Taiwan Solar Projects: An Introduction to Key Legal and Regulatory Issues

Back in 2017, the Taiwan government took decisive action to phase out Taiwan’s reliance on nuclear energy. The government announced a plan to eliminate nuclear power, increase Taiwan’s consumption of renewable energy to 20% of total consumption, and increase Taiwan’s installed solar power generating capacity to 20 GW, all by 2025. Taiwan’s resources include abundant sunshine, up to 2,000 hours per year in central and southern Taiwan, but unfortunately not abundant land. This tension between the relative abundance of sunshine and the relative scarcity of land has resulted in a complicated, and often frustrating, legal framework for Taiwan solar energy projects.

Taiwan’s solar projects include both ground-mounted and rooftop projects, both on government-owned and on privately-owned land and buildings. Developers include both Taiwan Power Company, or Taipower, the government-owned grid operator, and various Taiwan and foreign-owned private developers. These variations, in type of developer, type of project and type of owner of the underlying asset, all contribute to the complexity of Taiwan’s solar energy regulatory framework.

As of the end of last year, Taiwan’s installed solar energy capacity was about 5.8 GW. This represents definite progress, but slow progress, toward the government’s official goal of 20 GW by 2025. Figure 1 is a map that lists Taiwan’s solar power installations as of July 2020. A few conclusions from this map are clear. First, solar energy projects have been built throughout Taiwan, including on a number of small, outlying islands. Second, most Taipower projects are less than 2 MW. Third, in most cities and counties that have both Taipower projects and privately developed projects, the capacity of the private projects is much greater than the Taipower projects.

The Taiwan government has also taken action to increase the demand for renewable energy. Beginning in 2025, most businesses that have signed contracts with Taipower for delivery of 5 MW or more of electrical power must generate or purchase at least 10% of their power requirements from renewable energy sources. It appears likely that many business users will purchase solar power from private developers to fulfill this new legal obligation.

This article comments on two major types of legal considerations for solar energy projects in Taiwan, corporate business structure issues and solar project regulatory issues. Both of those topics are very large and very detailed, so this article can provide only a general introduction to a few key issues. Proper legal advice would require a full understanding of a project’s background facts and a developer’s goals. In addressing legal considerations, one size definitely DOES NOT fit all.

CORPORATE BUSINESS STRUCTURES

In general, any local or foreign investor may incorporate a Taiwan company to own and operate a solar energy production business. A foreign investor may choose to set up a joint venture company co-owned with a local investor, but a local investor or local business partner is not legally required.

Before a foreign investor sets up or invests in a Taiwan company, the investor must first obtain foreign investment approval, or FIA, from the Investment Commission of Taiwan’s Ministry of Economic Affairs. FIA is usually granted routinely for foreign investments in Taiwan solar energy production, though the requirement to obtain FIA needs to be considered in preparing timelines and expense budgets. The major exception to this general rule of routine FIA is that FIA is not available for solar energy investments by companies incorporated in the People’s Republic of China or owned by PRC investors. PRC investment into Taiwan solar energy production is effectively prohibited.

Many foreign investors utilize an offshore holding company to hold their Taiwan investment, whether in solar energy production or some other business. Such a holding company allows a foreign investor to bring in other co-investors or sell some or all to its investment confidentially. Without an offshore holding company, any new investment or any transfer of the original investment would involve a change in ownership of the Taiwan company’s shares. An additional FIA would be needed for such a change in ownership, adding time and expense and resulting in disclosure of price and other terms of the investment transaction.

If an investor invests in more than one Taiwan solar energy project, the investor usually incorporates each project separately. This insulates the assets of one project from the liabilities of another project. It also adds flexibility in allowing the original investor to bring co-investors into one particular project and makes it easier and more efficient for an investor to sell its interest in a single project.

Also, a foreign investor with multiple projects might decide to have the shares of each project company held by a holding company incorporated in Taiwan. Dividends from a Taiwan company to a foreign shareholder are normally subject to withholding tax. If an onshore holding company is used, dividends from one project can be reinvested into another project without paying withholding tax. In the absence of an onshore holding company, dividends from each project are subject to withholding tax, often at 21%, and only the after-tax balance can be reinvested into another project in Taiwan.

