Off-Grid

Solar-, Wind-Diesel Hybrid Plants at Remote Mines as a Target for Investors

Solar-, Wind-Diesel Hybrid Plants at Remote Mines as a Target for Investors

Recently, hybrid markets have gained momentum, especially for solar-diesel hybrid applications. Photovoltaic (PV)-diesel projects form a typical subgroup and combine PV plants with diesel generators. Clean and relatively inexpensive PV energy displaces dirty and expensive diesel electricity during the daytime. Diesel generators remain with two main functions: to balance the intermittencies from instable solar irradiation and to power the consumer during nighttime. If storage is included in the configuration, the renewable energy share can be increased considerably.

External investors have expressed a special interest in PV-diesel hybrid projects for the mining industry. The flagship project is JuWi’s 10.6 MWp (solar) project at Sandfire’s Degrussa Mine in Australia. The project is financed by Néoen, a renewable energy independent power producer with a background in grid-connected projects. Recently, a European renewable energy investor has started a fund for off-grid projects and is looking at building up a EUR 200 million to 400 million project pipeline for solar- and wind-diesel hybrid and storage projects.

More financial investors have discovered solar- and wind-diesel hybrid applications as an interesting investment target. Investors see the potential of high returns in hybrid projects. In the hybrid context, the price for solar or wind electricity is benchmarked against high diesel electricity prices – particularly valid for remote mines without grid-connection. That is why in comparison to grid-connected scenarios, hybrid projects allow for potentially higher margins. The business cases, however, are site specific, as prices for electricity from diesel depend largely on transport, taxes, theft and the efficiency of the diesel generators.

From the perspective of the external investor, there are also some downsides. Hybrid projects are more complex than grid connected projects. The power generation plant unit is directly coupled with the consumer, whereas in large grids individual generating and off-taking units of the size of the largest hybrid projects would completely lose their relevance in the mass. The one-to-one setup between generator and off-taker requires higher reliability levels. In the end, the investor, as the owner of the power plants, has to deal with the risk of production losses due to power failure.

In that context, the attention also has to be drawn to the off-taker risk. When the location of the hybrid project is remote, the potential return is better. At the same time, the off-taker risk rises. In remote locations the electricity cannot be easily sold to other industrial off-takers. The solution then normally is to dismantle, move and rebuild the plant. Various companies have developed redeployable, mobile concepts for solar plants. Normally, these solutions are suited best for small- and medium-sized loads, such as the exploration phase in mining.

Due to high transaction costs for financing, investors are above all interested larger projects. The special attraction of mines is that they combine high loads, respectively electricity consumption, at remote locations with good credit ratings of mining companies. The traditional finance sector considers mining companies as particularly reliable partners. It is no surprise that the external investors try to transfer the off-taking risk from the individual mine to the mining group.

In general, the risks can be reduced from the investor’s perspective by investing in a portfolio of hybrid projects – especially if the portfolios differs regarding country, industry, industrial segment – such as different resources in mining – and company on the off-taker’s side. On the technology side, additional risk mitigation is possible by investing in different installation types, such as wind or solar and different plant components.

In comparison to grid-connected projects, some of the risks are even smaller in hybrid projects. In remote locations, the future value of electricity from renewable energy plants fully depends on the price for electricity from diesel. Considerations about the development of the energy system and the future value of solar and wind power in case that renewable energy gains even more importance do not play an important role for evaluating the business case of hybrid projects.

Hybrid projects are normally more complex than grid-connected solar or wind projects. This complexity, however, is rewarded with potentially higher returns. That potential adds to the fact that off-grid solar- and wind-diesel projects are normally profitable without any governmental incentives or subsidies.

On the project finance side, we see a repaid development that suggests that external funding will not be a major bottleneck for hybrid projects in the near future, especially not applications in locations with a low country risk. At the forefront of this development we see renewable energy investors who are experienced in solar and wind projects. That investor type will assess the technology risks of solar and wind adequately low, which leads to a realistic overall evaluation of the hybrid projects.

The study “Solar-diesel-hybrid power plants at mines: Opportunities for external investors” can be downloaded at th-energy.net.

Lead image: Giant Ore Truck at Copper Mine. Credit: Shutterstock.