Comparison of local content requirements for offshore wind power: Case studies from Taiwan, Japan, South Korea, and the United States

Among all governments' attempts to develop local industry chains while driving energy transition, the local content requirement (LCR) is the most commonly used policy instrument, which encourages firms to use local inputs or produce goods domestically. Although economists have criticized the LCR as distorting competition, raising electricity prices and investment risks, it has been adopted by governments for its ability to foster a nascent industry, bring jobs, and increase public support for renewable energy.

Related article: Taiwan finalizes directions of IRP policy for offshore wind energy zonal development

The renewable energy industry is witnessing the growing popularity of LCRs. According to the Organisation for Economic Co-operation and Development (OECD) and the Peterson Institute for International Economics (PIIE), the number of solar and wind energy markets implementing LCRs has increased from four in 2000 to 31 in 2021 [1], including major offshore wind players such as the U.K., Japan, Taiwan, South Korea, and the U.S. However, there was also controversy over the implementation of LCRs. A case in point is the discord between the U.K. and the EU. The U.K.'s requirement for 60% localization of bidding projects in 2021, where violators could be fined or must withdraw from the Contract for Difference (CfD), led the EU to appeal to the World Trade Organization (WTO) in March 2022, accusing the U.K. of violating the WTO's national treatment principle. The lawsuit was suspended after the U.K. amended the rules for the fourth and fifth rounds of CfD tenders in July of the same year to discontinue the LCR. This article will overview the LCR regulations in Taiwan, Japan, South Korea, and the U.S., followed by a comparison of possible violation for WTO regulations, implementation approaches, incentives, covered projects, and derived costs.
 

LCR regulations in Japan, South Korea, and the United States

Japan: Small share of LCR in score rating
Japan announced the official bidding rules for wind farms in Akita, Niigata, and Nagasaki prefectures in December 2022, with a total score of 240 points, including 120 points for supply prices with a floor of 3 yen/kWh, 120 points for wind farm construction capabilities, 80 points for project implementation capabilities, and 40 points for local contribution.Within the local contribution project, the "regional economic spin-off effect" and "domestic economic spin-off effect," each with 10 points, fall under the LCR as assessments of external benefits of wind farm development on the regional and domestic economy. The score for "regional economic spin-off effect" is determined by the prefectural governor, which is based on a ranking system consisting of Top Runner (100%), Excellent Runner (75%), Middle Runner (50%), Satisfactory (25%), Minimum Level (0%) and Fail (disqualified from bidding).
 

South Korea: Wind turbines as the focus
At the end of December 2021, the Korean New and Renewable Energy Center (KNREC) revised the calculation method of renewable energy certificates (RECs) for offshore wind power and introduced LCR regulations. Since South Korea has a competitive manufacturing capacity for submarine cables, substations, and ships, the LCRs focus on wind turbine construction. The total score is based on the cost structure of the wind turbine, with a total of 100 points, including 36.4 points for the nacelle (subdivided into nacelle assembly, gearbox, generator, etc.), 14.3 points for the blade, 12.7 points for the tower, 30 points for the underwater foundation, and 6.6 points for the cables. If the total score exceeds 50 points, additional REC weighting will be granted.
 

United States: Targeting the share of wind farm construction cost and marine engineering
The Jones Act and the Inflation Reduction Act (IRA) in the U.S. include provisions related to the LCRs. The Jones Act allows only U.S.-built, owned, and operated vessels to carry passengers or transport cargo in U.S. ports and coastal areas. Foreign wind turbine installation vessels wishing to operate in the U.S. must travel from a foreign port to the wind farm and must not carry any cargo or wind turbine components with them; parts must be transported from the port to the wind farm by a Jones Act-compliant vessel and then transferred to a foreign installation vessel for operation. This regulation has greatly affected the wind farm construction process and forced developers to consider using U.S.-built jack-up vessels that cost about US$500 million, much higher than foreign prices.

Under the IRA, developers are entitled to a 10% Investment Tax Credit (ITC) if the local content share of a wind farm's construction costs complies with the LCRs and that the wage and apprenticeship regulations are satisfied. The share requirement of LCR varies depending on the project start date, with 20% for projects beginning by the end of 2024 and increasing to 35%, 45%, and 55% for projects starting by the end of 2025, 2026, and 2027, respectively. The U.S. Treasury will grant a subsidy if the wind farm construction cost increases by 25% or more due to the LCRs or the necessary materials in the U.S. are unavailable or undesirable in quality or quantity.
 

