The Taiwan Banker

Taiwan’s is still in the early stages on its journey to green energy, but by formulating complete policies and planning, it can effectively reduce financing unpredictability, and give Taiwan’s financial in dustry brighter business opportunities.Offshore wind power is the key to Taiwan’s next stage of green energy development. Financial institutions must figure out how to structure feasible credit practices to meet funding needs.Minimizing risk through accurate planningTaiwan Academy of Banking and Finance (TABF) President Hank Huang (黃崇哲), who has long studied large public works projects and project financing, pointed out that technical evaluation shows that the Taiwan area has an intrinsic geographic advantage for wind power development. In view of the large amounts of funding needed for its development, though, for the Taiwanese banking sector to grasp this opportunity, it must first grasp the two major points of project financing risk control. The first point is understanding the risks and their mitigation strategies of each stage throughout the entire project cycle; the second is that risks should be allocated to the party best able to manage them at the lowest cost. Only when these preconditions are met can loans be priced according to risk, so that financial institutions can be fairly remunerated.Vendor selection and pricing for Taiwan’s planned offshore wind capacity of up to 5.5GW in 2025 has been completed. According to the bids, the total capacity is 1.664MW, and the price is NT$ 2.2245-2.5481 (per kWh) – below Taipower’s acquisition rate of NT$ 5.84. This is a prize in Taiwan’s renewable energy transformation, but the key is how to manage the risks of future offshore project financing.“Risk and pricing are one and the same, and pricing must should be differentiated.” Offshore wind farms vary in terms of initial design, planning, construction, installation, operations, operational period, and risks. According to Huang, the present bottleneck is not capital, but rather overall planning and risk bearing capacity.Taking policy risks as an example, Taiwan’s high-speed rail and IPP private sector power plants, etc., are all geared towards project financing, in the hopes of effectively mobilizing private capital. Not just Taiwan’s high speed rail, but also European and Japanese rail systems have seen uncertainty and policy reversals, so that construction costs could not be determined before signing of financial contracts. In the end, only third-party contracts guaranteed by the government could be used to compete Taiwan’s most important recent transport projects. Moreover, after IPP private power plants were contracted for operation, both sides took time to revise their power purchase contracts over the years in response to public opinion, and to check their desire for profits. The risks of losses to investors have been dealt with in policy terms in Taiwan’s past project financing, and this will be an essential challenge for future offshore wind energy project financing as well.Huang further explained that for international infrastructure projects, once the project is designated as having policy risks, the best response is to cooperate with state financial institutions or pure private Taiwanese banks with government tasks, while receiving corresponding benefits. Other unforeseeable risks are borne by reinsurance companies with assessment capacity, and priced accordingly.Full capital mobilization and project financing to spur financial innovationProject financing is more complicated than general financing in processes including pre-assessment and after-sales management, especially in the absence of capital guarantees. “At this stage, we must still learn from foreign countries, but by accumulating experience, we can substitute for imports in areas including industrial technology and project evaluation, and even become international champions.” Huang believes that through syndication of project financing, different participants can set prices based on their own risk capacities. With participation, opportunities will arise. In the long run, more sales and development channels are required.Huang emphasized that domestic excess savings have exceeded 10% of GDP for years, an extremely high rate. Aside from being a cause of long-term industrial migration and changes in domestic industrial structure, it also reflects a major problem: savers and corporations lack the will to invest. If this idle capital can be activated, major new infrastructure projects such as offshore wind can be introduced, letting capital find its home, and also allowing for the sustainable non-nuclear development, with far-reaching significance and value.International offshore wind power mainly uses project financing, on the basis of bankruptcy isolation and financial planning. The project sponsor sets up a SPV/SPC for equity financing, which is more likely to provide collateral than in direct financing. In project financing, the syndicated lenders usually proceed by evaluating future earnings, with no recourse on the debt. Huang said that identifying and assessing risks beforehand, and passing some of them on to international reinsurers, can protect the debtors’ claims.“In the long run, green energy is the right direction. All parties must mobilize together.” Huang believes that domestic green energy is on the rise, including solar and offshore wind energy, but for the financers providing the capital, risk assessment technology and human resources to finance the related projects are the most pressing needs.Seminars and courses to develop talentRegarding occasional outside doubts and criticisms, Huang is optimistic that the process of cooperation with foreign companies and banks will be helpful for local finance. He also expects that Taiwan will take advantage of the circumstances with a solid industrial chain and management. According to him, “overall project risk should be apportioned rationally, and pricing must be reasonable.”In the United Kingdom and Germany, for example, the government or state-owned businesses are not independently responsible for development and funding risks, but government issuance of information on benefits attracts private investment, and through risk transfer, financial institutions bear certain appropriate risks, as well as obtaining high rewards. More importantly, the capitalization process creates a higher level of meaning and value for corporate social responsibility.In November 2017, the Financial Supervisory Commission (FSC) created a Green Finance Action Plan to respond to major policies including ending nuclear power, and energy transformation, whose contents covered credit, investment, capital market financing, human resource development, promotion of green finance products or services, information propagation, and green sustainability. Notably, its short-term objectives are to help the green energy industry obtain funding necessary for business development, and understanding green energy financing human resources through intense training. Financial measures strengthening credit, investment, and financing will open up financial markets and provide support for green energy.To this end, TABF has set up a special series of seminars and training workshops to discuss project financing experience from the preparation and construction to transfer and maintenance stages, helping practitioners better understand the pressure points in project financing, create more underwriting talent, and find more business opportunities.Glossary:Project financingThe main feature of project financing is that banks’ credit evaluation revolves around future cash flows and contract structure, rather than collateral, so the project shareholders have no recourse. If the plan can be completed in a timely manner, the income it generates becomes the repayment source and guarantee.