Replacing Diesel Generation with Hybrid Renewable Energy Plants

What players are emerging to transform the fleet of off-grid diesel power plants in developing countries? This year’s Finance for Resilience winners at the Bloomberg New Energy Finance Future of Energy Summit included Global Renewable Independent Power Supplier (GRIPS). GRIPS seeks to connect large off-takers with investors through an innovative, market-based approach. According to Alexander Voigt, CEO of GRIPS, the startup will replace captive diesel generation with hybrid renewable power plants in places with nonexistent or unstable grid connections. While the plants will still employ diesel for backup, the bulk of the power will be provided by wind or solar in combination with battery storage.

GRIPS will finance and operate the plants, selling clean energy directly to commercial and industrial energy consumers worldwide and across all sectors. Voigt said that benefits include off-grid economic development, reduced emissions, and the potential to provide clean and reliable power to communities surrounding the off-takers.

Initially financed by a mix of public and private funding, GRIPS intends to aggregate projects into a balanced, diversified portfolio that offers attractive returns to a broad range of investors.

In this interview, Arvid Seeberg-Elverfeldt, CFO at GRIPS, shares his perspective on the organization’s implementation strategy.

CEFF: What is the scale of the opportunity for GRIPS?

Seeberg-Elverfeldt: Globally, there are at least 150 GW of continuously-running off-grid diesel generators with an annual growth rate of 5-10 percent. Some estimates show that the market may actually be closer to 300 GW, so GRIPS’ estimate of 150 GW is quite conservative.

It would be very surprising if nobody in the world came up with a concept to transform this vast renewable energy potential into something tangible. The market is going to develop; it has to develop when you look at the market size.

CEFF: What industries are you evaluating for pilot projects?

Seeberg-Elverfeldt: Examples of potential industries include food processing, paper and pulp, textiles, mining and tourism. One key criterion for making GRIPS generation projects economical is selecting off-takers whose operations require power on a continuous, year-round basis. Cyclical industries are not a good fit for the GRIPS model.

CEFF: What will be the average size of a GRIPS hybrid power plant?

Seeberg-Elverfeldt: The sweet-spot that we have identified for an off-taker would be about 20 GWh per year. If the only renewable source used in the hybrid power plant was solar photovoltaic, this would translate into a renewable capacity of approximately 8-14 megawatts plus storage and conventional generators. But we are also looking at smaller projects.  The biggest challenge when constructing an off-grid generating facility is to carefully match the capacity to the off-taker’s load curve.

CEFF: In what global regions will you focus your efforts?

Seeberg-Elverfeldt: We want to decouple reliable energy generation from the availability of a stable grid connection. Sub-Saharan Africa is promising because of the very low quality of the public electricity grids. We are also looking at Southeast Asia, Asia (more generally), and Latin America. Island nations worldwide also hold great potential, as do some European islands, specifically in Portugal and Greece.

Countries that have a very large geographic extent, such Canada, may also fit our model because there are vast areas that do not have grid coverage but do have economic activity – for example, mining operations.

CEFF: We have read that GRIPS proposes to fund its projects with 100 percent equity, employing 5-year power purchase agreements (PPAs) as opposed to the longer PPA terms that are common in the industry. Why have you adopted this strategy?

Seeberg-Elverfeldt: We do offer long-running PPAs but many of our potential off-takers (for example, the manager of an industrial plant in Sub-Saharan Africa) may not be in positions to sign a 20 year-long PPA. So, we want to give them the option to sign shorter ones with an initial term of around five years. This typically does not work with debt-financing because debt holders want a guaranteed source of income for 15 or 20 years. All-equity financing will allow us to offer shorter-term PPAs and to enlarge our pool of potential customers.

Another reason is that in many of these countries, debt financing is either not available at all, or is extremely uneconomic. That said, our five-year shorter-term PPAs will be structured toward renewal by the off-taker with the opportunity for renegotiation. This has its benefits for the customer in terms of business planning – and it gives both sides the flexibility to re-price the contract, for instance based on changes in fossil-fuel prices.

CEFF: How do you propose to control currency risk? Will you seek PPAs in stable currencies such as USD or Euros?

Seeberg-Elverfeldt: [Using] United States dollar-denominated contracts is the typical approach in such cases. This is often the easiest method in many countries. For contracts denominated in local currencies, inflation indexing is very common.

Of course, there is also the remaining currency risk. Creating a diversified portfolio of non-Euro, non-USD currency projects is one way to handle a very large part of that risk. We are also considering hedging, but this is very expensive for less-liquid currencies.

Additionally, the Currency Exchange Fund (TCX) provides mechanisms to handle currency risk for less-liquid currencies. We expect that further instruments will be developed. GRIPS will be looking at these, depending on project location. Ultimately, if there is a currency that we are not comfortable with and that cannot be hedged at reasonable terms, we will choose not to pursue the project.

CEFF: What other risks are you thinking about?

Seeberg-Elverfeldt: Renewables are still evolving – and that’s great, because costs continue to come down, but the technology is actually one of the smallest risks. The real risks are country risk, counterparty risk, and the perception of risk itself. Since many large investors are not familiar with areas like Sub-Saharan Africa, they may be overly cautious in doing business in these regions.

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