Cross-strait risks cannot be ignored, insurer warns offshore wind farm firms chasing lucrative Taiwan projects

PUBLISHED : Sunday, 27 May, 2018, 4:45pm
UPDATED : Sunday, 27 May, 2018, 4:45pm

Heightened geopolitical tensions in the Taiwan Strait, the narrow sea channel between Taiwan and mainland China that has become an offshore wind farms investment hotspot, has raised concerns on the adequacy of insurance coverage for the sector, according to an insurer focused on renewable energy. 

International developers – mainly European – have flocked to grab a share of lucrative wind farm development rights recently awarded on projects mainly in the seas west and northwest of the island, lured by excellent wind resources and high guaranteed long-term power prices.

“The prevailing attitude is one where they are almost discounting the likelihood of that risk because they are treating the Taiwan Strait as if it is the North Sea or the Baltic Sea,” said Jatin Sharma, the president of California-based GCube Insurance Services, which focuses on insuring renewable energy projects, in an interview with the South China Morning Post.

The current political climate would dictate they should be exploring financial ways to protect their investments
Jatin Sharma, president of California-based GCube Insurance Services

“The current political climate would dictate they should be exploring financial ways to protect their investments.” 

At stake is the security of wind farms worth at least US$22 billion that are expected to be built in the next five to seven years, which face war and asset expropriation risk, he said. 

While acts of the military are typically excluded from standard offshore wind insurance policies, in some cases where wind farm developers have bought policies to cover “specified risks” such as acts of war, they have later decided to “buy back” such coverage from their insurers, on the belief the geopolitical risk was relatively benign, Sharma noted.

This involves an agreement to terminate the policy and the payout of any lump sum cash payment to the policy holder, who will then assume the risks themselves. 

But they may later find that the geopolitical environment could change rapidly and that they have under-estimated the risks, Sharma said.

Other risks facing Taiwan’s projects include higher typhoon and earthquake occurrence and an undeveloped wind farm installation domestic supply chain, which meant their premiums are at least a third higher than similar projects in Europe, he noted. 

Since Taiwan President Tsai Ing-wen, from the independence-leaning Democratic Progressive Party, came to power two years ago, cross-strait tensions have been rising. 

The mainland has carried out a series of military drills targeting the island, including a live-firing exercise last month, following pro-Taiwan gestures from the US as the trade row between Beijing and Washington escalated.

The island’s Ministry of Economic Affairs late last month unveiled the results of its first major offshore wind farm construction tender, awarding the rights to build 11 offshore farms by seven developers, with combined generating capacity of 3,836 mega-watts (MW).  

Bids by mainland firms were excluded “due to concerns of national security”, Chen Chung-hsien, director of the energy technology division at Taiwan's Bureau of Energy, was quoted by Reuters to have said early this month.

Sharma said if mainland firms are allowed to invest, develop or supply equipment and parts to the emerging Taiwan offshore wind power industry, it would help mitigate the geopolitical risks. 

Winners of recently awarded projects in Taiwan, to be completed between 2020 and 2025, include Germany’s Wpd, Denmark’s Orsted – the world’s largest offshore wind farms developer – Canada’s Northland Power, Singapore’s Yushan Energy, and Taiwan Power.

Another 1,700 GW of projects are expected to be awarded in the next few months through a tendering process. 

Taipei is targeting offshore wind capacity to reach 5,500 MW by 2025 from 8 MW last year, making it one of the world’s investment hotspots. Some 18,814 MW were installed globally at the end of last year. 

European developers, which have already built up a cost-competitive supply chain in their home markets, consider Taiwan an attractive nascent market where guaranteed power prices are among the highest in the world – around triple those in Europe’s largest wind power markets where profit margins have been squeezed by falling prices due to competitive bidding. 

Taipei is targeting for half the island’s electricity generation to be fuelled by natural gas, 30 per cent by coal and 20 per cent by renewable energy – primarily wind and solar – as it seeks to phase out by 2025 nuclear power that took up 19 per cent of output. 

The mainland’s accumulative offshore wind farms installation last year exceeded 1,000 MW for the first time, making it the world’s third largest market in the segment after Britain and Germany, according to industry body Global Wind Energy Council.

The offshore segment accounted for just 3.5 per cent of accumulative wind farm installation globally last year. 

Returns on both onshore and offshore projects on the mainland are expected to fall as Beijing last week said all new projects will be subject to competitive bidding from next year, in which price is the biggest factor for project awards.