Finally, decisions about corporate business structures can overlap with decisions about finance issues. Taiwan banks provide New Taiwan dollar funding for solar energy projects, often at favorable interest rates. These loans can be provided either by a single bank or by a small syndicate of local banks. If an investor plans to finance multiple projects, it may be necessary to decide in advance whether to finance each project separately or finance all of the projects together as a group. If different projects have (or may have) different co-investors, the co-investors will likely prefer separate financing for each project. On the other hand, especially if the projects are small, the lender may prefer to fund all of the projects and take collateral over all of the projects to secure all of the debt. In fact, the lender may insist on using its standard form documents, rather than prepare a custom-drafted financing agreement, even though its standard forms may be ill-suited for project finance.

SOLAR POWER REGULATORY ISSUES

• Competitive bidding
• Environmental impact approval
• Acquisition of land/building access
• Grid connection and sale of power
• Local government project approvals
• BOE monitoring of construction
• Other project-specific issues

Above is a list of some of the key regulatory issues that need to be addressed in most or all Taiwan solar energy projects. These issues aren’t listed in chronological order. The chronology for a particular project is usually longer and more convoluted than this simple list suggests because preliminary approvals from one authority are frequently prerequisites for approvals from another authority. Thus, an investor often needs to zig-zag back and forth among the various authorities that share jurisdiction over different aspects of a solar energy project. There isn’t a single “window” that handles all solar project government filings. Even worse for an investor, many of the approvals have expiration dates. Some can be renewed as necessary, but others need to be “used” to complete some subsequent step in the application process before they expire. Thus, an investor must keep in mind various mandatory time limits throughout the regulatory approval process.

Competitive Bidding

First, a solar project to be built on government land or the rooftop of a government building typically begins with a government-issued request for proposals. Such an RFP typically requires bidders to submit their plans and bids within very short periods of time. The terms and conditions spelled out in the RFP are normally not subject to negotiation. A bidder normally identifies the peak capacity of the project it proposes to build and the percentage of its revenue it proposes to pay to the government owner of the land or building. In many or most cases, the winning bidder is the bidder offering to pay the most rent to the government land or building owner. Thus, the bid is a function of both peak capacity and rental rate. A losing bidder legally may file a bid protest, but protests are not common. And of course, there is no competitive bidding if the land or building is privately-owned.

Environmental Impact Approval

Second, Taiwan’s Environmental Protection Administration requires a detailed environmental impact assessment if a solar project is to be built on protected wetlands. EIA can be an expensive, time-consuming, and ultimately unpredictable process. In many situations, an investor may be well-advised to abandon a site and search for an alternative if it discovers that EIA approval will be required.

Access to Land/Building

Third, acquisition of access to a project site land or building can be challenging. The process of acquiring legal access to a project site depends on whether the land or building is owned by the Taiwan government or one or more private owners. If the property is owned by the government, it normally is administered by the National Property Administration. In this situation, an investor must obtain a consent letter from the NPA early in the regulatory process. Much later in the process, after the Bureau of Energy has issued an establishment permit for the project, the investor and the NPA must enter into a standard form administrative contract. The investor must post a bond with the NPA both at the time it obtains the initial consent letter and at the time it signs the administrative contract.

One of the major headaches an investor can face in the acquisition of access to government land is the possible presence of tenants or squatters on the land. The NPA may have signed formal leases with some occupiers of the land, and other occupiers may have acquired a statutory right to remain on the land based on the duration of their occupation and other factors. In such situations, it is the responsibility of the investor, not the NPA, to negotiate with the tenants and squatters to terminate their leases, waive their statutory rights, and leave the land. In fact, the NPA may not even willingly share what it knows about the occupiers on the land or the duration of their occupation. The investor may be completely on its own to deal with third-party occupiers.

Access to a privately owned project site is simpler in theory, but not always in practice. In some situations, it may be feasible for an investor to buy the land or building where the project is to be built. More often, though, the investor prefers to preserve capital and lease the project site instead. Unfortunately, an investor planning to lease a project site may need to sign leases with many owners. Under Taiwan law, a building may be owned by someone other than the owner of the underlying land, and there are differences in the rights of a building owner to use the land to access the building. To add to this complication, land may be divided into small plots, with different plots owned by different members of the same family, or a particular family member may have informal control over all of the family’s land even if he or she is not the registered owner.

