Local Financial Institutions as a Pillar－The Cornerstone for Sustainable Growth in Taiwan's Offshore Wind Power Industry

In the global renewable energy market, Taiwan's offshore wind power industry is continuously developing. As the industry expands, local development of the supply chain has become a key issue. One of the biggest challenges faced by this capital-intensive industry during its development is securing financial support.

Ethan Tsai, Deputy General Manager of Energy Transition Business Services at PwC Taiwan

By Xin-En Wu, Mei-Hsu Shih

Strategizing the Next Steps: How Should Taiwan's Offshore Wind Industry Move Forward?

Ethan Tsai, Deputy General Manager of Energy Transition Business Services at PwC Taiwan, analyzes the challenges of local development in the offshore wind power industry and the crucial role that banks play in supporting the renewable energy sector. "From the first phase of demonstration wind farms to the second phase of potential sites, and from the third phase zonal development 3.1 to the current 3.2, offshore wind in Taiwan has entered a relatively mature stage. The local industry has gained a certain level of self-sufficiency. Now, we should think about the next step: how to truly implement industrial development to benefit Taiwan's industries," said Tsai.

Although Taiwan's offshore wind power industry has developed rapidly, it is not easy to produce the entire supply chain domestically. Tsai believes that in order to achieve localized supply chain development, it is essential to involve not only local Taiwanese companies but also to attract foreign investment and introduce advanced technology.

When discussing how to attract foreign investment and enhance the development of the local supply chain, Tsai suggests that Taiwan's offshore wind industry should broaden its perspective, not limiting itself to the role of local manufacturers. Foreign companies establishing operations in Taiwan and collaborating with local enterprises can enhance Taiwan's international competitiveness, creating opportunities for local companies to enter international markets.

Overall, the offshore wind supply chain primarily encompasses maritime engineering, foundations, wind turbines, submarine cables, as well as offshore and onshore substations. Regarding the production of foundations, due to the high transportation costs and significant capital investment involved, it is challenging to export production capacity internationally unless there is sufficient economic scale. In terms of the power system equipment for onshore substations, the technology has become relatively mature across various markets. If foreign companies were to invest in Taiwan, it might be difficult for them to achieve synergies in exporting production capacity or technology to the international market.

Compared to foundations and onshore substations, which are capital-intensive sectors, Taiwan's maritime engineering industry holds considerable potential for expanding business internationally after in-depth local development. Due to the mobility of vessels, foreign companies can invest in Taiwan to accumulate experience that can then be applied to other markets. According to Tsai, this not only promotes the development of Taiwan's offshore wind industry but also provides local companies with opportunities to expand internationally.

New Challenge for Building the Industrial Supply Chain: Addressing Financing Needs

In addition to the challenges of localizing the supply chain, financing is also a key issue for the development of the offshore wind power industry. Tsai noted that 2023 was the lowest point for the offshore wind power industry, with various unfavorable factors for financing converging during this year.

"All along, the focus has been on the application for site development. However, successful financing is crucial to moving projects forward, so during the past period, financing for offshore wind power has become a major concern. In the future, financing evaluations will focus more on the development challenges and construction difficulties of projects," said Tsai.

He further explained, "Last year (2023) was the most challenging year, whether for offshore wind or other renewable energies like solar and energy storage. These areas faced numerous protests and policy adjustment issues. Development in onshore renewable energy has been relatively stable but still faces issues like land scarcity and resistance, leading to slowed growth. As for offshore wind power, projects that faced problems in the past are now progressing smoothly. Therefore, I believe 2023 should be the lowest point in financing challenges for the industry."

Tsai believes that various negative factors occurred simultaneously last year. He thinks that as market uncertainties gradually diminish, the worst-case scenario in the overall environment has likely passed. Additionally, the recent issue of the European Union applying to the WTO for coordination on localization is still awaiting further development. If the government and the WTO can reach a certain consensus smoothly, it is believed that the future financing environment for offshore wind power will greatly benefit.

In Tsai's view, financing for offshore wind should start from developers and gradually extend downward. "The supply chain thinking in offshore wind power is different from traditional manufacturing. In traditional manufacturing, the supply chain starts from the upstream manufacturing to the downstream brands/product companies. However, from a financial perspective, the offshore wind power industry is more like a reverse thinking process, starting from development. There needs to be a willingness to develop for the supply chain to grow."

In other words, developers must first secure sufficient financing to channel funds into various segments of the supply chain, thereby driving the development of the entire industry chain. For banks or other financing parties, what concerns them more is the strength of the developers and the feasibility of the projects, which directly affect the financing situation of the supply chain.

As for the financing needs of the local supply chain, Tsai mentioned that when it comes to supply chain financing, there should be a deeper focus on the overall situation. "When we discuss supporting the local supply chain, each supplier in the chain still needs to seek financing from banks independently to meet their capital needs. Currently, we see that companies with better development are mainly those listed on the stock market, which makes it relatively easier to raise funds. However, for companies that have not yet entered the capital market, their reliance on bank financing will be much higher."

Tsai emphasized that from an industrial perspective, banks will still base their decision to provide financing on the overall development of the industry. If banks are optimistic about the industry's prospects, the difficulty for supply chain companies to obtain funding will decrease.

He added that, broadly speaking, banks or funding providers will first consider whether the financing target has a reliable source of repayment. This repayment source comes from the supply chain's customers, namely, the developers. If banks believe that the offshore wind power sites or developers are strong enough, they will be more comfortable with providing financing to the supply chain. For local supply chains, one of the challenges in raising funds is the source of capital. If it is a listed company, the sources of funding might be relatively abundant; but if it is not a listed company, it typically can only rely on banks. When evaluating supply chain financing, banks need to understand the reliability of the entire industry and supply chain. If banks are not familiar with the supply chain's industrial characteristics, local supply chain companies will face certain challenges and difficulties during the fundraising process.

