Keywords

1 Introduction

To comply with the climate goals set by the Paris Agreement and achieve the green energy future, the Taiwanese government has actively used policy tools to attract foreign investment to help establish the wind power industry in Taiwan. Simultaneously, the Taiwanese government also attempts to distribute the economic benefits of the new energy industry to the local companies and people through the deployment of local content requirements (LCR) policies like many other countries. Nonetheless, the efficiency and the legality of LCR policies in this context have been highly debated. The aim of this paper is to discuss the compatibility with WTO rules and effeteness of LCR policies in the energy sector through documentary analysis. Coming through the government reports, news and academic literature, the author wishes to provide a fair check on the Taiwan model in developing its offshore wind power industry with particularly emphasis on LCR policies.

2 Local Content Requirements of Offshore Wind Power in Taiwan

2.1 The Development of Offshore Wind Power Industry in Taiwan

The Taiwanese government has designed an ambitious development plan for its offshore wind power industry (Jones Day 2018). In 2016, Taiwan’s electricity that was generated from renewable energy power plants accounted for 4.8% of the aggregate electricity produced and 9.4% of the aggregate installed capacity in Taiwan. The Taiwanese government has proposed an “energy transition” plan, which aims to progressively phase out nuclear power plants and have an energy mix containing 50% natural gas, 30% coal, and 20% renewable energy by 2025 (Jones Day 2018, p. 1). To achieve the electricity target for renewable energy, the Taiwanese government has emphasized the development of solar photovoltaic (PV) generation and offshore wind power. Regarding the wind power energy development, the government announced the “Thousand Wind Turbines Project” in 2012. The Program drafted a 20-year long map for the development of offshore wind power industry in Taiwan as shown in Table 8.1. These plan of three phases begins with demonstration projects, moving to the application round of commercial wind power farms and then expected to complete the development of wind power zones across Taiwan (Jones Day 2018, pp. 1–2).

Table 8.1 Three phases of the 20-year long map for the development of offshore wind power industry in Taiwan
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Based on the TEB Zonal Development Round rules (TEB 2021), interested applicants were expected to undergo a two-phase selection process. The first phase was the eligibility examination phase, in which interested applicants were required to pass a review of their technology capabilities, financial strength, and local industry promises. Only those who passed the review would be eligible to participate in the following price-bidding phase. The capacity would be allocated to the winning parties based on the bid price and the wind farm connection date (Buljan 2021).

The maximum capacity to be allocated for a single offshore wind farm and to a single developer is 500 MW, plus an additional 100 MW of capacity, depending on conditions such as wind farm integrity, development benefits, domestic industrial capacity, and grid-connection capacity. According to the latest announcement publicized by the Ministry of Economic Affairs (MOEA) in August 2021, 9 GW of capacity would be added in three phases from 2026 to 2031 (Buljan 2021). The bid price for the first phase of the development is limited between TWD 2.49/kWh and TWD 0/kWh. For the subsequent development phases, the average of all the winning bid prices in the previous period will be used as the price cap.

2.2 Foreign Investment Incentive Policies and Local Content Requirements for the Offshore Wind Power Industry in Taiwan

Knowing that it would require the technology and expertise of established foreign companies to help achieve the goal, the Taiwanese government provided a set of incentive policies to attract more foreign investments to develop the offshore wind power industry as quickly as possible (Jones Day 2021). Two major incentive policies offered by the government are lifting foreign ownership restrictions and assuring 20-year long feed-in tariff contracts.

Regarding the first incentive policy (Jones Day 2021, pp. 13–14): In Taiwan, foreign-owned companies that are engaged in certain industries are subject to foreign ownership limits. However, to encourage foreign investors to enter the Taiwanese offshore wind farm market, the foreign ownership limits and other additional restrictions were lifted.

Regarding the second incentive policy (Jones Day 2021, pp. 13–14): As mentioned above, a wind power project developer would sign a PPA with TaiPower. In December 2017, TaiPower published a standard-form PPA for offshore wind farm projects. The PPA provides for either a 20-year fixed feed-in tariff that is set on the PPA signing date, or a 20-year tariff of the winning price in a competitive auction covenanted by and between the project developer and the Taiwanese government. According to the Offshore Wind Power Farms Capacity Application Rules released by MOEA in 2017 (MOEA 2017), these applications to develop offshore wind power farms will follow a “Selection Period First, then Auction Period Next” procedure. In the selection period, 10 projects that were selected and allocated 3.836 GW by the government were guaranteed a 20-year fixed feed-in tariff price announced by the MOEA. These selected projects would be required to meet the standard of local content requirements. In the following auction period, other project developers who were selected via a competitive auction entered into PPAs with TaiPower under their winning bid price for 20 years. The difference between the selection period and the auction one, is that the developers who compete in the auction period don’t need to meet a certain local content requirements standard but have to win the contract with a competitive price.

