The Localization Dilemma of Taiwan Offshore Wind Power

Green Mentor's Fireside Chat

  We have been publishing a series of articles since last year (2017) predicting the direction of development of Taiwan’s offshore wind power (OWP) industry. Guess what? We were correct, as shown by the developments six months later. I guess these predictions performed better than my lottery tickets! Therefore, today I would like to continue the discussion established in the previous “The Selection Process Dilemma of Taiwan Offshore Wind Power” to talk about the dilemma of localization and providing possible solutions.

  The controversy regarding localization began surfacing during the selection process. Recently, due to the crazy-low price, the controversy has officially become a dilemma.

  Recently, the deputy minister of the Ministry of Economic Affairs and the director-general of the Bureau of Energy spoke to the media and published news release to explain the cause for the ridiculously low price, highlighting their expectation of stimulating the development of related industries in Taiwan through the selection process during the previous stage. As later developments showed signs of progress in the desired direction, this led to a significant drop in cost, which in turn gave birth to the crazy-low price during the “subsequent” bidding process.

  The key words in the whole thing is not whether the NT$5.8 before is reasonable or not, or whether the recent crazy-low price is rational or otherwise: It is whether the localization is valid or not.

  If we spend NT$900 billion and it actually helps build a comprehensive domestic OWP supply chain for Taiwan within 7 years, then I would say it is absolutely worth it.

  However, other nations invested decades into the establishment of their capabilities in maritime engineering by relying upon the momentum provided through traditional gas and oil industries. Can Taiwan develop the capabilities in even a shorter period of time? Can Taiwanese industry players develop the capabilities of building modular wind turbine units within a short period of time, which took their foreign counterparts over decades to build?

  In the previous article, we have indicated that “the required technology of OWP is not something we can easily claim through empty talks. OWP has been around for quite a while, and even today, only few countries such as Germany, Denmark, and the UK have acquired a relative advantage in the field. For other countries, they are having a hard time catching up due the leading nation’s accumulation of both capital and technology in the area.”  

  Come to think of it, every foreign ICT company wants to leverage Taiwan’s low-cost supply chain to bring down the cost of their products. Can we fully utilize it to find positions in the supply chain of OWP industry? Which strategic position should we pursue?

Of course, we love our nation – as long as we can see the prospects

  If the government wants to convince us to pay two-and-a-half times more the price we are paying today for electricity, the justification probably lies with “the degree of localization.” If the degree of localization is relatively low but we have to spend NT$5.8, it is clearly not showing any cost-effectiveness. On the other hand, if the degree of localization is rather thorough and leading to the birth of Taiwan’s domestic maritime engineering service and fully Made-in-Taiwan wind turbines, than such expenditure would be well-justified.

  Yet, other than glamorous PowerPoint presentations with beautiful figures shown at conferences, do we actually see any in-depth explanations or analysis?

  I believe that the government will do its best to support local industry. However, all the evidences seen today are a bunch of MOUs – which are not even legally binding – as so-called evidences. Even in regulations, all it asks of industry players is to “provide concrete industry-related execution plans, supportive documents, and opinion letter from the Industrial Development Bureau” during the contract-signing process.

  As for how far the developers are willing to commit themselves to, the related details are also reflected in the administrative contract it signed with the government (Article 6 of the OWP Planned Area Selection Contract: Commitment of the Developer (1) – in accordance to its commitment, the Developer will provide concrete industry-related execution plans, supportive evidences, and opinion letter from the Industrial Development Bureau before XXXX year XX Month XX Day). Notice that it only makes it obligatory for the developer to “provide” the documents. It is fairly obvious that the approach has been take to sidestep the risk of violating related regulations under international trade laws and WTO. Yet, how can anyone expect such approach to achieve the objective of localization?

  In the face of mounting criticisms, the government was forced to release a press release making clarifications on July 11. In the news release titled MOEA Stresses Once Again: OWP Wholesale Purchase Price Not Overpriced, Determined in Accordance with Regulations and in Compliance with Global Trends, the government took a strong stance on the issue: it argued that the requirement for localization is not a non-binding request; it is legally-binding with penalties to punish non-compliance:

  1. The “Directions for Allocating Installed Capacity of Offshore Wind Potential Zones” clearly stated that localization involves commitment in advance and concrete implementation measures as follow-up. The developer must devise concrete industry-related execution plans with the determined deadline which must receive the green light from the Industrial Development Bureau. This is concrete and legally-binding – definitely not a non-binding request.
  2. The developer should achieve localization objectives in categories it committed to and the setting up of wind farms by the year of the promised deadline. Breaches of contract may result in the implementation of severe penalty mechanisms affecting performance bond and FIT rates.

