Offshore wind power is emerging as a key component of energy transition strategies in many Asia Pacific (APAC) countries. A few nations like China and Japan have had a head start and are already witnessing significant offshore wind development owing to enabling policy frameworks. Meanwhile, other markets like Taiwan, Vietnam, and South Korea have also forayed into this space with ambitious targets and regulations being formulated.
Against this backdrop, Global Transmission Report organised a one-day virtual conference on Offshore Wind Transmission in APAC on April 14, 2021. Daniel Mallo, Managing Director – Head of Natural Resources & Infrastructure, Asia Pacific, Societe Generale Corporate and Investment Banking (SG CIB) gave a presentation on financing of offshore wind projects in APAC and spoke about his experience and the emerging offshore wind markets in the region. Edited excerpts from his address…
Offshore wind power is a truly exciting sector because we see such an acceleration in this space. Moreover, the offshore wind power sector is becoming truly regional. For financial institutions like ours, this means more emerging opportunities in new markets. We have been involved in every facet of the offshore wind industry and in every part of the globe where offshore wind development has happened to date in this space. In our experience, this sector is now moving from a one country wonder to a regional asset class. That is truly exciting for us as financiers looking to extend capital.
In the APAC region, offshore wind will act as an accelerator of the energy transition. Taiwan has fast emerged as a key offshore wind market in the region. It is amazing what the country has achieved in the offshore wind sector in a very short span of time. Until three years ago, there was no offshore wind industry in the country. Now it is well on its way to have close to 2,500 MW in construction phase. The first few 100 MWs are already operating.
What we have seen on the financing side is that Taiwan has attracted equity investors from all over the world. We have seen investors from Australia, Germany, Japan, Denmark, Canada, and Thailand. As many as eight different export credit agencies have been involved in financing in Taiwan. Typically, we tend to see export credit agencies in emerging market jurisdictions where political risk is high, so it is not unusual to see them in nations like Indonesia or Vietnam. However, Taiwan is a developed market with solid investment grade rating, yet it has relied heavily on the export credit agencies to get its offshore wind industry funded. It will be interesting to see how that replicates in other markets across the region.
“Taiwan is a developed market with solid investment grade rating, yet it has relied heavily on the export credit agencies to get its offshore wind industry funded. It will be interesting to see how that replicates in other markets across the region.”
On the debt financing side, Taiwan is highly overbanked with lots of local banks and very high levels of liquidity onshore. Yet we have seen relatively modest participation by local financial institutions in the offshore wind investment. A little bit less than 1/4 of the $9 billion that have been raised have been provided by local banks. Meanwhile, the majority has been provided by international banks. A key reason for this maybe because of the novelty factor. Even though the banks are liquid, they just have not participated at all in the offshore wind sector in other parts of the world like in Western Europe. So, the problem really is a bit of a novelty factor as they have not learned the lessons that some of us have learned. So, we will keep a lookout for how that translates into other markets. Going forward, we expect an institutional market coming up over time in Taiwan.
Japan is clearly the next upcoming market in APAC. There was already an inaugural financing last year for the 140 MW Akira and Noshiro Project in northwest Japan. Our learning there is in stark contrast to Taiwan. The first thing that we have learned is that it took under a billion U.S. dollars for setting up a 140 MW project. So, when it comes to Japan things tend to be expensive, including offshore wind. The second thing that we have learned is that the equity financing space is Japanese dominated. In the Japanese offshore wind market, there are a dozen or so equity investors, energy companies and others – all Japanese. Thus, it is a 100 per cent consortium of Japanese companies. Maybe the industry will have to open for external providers as well in the future.
On the debt side, the scenario is similar in Japan. Our company is the only non-Japanese lender in a syndicate of Japanese investors. For now, the industry is still in its early days and the scenario might change in the future. However, there are a few reasons for this present difference in investment trends. Firstly, Japanese investors are experienced in this space unlike Taiwanese ones which have not participated at all in offshore wind in Western Europe. On the other hand, Japanese banks have already made several investments in the UK and other regions in Western Europe. Thus, Japanese investors, both on debt and equity side, have a body of knowledge and experience in this particular asset type across other geographies that can be replicated locally unlike in Taiwan. Moreover, Japan arguably has a more established marine services industry and supply chain infrastructure than Taiwan.
“Japanese investors, both on debt and equity side, have a body of knowledge and experience in this particular asset type across other geographies that can be replicated locally unlike in Taiwan. Moreover, Japan arguably has a more established marine services industry and supply chain infrastructure than Taiwan.”
Another potential market that we are keeping an eye on is South Korea. It is likely to be the next market in line after Taiwan and Japan. What will be interesting in South Korea is that it could be a very big market for floating offshore wind owing to very conducive conditions for this type of offshore wind installations. Till date floating offshore business is in its infancy and there are a few 10s of MW deployed. So floating offshore wind will be a new opportunity for the financing community. Like South Korea, Japan also has the potential to develop many hundreds of MWs of floating offshore wind projects. However, an interesting trend in South Korea would be related to technology as there will be a push to go local in this country. Presently, the energy industry in South Korea revolves around construction companies and technology providers and there might be a desire to promote local technology. Thus, we will see how that impacts the financing ability.
“What will be interesting in South Korea is that it could be a very big market for floating offshore wind owing to very conducive conditions for this type of offshore wind installations.”
Vietnam is another potential market owing to tremendous fundamentals – a fast growing economy, increasing demand for power, a long coastline, and a good offshore wind resource. All these factors are very positive for Vietnam. However, the country’s power sector suffers from imperfect regulatory frameworks especially the power purchase agreement mechanism. This would have to be carefully considered by the financing community.
There are a few other markets in APAC like Australia, China, India, and the Philippines. There are sizable projects in Australia which is a little bit counter intuitive because one thing that Australia is not known for is its lack of land. There is plenty of land available for onshore wind projects. However, maybe there is an opportunity there to offset the higher cost of offshore wind by greater production levels. A key concern here is that the renewable energy sector in Australia is suffering a little bit from grid access issues. So, resolving grid issues for an offshore wind farm collection seems challenging.
China is obviously the largest renewable energy market in the region. However, in China, financing is very different, and it is not an opportunity for financiers like us. China is a large market, but it is dominated by local government owned companies and banks as well as local technology providers.
“China is a large market, but it is dominated by local government owned companies and banks as well as local technology providers.”
Then another market for the future is probably India. Offshore wind resource is quite good on both coastlines – Gujarat in the west and Tamil Nadu in the east. Moreover, offshore wind could also be the accelerator in the energy transition in India. Finally, the Philippines is another market on the horizon for us. Summing up, to us the one exciting thing about the offshore wind industry is that it is becoming a truly regional business and we are looking forward to investing in this space.