Taiwan’s Recent Offshore Wind Power Political Turmoil: The Implications for Investors

Green Mentor's Fireside Chat

Shocking News: Criminal Actions against the government staff on offshore wind power regime!

  On June 22, 2018, the Ministry of Economic Affairs (MOEA) announced the results of its offshore wind power (OWP) competitive auction. Two companies were awarded the development rights for four offshore wind farms (OWFs), with a total capacity of 1,664 megawatts (MW). The projects are to be completed by 2025. This auction followed the selection process, which occurred two months ago. This June round was supposed to have completed the Taiwanese government’s attempt to develop 5.5 gigawatts (GW) of OWP capacity by 2025, but the June results were shocking. The announcement that the winning bids were between NT$2.2245 and NT$2.5481/per kilowatt-hour (kWh)—less than half of the April selection (feed-in tariff (FIT)) of NT$5.8 /kWh—has started heated debates on OWP subsidies that may cast a shadow on the future development of OWP. These issues became a hot topic on talk shows and newspapers. The opposition party (the Chinese Nationalist Party, also known as KuoMinTang, or KMT) had long been against the NT$5.8 /kWh FIT. On June 29, 2018, they took things even further by going to the Taipei Prosecutor’s Office to accuse the government officials of committing offenses of malfeasance as defined by Article 131 of the Criminal Code of the Republic of China (ROC). Under Article 131, an act of malfeasance is defined as when a public official “directly or indirectly seeks to gain illegal benefits from a function under his control or supervision for himself or others and gain benefits.”

  To prove that the government can achieve the “2025 Nuclear Free Homeland” goal as put forth by the Tsai government, despite the lack of adherence to legal processes, careful planning, and congressional supervision, the ruling Democratic Progressive Party (DPP) has been aggressively pursuing the development of renewable energy. The opposition party KMT also seeks the progressive development of renewable energy. However, due to the issues mentioned above, KMT was opposed to the current scheme for OWP development. The legislators of KMT have not only accused the Minister of Economic Affairs Shen Jong-chin (沈榮津) of malfeasance, but also asked the Control Yuan (監察院) to investigate the matter. This article will provide an in-depth review of these related disputes.

A brief overview of the unique offshore wind power selection/bidding scheme in Taiwan

  The previous KMT government released information about 36 potential wind farms to the public in 2015. The announcement attracted many OWP developers starting to evaluate feasibility. The disputes began with the DPP’s recent OWP policy approach. To give impetus to OWP, the DPP maintained and raised incentives of a feed-in tariff (FIT) to NT$5.8 and 6/ per kilowatt-hour (kWh) in 2016 and 2017 respectively.

  The total capacity that the developers applied for exceeded 10 gigawatts (GW) in mid 2017. However, due to limitations associated with the construction of offshore substations and related transmission facilities, only about 5.5GW were allowed to enter the grid by 2025. The government initiated a process called “Select first, Bid second” to allocate the development right. This non-price-based measure of selection was the first of its kind in Taiwan and in the world. It lit the fuse for subsequent disputes.

  In the first round, conducted in April 2018, seven companies were awarded a total of 3,836 megawatts (MW) of grid connection capacity at the feed-in tariff rate of NT$5.8/ per kilowatt-hour (kWh). The 3,836MW will enter the grid in two phases. First, 738MW of capacity will be installed in 2021; second, the remaining 3,098MW of capacity will be completed between 2021 and 2025. Meanwhile, in April, the price of OWP in other countries was only NT$2.5-2.8/kWh. Despite controversy and criticism, the government insisted that Taiwan needed to absorb the higher price to promote localization of the OWP supply chain.

  A whole new level of chaos was about to descend when the results of the June round of bidding were announced. In this phase, the winning bids would supply wind power at NT$2.5/kWh, a price lower than the current electricity price in Taiwan—causing news reports to describe this as the “broken price.” What triggered even more controversy was the fact that the bid price in the second round was lower than the FIT subject to selection scheme in the first round; it also further proved that the price in the first round was extravagant.

Why at this moment?

  Challenges from the opposition party KMT to the high purchase price for OWP are not new. In the beginning of the parliament session for 2018 , the KMT members of Parliament had already spent a lot of time questioning and attacking this tariff, which was almost twice as high as those in European countries such as Germany and the United Kingdom. Yet they were unable to raise public concern. The government simply replied that:

  1. Taiwan is located in an area that experiences several earthquakes and typhoons every year. This increases the cost of construction. In particular, the lack of construction experience in Taiwan contributed to the higher cost.
  2. The Taiwanese government wished to use the NT$5.8/kWh price to force/incentivize the OWP developers to help Taiwan localize the supply chain. Thus, even though Taiwan would pay more up front, the establishment of local OWP companies will be further strengthened.