In addition to the economic incentives, the Taiwanese government has prioritized the development of the wind power industry since 2019; it has been estimated that the new electricity generated by wind power equipment will amount to up to 9 GW per year, which will rank 4th in the world (MOEA 2021a). The government’s determination and strong incentive policies have undoubtedly helped to attract foreign investment to contribute to Taiwan’s development of the local wind power industry.

The Taiwan director of a well-established wind power company that is related to a Danish company, K2 Management (MOEA 2021b), remarked that “Taiwan may be the only country in Asia that allows foreign investors to own 100% of stocks,” implying that this is a huge incentive to attract foreign investment to contribute to Taiwan’s wind power industry. In 2020, due to the rapid development of the wind power industry in Taiwan, the EU became Taiwan’s 5th biggest trade partner, with the total annual investment from the EU amounting to 46.2 billion dollars, calculated from January to October. In short, the EU became the biggest source of foreign investment in Taiwan, thanks to Taiwan’s policies to fully support the development of the wind power industry (Business Today 2020).

While increasingly more foreign companies expressed their willingness to invest in the wind power industry, the Taiwan Ministry of Economic Affairs (TMEA) presented a detailed set of LCRs for various sectors of this industry, ranging from underwater engineering and maritime engineering to turbine configuration. The TMEA asked all interested companies to ensure that the various LCR levels were applied. The purpose of the LCRs, from the TMEA’s point of view, is to promote international technology transfer and local industries.

LCRs, defined as one type of performance requirements, are industrial policy measures that condition the granting of a benefit, by means of subsidies or other kinds of incentives, on the use of domestic products and services (Junior 2019). In short, LCRs require that a minimum level of goods and services is bought and/or manufactured locally. Conceivably, LCRs are not always welcomed by foreign investors (Bazilian et al. 2020).

The Director of the Taiwan office of Copenhagen Infrastructure Partners (CIP), which invested in developing Taiwan’s wind power farm, has stressed that European countries have their respective strengths in different sectors of the offshore wind power industry (Commercial Times 2021). For example, the Netherlands and Belgium focus on maritime engineering, Denmark excels at turbine manufacturing, and East European countries are responsible for component production. The division of the works was driven by the free market. By contrast, as appealing as the incentive policies provided by the Taiwanese government are, Taiwan lacks the foundation to support a full and complete wind power industry chain. For example, the production of one single turbine includes the production of leaves, electricity generator, and other underwater engineering works, all of which require professional knowledge and high expertise. It would be very challenging for Taiwan to develop a wind power farm on its own land, especially when tied up by many LCR rules.

3 The Rules of LCRs in Taiwan

3.1 Local Industry Relevance Execution Plans in the Offshore Wind Power Farms Application Round

According to the MOEA’s plan, the total electricity generated by offshore wind power systems in Taiwan will reach up to 5.6 GW by 2025. Although it is a huge market, there are certain requirements for foreign investors to enter the wind power industry.

The Offshore Wind Power Farms Capacity Allocation Application Rules (Wind Power Farms Application Rules) was promulgated by the Taiwanese government in 2017 as aforementioned (MOEA 2017). In the first selection stage, the MOEA planned to select the wind power site proposals that generated no more than 0.5 GW of electricity by 2020. At this stage, foreign investors were required to present many evidential documents to prove that their proposals were feasible. Subsequently, the TMEA planned to select the wind power site proposals that would generate up to 3 GW by 2025 and asked foreign investors to present “substantial local industry relevance execution plans.” The final decision would be made based on the technology capabilities (60%) and financial strength (40%) of the applicants. The applicants would be required to undertake to comply with the substantial local industry relevance execution plans in time. The details of these local relevance requirements are provided in the Appendix 8 of the Wind Power Farms Application Rules and reorganized by the author as shown in Table 8.2.

Table 8.2 Evaluation standard of wind power farms application rules
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The pledge to execute the substantial local industry relevance plans would not only include the LCR plans, but also contracts with local providers. Foreign investors would be penalized if they failed to keep their LCR promises without justified grounds. In that case, they might be penalized 3% of the contract performance bond each month, while their contractual positions might be replaced by the next company in the waiting line.