Tsai believes that this makes it even more critical for supply chain companies, which have limited capital channels and are less familiar to banks, to secure funding. This is essential to further support the development of the supply chain. Therefore, it is crucial for supply chain companies to help banks understand the industry and the characteristics of their supply chain and to comprehend the banks' considerations to successfully gain bank support.

"It's a two-way process. They need internal specialists to communicate with banks or seek assistance from external consultants to understand what banks prioritize during their evaluation. From the entire supply chain perspective, this is a chicken-and-egg problem," Tsai further explained. Suppliers and developers need to support each other. If local suppliers can't find funding to invest in equipment, they won't be able to support developers. Therefore, the capital needs of the local supply chain are particularly crucial in the offshore wind power industry, a point often overlooked in the past.

Support from Local Banks is Vital for Industry Development

"Whether for local industry development or overseas expansion, a key factor is the financing capacity of local financial institutions," said Tsai.

According to Tsai's observations, currently, Taiwanese banks supporting the offshore wind power industry can be divided into three categories: foreign banks, local government-owned banks, and local private banks. Foreign banks already have relative experience in other countries, so they are relatively familiar with this industry, but group policies and risk preferences still constrain their financing operations in Taiwan. Over the past few years, local private banks have greatly improved their understanding of the industry and are more willing to invest in the early stages of offshore wind power industry development. Government-owned banks have traditionally lacked relevant experience and have not built specialized teams for evaluation. Therefore, they need more time and effort for financing offshore wind power projects. They usually have a higher willingness to support projects involving government-owned enterprises, such as China Steel. However, recently, government-owned banks have also started to actively evaluate the opportunity to finance offshore wind power projects, which is a significant development.

In the five or six years from 2018 to now, Taiwanese banks have significantly increased their familiarity with this industry. The current financing evaluation has entered a new stage, with more emphasis on technical and construction risk analysis of projects. It is believed that the quality and quantity of bank support for offshore wind power financing will improve in the future.

Regarding the situation with foreign banks, Tsai noted that due to regulatory restrictions, foreign banks have relatively less flexibility in their financing business in Taiwan. Even though their group asset size far exceeds that of local banks, their lending in New Taiwan Dollars is still restricted by the branch's net worth. "Foreign banks' branches in Taiwan are limited by their net worth, typically capped at twice the branch's net worth or NT$7 billion for a single enterprise, which restricts their lending amounts," Tsai pointed out.

Local banks, on the other hand, have stronger capital momentum, especially in lending in New Taiwan Dollars. "Although to avoid risk concentration, local banks' lending limits for the same legal entity or affiliated group companies are generally set between 5% to 40% of their net worth under legal regulations, many local banks still have more room for financing than foreign banks," said Tsai.

Tsai illustrated, taking a local bank as an example: Suppose Bank A wants to lend to Group B, based on Bank A's net worth, assuming an end-of-year revenue of NT$400 billion. If the lending limit is calculated at the minimum 5%, then 5% of NT$400 billion is about NT$20 billion. If calculated at the maximum 40%, then 40% of NT$400 billion is about NT$160 billion. Theoretically, Bank A could lend at least NT$20 billion to Group B and, at most, up to NT$160 billion.

In fact, banks will still have their credit policies and certainly will not put all their eggs in one basket. Tsai emphasized that support from local banks is crucial for the renewable energy industry. From the perspective of the lending capacity of local banks, there is sufficient support to meet the funding needs of Taiwan's future offshore wind power industry.

In addition to banks, life insurers and funds also become funding options. Tsai noted that when life insurers make equity investments, especially in large-scale projects, their processes are more complex. For example, life insurers interested in investing in offshore wind power projects must have fully secured financing or expect stable cash flow to participate. Although certain regulations limit the investment and financing space for life insurers in the offshore wind power industry, offshore wind power and other renewable energy sources are seen as stable investment options for life insurers, who possess abundant capital and will continue to be important providers of equity capital. In terms of fund investment, although there are not many private equity funds established in Taiwan, and local fund investment capacity is relatively small compared to life insurers, the global trend towards green energy development suggests that new investment capacity will still enter the market in the future.

The offshore wind industry is a highly capital-intensive market that requires substantial and broad financial support. These funds will inevitably rely mainly on local financial institutions. Regardless of environmental changes, support from local financial institutions remains indispensable.

To further strengthen financing confidence in offshore wind power, the government has introduced a national financing guarantee mechanism to enhance the confidence of government-owned banks. The government is working through various guarantee mechanisms to encourage support from government-owned banks. "Government-owned banks play a crucial role in the national financing guarantee mechanism. Their capital contributions and participation are vital for the overall provision of funds. Some state-owned banks are already actively assessing participation in professional financing for phases 3.1 and 3.2, indicating continued interest and support for the future development of the offshore wind power industry," Tsai pointed out. Banks place significant importance on risk management for wind power industry investments, and the cooperation of the national financing guarantee mechanism helps reduce banks' risk concerns and increase their willingness to participate.

Support and testing for the offshore wind industry over the past few years have significantly increased market familiarity with this sector. There is also a growing trend of local government-owned enterprises and government-owned financial institutions participating in offshore wind power projects and their supply chains. Tsai emphasized, "From a financing perspective, the momentum for future funding is promising."