Comparison of LCRs in different countries

1. Likelihood of violating WTO regulations: Except for Japan where regulations are ambiguous, Taiwan, South Korea, and the U.S. are all at risk of violating WTO regulations. Taiwan's Directions of Industrial Relevance Program Policy for Offshore Wind Zonal Development requires wind farms to use a certain proportion of locally manufactured components, which puts foreign component manufacturers at a disadvantage and may violate the WTO's national treatment principle, similar to the formerly mentioned example of the lawsuit against the U.K. by the EU. On the other hand, the U.S. Jones Act was established before the U.S. became a party to the General Agreement on Tariffs and Trade (GATT 1947) and therefore enjoys an exemption.The potential sites such as Taiwan, the U.S., and South Korea offer economic benefits to developers through indirect subsidies (Taiwan's feed-in tariff, U.S. ITC, and South Korea's REC weighting) and share the profits to local manufacturers or attract foreign manufacturers to transfer their technology to promote the development of local industries through the market mechanism, which may violate the Agreement on Subsidies and Countervailing Measures (SCM) in terms of import substitution subsidies . For instance, the EU claimed in late 2022 that it may file a lawsuit against the U.S. with the WTO due to potential undermining of fair competition under the IRA.                                                                                                                      
2. Government promotion of LCRs: Both Taiwan and Japan, which are in the zonal development phase, adopt punitive approaches to LCR implementation. Players will be disqualified from bidding for wind farms if they do not fulfill the LCRs in Taiwan, namely the target share of their domestic key projects is not achieved with 10 points added; or if they are judged as "Fail" in terms of local and national economic contribution in Japan. These two countries offer no economic incentives other than a greater chance for players reaching higher share to qualify for wind farm development. In contrast, LCRs are considered non-mandatory in South Korea and the U.S., both offering incentives such as more ITC or REC weighting to those who fulfill the LCR, with no penalty or impact on bid eligibility for those who fail to do so.                                                                                                                                                                                                                         
3. Projects covered by LCRs and the target shares: Taiwan’s LCR covers 25 key projects in five categories: power facilities, underwater foundations, wind turbine components, marine engineering, and industrial design. The first three categories are required to reach 60% of the applied capacity, while maritime engineering services should prioritize domestic demand, with more than ten points added. On the other hand, instead of requiring localization of specific components, the U.S. mandates a certain share of construction costs for wind farms from domestic sources. The share requirement depends on the time wind farm construction begins, with 20% required by the end of 2024 and 55% required by 2027 and beyond. In contrast, LCR regulations in Korea and Japan are less stringent than those in Taiwan and the U.S., with Korea requiring only about 50% of the total cost of a wind turbine and Japan having no specific regulations.                                  
4. Potential additional costs to fulfill LCRs: Considering the projects to be realized, share requirements, and availability of subsidies, Taiwan's additional costs are likely to be the highest, followed by the U.S., where subsidies are available, but the local offshore wind industrial chain is not yet complete and operating costs are increased subject to the Jones Act. South Korea, on the other hand, has the lowest LCR-derived additional costs due to its competitiveness in underwater foundations, towers, and cables, with a total score of 49.3. Furthermore, establishing component manufacturing plants in the country is compliant with the regulations, which has also led to lower additional costs for LCRs. The additional costs derived from the LCRs of Japan remain unknown as there is no government regulations in place.

The above suggests that there are trade-offs in the implementation of the LCRs, where the government must choose between fostering specific industries, incurring unnecessary losses in the market, and incurring administrative costs. Taiwan's clear and strict LCRs are likely to increase development costs, while they also enable the government to allocate resources to specific industries and track their development. Conversely, the U.S. regulations on the total cost allow the market to determine which industries are suitable for development in the country. While this approach reduces market distortions, the government must spend more administrative resources to evaluate the construction cost of each wind farm and monitor the source of each component and the capital flow of developers. 

The LCRs will inevitably affect the attractiveness of the market and pass on additional costs to consumers. In addition, the global market environment is continuously evolving, especially after the U.S.’ IRA kicked off the subsidy race, which re-ranks the attractiveness of the markets. As a result, policy makers should keep an eye on the market dynamics and maintain flexibility to make appropriate and timely decisions.


[1] Megan Hogan. (2022). Local content requirements threaten renewable energy uptake, PIIE, https://www.piie.com/blogs/trade-and-investment-policy-watch/local-content-requirements-threaten-renewable-energy-uptake