3.2 Local Industry Relevance Execution Plans in the Offshore Wind Power Farms Application Round

In August 2021, the MOEA again announced the “Offshore Wind Power Zonal Development Capacity Allocation Rules” (MOEA 2021a). According to the Industry Relevance Policy Order released by the Industry Bureau of MOEA later in December 2021 (MOEA 2021b), in this third phase of Offshore Wind Power Zonal Development, it stipulated that LCR would be examined by a “promise before, execute afterwards” standard (MOEA 2021b). This suggested that foreign investors would have to present substantial local industry relevance execution plans that were approved by the government body. Bound by the LCR promises, foreign investors would have to complete the establishment of wind power farms and LCR items in time; else they would be penalized for failing to meet the contractual obligations.

According to the Article 4 of this Allocation Rules, from 2026–2031, each year will allocate 1.5 GW wind power capacity to qualified developers. From 2032–2035, it is planned to allocate 6 GW but the details of the allocation will be decided afterwards based on the development of global technologies and outcomes of the previous allocations.

The selection standard of developers during this zonal development round (2026–2035) is stipulated in Article 8 of this Application Rules. It suggests that technology capabilities accounted for 60% and financial strength accounted for 40%, same as the wind power farms application round, but adding the third criteria “Industry Relevance Execution Plan” as a value added item.

Based on the details shown in the Appendix 7 and Article 8 of this Allocation Rules, the selection criteria and LCR are highlighted by the author in the Table 8.3 below. Comparing the Table 8.2 and Table 8.3, it is shown that the LCR specified in the evaluation criteria in the second Round have been moved to the value-added column in the Zonal Development Round. Nonetheless, it is not surprising that these LCR regulations have triggered some criticisms. The Chief of the EU Energy Policy and Coordination Office, Cristina Lobillo Borrero, once pointed out that LCR rules in Taiwan ought to adhere to international trade rules for Taiwan to help the global value chain without interfering with the rules of the international economy (Junior 2019).

Table 8.3 Evaluation standard of offshore wind power zonal development capacity allocation rules
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3.3 Updated Local Industry Relevance Execution Plan for the Zonal Development Round

Following the first version of the substantial local industry relevance execution plan for wind power clusters in August 2021, the TMEA again announced an updated version in December 2021. The main difference in this version was that the LCR rules would be examined every two years instead of five years. Another major difference was that some LCR items were more flexible. Especially regarding some difficult LCR items, the new rules allowed foreign investors to choose the LCR items voluntarily instead of compelling them to fulfill all the LCR items. Should foreign investors choose to implement the “voluntary” LCR items, they would be awarded more points under the government examination. The rules also allow more flexibility for foreign companies to fulfill LCR items, including ways of purchase, cooperation, and investment.

4 The Compatibility of LCR Policies and WTO Rules

The Organization for Economic Cooperation and Development (OECD) published an “Emerging Policy Issues: Localization Barriers to Trade” report in May 2015, which summarized various types of LCR rules and stated their potential negative impact on international trade. Nonetheless, many countries use LCR rules to promote local economies and increase employment opportunities. According to the “Local Content Requirements: A Global Problem” (Hogan 2021) report published by the Peterson Institute for International Economics in 2013, LCR policies have become increasingly popular among countries to protect local industries and increase job opportunities. In the last two decades, LCR policies have gained increasing prominence, especially in the renewable energy sector (Hogan 2021). LCR rules may include the use of a certain amount of local products or services, tax discounts for local purchases, companies should be run by local people, etc.

According to the Peterson report, it was estimated that LCR rules impacted almost 928 billion dollars’ worth of global trade (5%), causing trade losses worth 93 billion dollars. It is concluded that these LCR rules may be substituted by other “localization” mechanisms, such as corporate social responsibilities, staff training programs, more investments in fundamental infrastructures, tax deductions, subsidies, etc.

There are quite a few agreements of the World Trade Organization (WTO) that prohibit LCR rules but have never been taken seriously. For example, the Agreement on Subsidies and Countervailing Measures (SCM), the Trade-Related Investment Measures (TRIMs), and the General Agreement on Tariffs and Trade (GATT), all of which contain prohibitions on the use of LCRs by WTO members (Junior 2019). Nonetheless, as much as these WTO agreements clearly prohibit the application of LCR rules, it would be very difficult for companies involved to quote these agreements against LCR policies in a disputed country. First, only members of the WTO are entitled to file complaints to the dispute settlement body of the WTO; however, only governments are WTO members and not corporations. Second, for a government to file an international complaint through the WTO mechanism, the decision would be based on many complicated issues and would not consider the mere interests of a single company, not to mention the difficulty for the company at dispute to prove its losses. Eventually, it would take years to obtain a ruling from the WTO dispute settlement mechanism, while the corporations involved would not receive any compensation under the current legal framework of the WTO.

