An evolving market in Asia for offshore wind

An evolving market in Asia for offshore wind

December 08, 2020 | By Julien Bocobza in London, Nicky Davies in Singapore, and Aditya Rebbapragada in Singapore

A number of key factors and trends will influence how the offshore wind market develops in Asia over the next decade.

In the meantime, opportunities to invest in offshore wind energy developments are being created by government measures from Japan to India.

Most of the activity to date has been in Taiwan.

Until recently, the Taiwanese market was dominated by international developers and international lenders able to lend in local currency, together with a limited number of Taiwanese commercial banks. However, Taiwanese government policy mandating greater local content for offshore wind projects, a trend toward a lower feed-in tariff and difficulties with liquidity in local currency are now driving developers to seek new opportunities elsewhere in Asia.

New Asian markets

Opportunities in Japan, South Korea, Vietnam and India are attracting the greatest interest.

Japan has a target to install 10,000 megawatts of offshore wind capacity by 2030, and it has enacted legislation to take steps to meet this target. The government launched the country's first offshore wind auction for a floating offshore wind farm off the coast of Goto City in June 2020 and the country's first offshore wind auction for fixed-bottom offshore wind farms in November 2020. The tender for fixed-bottom projects will remain open until May 27, 2021 and covers four zones that are located off Akita and Chiba prefectures.

South Korea set a target of installing 12,000 megawatts of offshore wind capacity by 2030 in its Renewable Energy 2030 implementation plan announced in 2018. Offshore wind is critical to it achieving its separate net-zero emissions target by 2050. According to the Global Wind Energy Council, South Korea has installed only 132.5 megawatts of offshore wind capacity currently. It has several floating offshore wind projects in development.

Vietnam has the potential for 261,000 megawatts of fixed and 214,000 megawatts of floating offshore wind, according to the 2019 World Bank report Going Global: Expanding Offshore Wind to Emerging Markets. The Vietnamese government is considering a proposal to extend its feed-in tariff regime by another two years through November 2023. It is available currently at a tariff of 98¢ a kilowatt hour to offshore wind projects that reach commercial operation by November 2021. It is not clear whether the extension will be approved and if it does, whether the tariff would be maintained throughout the extended period at the current rate or potentially step down over time.

Mainstream Renewable Power, a UK developer, has submitted an application for a 1,000 megawatt offshore wind project in Vietnam in a joint venture with local player Phu Cuong Group. Mainstream received approval in June 2020 for a separate 400-megawatt project that is expected to start construction in the third quarter of 2021.

Copenhagen Infrastructure Partners, together with Vietnam based Asiapetro Petroleum Energy Corporation and Novasia Energy Company, signed a memorandum of understanding in July 2020 with Bin Thuan People's Committee to develop a 3,500-megawatt offshore wind project in La Gan.

Another UK-based wind developer, Enterprize Energy, revealed plans to develop a 3,400-megawatt offshore wind farm in Thang Long and received its site survey licence in June 2019.

India also has significant potential. The World Bank Going Global report estimates that India has potential for 112,000 megawatts of fixed and 83,000 megawatts of floating offshore wind. The World Bank, through its offshore wind development program, is in discussions with the Ministry of New and Renewable Energy and the Solar Energy Corporation of India to develop a demonstration project off the coast of Tamil Nadu in the next two years.

Corporate PPAs

As the offshore wind market matures in Asia and companies look for opportunities to offset their carbon footprints to meet their environmental commitments and satisfy their investors, offshore wind developers are likely to rely more heavily on corporate power purchase agreements to sell the electricity, building on a trend already well underway in Europe.

Denmark's Ørsted is leading the way. It already concluded a deal to supply the Taiwan Semiconductor Manufacturing Company with power from its Greater Changhua 2b and 4 offshore wind developments in Taiwan under what is reported to be the world's largest offshore wind corporate PPA.

Savvy developers are mindful of issues such as the creditworthiness of the corporate offtaker, the size of the offtake and the duration of the corporate PPA, which will all be subject to scrutiny from a bankability perspective.

