WEBVTT 1 00:00:00.440 --> 00:00:07.000 You're listening to Redefining Energy. Your co hosts from Berlin, Gerard Raid and 2 00:00:07.160 --> 00:00:13.560 from London, Lawrence segalem. Today on Redefining Energy, Jard, we took 3 00:00:13.599 --> 00:00:19.199 about one of your favorite subject, the power markets. I love prices that 4 00:00:19.280 --> 00:00:21.280 go up and down, you know, it just excites me. It's the 5 00:00:21.359 --> 00:00:24.839 volatility. Laurent has been so great the last year and a half. It's 6 00:00:24.879 --> 00:00:28.839 just been amazing, you know. But first a world from our partner. 7 00:00:29.199 --> 00:00:34.719 It kind of Capital is a sustainable investment and asset development company headquartered in Hamburg 8 00:00:34.759 --> 00:00:38.399 in Germany. It could a capital invest in real assets and clean energy and 9 00:00:38.479 --> 00:00:42.880 sustainable infrastructure on behalf of its clients. Yes, yeah, it has been 10 00:00:42.880 --> 00:00:48.719 amazing for you, but not for regulators and governments who would like to intervene, 11 00:00:49.159 --> 00:00:53.960 like to reform the markets. And I think it was probably time for 12 00:00:54.039 --> 00:00:58.719 us to do an episode on what are the power markets? Do they need 13 00:00:58.799 --> 00:01:02.840 to be reformed? With other problems? Yeah, I agree with you. 14 00:01:02.880 --> 00:01:07.480 It's been a whilcoming this podcast. So when you see the prices we witness, 15 00:01:07.560 --> 00:01:12.519 whether it was in the US after the tempest Urine takes us, or 16 00:01:14.000 --> 00:01:19.040 of course in Europe the Russian invasion of Ukraine and the consequences on the energy 17 00:01:19.079 --> 00:01:26.840 prices. We have had such a creativity from regulators and politicians to change the 18 00:01:27.239 --> 00:01:33.879 gap. That incredible inventivity. But are they going to destroy the market by 19 00:01:33.879 --> 00:01:37.519 trying to reform it? What you've said is very important because you talked about 20 00:01:37.560 --> 00:01:41.599 the creativity, and actually I think what saved us, Lauran has been the 21 00:01:41.599 --> 00:01:45.799 creativity of the market participants, and the market has worked. We've had no 22 00:01:45.920 --> 00:01:49.799 brownout blackouts, you just think in terms of gas or the chaos we talked 23 00:01:49.799 --> 00:01:56.040 in around that our energy markets have actually worked. However, obviously there's the 24 00:01:56.079 --> 00:02:00.879 market has been very stressed, but I would take a view that this stresses 25 00:02:00.040 --> 00:02:05.799 they were coming anyway because the whole intermittent renewables in the system was causing that. 26 00:02:06.079 --> 00:02:08.759 So the whole result of all of this is that it's just well, 27 00:02:08.919 --> 00:02:13.360 actually, rather than me talk about it, let's go and bring someone in 28 00:02:13.560 --> 00:02:17.479 who actually really knows what they're talking about. Right spoiler Alloert for our listeners. 29 00:02:19.000 --> 00:02:23.360 Very geeky episode, Very geeky. Sometimes it's great to be geeky. 30 00:02:23.439 --> 00:02:28.319 So we're going to get a real expert on rather than myself from Iron just 31 00:02:28.360 --> 00:02:30.439 talking about the markets. We wanted to have someone on that we can have 32 00:02:30.479 --> 00:02:38.599 a great conversation and answer. We took Stephen Woodhouse, who really is consultant 33 00:02:38.039 --> 00:02:44.759 globally in and around power market design and what country shouldn't shouldn't do. Stephen 34 00:02:44.879 --> 00:02:50.800 is a jorector at a free management consulting Yes, twenty five years of experience 35 00:02:50.879 --> 00:02:54.960 in the electricity business and he heads a free global work on the energy market 36 00:02:55.000 --> 00:03:01.280 design. Is really the perfect guest to talk about the conundrum of the power 37 00:03:01.400 --> 00:03:06.439 markets. Well, let's bring them on. Roun Steve really, thank you 38 00:03:06.520 --> 00:03:07.919 very much for coming on the show. Thank you, Gerard, it's a 39 00:03:07.919 --> 00:03:10.879 while since we've spoken. I mean, what we're here to do is to 40 00:03:10.919 --> 00:03:16.599 talk about the whole role of the power markets in the electrical system, and 41 00:03:16.639 --> 00:03:20.400 also that we'd love to hear your thoughts going forward and just how you see 42 00:03:20.439 --> 00:03:23.479 