When J.W. Kuo (郭智輝) takes up his new role as minister of economic affairs next month, he will need to move fast if he is to salvage one of the government’s signature projects. Policy conflict and misguided goals threaten to sink outgoing President Tsai Ing-wen’s (蔡英文) hopes of achieving renewable-energy targets, and it will be Kuo’s job to either kill that dream or rewrite existing policy to get the plans back on track.
Multiple phases of offshore wind projects have revealed cracks in government policy. A smooth ride would have meant Taiwan hitting Tsai’s 2016 target of getting 20 percent of its electricity from renewable sources by next year. Instead, byzantine and inflexible local procurement rules and limits on project sizes have led to cost overruns, delayed rollouts and prospective contractors leaving the market altogether.
These challenges collide headlong with the planned phase-out of nuclear generators, inching Taiwan toward a power crunch and a repeat of blackouts experienced over the past decade.
It did not have to be this way. Wind power plants are historically among the most reliable out of more than two dozen types of major undertakings tracked by Bent Flyvbjerg, the renowned professor at the University of Oxford’s Said Business School and pioneer of the long-term study of megaprojects.
Nuclear storage facilities have the worst track record, Flyvbjerg and Dan Gardner write in their book How Big Things Get Done, with a mean cost overrun of 238 percent. Olympic Games come in at an average 157 percent more than projected. Wind power, on the other hand, is a hands-down winner, blowing budgets by just 13 percent, bested only by energy transmission infrastructure (8 percent) and solar power (1 percent).
There is a reason why wind and solar have a history of on-time and on-budget delivery, and Taiwan’s policymakers would do well to remember it.
Both types of infrastructure are modular, which means they can benefit from economies of scale and prior knowledge on how to deliver. Developers can build, perfect, iterate and repeat smaller power plants, getting better in increments as they head toward completion.
Moreover, this gradual improvement can be carried on to the next contract. Nuclear storage and Olympic Games suffer from the opposite: They are invariably one-off bespoke deals and by their very nature fall victim to the Eternal Beginner Syndrome — teams are learning from scratch each time.
Taiwan’s offshore wind-power farms, which are supposed to be sprouting up off the west coast in the Taiwan Strait, ought to have offered the same benefits. Global contractors including Orsted A/S, Northland Power Inc and Jera Co brought their experience from past projects to Taiwan, but were stymied. Instead of buying components from familiar and proven suppliers, contract rules force them to buy at least 60 percent of their parts locally.
What is more, the government stipulates exactly which of those bits and pieces must be domestic. Items ranging from foundation jackets to survey vessels are subject to these requirements.
However, Taiwan has neither the experience nor the capacity for this. That means economies of scale and prior knowledge are both lost.
In some cases, only one or two domestic companies have the production capability, creating monopolies that drive up the price while still lacking the ability to deliver on time. Yet it is the master contractor that must pay the penalty for delays, forcing costs even higher. These budget overruns and rollout delays in earlier phases have spurred some developers to not even show up for later rounds.
In a round of auctions in 2022 — where contractors bid to provide power to the government’s electricity monopoly at the lowest price — at least seven consortiums offered to sell to Taiwan Power Co at near-zero cost, data compiled by BloombergNEF showed.
In doing so, winners get a mandate to build offshore wind farms, and bet that they can find an alternative buyer who would pay a price that would cover their costs. If they can, they are not required to sell to Taiwan Power Co at the winning bid. Their customers would instead be Taiwanese corporations with a need for renewable energy and a willingness to sign long-term contracts.
Yet power providers are still hamstrung by local procurement laws, which drive up budgets and with them the point at which contractors can be expected to make a return on their investment.
The biggest risk is that some of these winning bidders do not land a corporate power-purchase agreement and let their mandate lapse with no penalty, leaving Taiwan without the renewable energy it so desperately needs as it shuts down nuclear reactors that were once the backbone of the economy’s electricity supply.
It is not too late. Kuo comes from the corporate world and is the chairman of Taipei-based industrial-equipment maker Topco Group, which counts Taiwan Semiconductor Manufacturing Co among its clients. More importantly, “he has expertise in leadership and strategic development planning,” the company’s annual report says. Those are skills he would need when he joins the Cabinet upon the May 20 inauguration of Tsai’s elected successor, Vice President William Lai (賴清德).
If Kuo wants to salvage those wind-power goals, he would need to pick a policy, and quickly. The only path forward is to relax the procurement rules and allow contractors to buy parts from whomever they want at competitive global prices. The government might also consider spurring local companies to buy renewables, either with carrots (subsidies) or sticks (mandates).
If, on the other hand, the goal is to use protectionism to try and seed a local wind-power industry, then Taiwan must be willing to spend orders of magnitude more for its electricity and accept a high chance of failure.
Should that be the choice, then the public and companies should brace for more power blackouts in the years to come.
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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