From green energy to data centres, opportunities are varied and expanding fast, with local banks and global investors playing bigger roles
In past decades, project finance was not frequently seen in local syndicated loan markets, and most project finance transactions were infrastructure projects developed by the private sector or through a public-private partnership (PPP). The most high-profile project financing transaction was Taiwan’s high-speed rail project, a NTD323.3 billion (USD10.5 billion) multi-tranche syndicated loan, in 2000.
Beyond these, project finance was also adopted for construction projects such as waste incineration plants, power plants, and so on.
However, the project finance market in Taiwan underwent significant changes after 2016. The policy goal of a “nuclear-free homeland” by the Taiwan government stimulates the demand for alternative energy sources in the Taiwanese market – the Taiwan government plans to replace nuclear energy with renewable energy in Taiwan’s power supply.
In this regard, to accelerate investment in renewable energy technologies, Taiwan law also offers the “feed-in tariff” policy mechanism (meaning that the Taiwan government will require Taiwan Power Company to purchase electricity generated by renewable energy providers at a fixed price).
Sarah Wu
Partner
Lee and Li
Taipei
Tel: +886 2 2763 8000 (ext. 2296)
Email: sarahwu@leeandli.com
Therefore, it has begun to vigorously develop green energy – mainly offshore wind power and solar energy projects. Green energy projects, as a result, have become a hot topic of project finance in recent years.
Among the ongoing solar projects, onshore and offshore wind farm projects and the BESS (battery electricity storage system) projects, a landmark case was the Formosa 1 Offshore Wind Power Project (F1), the first offshore wind farm project in Taiwan, which successfully reached financial closure in 2018, followed by subsequent milestone projects (as of today, 10 offshore wind farm projects have reached financial closure) and some other projects in the pipeline are aiming to reach financial closure by 2027.
In addition, since solar plants have been the major source of green energy, with a target output set by the government accounting for nearly 70% of Taiwan’s green energy, various project financings for solar plants (including ground-mounted solar power plants, rooftop solar power plants, floating solar power plants, and acqua-solar hybrid power plants) are also blooming in the market.
Our firm has actively participated in offshore wind farm projects and solar projects, acting as Taiwan counsel to sponsors and borrowers, as well as lenders, advising on various issues in relation to the reorganisation, foreign investment, government permits and authorisation, project due diligence, financing structure, foreign exchange, hedging and the creation of security interests under local laws, and reviewing and commenting on relevant project and finance documents. The firm was also involved in the divestment of sponsors during the construction or operation period of onshore/offshore wind farm projects and solar projects.
Regarding the development of Taiwan’s project finance market in the past few years, as a deeply involved legal participant, the authors have several observations.
Participants and Taiwan banks
Large banks have been active in the financing of green energy projects in Taiwan. To date, most of the project finance transactions were arranged or funded by foreign banks (including but not limited to Mizuho Bank, Sumitomo Mitsui Banking Corporation, Mitsubishi UFJ Financial Group, Crédit Agricole Corporate and Investment Bank and DBS Bank) and almost all of those project finance transactions were still led by international financial advisers and banks, adopting international norms and practices in those transactions.
Odin Hsu
Partner
Lee and Li
Taipei
Tel: +886 2 2763 8000 (ext. 2134)
Email: odinhsu@leeandli.com
However, the role of Taiwan local banks has become particularly evident in the development of Taiwan’s project finance market. With respect to Taiwan local banks, in the past, project finance features non-recourse or limited-recourse, which goes against the risk-averse mindset of Taiwan banks.
These banks, accustomed to following commercial banking business models and relying heavily on the creditworthiness of the borrower and its sponsor, therefore do not actively participate in project finance.
In general, Taiwan local banks are reluctant to participate in projects they are not familiar with, and government-owned banks are even more conservative about funding large-scale projects.
Based on experience, however, large local banks (such as CTBC Bank, Taipei Fubon Bank, Cathay United Bank, E.SUN Bank and SinoPac Bank) have recently been active in the participation of project finance relating to renewable energy.
Even in recent cases, there are already Taiwan local banks capable of serving as financial advisers for developers. In addition, government-owned banks have gradually started to participate in project finance cases in the past two years under the national credit guarantee mechanism.
Aside from banks, there has also been a rise in insurance companies’ and global institutional investors’ participation in project finance in Taiwan. A case was announced in 2020 by an offshore wind farm project, stating that it had signed agreements with a consortium comprising a global institutional investor and a Taiwanese private equity fund, which will acquire a total of 50% ownership share of this offshore wind farm project.
As for insurance companies, in addition to cases where they act as investors, there are also instances where they serve as lenders in offshore wind project finance.
Power purchase agreements
Although the Taiwan government provides a “feed-in tariff” mechanism, the international trend towards clean energy demand, and the requirements from international customers for Taiwan manufacturers to use green energy, have prompted more and more power plants to sell electricity directly to corporations through corporate power purchase agreements, rather than to Taiwan Power Company.
The most notable example is an offshore wind farm selling all its electricity to Taiwan Semiconductor Manufacturing Company; this corporate power purchase agreement is the largest power purchase contract in the world. Recently, there have been offshore wind power projects adopting multiple corporate power purchase agreements, representing the establishment of a new model.
In addition, to assist companies that cannot meet the credit rating requirements for offtakers under project finance in obtaining green energy, the government has initiated the establishment of a company that serves as power sales platforms through government-owned enterprises. This entity acts as a bridge between power plants and electricity purchasers.
Overall, 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.
Application in other sectors
In recent years, project finance in Taiwan has mainly been used for financing related to green energy. However, in the past two years, with the construction of data centres in Taiwan, the demand for related financing has increased, opening a new field for the development of Taiwan’s project finance market.
Although the financing structures of current data centre cases do not fully adopt a pure project financing model, they are still fundamentally based on project finance. 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.
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 encouraging investment in data centre construction, it is expected that Taiwan’s project finance market will maintain its growth trend, and may even be applied in new financing areas.
LEE AND LI, ATTORNEYS-AT-LAW
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