the future of them. You know, people just probably having a clue what 43 00:03:23.520 --> 00:03:25.960 the power markets are because most people just go on by electricity and they get 44 00:03:25.960 --> 00:03:30.039 it from the local utility. So when they think of power markets, it's 45 00:03:30.080 --> 00:03:32.199 something probably theoretical and far away from them. So maybe you could just start 46 00:03:32.199 --> 00:03:37.000 by talking a little bit about what power markets are and what role they have 47 00:03:37.120 --> 00:03:43.560 in our energy system. For decades, governments organized power like they organized roads, 48 00:03:44.159 --> 00:03:50.800 and governments were responsible for investment decisions. They had agencies and operators who 49 00:03:50.800 --> 00:03:55.599 were responsible for deciding how to use the infrastructure, and like most nationalized industries, 50 00:03:57.120 --> 00:04:00.599 on the one hand, it got pretty inefficient because they weren't any good 51 00:04:00.639 --> 00:04:03.719 incentives on anybody to do things efficiently. And on the other hand, the 52 00:04:03.800 --> 00:04:09.039 government they're not very good at taking long term decisions. They're best at taking 53 00:04:09.080 --> 00:04:14.240 short term decisions. So for a variety of reasons, the kind of consensus 54 00:04:14.400 --> 00:04:20.079 in most Western thinking countries was that we needed to bring markets into power rather 55 00:04:20.160 --> 00:04:27.240 than do it all through government dictat And we started off in a world most 56 00:04:27.360 --> 00:04:31.800 countries liberalized their power markets when they've already got enough infrastructure, so the market's 57 00:04:31.839 --> 00:04:36.279 job is really to use the infrastructure efficiently. And we kind of dabbled in 58 00:04:36.319 --> 00:04:41.519 a world where the market gives the incentives to build new infrastructure, at least 59 00:04:41.519 --> 00:04:45.680 for power generation. And that worked in a lot of places quite well for 60 00:04:45.800 --> 00:04:49.959 quite a long time. But it stopped working well in a lot of places, 61 00:04:50.480 --> 00:04:55.639 particularly when the government started taking views on what they thought the right generation 62 00:04:55.759 --> 00:05:00.959 mix should be and how green and how renewable and how carbon it should be. 63 00:05:00.399 --> 00:05:05.399 And we've started interfering in the natural kind of investment. And markets are 64 00:05:05.480 --> 00:05:10.120 quite good at investing in the same old stuff again and again because it's low 65 00:05:10.199 --> 00:05:15.879 risk. Markets are not great at breaking boundaries on investment into completely new areas. 66 00:05:15.399 --> 00:05:21.639 So we've moved the scale back towards government intervention on investment and it's changing 67 00:05:21.680 --> 00:05:27.279 things quite radically as we moved to a lower carbon system. Stephen, before 68 00:05:27.319 --> 00:05:31.959 we dive in the problem we're seeing now. What you're saying is those markets 69 00:05:32.079 --> 00:05:41.040 which have been around for set thirty years have delivered the price signal necessary for 70 00:05:41.439 --> 00:05:46.040 an optimizing the generation. So that's the famous merit order, and the second 71 00:05:46.279 --> 00:05:51.600 is also delivering price signals for investment. But as I see it, there 72 00:05:51.639 --> 00:05:58.079 are different power markets around the world. So we've got continentally your Scandinavia, 73 00:05:58.279 --> 00:06:02.879 the UK probably be different front and then in the US with PGMO CASO. 74 00:06:03.480 --> 00:06:08.360 I guess these other means, can you explain a bit what is similar to 75 00:06:08.600 --> 00:06:14.319 all those main markets and what is different If you were to categorize power markets, 76 00:06:14.360 --> 00:06:18.439 there are probably some dimensions. You would look at one of them is 77 00:06:18.519 --> 00:06:27.120 whether the markets are centrally dispatched or whether the dispatch is decentralized, and everything 78 00:06:27.439 --> 00:06:31.360 in the end is a hybrid. But virtually all of the European market designs 79 00:06:31.560 --> 00:06:39.120 basically have price incentives, continuous markets through the day, and people dispatch their 80 00:06:39.160 --> 00:06:44.319 assets relative to the markets and the market prices, and they take decisions for 81 00:06:44.360 --> 00:06:49.839 