  Since energy issues are technically detailed, such reasons seemed to make a very persuasive prime facie case. Therefore, the KMT was unable to attract public attention and create engagement to advance the debates.

  Yet, right after announcing the higher than expected’ tariff, followed by lower rate in the second round, the government considered the low competitive bids in the second round to be a great achievement of MOEA’s policy to promote OWP. The government even claimed that due to its planning and strategies, the price of renewable energy could compete with that of the traditional power plants. The winning OWP bids in the June auction were even lower than the country’s average electricity price of NT$2.6/kWh.

  While the government was celebrating its achievement, the public’s negative opinions about the original NT$5.8/kWh tariff reached a new high! With a little logic and reasoning, it was not hard to realize that it isn’t possible to have a technological breakthrough that would lead to such a steep price drop within two months. Even assuming a cross-subsidy between the first and second rounds, in the eyes of the general public and the KMT, it is easy to sell the story and provide evidence that the NT$5.8/kWh tariff was simply too high.

  To pour more oil on the fire, controversy erupted over pension reform for civil servants, teachers, and the military. In June 2018, the ruling party (DPP) claimed it would save the people money by passing pension reform. The government then used the idea of inter-generational justice to persuade the general public to buy into the pension reform. However, in the case of OWP, the price of NT$5.8/kWh would be fixed for the next 20 years and be passed on for the next 20 years. It is extremely ironic that this high price would be justified on the basis of inter-generational justice. This paints a scenario to the public in which the government would prefer to save itself a little bit of money through pension reform, while forcing the public and future generations to pay a much higher electricity price for the next 20 years. The KMT is always on the same side as civil servants, teachers, and the military. The unsuccessful movement to boycott led the KMT to undertake legal action as part of their approach to criticizing the high tariff.

  Military pension reform was the likely spark that caused KMT to launch accusations of criminal actions related to OWP against the government. The DPP may have seen this as the butterfly effect of military pension reform (an act that irritated the KMT).  

Why criminal actions?

  KMT disputes the assertion that the decision-making process for the OWP was done in a black box.

  Take the scoring for the first round as an example. The government set “cooperation with domestic financial institutions” as one of the grading criteria for selection. After the results were announced, news reports mentioned that few public banks had any joint loans with the developers due to high credit risk and the bank’s inability to assess risk. Now here comes the question. Since none of the OWP companies substantially cooperated with any domestic financial institutions, how did the government determine the score for this factor? Did the government use a memorandum of understanding (MOU) as the benchmark? How can this sort of decision-making and action gain trust from the general public?

  The second set of issues that KMT disputes is about the pricing. Since all wind farms, from both the initial and second rounds, would be completed within a similar timeframe, why is the price doubled? Moreover, if the price in the second round can drop to a range similar to what is seen in other countries, why is the FIT in the first round so high? The difference between the FIT in the first round and the bids in the second round might lead to an increase in annual electricity cost of NT$45.5 billion. Taking into account that the contracts from both rounds are signed for 20 years, the price difference between the first and second rounds could result in an additional purchase cost of NT$910 billion.

  From our perspective, the crucial point is the obvious lack of legal basis for the government to conduct the selection and bidding processes. For the welfare of the general public, the best way to resolve the OWP application boom would be through a competitive auction. This has been the normal practice since the 2010 photovoltaic (PV) development boom. Yet, in this case, the government decided to act in favor of the OWP developers by adopting a FIT and a non-price-based selection scheme for the April round. Furthermore, more than half of the 5.5GW capacity, ie., 3836MW, has been allocated by this method. In addition, the government purposely avoided Parliament scrutiny by using the administrative internal ordinance. All of these actions could cast a shadow over the legitimacy of the selection scheme.

Why Control Yuan’s investigation?

  Based on these disputes, KMT legislators initially went to the prosecutor’s office to request an investigation; then, they went to the Control Yuan and asked the members to impeach the government personnel involved in this scheme, including the Minister of Economic Affairs Shen Jong-chin (沈榮津), Deputy Minister of Economic Affairs Tseng Wen-sheng (曾文生), Deputy Minister of Economic Affairs Kung Ming-hsin (龔明鑫), and Bureau of Energy Director-General Lin Chuan-neng (林全能).

