The government’s Forward-looking Infrastructure Program has been the subject of much heated debate and its “green” energy components have been at the center of discussion.
Opponents of the proposals believe that too little has been allocated to “green” infrastructure, that the plan is not sufficiently forward-looking and that it falls short in several crucial aspects.
More than NT$24.3 billion (US$804.6 million) has been earmarked for the “green” infrastructure parts of the plan, relying on a further NT$1.43 trillion in private investment. Clearly, the government is hoping its initial investment will unleash something of a multiplier effect and encourage private investment into the renewable energy sector.
The fundamental orientation of the policy is quite solid, but it will stand or fall with its success in drawing market capital into the sector. Crucial to this is how “green” energy finance institutions and support facilities are devised.
With about NT$100 trillion in capital accessible in the form of banking assets, securities and insurance, there is no shortage of funds for the establishment of a “renewable” energy sector.
The problem is that there has been very little increase in domestic investment in “green” energy production over the past several years, mainly because the domestic financial sector is unfamiliar with the “green” energy industry and is unsure whether the business model will yield adequate returns on investment — whether it will be self-liquidating — making it difficult to assess risk, all of which has suppressed the willingness to invest, let alone to set up a market for “green” energy finance or to drive investment.
One example of this might be the proposals for offshore wind farms, regarded as the secret to kick-starting the domestic “green” energy sector.
Domestic banks assessing the installation and operational lifetime of offshore wind farms — which can be as long as 20 years — and the amount of financing required — as much as NT$15 billion — think the risk is considerable, such that there are still significant reservations about financing offshore wind farms.
Even though the Financial Supervisory Commission (FSC) flagged the financing of renewable energy sources as a major government policy to promote as early as last year, and said that it would proactively assist the “green” energy industry in obtaining finance and developing the required human expertise in “green” finance, “green” energy enterprises, financial markets and the government will still have to work in concert to completely remove all the obstacles to setting up a “green” energy sector.
For a start, “green” energy companies will have to provide sufficient financing of their own. Successful ventures overseas have seen companies putting up anywhere between 25 percent and 30 percent of the costs, seeking the rest from banks.
However, in Taiwan, many ventures remain underfunded, with insufficient self-financing.
Fortunately, several foreign investment groups have shown interest in the development of a “green” energy sector in Taiwan, especially offshore wind farms in the Taiwan Strait. If domestic and overseas investment can be brought together, it could make up for the shortfall in capital and make the sector a more palatable investment option for banking groups here.
In addition, the finance sector needs to improve its own ability to evaluate “green” energy investment projects. Overseas wind energy financing projects, for example, invoke many considerations, from choice of location to parallel connection analysis, from power generation data analysis and operation and maintenance techniques to safety evaluation.
However, there is little local experience in this area and banks will have to set up designated task forces as soon as possible. One idea might be for them to look to how “green” energy plans are evaluated and how risk is assessed in European nations such as Germany, the Netherlands and Denmark, which have a wealth of experience in this field.
At the same time, banks could also consider adopting a set of internationally recognized standards as the basis for to make their loan appraisals.
The government’s plan has already allocated NT$1 billion for viability assessments and the establishment of a database for offshore wind farms, as well as NT$1.64 billion for the establishment of a third-party testing and certification center for “renewables,” which the government hopes will communicate with the finance sector during the process of building up the industry.
The center would provide statistics to the finance sector, allowing it to appraise issues specific to “green” energy and to create a favorable environment for “green” energy investment.
Taiwan lacks the required funding and insurance solutions for a “renewable” energy plan, just as it lacks policy-oriented financial institutions like KfW, the German development and import-export bank. National banks operate on the same model as commercial banks, and for domestic public and private banks to be tasked with funding “green” energy projects is a massive proposition, especially with large-scale development plans such those for offshore wind farms.
The FSC’s proposal of entrusting state-owned banks with the role of industrial banks is a viable option, but regulatory, organizational and personnel changes will be necessary, whether existing state-owned banks are repurposed or new banks are set up, and none of this is easily achievable in the short term.
Wang Chia-wei is deputy director of the Overseas Business Institute at the Taiwan Academy of Banking and Finance.
Translated by Paul Cooper
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