Key View: Energy and utility infrastructure development will be dominated by a strong pipeline of offshore wind projects, in addition to opportunities in the solar and gas power generation sub-sectors. Non-Taiwan, China-based firms will have a significant presence in the market, but we expect increasing local participation as local expertise and supply chains become more developed.
The reason for healthy growth in the sector is the adverse sentiment surrounding nuclear generation, since the Fukushima nuclear crisis caused the authorities to revise their energy policy, scrapping plans to increase nuclear generation capacity. Taiwan, China’s long-term power development plan (PDP) calls for significant growth in both gas and renewables generation, while outlining targets to phase out nuclear by 2025 and progressively reduce electricity contributions from pollution-heavy coal and oil-fired generation.
We therefore expect Taiwan, China to continue to rely heavily on thermal sources to meet power demand over the next decade, ensuring that the import bill remains high. Concurrently, it is expected to significantly expand its renewable capacity so as to kick-start a slow but steady transition away from thermal generation. The authorities currently target share of generation at 25% renewables, 50% gas and 27% coal by 2025. We expect the authorities to accelerate their energy agenda over the coming years. Indeed, our Power team remains bullish in their growth forecasts for Taiwan, China’s non-hydro renewables sector, in line with a very strong ongoing official commitment to develop the sector.
A strong pipeline of projects in Taiwan, China’s burgeoning solar and offshore wind sector will lead growth of the energy and utilities sector over the next decade. There are also opportunities from the thermal sector, supported by a handful of thermal facilities in the project pipeline, which will offset some of the older plants that are due for retiring over the coming years. We forecast the energy and utilities sector sector to grow at an annual average of 2.1% in real terms over the 2022-2031 period.
Wind And Solar Investments A Bright Spot
Strong project activity in the solar and offshore wind sector is driven by supportive official policies towards the development and usage of renewable energy. The authorities have adopted an anti-nuclear stance and has aggressively promoted the development of Taiwan, China’s renewable energy sector. Our Power team is bullish in their growth forecasts for the non-hydro renewables sector, in line with the authorities' strong ongoing commitment to develop the sector. The team forecasts that Taiwan, China will add net non-hydro renewables capacity of 20.4GW between 2021 and 2031, driven primarily by offshore wind and solar developments. Their forecast is also underpinned by growing investor interest, which has strengthened the renewables project pipeline significantly. This will boost construction activity in the energy and utilities sector.
From a project perspective, construction of the USD2.0bn, 376MW Formosa 2 Offshore Wind Farm, located 9.5km off the coast of Miaoli County, is in full swing. Major works related to nearshore pre-trenching and Horizontal Directional Drilling undertaken by Jan De Nul commenced in June 2020, and construction was completed in 2021. Another project, the Changfang and Xidao Offshore Wind Farm, had achieved financial close at the end of February 2020. At an estimated cost of USD3.0bn, construction and installation has been split into three phases, with the first phase expected commence in 2021. In June 2021, CTCI Machiner has manufactured 48 pin piles for the first phase of the plant. Once fully commissioned in 2024, the Changfang and Xidao Offshore Wind Farm will include a total of 62 V174-9.5MW supplied by MHI Vestas, with a total capacity of 589MW.
Similarly, the USD2.8bn 640MW Yunlin Wind power Project has a scheduled completion date of 2022. In April 2021, TotalEnergies signed an agreement with WPD to acquire a 23% stake as the project installed its first wind turbine. Lastly, the 900MW Greater Changhua 1&2a offshore wind farm entered construction phase in March 2021. Built by Ørsted, work will start on array cable laying, installation of the offshore substations and foundations in late 2021. Turbine installation is due to begin in 2022, with the two wind farms planned to start operations by the end of 2022.
Foreign Companies To Play Big Role In Offshore Wind Development
Development of Taiwan, China’s offshore wind market is expected to be strongly supported by non-Taiwan, China-based companies in the short term. In our previous analysis of Taiwan, China’s infrastructure competitive landscape, we have identified heavy European involvement in the offshore wind sector. Companies involved in construction works and the supply of equipment include the Netherlands-based Heerema Marine Contractors, Belgium-based DEME Group and Luxembourg-based Jan De Nul Group. European expertise in offshore wind technology and project management suggests that Taiwan, China will continue to be reliant on these companies, but in the longer term, we expect a build up of local technical expertise and the establishment of local supply chains that will result in a slow shift in market dominance away from European companies towards local companies.