  Why are the KMT legislators willing to go to the extent of going to court and the Control Yuan? According to the Constitution of the Republic of China, in addition to the Executive Yuan, the Legislative Yuan, and the Court of Justice, the government includes two more branches—the Control Yuan and the Examination Yuan. The Constitution did not give Congress the powers of supervision and impeachment. It established the Control Yuan to execute such powers, thereby avoiding dictatorship by Congress. The Control Yuan is hence responsible for the investigation of a public agency. When it has specific evidence to prove a dereliction of duty, then the Control Yuan can impeach that government employee and send the individual to the disciplinary authority.

  The disputes regarding OWP are significant enough that it led KMT legislators to not only believe that there should be an investigation for dereliction of duty, but also believe that the Minister of Economic Affairs had violated the "dereliction of duty" clause as stated in the Criminal Law. For these reasons, the legislators asked the court and the Control Yuan to take action at the same time.

Implication for OWF developers and investors

  These investigations (and their results) may be disruptive to the results of the OWP auctions. For instance, if government officials were to be impeached or correction measures proposed, how would it affect the future development of OWP in Taiwan? The risks are high from several different perspectives.

  For instance, when the Control Yuan investigated ground mounted solar farms, the investigation results were announced in September 2017. During the investigation, the civil staff of the Agriculture Council were very concerned and therefore a lot of issued permits and FIT grants were cancelled or re-evaluated. This also led to the outcry from the PV developers. Does this scenario sound familiar? It is highly likely that very a similar scenario would occur to the OWP industries.

  In addition to the investigations, the political risk for these OWF developers are high. Even if the developers are able to acquire the rights to development this year, given the long development timeline, these rights may be changed retrospectively based on the election results. This year’s election results and the results of the 2020 presidential election may lead to a dramatic change in the political scene. This, in turn, may lead both the central and local governments to take different positions regarding construction and operation-related permits.

  A deal is a deal! But in Taiwan, it would be subject to a lot of changes. Again, we can take the development of independent power producers (IPP) as an example. Since 1995, the IPPs have played a key role in Taiwan’s power supply. However, their windfall profit has long been a controversial issue. In 2013, Tai-Power decided to renegotiate the contract with its nine IPPs. Even if the IPPs hadn’t all agreed to such price negotiation, it created investment uncertainty and caused Japanese investors to withdraw. Would this situation happen to OWF after 2025 or earlier? We cannot exclude such a possibility, as this is sadly becoming the norm of energy development in Taiwan.

  Furthermore, with the heated debates around the NT$5.8/kWh FIT, the risk of contracts may also be high. Tai-Power is under no legal obligation to sign the Power Purchase Agreement (PPA) with tariff rate of NT$5.8/kWh within this year. Thus, any delay could affect the profit and original investment analysis of the OWP developers. Since the only justification for the high FIT is the localization content, additional localization documents provided by the developers from the selection procedure will likely face strict scrutiny.

  There will be three major events that may contribute to fiercer deliberations concerning the controversial NT$5.8/kWh FIT—the beginning of the new term of Parliament, the FIT for all renewables in 2019, and the 2018 municipal elections near the end of this year.

  In September Parliament is about to begin a new term. After summer vacation, this is a good timing to launch massive attacks in the Parliament to heat up the debates. From past experience, the next likely move would be the Economic Development Committee (of the Parliament) adopting a resolution to freeze the process of implementing the outcomes of the auctions, because there seem to have been a lot of illegal issues surrounding the process.

  Second, discussions about next year’s FIT for all renewables, including the controversial OWP, are currently underway. If the 2019 FIT for OWP is much lower than the existing FIT of NT$5.8/kWh, it would create tremendous pressure on the government or Tai-Power to not sign the PPA. This explains why this year’s tariff discussions are so secretive. In the past, there would be a lot of news about tariff-related issues. Yet this year, there has been silence. Instead of having to point at media reports and start shouting “fake news,” the strategy here is to stay in the shadows, work in the shadows, and hope that the decision stays in the shadows. Yet, is it possible in Taiwan?

  In addition, the November 2018 municipal elections may play a vital role in stalling the process of implementing the auction results. The general public has been questioning the results of the selection scheme. In the best interest of politics—which, based on past experience, is how the government usually leans—it is likely that the government will stall the implementation of the results. Furthermore, if the results of the municipal elections are in favor of the KMT, particularly in the counties of Changhua and Yunlin, it could be an even stronger incentive for local governments to refrain from recognizing the selection results and to adopt further measures to block their implementation after the election.

  Last but not the least, without a legal basis for the competitive bidding auction and initial round of selection, the legal risk for the OWF will be high forever. The uncertainty surrounding the policy and the legal framework can render all the currently claimed rights invalid or subject to revocation. In the end, all development rights will be, as they were from the beginning, non-existent.

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