themselves about how they operate those assets, whereas most of the liberalized American markets, 82 00:06:50.000 --> 00:06:53.800 and this is true in Asia and some other places as well, have 83 00:06:54.040 --> 00:06:59.680 central dispatch. In fact, Ireland is a similar model where the generators submit 84 00:06:59.720 --> 00:07:02.600 all of their parameters to the market operator and they get told what to do. 85 00:07:02.879 --> 00:07:08.720 And that centralized world sounds like a better world if you look at it 86 00:07:08.839 --> 00:07:12.879 very simply because you can co optimize a whole load of things. We don't 87 00:07:12.879 --> 00:07:16.720 need power stations just to deliver energy. We need them for reserve and frequency 88 00:07:16.800 --> 00:07:23.759 response and inertia and stability and locational congestion management. So if you know all 89 00:07:23.800 --> 00:07:28.120 of the operating parameters of the resources, and you know all of the needs 90 00:07:28.120 --> 00:07:31.040 of the system, it sounds like a good idea to kind of centralize all 91 00:07:31.040 --> 00:07:36.920 of that stuff. But the world is becoming very complicated. The nature of 92 00:07:38.000 --> 00:07:44.199 the resources that we're trying to operate flexibly is becoming much more diverse. So 93 00:07:44.279 --> 00:07:50.360 it's not about optimizing power stations anymore. It's about optimizing batteries or EV chargers, 94 00:07:50.480 --> 00:07:56.959 or industrial processes, or heating and HP coproduction of heat and electricity. 95 00:07:57.199 --> 00:08:01.839 I don't think you can centrally optimize in an office a thousand miles away. 96 00:08:03.279 --> 00:08:07.759 I believe that in this new world where we have much more diverse resources, 97 00:08:07.319 --> 00:08:13.160 centralization runs out of possibilities and decentralization has to be the way to go. 98 00:08:13.519 --> 00:08:18.360 So this central decentral dilemma is one of the big splits between how power markets 99 00:08:18.360 --> 00:08:24.720 are organized. The other big split is whether you say that the energy price 100 00:08:24.279 --> 00:08:28.439 is the price and that is the value of energy, or whether you say, 101 00:08:28.480 --> 00:08:33.639 well, actually, that's just about the marginal cost and we need to 102 00:08:33.639 --> 00:08:39.000 top up the energy signal with a completely separate capacity product. Now, again, 103 00:08:39.080 --> 00:08:43.559 my views are that if you have one energy price, that's a signal 104 00:08:43.600 --> 00:08:50.360 to allow you to determine your flows along all of the transmission infrastructure across the 105 00:08:50.399 --> 00:08:54.240 whole of Europe. It allows a real time signal for demand response. If 106 00:08:54.279 --> 00:08:58.879 you cut a chunk off the top of that value and say okay, well 107 00:08:58.879 --> 00:09:01.840 this is now a capacity products. You end up in a much more complicated 108 00:09:01.879 --> 00:09:07.320 world because what do you mean by capacity? Who's eligible? Most of those 109 00:09:07.360 --> 00:09:13.120 capacity mechanisms end up being about supply side solutions, not demand side solutions. 110 00:09:13.120 --> 00:09:16.960 However hard they try, you end up having to come up with a bunch 111 00:09:16.039 --> 00:09:22.679 of arbitrary derating factors to determine how well a battery performs compared to a longer 112 00:09:22.799 --> 00:09:26.639 duration storage asset or a power plant. That's the second big dimension about whether 113 00:09:26.679 --> 00:09:33.480 we think kind of investment in firm and flexible capacity should be delivered through the 114 00:09:33.600 --> 00:09:37.720 energy price or whether it should be delivered with some kind of separate top up 115 00:09:37.720 --> 00:09:41.960 instrument and revenue stream. And I guess you would say there is a third 116 00:09:41.960 --> 00:09:46.240 dimension as well, and everywhere is somewhere on a spectrum. Here do you 117 00:09:46.320 --> 00:09:50.240 have a price for a huge area or do you have a local price? 