Our view is informed by the policy stance towards offshore wind development, as it seeks to strike a balance between reliance on foreign expertise and the usage of local capabilities. There are policies to mandate the use of the local supply chain, and lately, this requirement has been a key factor considered by the authorities when selecting winning projects.
Hurdles To Growing Private Participation
Although renewable power projects are often among the most attractive for private investors to develop as independent power producers (IPPs) owing to their lower capital costs and favourable power purchase agreements, we note that Taiwan, China's poor track record among IPPs will somewhat dampen international and private investment in the sector. Restrictive power agreements and difficulties obstructing renegotiations have deterred more private sector involvement in the power sector. This was notably exemplified in 2012 when four IPPs took legal action against public sector utility Taiwan Power Company, as negotiations on the adjustment of the terms of their contracts broke down. This came about as the utility's power purchasing budget was slashed by TWD9.5bn from TWD142.7bn. There are long-term plans to privatise Taiwan Power Company, which could ultimately lead to a more-liberal and accommodative business environment that facilitates greater investment by private and non-Taiwan, China-based entities in the sector.
Nuclear Phase-Out To Continue
Nuclear power accounted for 8.7% of Taiwan, China's total electricity generation in 2020. Taiwan, China has six nuclear reactors at three nuclear power plants, with a combined gross capacity of 4,927MW. Two of the nuclear plants are near Taipei, and the third is in Pingtung County. Construction of the fourth nuclear power plant, known as the Lungmen facility, in the Gongliao District of New Taipei City, has not gone smoothly. The project started construction in 1999, but pre-operation tests were plagued by a series of incidents, including blackouts and fires. Work on the power plant was suspended in 2014. In October 2017, the project was cancelled by the authorities. An attempt to win a referendum to restart construction in December 2021 was rejected, and there is little prospect of the project going forward in the near term.
Taiwan, China is currently continuing with a nuclear phase-out policy: following the decommissioning of the Kuosheng 1 reactor in July 2021. A second reactor is due to be brought offline in 2023, while the licenses for the remaining two reactors at Maanshan are due to expire in 2024 and 2025, respectively. The Power team expects Taiwan, China's nuclear reactors to operate until 2025 at the latest, and they deem it unlikely that this will be extended. Their view is informed by the ongoing commitment by the authorities to achieving a nuclear-free Taiwan, China.
We expect projects in the water sector to support growth of the overall energy & utilities sector as well. Opportunities in Taiwan, China’s water sector will be provided through the Forward-Looking Infrastructure Development Programme, where TWD250.8bn (USD8.1bn) is expected to be allocated to develop and construct water-related infrastructure over an eight-year period beginning in 2019. In August 2020, the authorities had released a proposed budget in which water infrastructure projects had received an allocation of TWD52.4bn (USD1.8bn). Projects highlighted in the budget include TWD5.0bn (USD170.0mn) excavation of an artificial lake adjacent to the Dadu River and a project to improve tap water quality, which would cost TWD3.0bn (USD10.0mn). In an analyst briefing in December 2021, local engineering company CTCI noted that the authorities are planning to announce tenders for five desalination plants on a build-own-operate (BOO) basis in 2022 in Taoyuan, Hsinchu, Chiayi, Tainan and Kaohsiung, with an estimated value of TWD60.0bn.
Main objectives of the Forward-Looking Infrastructure Development Programme include:
- Reliable Supply And A Sustainable Environment: The authorities aim to increase regular water supply by 1mn metric tonnes per day, and emergency supply by 2mn metric tonnes per day. To achieve this, new water infrastructure will have to be constructed. Reliability of water supply will also be improved through the introduction of smart technologies and repair and maintenance works related to existing water infrastructure.
- Flood Control And Prevention With Resilient Public Lands: Investment will be made into improving rival channels, regional drainage systems and constructing coastal seawalls to improve the resilience of Taiwan, China’s water infrastructure against floods. Plans include the construction of 250km of levees, revetments and storm drains, 120km of rivers and drainage systems, and improvement works related to 16km of seawalls.
- Improved Water Quality And New Water Environments: More waterfront spaces are expected to be created over the coming years. There are plans to improve rivers, waterways, lakes and beaches to allow more people to enjoy waterfront recreational spaces.