Co-location and hybrid projects to be a key part of the energy transition

Co-located or "hybrid" projects combining generation and energy storage assets have many benefits. These include providing greater system reliability, unlocking the value of curtailed energy and providing a firmer generation profile to the market, reducing reliance on coal and gas for firming and potentially delivering higher revenues to developers. It is perhaps for these reasons that that we are seeing an increasing number of hybrid projects under development. In some cases, projects are conceived as hybrid from development stage, whereas in other cases batteries are being staged with generation projects or retrofitted to existing generation projects.

In this article, we take a look at the advantages of hybrid projects, and some of the challenges that developers of hybrid projects may be facing in the market.

Advantages of co-location and hybrid projects

Economic viability of projects

Co-locating batteries with other energy generation sources, such as solar or wind farms, can reduce operational costs. By storing excess energy during periods of low demand or high renewable energy generation, batteries can be discharged during peak demand times, reducing reliance on more expensive power sources like peaker plants. This optimisation can lower overall operational costs for energy providers.

Energy price stability

The addition of batteries to a renewable generation asset level out the times where supply exceeds demand. From the point of view of a prospective investor in renewables, the certainty of supply and demand assists with forecasting future revenue rather than experiencing the highs and lows of Australia’s generation market; especially considering batteries have a maximum capacity, which when discharged at peak periods provide a certain 2-4 hours of consistent income each night. Securing offtake agreements for the appropriate prices during these peak periods will be crucial for a successful project.

Firming duration

The dominant renewable energy sources in Australia are solar and wind which, as we have recently seen on the east coast during a ‘wind drought’, can be inconsistent due to uncontrollable environmental conditions. Batteries allow the project to more consistently service the energy market during these periods.

Falling cost of batteries

Over the past 18 months battery prices have fallen approximately 23% as commodity prices fall and global supply increases. This cost decrease, combined with likely technological efficiencies to increase the ability of batteries to hold power for longer, will increase the economic viability of projects coupling batteries with a renewable generation asset.

NER changes facilitate hybrid projects

In the past, participants who wished to both export and import energy had to register both as a Generator and as a Customer. In June 2024 the AEMC completed a change to the National Electricity Rules to better integrate hybrid facilities and better recognise storage and connection points with bi-directional flows. This was done to facilitate a future market where hybrid systems play a bigger role in firming renewable energy. The changes included a new registration category of Integrated Resource Provider (IRP), which allows storage and hybrid projects to register and participate in a single category. Further aspects of the rule change include clarity for scheduling obligations that apply to different configurations of hybrid systems; including flexibility to choose whether the technologies are scheduled or semi-scheduled, enabling aggregators registered in the new category to provide market ancillary services from generation and load, and amending the framework to recover non-energy costs based on a participant's consumed and sent out energy over relevant intervals.

Increasing Government support

Hybrid projects combining co-located generation and energy storage assets owned by the same special purpose vehicle and using the same connection point are eligible to participate in the updated Capacity Investment Scheme (CIS). According to the CIS Tender 1 National Electricity Market Generation Guidelines released in May 2024, the process aims to accommodate multiple types of hybrid configurations, including novel hybrid configurations. The CIS design paper specifically states that hybrid projects may provide additional market benefits compared to a generation project and deliver higher expected revenues; and, accordingly, demonstrate a higher expected Financial Value against Merit Criterion 5, together with greater system reliability and benefits which would contribute favourably towards against Merit Criterion 1.

State Governments are also supportive of hybrid projects. In the recent NSW Government LTESA round, AEMO noted in respect of its award of an LTESA to the Maryvale Project that it was awarded a higher price as a hybrid project, noting that the plant effectively provides a firm generation profile to the market. This benefit to NSW electricity customers outweighed the higher cost in the MC1 assessment.

Challenges of co-located and hybrid projects

Complexity

Hybrid projects require careful consideration of staging, access and cumulative effects of co-location. Connecting to the grid in a timely manner requires close coordination and communication with regulators, however there remains the risk that grid connection works carried out by the grid operator may cause delays.

Compliance with Development Approvals

Compliance with Development Approval conditions may require significant management and resources. This is particularly the case for combined development approvals for BESS projects with generation projects. In some cases, these approvals (particularly where the approvals process predates the most recent legislative developments) will not make clear how the co-located projects are to be developed and staged, and whether they are dependent on each other or whether they can, if need be, be separately developed. There can also be challenges when separate developers are developing different aspects of the project (i.e. the generation v the storage), as there will need to be a significant amount of coordination, resource and risk sharing to work through on a practical and a contractual level.

Lengthier approvals processes

The battery component of a hybrid project in particular can lead to more noise complaints relative to a solar project, for example, particularly where built nearer to populations and in more population-dense regions.

In addition, larger scope of a hybrid project increases the risk of the project being determined to be a 'controlled action' under the EPBC Act. Such projects may need further time to obtain approvals and will require careful staging as assessment of impacts is undertaken through the relevant stage environmental assessment process.

Project delivery risks

The East Coast is experiencing an infrastructure and construction boom across all sectors. The market comprises fewer participants following the recent exit of several key players. Those that remain are unwilling to take a range of project delivery risks traditionally borne by EPC contractors. Engineering Procurement & Construction contracts entered into in relation to the project may experience delays as they are increasingly unlikely to be fully wrapped, and different suppliers may provide different components of the hybrid project. The disaggregated contracting structures means that developers and operators must accept risks under delivery contracts that were once accepted by the contractor market, for example, relating to grid connection, site conditions and separate contractor delay.

Increased scope for delays and cost-overruns

With more complex projects, there is greater scope for delays and cost-overruns, which may need to be managed by flexibility in debt finance or via additional equity injections.

Complex revenue structures

We are seeing increasingly innovative revenue structures, which combine government support under CISAs and LTESAs with more traditional PPA/BSA models. We are seeing increasingly a number of integrated PPA/BSA contracts. These are more complex than separate agreements in terms of pricing, risk allocation and delivery.

Financing

While hybrid and staged projects are understood in the financing market, financiers may have concerns about matters such as gaps in split contracting structures, ensuring the revenue contracts provide guaranteed revenue streams, ensuring offtakers have acceptable credit ratings, and ensuring appropriate hedging positions on offtake arrangements are in place to limit merchant exposure.

The bankability assessment of these issues depends in large part on thorough due diligence and a gap analysis underpinning the contract negotiations, along with the capability and experience of suppliers and contractors, contractor warranties and the nature and quality of the offtake arrangements. Financiers will require minimum performance and availability requirements in the offtake contract are backed by equivalent warranties from contractors.