Offshore wind financial investment activity in Asia Pacific markets eclipses Europe for the first time

As reported today in Recharge, a leading business intelligence source for the renewable energy industries, total investment in offshore wind power projects in Asia Pacific (APAC) came in at almost double that in Europe in 2019, as the fast-moving emerging market eclipsed the sector’s historic heartland for the first time, according to new research from the Renewables Consulting Group (RCG) from its Global Offshore Wind: Annual Market Report. 

With offshore wind development in Taiwan, Japan, and Vietnam accelerating, financial investment activity in the sector for the Asia Pacific market has surpassed that of Europe for the first time, demonstrating the global potential for offshore wind.

Taipei’s offshore wind development plan, supported by a feed in tariff, is starting to bear fruit.  Five projects reached financial close in 2019, totalling almost 2 gigawatts (GW) in cumulative capacity. The Changfang and Xidao projects also reached a financial investment decision in the first quarter of 2020. The activity in Taiwan provides an example for the mechanisms and procedures that can be adopted in emerging markets in order to attract investment and lower project costs.

Investment activity in offshore wind projects in Asia Pacific wasn’t confined to Taiwan, with the Tra Vinh 1 project in Vietnam also reaching financial close in 2019 and, in early-February 2020, the Akita Offshore Windfarm in Japan reached the same milestone. Taken together, the total investment activity in the Asia Pacific market since 2018 has exceeded that of Europe and the Americas.

The total investment value reported for Europe projects in 2019 was c. USD 5.6 bn, whilst the value for Asia Pacific was at least USD 10 bn. The maturity of the European market, and intense competition, have driven down cost per megawatt. Asia Pacific markets are learning from that experience, but scale and increased local content will be required for costs to follow suit.

Taipei’s success can be attributed to a number of causes, but the presence of a robust financial support mechanism (in this case a feed in tariff regime) and the ongoing development of a local supply chain must be considered key drivers. The financial support mechanism provides developers with the confidence to make long-term investments.

Whilst 2019 was a particularly strong year for the Asia Pacific region, in terms of securing project investment, other markets continue to advance. Europe and the Americas laid the foundations for similar project progress from 2020 through to 2023, with significant lease auctions, power purchase solicitations and legislative changes taking place in the past year.

In the United Kingdom, France, the Netherlands, and the United States, large-scale offshore wind solicitations have positioned more projects closer to financial close than in any previous year in the history of the offshore wind market.

Across global markets, The Renewables Consulting Group (RCG) forecasts 8.0-13.5 GW of cumulative capacity will reach the financial investment decision milestone each year between 2020 and 2023 (inclusive). This positive outlook includes some multi-phase projects that have recently secured route to market with likely investment decisions distributed according to the specific phase of development and the success of some projects is predicated on securing contracts in future solicitations.

Exhibit: Offshore wind financial investment activity and forecast

There is a notable correlation between the Contracts for Difference (CfD) Rounds, the United Kingdom government’s main mechanism for supporting low-carbon electricity generation, and the spikes in cumulative capacity moving to a pre-construction phase. These typically follow a year after auction results are announced.

A similar link between financial support mechanisms and financial close is a feature of the forecast for the Americas region, where significant investment decisions are due to be made from 2021 onwards in the wake of large-scale solicitations during 2019, supporting a total of approximately 6.4 GW of offshore wind capacity.  Because leasing is managed by the federal government and power purchase agreement solicitations are managed at the state level, there is a potential disconnect between timings, with developers trying to marry the two timetables.

In the United Kingdom, permitting and leasing is a pre-requisite for entering into the CfD Rounds, whilst in the Netherlands, France, Denmark and, in the next phase of development, Germany, permits are issued alongside the route to market access. This keeps future power offtake aligned with development.

The implementation of a stable financial support mechanism in Taiwan helped drive the financial investment activity in Asia Pacific ahead of Europe in 2019. The feed-in tariff (FiT) support regime in Taiwan has both enabled projects to reach the pre-construction phase and encouraged cost reductions through downward pressure on subsidy levels. Taipei is implementing a three-stage plan for offshore wind development, which includes policies to promote the development of a local supply chain. Stage 1 was the first pilot projects, supported by FiT and loan schemes, called “Model Zone”; Stage 2 covers the period from 2020-2024, with a fixed FiT and escalating localisation requirements; and Stage 3 introduces FiT auctions. Robust development plans, managed by a central authority, can contribute to substantial market growth.

Vietnam updated its feed-in tariff system during 2019, with further revisions due in 2020 to address issues relating to currency exchange.

These two counties demonstrate that, with appropriate implementation of support mechanisms, projects can be developed around the world in new markets for offshore wind. The technology is providing a realistic alternative energy source on a global basis.

These newer markets have learned from European front-runners and have recognised the benefits of stable structures to provide a route to market for power. Japan, Poland and Ireland are all developing and implementing legislation to formalise financial support mechanisms for offshore wind projects.

And the push for these systems hasn’t just been top down. In 2019, energy company Equinor and the Canary Islands local government advocated the implementation of a route to market structure from the federal government in Spain to support floating offshore wind. Similarly, in Australia, the Star of the South project has sought support in a market with no formal process for offshore wind.

Looking further ahead, it is clear that once emerging markets successfully implement legislation that provides a clear framework for offshore wind and supports long-term investment through a stable financial support mechanism, investment decisions can be made on more projects in a shorter timeline, accelerating development.

RCG’s full financial investment activity forecast can be viewed in its Global Offshore Wind: Annual Market report. The 131-page piece of work includes details on each offshore wind market with analysis on the resources that will allow projects to reach route to market, FID and commissioning milestones. An overview of the global supply chain is also provided for various aspects of the wind farm ECPI process, as well as a breakdown on all development activity for each offshore wind market in 2019.

The Recharge news article is available on their website (by clicking HERE ) or below:

Recharge article - Asia Offshore Wind

Dr Lee Clarke

Partner and Chief Operating Officer