Key takeaways:
Taiwan's local content requirements [1] intended to bolster local industries are creating significant challenges for foreign investors in the offshore wind sector, exemplified by Orsted's recent exclusion from a major tender due to lower local procurement level in the project.
The ongoing World Trade Organization (WTO) consultation between the EU and Taiwan regarding these localization policies could take months to resolve, likely leading to prolonged uncertainty and higher investment risks for European and other foreign companies in Taiwan.
Given the likelihood that Taiwan will maintain its localisation policies for the next few years, international investors are likely to face increased costs and delays, which may hinder Taiwan's ability to achieve its renewable energy goals in the near future.
The dispute over Taiwan’s quasi-protectionism is not likely to drive a significant political wedge between Brussels and Taipei. However, hindered EU investment in Taiwanese wind energy reduces commercial motives for the EU to take an assertive stance on the Sino-EU energy relationship.
[1] Local content requirements are legislations that impose international and domestic companies to source a proportion of their goods and materials in the country of operation.
Background:
Over the last 10 years, as part of the Taiwanese government’s effort to promote a national energy transition plan, Taiwan has significantly invested in renewable energies, including solar photovoltaic and offshore wind power. Offshore wind, supported by domestic and international foreign direct investments (FDIs), has over the years grown enough to make Taiwan the largest offshore wind market in Asia-Pacific after China. In 2021, the Taiwan Ministry of Economic Affairs (MOEA) passed legislation requiring all offshore wind project developers to source at least 60% of the necessary components locally, with the exception of those elements that cannot be supplied from Taiwan’s domestic supply chain. The system awards points to companies bidding for offshore projects in Taiwan based on the level of local procurement they pledge to achieve.
Taiwan's local content requirements, aimed at promoting technology diffusion and strengthening local producers and service providers, have caused dissatisfaction among foreign investors operating in Taiwan. On July 26th, difficulties in meeting the localisation requirements (an issue already raised by European companies shortly after Taiwan’s announcement) triggered a formal consultation request by the EU at the WTO. Shortly after, the MOEA responded officially to the request by declaring that Taiwan would formally engage in consultations on the issue. As of WTO regulations, any member state’s consultation can be of a maximum length of 60 days, after which the complainant, in this case the EU, may request adjudication by a panel if the dispute has not been resolved. It has been a month today (23 August 2024) since the consultation process was initiated, and according to the dispute page of the WTO, no significant mutual agreement or withdrawal has been found yet on the contentious issue.
Future impacts for foreign offshore wind investors in Taiwan:
WTO consultations, especially if unresolved, often lead to timely panel decision processes, which can take up to 12 months to reach a final outcome on the dispute. In the case of the current offshore EU-Taiwan consultation, this would mean months of dealing with unchanged local content legislations for the several EU-based companies that have significant investments in Taiwan. Among others, this scenario would most significantly impact Orsted, the Danish renewables giant. Orsted holds significant business operations in Taiwan, where the Danish company has been the first renewables company to establish their Asia-Pacific hub in Taiwan. Despite Orsted claiming that the company is committed to playing a key role in Taiwan’s energy transition, the latest trends in the industry in Taiwan point to a more uncertain future for the Danish giant in the region.
Just over a week ago, the MOEA published the list of projects selected for the latest offshore wind tender. Five companies, including two Taiwan-based energy operators, were allocated projects for 2.7 GW. Significantly, Orsted, who had entered the bid, was not amongst the list of winning companies. Orsted’s lower final score, in significant part derived from a lower local content component, was a core reason for their exclusion, signaling the importance that Taiwan's protectionist legislation can have on one of the largest renewable energy companies in Europe.
Future outlook:
Considering that other nations (like Japan and Canada) are further advanced on their energy transition path and have in some capacity imposed protectionist policies in the early days of their wind power industry, KSG assess that it is unlikely that Taiwan will scrap its localisation policy over the next year due to the recent EU pressure.
However, in the long-term, KSG assesses that over the next five to ten years, Taiwan is likely to loosen its local content requirements as domestic producers and firms increase capacity in the sector. This implies renewed opportunities for foreign investors cooperating with local firms in Taiwan over future offshore projects.
In the shorter term, investments in Taiwan offshore wind will present higher challenges for international investors as a combination of long-lasting local content requirements and the looming possibility of Chinese military and economic interventions in Taiwan may drive up investment risks in the country.
With local content requirements likely to take time before changing, companies operating in offshore wind in Taiwan may face increases in prices and delays in production that will impact Taiwan’s ability to meet all of its green goals for the next five years.
While the current dispute over Taiwan’s quasi-protectionism is not likely to drive a significant political wedge between Brussels and Taipei, hindered EU investment in Taiwanese wind energy reduces commercial motives for the EU to take an assertive stance on the Sino-EU energy relationship, and towards China generally. Growing EU-Taiwanese co-operation would act as a deterrent to Chinese aggression towards Taiwan given the dependency China has on its EU trade. This dispute causes a slight undermining of that deterrent effect, and provides a reduction in the pace at which the EU may begin supporting Taiwan further in its efforts to deter and eventually perhaps defend against China.