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In past decades, project finance was seldom seen in Taiwan¡¯s syndicated loan markets. Most project finance transactions have been infrastructure projects by the private sector, or through public-private partnerships (PPPs), most famously the high-profile Taiwan High Speed Rail (THSR) multi-tranche syndicated loan for NTD323.3 billion (USD10 billion) in 2000.

Beyond this largest project finance transaction on the island to date were others for waste incineration and power plants.

However, the project finance market in Taiwan underwent significant changes after 2016, spurred by the government¡¯s policy goal of a ¡°nuclear-free homeland¡±. This initiative plans to replace nuclear energy with renewable energy, stimulating demand for alternative energy sources.

Feed-in tariffs fuel Taiwan renewables

To accelerate investment in renewable energy, Taiwan law also offers a ¡°feed-in tariff¡± policy mechanism, meaning that the government requires Taiwan Power Company to purchase electricity generated by renewable energy providers at a fixed price.

As a result, vigorous green energy development is underway ¨C mainly offshore wind power and solar energy projects ¨C with project finance becoming a hot topic in recent years.

Among these ongoing solar projects, onshore and offshore wind farm projects and BESS (battery electricity storage system) projects, a landmark was the Formosa 1 Offshore Wind Power Project (F1), Taiwan¡¯s first offshore wind farm, which successfully closed in 2018.

This was followed by milestone projects including 10 offshore wind farms that have reached financial close and others in the pipeline scheduled to reach financial close by 2027.

In addition, with solar plants a major source of green energy targeted by the government to ultimately account for nearly 70% of renewable power, project financing is also booming for solar power, including ground-mounted solar power plants, rooftop solar power plants, floating solar power plants, and acqua-solar hybrid power plants.

As an active participant in offshore wind farm and solar projects, the authors¡¯ firm acts as Taiwan counsel to sponsors and borrowers as well as lenders.

These include reorganisation, foreign investment, government permits and authorisation, due diligence, financing structure, foreign exchange, hedging and creating security interest under local laws, and reviewing relevant project and finance documents. The firm is also involved in the divestment of sponsors during the construction and operation periods of onshore/offshore wind farms and solar projects.

This first-hand experience in the project finance market in the past few years is the basis for the following observations and recommendations on project finance from the perspective of the authors.

Local banks join Taiwan renewables financing

Large banks are active in the financing of green-energy projects in Taiwan. To date, most project financing has been arranged or funded by foreign banks including, but not limited to, Japan banking giants Mizuho Bank, Sumitomo Mitsui Banking Corporation (SMBC) and Mitsubishi UFJ Financial Group (MUFG), along with France¡¯s Credit Agricole Corporate and Investment Bank (CACIB) and Singapore¡¯s DBS Bank, through their Taipei branches or otherwise.

Almost all those project finance transactions were also led by international financial advisers and banks, adopting international norms and practice in those transactions.

On the other hand, local Taiwan banks have been conspicuously absent from the project finance market. This is because project finance features non-recourse or limited recourse, carrying an element of risk that goes against the risk-averse mindset of Taiwan¡¯s banks.

Because they are used to following commercial banking business models and relying heavily on the creditworthiness of the borrower and its sponsor, most Taiwan banks do not actively participate in project finance. In general, they are reluctant to participate in projects they are not familiar with ¨C and state-owned banks are even more conservative about funding large-scale projects.

Based on the authors¡¯ experience, however, large local banks such as Taiwan¡¯s largest private bank, CTBC Bank, as well as Taipei Fubon Bank, Cathay United Bank, E.SUN Bank and SinoPac Bank, are recently more active in participating in project finance relating to renewable energy.

In recent cases, these banks have even served as financial advisers for developers. In addition, state-owned banks have also gradually started to participate in project finance in the past three years under the national credit guarantee mechanism.

Aside from banks, there has been a rise in insurance companies and global institutional investors participating in project finance in Taiwan. For example, an offshore wind farm project announced in 2020 that it had signed agreements with a consortium comprising global institutional investors and a Taiwanese private equity fund acquiring a total of 50% ownership.

Insurance companies can act as investors and there are also instances where they serve as lenders in offshore wind project finance.

Corporate power purchase agreements reshape Taiwan

Although the Taiwan government provides a ¡°feed-in tariff¡± mechanism, the international trend towards clean energy demand, and the requirement from international customers for Taiwan manufacturers to use green energy, have prompted more power plants to sell electricity directly to corporations through corporate power purchase agreements, rather than to the Taiwan Power Company.

The most notable example is an offshore wind farm selling all its electricity to Taiwan Semiconductor Manufacturing Company in the world¡¯s largest corporate power purchase agreement.

Recently, there have been offshore wind power projects adopting multiple corporate power purchase agreements, which also represents the establishment of a new model.

To assist companies that cannot meet the credit rating requirements for offtakers under project finance in obtaining green energy, the government has also initiated the establishment of a company serving as a power sales platform through state-owned enterprises, acting as a bridge between power plants and electricity purchasers.

Since the electricity rates stipulated in corporate power purchase agreements are higher than the tariff offered by Taiwan Power Company under the power purchase agreement, the use of corporate power purchase agreements will be key to the next phase of green energy project finance in Taiwan.

Taiwan energy projects enter refinancing

Project finance for energy projects in Taiwan began to develop around 2018, and after about eight years of development, a significant number of projects have since completed the construction phase and been in commercial operation for some time.

With operations having stabilised, many of these projects are now planning or undergoing the refinancing process (some have already completed refinancing) in order to secure more favourable credit terms.

Some sponsors are also seeking to negotiate higher debt-to-equity ratios with financial institutions, enabling shareholders to recover a portion of their initial investments in the project at an earlier stage.

Data centre finance expands Taiwan

In recent years, project finance in Taiwan has mainly been used for financing related to green energy. However, in the past three years, with the construction of data centres in Taiwan, the demand for related financing has also increased, opening a new field for the development of Taiwan¡¯s project finance market.

Although the financing structure of current data centre cases does not fully adopt a pure project financing model, they are still fundamentally based on project finance.

In this regard, it is expected that data centre financing will experience significant development in the next few years, during which a more structured project financing model specific to this sector is likely to emerge and gradually take shape. A potential concern exists in northern Taiwan, where constraints in electricity supply may adversely affect the pace and scale of data centre construction.

Taiwan project finance growth continues

In the past decade, due to the financing demands of green-energy projects, Taiwan¡¯s project finance market has experienced rapid growth.

With the continued demand for green energy and government initiatives now encouraging investment in data centre construction, it is expected that Taiwan¡¯s project finance market will maintain its growth trend ¨C and may even extend to new financing areas.

LEE AND LI ATTORNEYS-AT-LAW
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Email: attorneys@leeandli.com