Demystifying Hybrid Clean Power Generation Projects

Demystifying Hybrid Clean Power Generation Projects

Hybrid generation projects are becoming an increasing feature of the clean energy transition, so we asked Kevin Ryan, Senior Director Investments in NTR for his insights on what they are and key considerations for successfully investing in them.

Firstly, can you tell us what are hybrid projects? What is the difference between hybrid and collocated projects?

Hybrid and collocated projects comprise a combination of generation or generation and storage in one location. They will both typically benefit from sharing a certain amount of balance of plant or grid costs. They key difference is that collocated projects are not operationally connected. They comprise separate technologies operating independently beside each other, more often than not benefitting from different revenue lines or supports, while hybrid projects would have one point of grid connection – what is known as “behind the meter” – and would be operationally connected. For example, a solar project that both feeds the grid directly and feeds a battery and vice versa.

Why are hybrid projects becoming more prevalent?

There is still considerable amount of investment going into building self-standing generation or storage projects. But it is correct that hybrid projects are gaining traction as the level of clean power penetration on the grid increases.

Grid is increasingly a scarce resource to secure and it is one of the larger aspects of a project’s capex. By adding a second revenue source to one project, you are optimising the efficiently of a grid connection.  If, for example, a wind project is exporting on average 30% of its grid capacity, by adding another generating technology, or battery, you have the opportunity to export more on average over the available grid capacity, for example up to 50%.

Secondly, hybrid projects can help optimise revenues and reduce volatility of those revenues. Hybrid projects are advancing as a concept in countries where there are no subsidies such as in the Nordics or Spain in particular, places where the economic case for stand-alone generation has become more difficult because power prices have been low. Adding other technologies to the same point of connection can help increase your revenue potential.

Another aspect of the revenue uplift is that a hybrid project has the potential to offer power better shaped to the profile of the needs of the market or individual customers and as a result get paid more for that service. For example, with a combination of technologies, or a mix of generating technologies and battery, you can shape the profile of the power output to higher demand. You can also hold on to your power at times of slower demand when, for example, the market is experiencing negative prices, to release at times of higher demand and reduce price volatility.

This same ability to shift power to times when needed can also be of value in markets with rising grid curtailment. This wouldn’t be the primary reason for hybridising a project, but is certainly an added benefit.

So what are the key factors that determine the commercial feasibility of hybrid projects?

When we look at their commercial feasibility, we consider a number of factors in the underlying economics.

Firstly, we look at the size of the project. The overall size as well as the sizing mix of the generating technology and a battery. If the project is smaller than 30MW, for example, it won’t be worthwhile, given the complexities involved.

Secondly, we check to see how much available import capacity called “MIC”, is available. For example, if you are retrofitting batteries, most projects will in reality have very little extra import capacity left over and may have to seek more from the grid operator. Getting the right mix of size between the two technologies is also critical. How much of the grid connection will be used for the import needs of the battery can have an impact on available export capacity for the clean power generation.

Batteries can be more equity intensive than solar, for example, and you want to have the right mix between how much capital you have in your generation versus how much capital you have invested in your battery. While batteries take up a smaller footprint on the site, we find that in terms of capacity sizing, we’d be aiming for between half and two-thirds of the capex to be in the generation asset to optimise the economic value.

A fundamental aspect of the business case is whether the battery case stands up on its own merit. Is the battery market and the revenues and the regime itself for operating batteries, relatively attractive? Are ancillary services paid for? Are power prices sufficiently volatile to support attractive bid ask spreads? If you’re starting from a better position on the battery itself, clearly it helps the hybrid project.

Are there regulatory factors to take into account?

Yes. One of our first questions is whether, in the particular jurisdiction, batteries are actually allowed share the grid connection?  For instance, in some markets, batteries are not permitted to charge from the same connection as an exporting generating technology and if the battery is only allowed charge from the generating technology with which it shares the connection, the business case is reduced. The battery doesn’t have true flexibity and therefore it won’t get access to the full revenue potential.

Then, we consider how the project will work alongside or interfere with an existing subsidy. The rules of most generation support schemes were developed specifically to deal with single generation to have it as transparent as possible in order to be fair to the taxpayer. They weren’t designed for flexible generation in mind so you have a very evolving situation.

It can also add more complexity for grid operators because essentially they are ceding some control around imports. They really have to think through whether giving up on some import capacity, will they be getting better stability in the system.

We see varying degrees of restrictions being put on import capacity across different European jurisdictions.

What then would you consider to be the main technical complexities in hybridising projects?

It’s critical to get into the details on metering and measuring power flows. Consider metering on a single generation side where you have a single point connection.  Typically, the electrons are principally flowing out onto the grid. In a hybrid project, you might have two or three technologies in play with multiple meters. You may have a meter at the solar farm with another meter at the battery and the final one at the point of connection, like a triangle. You need to measure the power inflows and outflows between each of the project technologies and the grid and then between the technologies within the project.

From a revenue point of view, the flows need to be captured and optimised and the merit order needs to be clearly spelt out. You may have a PPA in place with specific obligations and at the same time, you might want to be optimising the time-shifting capabilities of the battery. You need to have the right systems in place for compliance that all is done correctly.  And to do this, the grid companies themselves need to lay out a hybrid grid code to take the different flows and rules sets into account for things like grid forming capability, additional reactive power.

Commissioning of a hybrid project is also more complex. You are commissioning the separate technologies and you are also commissioning how they interact together and in turn how they interact with the grid. The grid operators will be setting higher standards than for a more vanilla-type self-standing project. We have seen commissioning taking up to six months, because of this complexity and to be frank because everyone is learning about the dynamic interplays.

Which European markets would you consider to be emerging and which markets are mature for hybrid projects?

It’s mixed. In markets where there has been a greater need, such as markets with limited or no supports for clean power, or with significant penetration of renewables, hybridisation has moved a lot quicker. For example, the UK, Germany and parts of the Nordics. Spain is advancing quickly in the last 12 months too. We also note other countries catching up such as Italy and Ireland, as Ireland has quite high levels of grid curtailment.

In each case, the right regulatory frameworks are needed to allow for example batteries to both import and export and the grid operators have to progress their policies and testing regimes for grid compliance according to what role they want these projects to play.

How are hybrid projects viewed by debt providers? Is it possible to put debt into these projects?

Yes. We find that the banking community are very open to looking at banking hybrid projects, alongside a knowledgeable equity sponsor with the right technical and commercial experience. While the contractual arrangements between the inflows and outflows need to be bedded down, plainly speaking, what makes it easier for the banking community is the extent to which there is a high level of contracted revenue from the generating projects to anchor the finance and to what extent is priority given to the contracted revenues. And then secondly, what the size of the BESS project alongside the generation technology is another fundamental. The BESS gives upside but you’re not necessarily banking on that.

So, in summary, are hybrid projects here to stay?

Yes, very much so. We’ve seen the extent to which they have grown in Australia and Europe is rapidly catching up. European grid operators are advancing their thinking and technical capabilities to support hybrid projects with minimal restrictions and increasingly, regulatory impediments are being removed.

The key thing for project sponsors is to focus in particular on the contracts governing the operations and be very clear in terms of what comes first, second and so on in order of merit.  You will demystify and take away the complexity of the project by having a clear rule set and an experienced operator.