The capital currently invested in the net zero transition is woefully insufficient. At the same time, an enormous amount of idle savings are still to be found. In particular, insurance and pension fund investors often suffer from incompatible investment targets. If this imbalance is to be resolved, barriers to investment in renewable energy infrastructure must be removed so that these funds can join the ranks of carbon reduction investors. Amidst all this, various countries have high hopes for securitization, anticipating that it will lead to further investment. It can speed up Taiwan’s own net zero transition.

The impact of finance

The 2015 United Nations Climate Change Conference in Paris (COP21) saw the passage of the eponymous Paris Agreement. The parties agreed to ratchet up control over global temperature, targeting an increase of no more than 2°C higher than before industrialization (or even 1.5°C). According to the most recent Net Zero Tracker statistics, more than 130 countries and territories have pledged to achieve net zero emissions before 2050. In 2022, Taiwan also marked this as an administrative focus. In March, The National Development Council (NDC) announced Taiwan’s path to net zero, and established four major goals, which included a renewable transition.

As a result of the substantial increase in the proportion of renewable energy, and the listing of offshore wind power development as a key project, funding will be in great demand in the future. In September 2022, the Financial Supervisory Commission announced the Green Finance Action Plan 3.0, which will promote the impact of finance through investment and credit, assist firms to actively join in the net zero transition, and support the achievement of net zero emissions.

When it comes to the energy transition, installed renewable energy capacity is planned to continue expanding until 2050. The Plan’s solar electricity target is 40-80GW, and off-shore wind power is 40-55GW. As renewable energy should account for more than 60% of Taiwan’s power generation by 2050, there will be great demand for funding. For example, the first phase for off-shore wind energy will be “model windfarms,” and the second will be “potential farm sites”; these first two phases will achieve 5.7GW in installed capacity.

From 2026 to 2035, the third phase, “Block Development,” will make 15GW in installed capacity available. Due to the high cost of off-shore windfarm construction (approximately NT $200 million/MW), after deducting the developer’s own funding contribution of 25%, the next ten years will still require more than NT $2 trillion in funding. As a result, opening diverse fundraising channels and fundraising assistance will be extremely important.

Reducing energy transition gaps

How can more capital be guided to reduce funding gaps in the energy transition? In the understanding of the Asian Infrastructure Investment Bank (AIIB), the funding sources of an infrastructure project differ through its various phases. First, the risk is higher during the planning and construction phases due to a lack of steady cash flow. The funds come from either the developer itself, or externally from funds willing to take on higher risk. Next, the steady cash flow during the operational phase leads to the lowest risk; funds are sourced from revolving funds. The risks associated with each phase of the energy infrastructure lifecycle differ, along with each fund’s acceptance of risk. During the operational phase, institutional investors may be able to take over financing of projects.

At present, Taiwan has seven offshore windfarms in these first two phases, which have already completed approximately NT $492.6 billion in initial fundraising (including the developers’ own equity investments). Apart from equity investment, the principal funding sources are project financing and SPV financing. Currently, the total volume of syndicated financing of offshore wind power is already approaching NT $400 billion, but this figure still does not include the in-progress Hai Long Wind Power syndicated loan. The Hai Long windfarm has an installed capacity of 1,044 MW, with an estimated NT $150 billion in total financing.

The third phase of offshore wind power will require diverse fundraising channels, but the banking industry will also need to provide more credit assistance. In the first two phases, total syndicated financing of offshore wind power has approached NT $400 billion, with some banks approaching their industry credit concentration limits. After successively building 15GW in this third phase, demand for financing over the next ten years will exceed NT $2 trillion, leading some to question whether the banking industry will be up to the task.

Moreover, foreign investment banks may saturate Asia-Pacific offshore wind development, resulting in a crowding out effect. Foreign banks account for approximately two thirds of the first two phases’ financing credit. Recently, these banks have revealed a desire to sell off offshore wind power credit assets; their appetite for Taiwan’s offshore wind power is increasingly approaching the point of saturation. However, other Asia-Pacific countries, like Japan, South Korea, and Vietnam, are all clamoring to develop offshore wind power, which will come with enormous funding requirements. This demand will affect foreign investment banks’ continued participation in Taiwan’s offshore wind projects to a certain extent.

In order to solve this shortfall, offshore wind power will need diverse fundraising channels. Securitization is one possible solution. Offshore wind projects’ financing credit periods are long, with lifecycles of around twenty years. From the angle of capital activation, securitization may open up and activate banks’ currently held creditor rights, whilst also making use of revolving funds to support the block development of offshore wind power in the third phase.

Green financial asset securitization provides transitional momentum

When it comes to international institutions that support the trend of green financial asset securitization, the European Banking Authority (EBA) published a report on “Developing sustainable securitization” in June 2022. This report mentioned the desire to adjust relevant legislation and create a legislative environment friendly to renewable energy securitization. Additionally, recent reports from the International Renewable Energy Agency (IRENA), Climate Bond Initiative, and G20 all indicate support for green asset securitization leading more funds to assist in the global net zero transition. Therefore, securitization is leading even more funds to invest in renewable energy, making it an important strategy both towards a global net zero transition and the development of renewable energy. Successful US cases have shown that investors accept renewable energy projects packaged as securitized assets.

US solar asset-backed securities (known as solar ABS) are one of the major sources of debt financing for residential rooftop solar energy assets. From 2013-2020, 42 solar energy ABS deals of varying scale, time, and creditworthiness were completed, totaling over US $9.4 billion. Figure 2 shows that US solar ABS fundraising has grown significantly, starting in 2017.

For example, Hannon Armstrong, a sustainable infrastructure investment company headquartered in Maryland, issued US $100 million in low-carbon ABS in December 2013. The credit base came from the cash flows of more than 100 wind, solar, and energy efficiency projects, all of which possessed investment-grade credit ratings. This success shows that securitization of green assets with a credit rating can allow issuers to more easily scale up fundraising in the scattered climate investment markets. In October 2014, Hannon Armstrong issued even more low-carbon ABS based on wind power, with a price tag of US $115 million.

Finance’s impact: innovation and diverse products

Drawing on these foreign successes, Taiwan’s offshore wind power needs asset securitization companies specializing in fundraising renewable energy, as well credit strengthening mechanisms.

At the “Opportunities and Challenges Facing Taiwan’s Developing Bond Market” conference held by TABF in February 2021, some bankers indicated that the relevant statues and ordinances are already sound when it comes to financial securitization. Taiwan’s financial sector already possesses the relevant knowledge and technology. The question is whether it can find an external credit strengthening mechanism to allow it to spur the vigorous development of green asset-backed securities.

Going forward, if Taiwan can open up securitized asset fundraising, this will help the construction of offshore windfarms, and also guide more life insurance and pension funds into related securities. What is more, showing the impact of finance, financial institutions will also provide diverse and innovative products, becoming important cornerstones to assist in the development of Taiwan’s offshore wind power. They will guide the economy towards sustainable development through their use of market mechanisms, whilst also implementing the core strategic objectives of Green Finance Action Plan 3.0, thereby supporting the net zero emission target. Facilitating the development of renewable energy asset securitization  will make Taiwan’s offshore windfarms’ funding even more diverse.

The author is an Assistant Researcher at the TABF Financial Research Center