Similarly, rooftop access may be shared by all owners of the individual condominium units in a building. Some owners may be happy to lease their property to a rooftop solar project investor, while other owners may be opposed in principle or may hold out for more money. Thus, an investor may need to begin making payments to some owners, not knowing if or when other owners will agree to a lease. And finally, after the investor has signed all necessary leases, a risk still exists that a prior mortgagee could ask a court to terminate the leases as part of a mortgage foreclosure proceeding.

Grid Connection and Sale of Power

A fourth possible set of issues can arise from grid connection and the sale of power. These issues involve the project company’s relationship with Taipower. Grid connection may or may not be a major issue, depending on the proximity of the project to Taipower’s grid and the grid’s capacity at the connection point. If adequate Taipower facilities are already in place, grid connection may not be an issue. On the other hand, if Taipower needs to construct additional facilities to connect the project to the grid, the project company may face uncertainty as to when connection will really be feasible, and Taipower does not offer capacity payments.

In the future, it will be increasingly likely that solar project companies will enter into direct power sale agreements with large private power users, instead of selling their output to Taipower. These direct sale agreements necessarily include an integrated set of three additional agreements with Taipower, a wheeling contract under which Taipower delivers electricity from the solar project to the end user, a supply agreement under which Taipower buys any power the project produces in excess of the user’s requirements, and a residual power purchase agreement under which the user buys from Taipower any electricity the project cannot supply.

If the project company doesn’t enter into a power sale agreement with a private end user, it normally enters into Taipower’s standard form PPA, agreeing to sell all its energy output to Taipower in exchange for payment of the relevant feed-in tariff. However, solar energy tariffs are adjusted downward every six months, and a project’s FIT isn’t locked in until construction has been completed and the project is to be connected to Taipower’s grid. This can create a challenge for financing solar energy projects. Investors and lenders must commit most of their funds before construction begins. At that time, the applicable FIT, and therefore the project’s 20-year revenue stream, remains uncertain. Investors and lenders can do their best to estimate when a project will be completed, but any delay in construction, for whatever reason, can translate into a lower FIT, and jeopardize the project’s revenue potential.

Local Government Project Approvals

Fifth, a major challenge can be local government approvals. Local government authorities have jurisdiction over zoning and other land use considerations, but local authorities are often the place where neighbors, business associations, would-be suppliers and other third parties can make their political influence felt. Also, local government officials don’t always feel constrained by national government policy priorities, such as supporting the development of renewable energy. Thus, depending on the circumstances, it can be important, even essential, to persuade local officials that the local community will realize a tangible benefit from a proposed solar energy project.

BOE Monitoring of Construction

Regulatory issues also can relate to the Bureau of Energy. The BOE is responsible for issuing a project’s major permits and approvals, including an establishment permit, an equipment approval letter, a construction permit, and finally, when construction has been completed, the project’s electricity enterprise license. Essentially, the BOE’s responsibility is to make sure the investor’s plans make sense, that it will install appropriate equipment, that it is adequately financed, that it has obtained all the other approvals the project requires, and that it has the necessary technical staff to operate and maintain the project after it has been built.

Other Project-Specific Issues

Other steps in the regulatory process apply in some circumstances, but not others. Is the project to be built on coastal land, or in an urban planning area? If the land is agricultural, is it land suitable for farming or not? If the project site is a rooftop, is the structure legally licensed as a building, or is it just an illegal construction? All these questions matter, and in a specific case they can change or supplement the general regulatory framework outlined above.

CONCLUSION

The Taiwan government has recently launched a program to combine solar energy production with aquaculture, that is, fish farming. In general, farming, including fish farming, may only be conducted by properly licensed Taiwan nationals. Foreign investment in farming is prohibited. However, in six locations in Taiwan, a solar energy investor, including a foreign investor, may now enter into a cooperative arrangement with a fish farmer. Up to 40% of the farm’s fishponds can be covered by solar panels as long as the fish production remains at least 70% of its historic average. The program is new, and there are still some unanswered questions, such as what happens if there is a sudden shortfall in fish production for reasons having nothing to do with the solar facility, or what happens if the farmer retires or passes away. Nonetheless, it is a sign that the Taiwan government remains committed to solar energy and may even bring a bit of creativity to its efforts to encourage the further expansion of the industry.1

1 This article is adapted from a presentation with the same name delivered at a webinar organized by Neoventure Corporation on 28 October 2021

By Paul J. CASSINGHAM, Eiger, Taiwan, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact taiwan@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom