The Taiwan Banker

Taiwan considers wind power to be the “energy of the future,” but the first UK offshore farm is already being decommissioned after 20 years of service. Wind power’s reputation for high prices is long past. More and more turbines are being manufactured, creating more efficiency. Can Taiwan seize the opportunity and create a new path forward for the technology? Taiwan has always considered wind power to be the “energy of the future.” In fact, this concept is already out of date. In March 2019, the first UK offshore wind farm was decommissioned after 20 years of service. Constructed in 2000, it was regarded at the time as the “energy of the future,” but after 20 years, it is already far behind current industry technology, and has even become a relic. Turbine Efficiency Has Increased Six Times The farm, located in Blyth, Northumberland, UK, was commissioned by E. ON, Europe’s largest power company at the time, and had only two 2 megawatt turbines. In contrast, the newest and largest UK farm, the Hornsea One, built by the Danish energy company Ørsted, has 174 turbines, each of which produces 7 megawatts, for a total maximum generation capacity of 1.2 gigawatts. The economic value of the Blyth turbines is a far cry from the current larger and more efficient ones, and their main value is now historic. The Bryth turbines are to be demolished in April 2019, which is expected to take 4-6 weeks. One of the turbines will be used as a source of spare parts for E. ON’s onshore turbines, while the other will be supplied to Blyth Port for training purposes. E. ON stated that on the basis of its Blyth experience, it will continue to develop land-based wind power with 1.5 gigawatt capacity in the UK.The initial scale of offshore wind turbines is now equivalent to that of the old land-based turbines. Also in March 2019, the industrial conglomerate GE installed a 5.3 Cypress megawatt prototype in the Netherlands – currently the world’s largest grade of onshore turbines. As for offshore, GE’s newest model in development, Haliade-X, has a capacity of 12 megawatts, six times higher than the 2 megawatts of 2000. Clearly, offshore wind has made great strides over the past 20 years. The larger the turbine, the higher the operational efficiency, therefore cost has also been greatly reduced. Cost per Kilowatt Hour Is Also DownPreviously, it was thought that offshore wind would be an expensive energy source. In response, Taiwan affirmed that it would only develop with high wholesale price subsidies. In 2017, the government fixed the wholesale price for onshore wind power at NT$ 6.0437 per kilowatt hour for 20 years. Offshore wind was set at a stepped rate of NT$ 7.4034 for ten years, then NT$ 3.5948. But the notion that offshore wind is expensive is long outdated. Competitive bidding prices in Taiwan have ranged from NT$ 2.2-2.5. Reporting has suggested some sort of price manipulation, but from a global perspective these prices are not particularly unusual, much less implying some sort of underhanded activity. The government's perception of global offshore wind power price trends is conservative, rather than forward-looking. However, wind power developed has exceeded everyone’s expectations, including those of the manufacturers themselves. A wind power cost report published in 2014 by the integrated electromechanical manufacturer and turbine producer Siemens asserted that the levelized cost of energy (LCOE) – the total cost of turbine construction, operation, and maintenance per kilowatt hour amortized over its whole life cycle – was £0.14 (NT$ 5.72) in 2013. Siemens however projected that by 2025 it would fall to £0.061 (NT$ 2.5). This price has already been reached in competitive bidding in Taiwan.So then, what is the current global price of offshore wind power? The offshore power Denmark, finding capital expenditures to be 40% lower than projections, and operational expenditures down 20%, recently revised its cost calculation formula. The new formula anticipates that projects coming online in 2020 will average 0.046 euros (NT$ 1.6)/kilowatt hour. All of a sudden, wind power has been transformed from a high-cost energy source to a source of abundant and cheap energy. Offshore Wind is More Efficient than Onshore This result is not difficult to understand. According Swanson’s Law (named after the founder of SunPower), which describes almost all manufactured products, the log of price increases proportionally with the log of cumulative output. When cumulative production is doubled, the cost decreases 20%. The law comes from the experience of Texas Instruments and Robert Margolis’s 2002 Harvard thesis Understanding Technological Innovation in the Energy Sector: The Case of Photovoltaics.The number of wind turbines is increasing, and farms with over 100 turbines can now be found everywhere, providing the conditions for the learning curve to come into play. In contrast, the number of nuclear reactors being built each year, for instance, is very limited. Cost reduction for wind power will be much faster than with nuclear, and the same is true for battery modules. Another common misconception, based on common experience onshore, is that offshore wind is unstable. Walking down the street, you may find it breezy one moment, and still the next. This does not translate to periodic blackouts. The intermittency we feel in our daily experience is caused by turbulence and eddies resulting from ground topography – particularly in the city, in the presence of densely packed buildings. Even on land, the wind is more stable at high altitudes. You can experience this yourself with the aid of a kite: once it reaches a certain height, flight becomes smoother. The principle behind taller turbine towers and longer blades is that the higher the altitude, the more stable the wind, thus the more efficient power generation becomes.The same principle explains why offshore wind is more efficient than onshore. On the sea, there is no interference from topographical features like mountains or buildings, increasing the stability of the power generated. The airflows are consistent and can be projected from weather forecasts, thus offshore generation is called a “standard base load.” Meanwhile, size of the wind tower and blades is larger offshore, more effectively capturing the more stable, higher-altitude wind energy. Thus, there is no danger of blackouts arising from intermittent breezes as felt in daily life – only slow cyclical fluctuations with the seasons and the daily cycle.Rugged and Typhoon-resistantIn the parlance of power generation, stability refers not to continuously maintaining the same power level, but rather controllability. It is the balance of supply and demand which must remain steady, but demand fluctuates over time. Although immediate adjustments to demand are not possible, its changes are predictable. Advance scheduling is possible, helping maintain the stability of the power grid. Instability only arises from unanticipated changes. For example, power cuts have often occurred in the past in Taiwan due to nuclear power plants scramming – suddenly killing the reaction – leaving other power generators unable to quickly respond. Based on daily experience and past cases in which old-style small turbines installed by Taipower were damaged in typhoons, the public has also frequently questioned whether wind power development is suited for Taiwan, a typhoon risk area. These questions reflect a misunderstanding of the wind power industry. In fact, according to the International Electrotechnical Commission (IEC)’s wind turbine standards, top-grade turbines – those for high wind speed areas – must be able to withstand wind of 50 meters/second, as well as 52.5 meters/second on one occurrence per year, and 70 meters/second once every 50 years. How fast is 50 meters/second? The centers of strong typhoons maintain speeds of 51 meters/second. Data from the Central Weather Bureau show that Typhoon Megi, the strongest typhoon in Taiwan’s history, reached 65 meters/second at its center, so 70 meters/second is quite extreme.So even if the turbine itself is sturdy, will shutdown for self-protection during high winds affect the power grid? Turbine manufacturers have also created technological solutions for this problem. Siemens Gamesa 8.0-167 turbines, built for the Asia-Pacific, do not suddenly cut off in high winds, causing a sudden dip in output. Rather, they gradually reduce output to zero, providing adjustment time.New Opportunities for the Finance IndustryThe main difference between offshore wind and other renewable energy sources is that the required upfront investment is even larger. The Danish turbine manufacturer Ørsted may require up to NT$ 3,800 to build four wind farms in the Dachanghua field in Taiwan – about six times the cost to build Taipei 101. Such large-scale funding needs also open up new opportunities for the financial industry. When governments develop offshore wind, they often only provide the site and guarantee the power purchase price, leaving all development costs to the developer. Developers turn to the financial industry for these large capital injections, then use stable power purchase prices to repay the principal and interest. In this way, large-scale offshore wind farms around the world have become destinations for investors seeking stable returns. Ørsted’s publicity in the UK touts its role in creating new, stable investment opportunities. Taiwan’s policy to encourage offshore wind power was originally expected to attract a large amount of international funding to Taiwan, following Ørsted, previously estimated at US$ 30 billion by 2025. With the saturation of European markets, and Chinese markets only open to domestic companies, Taiwan would become an international destination for capital investors. The current government interference has affected investment, but offshore wind is still expected to create funding opportunities in the long term.The sector may also provide a way out of the current domestic investment slump. Taiwan’s excess savings have exceeded NT$ 2 trillion for the past five consecutive years. In 2018, domestic banks had a deposit gap of over NT$ 10 trillion. Banks are unsure of what do with the excess capital sitting on balance sheets. Small banks have specialists calling people day in and day out selling consumer loans, while large ones have given large numbers of loans at low very interest to large corporations whose risk is in fact not so low. There is an urgent need for projects with the ability to absorb large amounts of capital, with low risk and stable returns. The Taiwan economy is hampered by a variety of physical factors, reducing willingness to invest. Excess funds are a culprit behind speculation in real estate. Prices have reached the limit, not only becoming a severe social problem, but also even causing investors to pull back. Although a true solution in the long term will still require comprehensive economic and regulatory reform to eliminate barriers to investment, by transforming surplus funds into energy construction a timely manner, the offshore industry can provide a partial short- and medium-term solution. The government has emphasized local production, causing political interference in offshore development. In fact, the components are extremely large, logistics are difficult, and costs high, making local production and procurement a necessity in any case. Whether foreign investors set up a factory locally or authorize a local supplier, it still creates local business and employment opportunities. Even if the company is not local, such projects increase opportunities for Taiwanese people to work in foreign businesses, and to eventually learn from the management and technology in those factories. As they eventually flow back to Taiwan-owned businesses, their competitiveness will naturally improve. There is no particular need to emphasize localization.Originally a subject of wishful thinking, the wind power industry in Taiwan has experience political setbacks, becoming a subject of international industry discussion. It is however an important element of Taiwan’s energy independence and transformation. Despite the bumps in the road, with healthy development, wind power should become a way to support Taiwan’s energy independence and production.