118 00:09:50.279 --> 00:09:54.399 And how local is their price? So Europe as a philosophy has zoning, 119 00:09:54.720 --> 00:09:58.000 but Germany is a zone all of itself, and until fairly recently Germany and 120 00:09:58.039 --> 00:10:03.679 Austria were ones. And although the philosophy is that you have zones that reflect 121 00:10:03.679 --> 00:10:07.960 the congestion on the system. Even in the countries with relatively small zones, 122 00:10:07.080 --> 00:10:13.480 you don't reflect all of the congestion boundaries. The US markets, many of 123 00:10:13.600 --> 00:10:18.399 which have nodal pricing, but that's still at transmission level. So I think 124 00:10:18.720 --> 00:10:24.159 Texas or maybe it's California has something like eleven thousand zones, whereas Europe has 125 00:10:24.559 --> 00:10:28.240 somewhere in the region of forty. But distribution networks in the future will be 126 00:10:28.240 --> 00:10:31.440 congested. So how far do you want to go with this locational pricing. 127 00:10:31.759 --> 00:10:37.279 I don't know anybody who's proposing that you have different prices for each transformer and 128 00:10:37.360 --> 00:10:39.919 substation. So in the end, these are all a spectrum. But it's 129 00:10:41.000 --> 00:10:46.759 incredibly hard to do nodal pricing in a decentralized market. So if you want 130 00:10:46.759 --> 00:10:52.720 to have locational differentiation, you can probably only go as far as reasonably big 131 00:10:52.799 --> 00:10:56.360 zones if you want to retain decentralization. So there are lots of trade offs, 132 00:10:56.480 --> 00:11:01.440 lots of trade offs here. So see if just as one market you 133 00:11:01.519 --> 00:11:03.519 forgot and I'd love you to talk about and this is the whole sort of 134 00:11:03.519 --> 00:11:09.000 balancing market. In other words, what you have is at some point the 135 00:11:09.039 --> 00:11:11.639 grid operator does take over and say hey, listen, we need to make 136 00:11:11.639 --> 00:11:15.960 sure a demand and supply balance each other. And that's a completely different market. 137 00:11:16.000 --> 00:11:18.480 So could you talk a little bit about that and also just how you 138 00:11:18.559 --> 00:11:22.120 see that going forward. There were some politicy decisions in Britain in the old 139 00:11:22.200 --> 00:11:26.360 days. If you wanted to connect in a congested area, you got told 140 00:11:26.360 --> 00:11:30.720 to wait. But the government changed its policy about fifteen years ago to say 141 00:11:30.919 --> 00:11:33.360 no, no, if winn wants to connect, they must be given a 142 00:11:33.399 --> 00:11:37.960 connection and we'll sort out the congestion management later. So the nature of the 143 00:11:37.000 --> 00:11:43.200 balancing problem is much more stark these days. There's a lot more variation in 144 00:11:43.200 --> 00:11:48.000 the renewables and a lot more ramping for them to deal with within the thirty 145 00:11:48.000 --> 00:11:52.120 minute settlement intervals, and there's a lot more geographical redispatch needed. So the 146 00:11:52.279 --> 00:11:56.679 role of balancing is becoming bigger again and the grid operators having to take more 147 00:11:56.720 --> 00:12:03.799 and more actions. Now. The logical answer to that as an economist would 148 00:12:03.840 --> 00:12:09.679 be, well, let's have smaller time periods and smaller geographical price areas. 149 00:12:09.720 --> 00:12:13.559 If you believe in the philosophy of a decentralized market with a kind of a 150 00:12:13.679 --> 00:12:18.720 residual role for balancing for the grid operator, get the market to see the 151 00:12:18.759 --> 00:12:22.200 real problem as much as possible, and then let the grid operator have a 152 00:12:22.240 --> 00:12:26.159 smaller headache at the very last minute to deal with. I like to talk 153 00:12:26.200 --> 00:12:31.559 about pricing because what we've seen in Europe during the Ukraine crisis. Of course, 154 00:12:31.639 --> 00:12:37.120 it's price of gas when berserk and that triggered. First thing is the 155 00:12:37.240 --> 00:12:41.960 price last August went to what jar the five hundred open MAGA one hour? 156 00:12:43.360 --> 00:12:48.600 No, it went to thirteen hundred euros. So the price went insane. 