German renewables developers InfraVest and wpd closed the debt financing for their Eu91.4 million ($128.1 million) Houlong wind farm in Taiwan on 25 October. The 57.9MW project is the fifth that the pair have developed in the country and cements their position as the only independent renewables developer of any size in the country.

The two sponsors have a six-year history of financing wind projects in Taiwan, and the latest financing gives some indication of how market conditions have changed in the country since the pair’s first project, 50MW Miaoli, closed in 2005. Miaoli used a German-centric financing package, with heavy support from export credit agency Euler Hermes and KfW, and subsequent projects have stuck to this template.

The presence of German developers and lenders is unsurprising, since Taiwan’s original renewables framework was modeled heavily on that of Germany. The use of feed-in tariffs, especially when applied to solar photovoltaic capacity, has become less fashionable in European policy circles. Early in the last decade, however, Taiwan adopted a feed-in tariff, and has stuck to it, with minimal variations, since then.

The incentives for wind, first rolled out by decree in 2003, have fallen under a framework designed to encourage lower use of fossil and nuclear resources. This has led to a situation where roughly half of the country’s wind capacity is in the hands of local developers, and half is in the hands of local utilities. The country’s largest utility owner of wind capacity, Taiwan Power Corporation, or TaiPower, is also typically the independent producer’s offtaker.

But Miaoli was the first commercial wind farm in the country when it came online in 2006. Its Eu67 million financing, which closed in 2005, consisted of Eu47 million in senior debt, led by KfW and IKB, a Eu7.5 million mezzanine loan from German development bank DEG, and sponsor equity. The debt was swapped into New Taiwanese dollars at each draw, according to a forward purchase agreement that matched the project’s drawdown schedule.

For Houlong, the bulk of the project’s cost is met with Eu72.3 million in construction-plus-16-year senior debt, led by KfW-IPEX and Helaba. Euler Hermes is providing 90% commercial cover to lenders, a guarantee denominated in local currency. When Euler Hermes provided the original guarantee on Miaoli it was one of its first such local currency operations, but by the time of Houlong was much more comfortable with the structure.

The cast of lenders has changed a little in the intervening period. IKB, for in­stance, was one of the earliest victims of the problems in the US subprime housing market, thanks to a conduit’s exposure to poorly-structured mortgage-backed securities. After its 2008 bail-out, it now sticks to financing small and medium-sized German businesses. KfW, which has worked on each of the developers’ last four facilities, remains a constant presence.

The IKB incident highlights the strengths of the structure that was developed for Miaoli, which not only protects the German lenders from currency risk, but also protects the intermediaries for the NT$ financing from the credit risk of the lenders. For the first project IKB, KfW and DEG relied upon ANZ, through its Taiwanese operations, to provide local currency liquidity.

While the intermediary bank does not assume any project risk, Taiwanese lenders typically shied away from participating because of the complexity of the currency swap. One of the most significant advances in the financing for Houlong is the presence of (unnamed) local lenders in the group of intermediary funding banks, though Deutsche Bank, which enjoys wholesale Taiwanese dollar funding market access, is leading the group.

The project involves installing 24 Enercon E70 2.3MW turbines, the same model used at the developers’ other sites in Taiwan, as well as three smaller Enercon E44 0.9MW turbines. Enercon will also be responsible for long-term maintenance of the turbines when the plant is operational from 2013. The plant is located on the north-west coast of Taiwan, roughly 11km from Taipei, in Miaoli county.

Houlong is the second project that wpd and InfraVest have closed since Taiwan passed a Renewable Energy Act in June 2009. The effect of the legislation was essentially to codify practices that had developed under the decree-based framework. The previous tariff of NT$2 (rough­ly $0.06) per kWh, has been increased to NT$2.34, and a price-fixing committee sets the rate of increase or decrease for the tariff, usually with respect to the cost of other types of generation. Since the developers’ last project, 47MW Guanyin, closed, the tariff now stands at NT$2.61.

The combination of the Euler Hermes cover and the local currency funding has been effective in the Taiwanese onshore market. But the lenders have so far been unable to replicate it elsewhere. Local lenders in larger markets like China and India are comfortable enough with wind to fund projects directly themselves, while other Asian markets with strong local currency project finance markets, like Taiwan, have more limited experience with wind.

A more promising application of the structure may be in offshore wind. Taiwan offers an offshore tariff, and has ­several promising sites in the strait that separates the island from the Chinese main­land. Both KfW and Euler Hermes have experience in offshore. But even in Europe, the pace of development in offshore has been slow, and the periodic military tension between China and Taiwan across the Taiwan Strait would be an addi­tional complicating factor. ■

Longwei Windpower and Fongwei Windpower
Status: Closed 25 October 2011
Size: Eu91.4 million ($128.1 million)
Location: Miaoli county, Taiwan
Description: 57.9MW wind farm
Sponsors: wpd and InfraVest
Debt: Eu72.3 million
Arrangers: KfW and Helaba
Tenor: 16 years
Export credit coverage: Euler Hermes
Local currency funding: Syndicate of local lenders led by Deutsche
Technical consultant: Lahmeyer
Lender legal advisers: Clifford Chance; Russin & Vecchi (local)