Despite the fact that the main principle of the WTO is in favor of international free trade and even prohibits LCR policies in several agreements, there remain legal exceptions to the WTO rules that allow LCR policies.

Article XX of GATT states the general exceptions of LCR (WTO/GATT Article XX), some of which are closely related to the energy sector: (b) necessary to protect human, animal, or plant life or health; and (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption. In addition, although the paragraph, “(j) essential to the acquisition or distribution of products in general or local short supply” seems unrelated to the energy industry at face value, it was adopted by the Indian government to defend its LCR policies in the solar power industry (DS456).

In addition, Article III of GATT regulates the National Treatment on Internal Taxation and Regulation; however, it offers an exception in paragraph 8Footnote 1:

8. (a) The provisions of this article shall not apply to laws, regulations, or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.

(b) The provisions of this article shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this article and subsidies effected through governmental purchases of domestic products.

The Canadian government quoted this paragraph 8 of Article III to defend its LCR policies against Japan. Nonetheless, the WTO dispute panel ruled that Canada was not justified because LCR policies shall not be used in a commercial market (Batra and Bafna 2018).

Judging by the previous cases of Canada and India, although it is unlikely, it is possible that the LCR policies in Taiwan risk being challenged by other members of the WTO. Nonetheless, as argued by Huang (2021), LCR policies can be designed as a WTO-compatible industrial policy if (1) the LCR in services is prioritized; (2) the LCR and government support scheme (such as FIT) are severable; and (3) Article XX of the [in particular, paragraph (b)] is used wisely, in which case the LCR is closely connected to the objectives pursued, thorough effectiveness analysis on the implementation of the LCR has been provided, and the due process of law has been honored.

5 The Effectiveness of LCR Policies

The LCR policies may not only be challenged through the WTO dispute settlement body but can also bring unintended economic results. A research study that uses Brazil, India, and South Africa as examples evaluates whether LCR rules have helped create local manufacturing capacity or benefited local companies (Bazilian et al. 2020). The study concludes that companies in all three countries have tended to take on roles that are more easily borrowed from other industries, such as project development or ancillary services. Consequently, it is more difficult to set up manufacturing capacity in more sophisticated components (Bazilian et al. 2020). This research also finds that local content rules have contributed to increasing project costs.

Another disadvantage of LCR is that costs may increase because of the compulsory requirements to purchase local items. As mentioned previously, the Indian government applied LCR policies in building up its local solar power industry. A study that used data on Indian government-run solar PV auctions held in India between 2014 and 2017 found that not all of the auctioned contracts entailed LCRs (Probst et al. 2020). By comparison, it was concluded that LCR policies caused a 6% per kWh increase in the cost of solar PV power compared to similar projects that were not subject to the same LCR policy. In addition, during these three years, Indian solar panels remained approximately 14% more expensive than international panels. Although the empirical data analyzed in this study also suggested short-term increases in domestic manufacturing capacity, during the same period, Indian firms did not increase market share or enter international markets.

Although the economic impact of LCR policies is sometimes challenged by empirical data, many countries still favor LCR policies to build up local industry. In addition to economic advantages, LCR policies can also be justified on social grounds. The exceptions of the WTO agreements signal the same message: international free trade is not absolute if there are other justifiable considerations.

As suggested in this study, one of the most common and effective methods that governments apply to support clean energy remains LCR policies. The author emphasizes that the prohibition of LCR policies without any quality assessment and analysis of its impacts on the environment will conceivably draw criticism from environmentalists. The study analyzes the GATT regulations and the results of the dispute settlement body and concludes that, due to a lack of clarity, generality, and flexibility, and failure to meet the positive and negative requirements, the aforementioned sources are deficient in justifying the removal of the legal prohibition. Therefore, the best solution is to revise the regulations of the Agreement on Subsidies and Countervailing Measures.

In particular, support for a global free market does not necessarily contradict LCR policies. The conclusion in this study is that globalization goes hand-in-hand with localization. To compete in large markets (India, China, the US, and Brazil), EU companies have to grow local manufacturing and supply chains (Lacal-Arántegui 2019).

Professor Meyer (2015) has argued that the WTO prohibition fails to account for the public goods that are generated by LCR programs and suggests that local subsidy programs can help balance international trade with the valuable global public goods such programs can contribute.

Meyer used an original 50-state survey and identified 44 state renewable energy programs in 23 states within the United States that could violate WTO rules. Nonetheless, Meyer argued that these programs could increase global welfare despite their discriminatory nature. In other words, LCR policies help local governments internalize a few of the benefits of providing global public goods, such as reducing greenhouse gas emissions through investments in renewable energy technology. Local efforts to address global public goods would create benefits in other jurisdictions. To sum up, it is imperative to reform international trade law so that local governments can play a role in solving global problems.