Also, regulatory hurdles remain in some jurisdictions to entering into corporate PPAs, either due to licensing issues for generation and distribution or restrictions on wheeling where the power purchaser is not directly connected to the source of the renewable energy via a private wire connection, but is instead taking power from the national grid.

In Vietnam in particular, there have been a number of new regulations that are designed to promote the growth of renewable energy projects and enable corporate offtake, but it is a dynamic and fast-evolving market currently in terms of the regulatory framework.

Demand for virtual PPAs is also expected to increase. These are essentially a financial contract between the generator and the corporate offtaker that exchanges variable cash flows derived from the electricity market price and renewable energy credits for fixed price cash flows without any physical exchange of electricity. Such contracts are common in the United States for projects that sell their electricity into an organized power pool and, therefore, receive floating prices. A virtual PPA acts as a hedge that puts a floor under the electricity price. The project receives fixed payments from the corporate offtaker and pays it the floating revenue received from selling the physical electricity from the project into the power pool.

Virtual PPAs will become more common in Asia where the generator's main offtake is based on variable market pricing rather than a fixed tariff.

Leveraging oil infrastructure

Various elements required for offshore wind development, including foundation and substation development, use of installation vessels and subsea cabling, can leverage existing capabilities already well developed by the offshore oil and gas sector in a number of Asian countries.

A critical aspect of this is being able to use foreign flagged vessels and crew in these new markets.

Japan has strict cabotage regulations for foreign flagged vessels being used for offshore wind farm construction. However, the Japanese government is looking to ease the restrictions to promote offshore wind energy development.

South Korea already has significant shipbuilding and cabling expertise through companies like Samsung and Hyundai and may be able to support supply chains in the region by promoting the manufacture of offshore wind installation vessels domestically.

Other countries, like Vietnam, may require greater investment in the local onshore infrastructure and supply chains to support the growth of the offshore wind industry in order to capitalise fully on the opportunity.

Floating offshore wind

Floating offshore wind projects are expected to get significant traction in Asia. A number of experienced European developers are already circling the sector. For example, JERA, the largest Japanese utility company, ADEME Investissement, a 100% French state-owned investment company aimed at financing innovative infrastructure projects, and IDEOL, a global developer of floating offshore wind technology, have agreed on the key terms for the establishment of an investment vehicle dedicated to financing the development phase of at least 2,000 megawatts of floating offshore wind projects.

Floating turbines are particularly relevant for Japan, where fixed-foundation offshore wind projects are not suitable given the water depths of a large number of areas identified for offshore wind development.

South Korea is also a key market for floating turbines. For example, French oil company Total and the Macquarie Green Investment Group have concluded a 50-50 partnership to develop a portfolio of five large floating offshore wind projects in South Korea with a potential cumulative capacity of more than 2,000 megawatts. Norwegian oil company Equinor, the Korea National Oil Corporation and Korea East-West Power have also formed a consortium to develop a 200-megawatt floating offshore wind farm off Ulsan.

Floating offshore wind provides an opportunity for traditional oil and gas players, many of whom are now diversifying rapidly as part of the energy transition.

Green hydrogen

In the longer term, offshore wind developers will pursue green hydrogen production as a potential use for the electricity generated by massive offshore wind turbines. Using the electricity to power electrolyzers will help mitigate curtailment risk, facilitate grid balancing and further maximise revenue.

A number of pilot projects are expected in the near term in Japan and South Korea before hydrogen production facilities can reach scale as demand for hydrogen increases. Hydrogen demand is already growing in the region, often with political support from governments. An illustration of this is that a number of Japanese companies have formed the Kobe-Kansai Hydrogen Utilization Council with a view to pursuing large-scale utilization of hydrogen in the 2030s.

Policy support

How fast offshore wind develops ultimately in Asia, as in other regions, depends in large part on government policies.

So far, there are promising signs in most countries in the region. All countries in the region have committed to address climate change. The follow-through varies from one country to the next. The levels of government support and regulatory reform required to facilitate development and financing of offshore wind are also greatest in emerging markets where existing infrastructure is more likely to be found lacking.