157 00:12:48.639 --> 00:12:56.159 And of course this all the question of marginal pricing inhalation to the last electron 158 00:12:56.240 --> 00:12:58.840 fixed the price for pretty much everything. And also we're going to start and 159 00:13:00.080 --> 00:13:03.960 entering into moments where there's so much vulnerable as on the grid that in fact 160 00:13:05.000 --> 00:13:09.440 you don't even use gas anymore. So the question is going forward, those 161 00:13:09.480 --> 00:13:15.600 markets which will structure around gas, how can they evolve to take into account 162 00:13:15.639 --> 00:13:20.120 the fact that you may not have gas anymore into the grids. There are 163 00:13:20.159 --> 00:13:26.519 people who say they make a very plausible sounding, but I think illogical and 164 00:13:26.600 --> 00:13:31.759 flawed statement. They say, marginal pricing is designed around thermal units which have 165 00:13:31.799 --> 00:13:37.039 a marginal cost, and as we increasingly replace the thermal units with units that 166 00:13:37.080 --> 00:13:41.960 don't have a real marginal cost. The philosophy of marginal pricing falls away, 167 00:13:43.320 --> 00:13:46.360 and we need to move to some kind of long term pricing that is plausible 168 00:13:46.440 --> 00:13:52.000 sounding nonsense. And I think I would say that marginal pricing are paraphrase Winston 169 00:13:52.120 --> 00:13:56.799 Churchill. He said democracy is a terrible system. It's just better than all 170 00:13:56.840 --> 00:14:01.159 of the other ones. So there are lots and lots of problems with marginal 171 00:14:01.200 --> 00:14:07.639 pricing. So let's start with the philosophy of markets. Markets bring volatility, 172 00:14:07.840 --> 00:14:11.840 they bring risk, they bring winners and losers, and because of all of 173 00:14:11.840 --> 00:14:16.440 that stuff, people are incentivized to find the most efficient solution. Markets are 174 00:14:16.480 --> 00:14:20.080 really really awful and inefficient, aren't they. But do you want somebody else, 175 00:14:20.399 --> 00:14:24.360 government determining all of this stuff, because it would be much much worse. 176 00:14:26.200 --> 00:14:30.360 So marginal pricing, Gerard, go ahead. Hopefully I triggered a thought. 177 00:14:31.000 --> 00:14:33.639 Just I think it's great to talk about marginal pricing because I agree with 178 00:14:33.720 --> 00:14:37.360 you, know, I mean it's not just power markets. I mean basically 179 00:14:37.720 --> 00:14:41.360 every market across the world is based in some form of marginal pricing. Where 180 00:14:41.440 --> 00:14:45.440 I would love to hear your views is that if I look at the whole 181 00:14:45.600 --> 00:14:48.039 amount of sort of variable renewables we have in the system, solar and wind, 182 00:14:48.120 --> 00:14:52.960 we're increasingly having days where we just have negative pricing. So how do 183 00:14:54.120 --> 00:14:58.720 I incentivize the build out of that solar or that wind when I know that 184 00:14:58.759 --> 00:15:03.840 they're certain days that I'm actually going to have to pay someone to take my 185 00:15:03.919 --> 00:15:07.519 power? How do we sort of incentimize from a financial point of view, 186 00:15:07.559 --> 00:15:11.960 that generation in the most efficient way. Okay, there are some simple and 187 00:15:13.000 --> 00:15:20.039 some complicated answers here. Negative prices could be good economics if you're thinking about 188 00:15:20.159 --> 00:15:24.879 do I close down my nuclear plant overnight and incur a startup tomorrow morning? 189 00:15:24.360 --> 00:15:26.840 Or am I willing to run at a loss for a few hours. So 190 00:15:26.960 --> 00:15:31.919 negative prices are not a completely alien concept in power markets, but if they're 191 00:15:31.960 --> 00:15:37.200 driven by stupidly written subsidy schemes, then that's a problem with the subsidy scheme, 192 00:15:37.639 --> 00:15:41.639 and the right answer would be to kind of renegotiate the terms of those 193 00:15:41.679 --> 00:15:45.399 contracts in a way that the generator is still happy, but you don't get 194 00:15:45.440 --> 00:15:48.360 them writing negative prices. Having said that, markets are very clever things. 195 00:15:48.720 --> 00:15:54.320 If you have streams of negative prices. We will find people finding clever ways 196 00:15:54.519 --> 00:15:58.480 of accommodating how to consume negative priced energy. I was with a tariff in 197 00:15:58.519 --> 00:16:03.480 the UK, an agile tariff where actually it was inspimental tariff because I got 198 00:16:03.480 --> 00:16:07.120 a smart meter. They basically says your prices double the spot price. They 199 00:16:07.240 --> 00:16:11.679 capped it. It was in lockdown at thirty five pencer units and they said 200 00:16:11.679 --> 00:16:15.960 your prices double the day ahead spot price. If it's positive, it's positive. 201 00:16:17.240 --> 00:16:21.159 If it's negative, it's negative. And people at the domestic level, 202 00:16:21.240 --> 00:16:25.960 we're finding ways of consuming negative price energy. I got an EV charger. 