In another study that examines the role of industrial policy in developing renewable energy (RE) to cope with climate mitigation mandates (Lewis 2021), Lewis finds that to justify investments in clean energy sources, an increasing number of countries are linking the political rationale for RE development to local economic benefits, such as job creation, local manufacturing, and technological innovation. Consequently, industrial policies are being strategically deployed to allow countries to capture economic benefits from RE deployment beyond what deployment policies alone may bring. Under these circumstances, LCR policies are often used as an industrial policy tool to support the localization of RE technology manufacturing by mandating the use of a certain portion of locally manufactured components. As LCR has been the most widely studied green industrial policy in the literature to date, it demonstrates that the effectiveness of LCR policies in promoting local industrial development may differ across countries and technologies.

According to a document released by the OECD (OECD 2022), LCR policies may help local governments achieve certain short-term objectives; however, they may undermine the long-term competitiveness of a country. While echoing some criticisms that LCR policies may cause inefficiencies in the affected sector, the OECD study highlights the subsequent costs imposed on the rest of the economy as well (Stone et al. 2015). In sum, the OECD study argues that the disadvantages due to the LCR policies can offset its potential benefits, such as job growth and the scaling of the local economy. Nonetheless, the OECD also points out that the world has favored LCR policies since the 2008 economic crisis: a decade after the financial crisis, more than 340 localization measures, including over 145 new LCRs, have been implemented by governments largely to improve domestic employment and industrial performance.

In another paper released by the OECD in 2015 (Stone et al. 2015), it was concluded that despite the predominately “negative evidence” of the impact of LCRs on trade, they continued to play a significant role in trade policy. The study concluded that the “negative impact” of LCR policies could cause a decrease in exports in non-LCR affected sectors and a growing concentration of domestic activity in a few targeted sectors, undermining potential growth and innovation on a broader scale. Therefore, the study recommends that countries replace LCR with alternatives. Nonetheless, OECD offers an overall insight focusing on the economic growth; it should be noted that since the effectiveness of LCR policies differs across countries, some might enjoy more benefits than harm. In addition, there may be other social justifications for adopting LCR policies, as mentioned earlier.

For the overall economic situation in Taiwan, according to the data shown on the Taiwan economy official website (Taiwan government website 2022): Following the financial crisis in 2009, Taiwan’s export-oriented economy suffered another down-turn in 2015 due to the weak global demand for consumer electronics products coupled with the falling price of crude oil. However, since 2016, the situation has improved. While the recent years’ economic growth rate has been modest due to the impact of the U.S.- China trade dispute, expanding domestic production driven by the reshoring of manufacturing companies has helped to offset the drag. The economic growth had rebounded by January and February of 2020, with exports and imports respectively increasing by 6.4 percent and 5.3 percent, and the overall trade value rising 5.9 percent year on year. Intriguingly, the statistics showed that 2016 was the turning point, which was also the year of the demonstration round of Taiwan’s offshore wind power industry development. There is no sign that Taiwan’s overall economic growth was affected by the LCR policy in the offshore wind power energy sector. On the contrary, Huang, in an insider commentary published in January 2020, described Taiwan’s offshore wind market as the most open one in East Asia, while acknowledging that national protectionism was no secret when doing business in Asian markets (Qiao 2020; cited in Huang 2021).

6 Conclusion and Policy Recommendations

As discussed in the previous section, two main issues surround the LCR policy: legitimacy and its effectiveness. Many who argue against the LCR policy adopted by countries claim that it is against the international free trade rules or that it negatively impacts countries’ economic or job growth. Nonetheless, the author of this study argues that it is possible to have a WTO-compatible LCR policy, considering the exceptions. The effectiveness of the LCR policy may differ from country to country. From the data provided by the Taiwan Offshore Wind Power Association, as shown in Table 8.4, the production value and job opportunities both seem promising.

Table 8.4 Job opportunities and production value of the offshore wind power industry in Taiwan
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This study concludes that Taiwan’s efficient development of its offshore wind power industry from ground zero has set a good example for other countries. The LCR policy helps mitigate the economic incentives to attract foreign investors, build up the local industry, and create job openings. Thus far, there is no evidence of a significant negative impact. As much as the author considers that the LCR policy is not necessarily negative or illegal in the context of international free trade, the policy recommendations in this study are to design the LCR rules carefully to ensure its compatibility with international trade rules and effectiveness in the local economic and social contexts.