the time it takes to install turbines is decreasing with experience. For this reason, each project is likely to be cheaper than the previous one. Initially it used to take days to install a single turbine but some crews have reduced this to as little as 10 hours. Accessibility during operations is also either by boat or helicopter (for turbines far from shore). In Taiwan's case, most turbines will be close to shore and accessible by boat. Offshore wind also requires a sophisticated remote control system to allow operators to monitor and switch turbines on or off remotely.

A key success factor is planning. Most problems occur due to misjudgments in planning. Plans need to be flexible and prepared for deviations. Offshore wind energy generation assumptions tend to be very conservative. The upside, as experience in Germany has shown, is that actual energy produced tends to be higher than expected.

Size matters. Larger projects are more efficient and can also afford dedicated teams, rather than having to share service personnel with other projects. Stakeholder management is another key factor. The most successful projects employ people from the local community such as fisherman and harbour workers and integrate local industry players.

In terms of environmental issues, there is some disturbance of the sea bed and noise during the construction of foundations and installing turbines. However, according to Olsen, a lot of studies show that some species, which initially flee from wind turbine locations during construction, eventually move back. Some studies actually showed that plant and fish species increased by making use of the wind turbine infrastructure.

According to Olsen, Taiwan has already solved technical issues. In order to keep up momentum, larger projects and investors are needed (project finance). Taiwan would do well to use teams with experience and well-known contractors initially. In addition, Taiwan is still lacking infrastructure (such as harbor facilities) and a stable regulatory environment.

In terms of the regulatory environment, Taiwan could learn from Germany's example, which set up a single window one stop shop for wind projects. This agency took care of the whole process, from start to finish, including administration, liaison with all relevant government agencies, local communities and the applicant. Political support for renewable energy was also crucial.

Insurance costs for offshore wind are currently high because of the perceived risk factors and the high costs of the technology. However, rates should go down in future as the industry matures and the perceived risks fall. For example, the perceived risk factor will be fall when it has been demonstrated that wind turbines can withstand typhoons and earthquakes.

In his presentation, Peter Schäfer, said that KFW is the largest financer of offshore wind projects globally and has financed 17 long term wind projects worth €2 billion since 2010. What sets the bank apart from its competitors is that it employs engineering experts as part of its team working on wind financing projects. According to Schäfer, the bank is working on six projects in Taiwan and committed to providing finance equivalent to up to €300 million euros in Taiwan dollars.

Commenting on some lessons learned from their experience in Europe, strong political support and a stable regulatory framework are vital for offshore wind projects to succeed. Given the fact that offshore wind is not yet competitive with other energy sources, government support is still needed. This includes providing infrastructure connections to the grid. In Germany, for example, the utility is responsible for grid connection. Another important factor was a very strong supply chain in Europe.

While there was a steep learning curve in Germany, it was impressive how fast progress has been since the first offshore wind project. Back in 2010 there was no appetite for large projects given the huge costs and the lack of experience in offshore projects. For this reason, the government implemented a special promotional programme. Since the success of the first project, 30 banks have invested in projects. With the success of each project, the perceived risks and the cost of debt have continued to fall. As a consequence, financial support from the government is no longer needed.

Building wind parks requires strong partners, although it is advisable to limit the number of partners to two or three in order to preempt conflicts that may arise if too many partners are involved. Operators should also take into account the possibility of delays and cost overruns that may be unavoidable when building offshore wind parks. Financial structures need to be robust enough to cope with uncertainties.

Another important consideration is bankability. Projects need to generate sufficient net cash flow to cover operating and financing costs, taking into consideration that capex and operating costs are higher for offshore than onshore projects while prices for offshore wind continue to fall. Projected energy yield estimates tend to be conservative. For this reason standards for financing offshore projects are high and projects perceived to have limited potential will not be financed.

Taiwan stakeholders are advised to adopt international wind measurement standards in their models. They would do well to follow the German government's example by financing the establishment of platforms to measure wind conditions in targeted areas and make the data freely available to all stakeholders, including investors.

Taiwan has ideal conditions for offshore wind to reach the government's target of 3GW for offshore wind by 2025. Shallow water in the targeted area should make the installation of offshore turbines not too difficult. However, investors need a degree of certainty. For example, the risk of the government retroactively changing the FIT for a project is not acceptable to foreign investors. In addition, grid access needs to be guaranteed prior to the start of projects. To ensure the success of projects, it is advisable to choose only experienced manufacturers and operators as partners. At present, only European companies have the necessary technical ability and experience to install and operate offshore wind parks.

In terms of financing for offshore projects, local banks in Taiwan do not yet have any experience in project finance of this kind. Taiwan also lacks the necessary mechanism to encourage local communities to invest in renewable energy. A key question for local communities is whether or not they are willing to invest in long term projects.

In terms of financing, there may be other types of local debt providers available, such as insurance companies. Access to Taiwan dollars and exchange rate risk are issues for international banks. These could be addressed through cooperation between local and international banks.

The speakers concluded with several key messages: Taiwan has ambitious offshore wind goals which can be reached given shallow water and good wind conditions. Bringing down costs quickly is critical to success and this can be done by drawing on European experience. A stable regulatory environment, including predictable FITs and secure land rights are crucial for success.

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