  However, this might result in greater controversies. At this point, the developers are already having second thoughts on whether to sign the administrative contract on OWP development. MOEA’s take on the wording of the contract appears to be drastically different from everyone else’s interpretation. It is no longer the original understanding where the Industrial Development Bureau simply offers its “opinion” on the developer’s statement regarding the scope and degree of localization it is willing to implement. As an answer to public pressure, now the bureau all of a sudden has the authority to review the details!

  If you are in the developer’s shoes, what other choice do you have other than stomaching the blow, since you’ve already invested so much into it?

  If the development commits itself to localize “A,” but the Industrial Development Bureau will only grant you the permission if you include “B”, “C”, and “D”, would you do it? This kind of reasoning obviously reflects those arguing that the decision of environmental impact assessments can be vetoed: if you will not go the extra mile of promising to reduce the noise from constructions, you will not pass the environmental impact assessment.

  What is different here is that implementing measures to reduce the noise of constructions and fulfill your promise is a lot easier than localization. There is already the question of whether the Industrial Development Bureau have the authority to conduct review. The bigger problem, however, is whether the bureau should punish the developer when it fails to implement the additional localization conditions made by the agency?

  Effectively, it is a “damned if you do and damned if you do not” scenario for the Industrial Development Bureau. Attempts to enforce localization risk violating international trade laws, which may result in consequences of trade sanctions impacting other domestic industries. Is it worth it to subject existing Taiwanese industries to trade sanctions in the interest of developing a new industry?

  As for whether this is technically viable, we will invite another Green Mentor to analyze the opportunities and challenges of localization from a technical perspective in the future, so we will skip that for now. Here, I will like to take a look at this scenario from the perspective of consumers.

Would you like one unit of made-in-Taiwan wind turbine or two-and-a-half units of European-produced wind turbine?

  There are many people who have different views regarding this. They believe that “yeah, it is a necessary evil because developing a local industry is paramount.” However, is it really worth it if you have to spend more than twice the amount of money throughout the localization process?

  For the average Joe, they are definitely no Koreans who are known for their zealous patriotism. For the same amount of money, they will choose to buy 2.5 wind turbine units made by Europeans rather than purchasing 1 MIT wind turbine. It is like saying that if one MIT electric vehicle is 2.5-times the price of a Tesla vehicle, would the average Joe choose to buy the MIT vehicle to show their support for the island? Remember, this is on a completely different level from spending a little extra cash to buy organic food to show your support for small farmers.

Localization: why choose to crash the plane when there is a way for soft landing?

  The government is trapped in its thinking that the only way to develop a localized OWP industry for Taiwan is through forced localization. Taking a look through the past, you will notice that our efforts to localize high speed rail, public mass transit systems, and the automobile industry have all failed miserably. It would seem like the effort with the OWP industry will be no exception. So, what can you do to achieve the objective of localization?

  During the process of discussing forced nationalization in the second half of last year (2017), many international and domestic experts stressed that stabilizing the investment environment – especially a “development volume seeing stable annual growth” – is the key to developing localization based on the experience of the UK. Through a tendering process involving only a relatively few small zones each time, the British government adopts gradual development with tenders every two or three years. This approach not only allows local industries to learn over time, it also allows foreign firms to invest more. When we look back at Taiwan’s case, we realize that it has only completed setting up two units at the wind power demonstration zones, so the island is only in the trial stage at best. However, the country’s approach of immediately opening up large number of wind power fields through the drafting of guidelines on field allocation is without doubt a subject of grave concern.

  As seen from the experience of OWP development in European countries, it is not a necessity to set premium rates forcing localization. As long as you can create a stable investment environment, you will naturally attract companies and businesses to form a certain degree of clusters, stimulating an organic localization. The UK is a country where the process has been relatively successful. (Of course, WTO and the European Union Competition Law are the main factors discouraging countries from implementing measures forcing localization). In the attempt to achieve its objective via forced localization, Taiwan is also setting up grounds for a future dilemma for itself.

Offshore Wind Power

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