203 00:16:26.039 --> 00:16:29.679 I don't have a battery, but some people do. So markets can sort 204 00:16:29.759 --> 00:16:33.759 out all kinds of distortions. And if there are systematically periods of negative prices, 205 00:16:33.799 --> 00:16:38.120 you'll find people install equipment that can use negative price energy. They won't 206 00:16:38.120 --> 00:16:41.440 be there forever. Can I just follow up that, because I should be 207 00:16:41.480 --> 00:16:49.840 asking is how do we incentivize a move away from this all fossil electricity system 208 00:16:51.240 --> 00:16:55.399 to a clean energy based system without bankrupting us? Yeah? Okay, So 209 00:16:55.440 --> 00:16:57.000 if you build a wind farm, you need to get your money back if 210 00:16:57.000 --> 00:17:00.799 you've got a yield of let's say the equivalent of four thousand hours a year. 211 00:17:02.159 --> 00:17:04.480 You don't really care if you get paid for four thousand hours a year 212 00:17:04.480 --> 00:17:08.119 and get your money back. If let's say two thousand of those hours the 213 00:17:08.200 --> 00:17:14.480 value of the electricity is negative, so really you're only producing on two thousand 214 00:17:14.680 --> 00:17:18.279 useful hours. You don't really care if you get paid for four thousand hours 215 00:17:18.279 --> 00:17:21.640 a year, or if you get paid more obviously for the two thousand, 216 00:17:21.680 --> 00:17:25.599 and you don't produce in the other two thousand. If we are running a 217 00:17:25.720 --> 00:17:32.839 system where people are producing electricity when the value of their output is negative, 218 00:17:33.079 --> 00:17:37.079 you are loading a cost onto the system. Now, it might be that 219 00:17:37.119 --> 00:17:40.599 we can find ways of soaking up that negative priced energy, but if it's 220 00:17:40.640 --> 00:17:45.640 outificially created, we need to write support contracts. And we're looking at this 221 00:17:45.720 --> 00:17:51.359 idea of a deem generation CFD that only basically support you to produce when you 222 00:17:51.400 --> 00:17:53.799 should be producing, and if the value goes negative, you should damn well 223 00:17:53.880 --> 00:17:59.319 stall. So get the support contract structure right. In the first instance. 224 00:18:00.119 --> 00:18:06.359 You should also make sure that renewable generators do face the consequence of their locational 225 00:18:06.440 --> 00:18:11.039 decisions. Now in Britain at least, although we don't have locational energy prices 226 00:18:11.720 --> 00:18:17.519 we have locational losses and we have locational grid fees, and we charge all 227 00:18:17.559 --> 00:18:19.519 the users of the grid for the use of the grids, not just the 228 00:18:19.559 --> 00:18:23.599 customers. So the generators pay quite a premium if they want to locate in 229 00:18:23.640 --> 00:18:27.839 Scotland where it's congested, and they lose quite a percentage of their output. 230 00:18:27.920 --> 00:18:30.640 I don't know the exact number, but it's three four five percent of their 231 00:18:30.640 --> 00:18:37.319 gross production is lost in the transmission losses and that is applied to their CFD 232 00:18:37.480 --> 00:18:41.359 revenue as well as their energy production. So make sure you've got the right 233 00:18:41.400 --> 00:18:45.640 locational incentives on generators based on where they are. But the losses and the 234 00:18:45.640 --> 00:18:49.759 grid costs and the congestion that they cause, that's part of the story. 235 00:18:49.839 --> 00:18:53.799 Make sure we're not sticking a load of renewables in places where they shouldn't economically 236 00:18:53.839 --> 00:18:57.000 be. It might be better that they go to places either with a lower 237 00:18:57.079 --> 00:19:03.119 yield or kind of more diversity in the timing, so not everybody's producing at 238 00:19:03.119 --> 00:19:07.519 the same time, so maybe western east facing solar rather than south facing solar. 239 00:19:07.079 --> 00:19:11.000 And you can do that with central planning. You can do it with 240 00:19:11.039 --> 00:19:15.559 appropriate tariffs, or you can do it through the support scheme that gives people 241 00:19:15.759 --> 00:19:22.519 kind of a locational price that reflects those locational factors. The question still comes 242 00:19:22.519 --> 00:19:27.119 back to marginal costs and marginal pricing. Do we want marginal pricing to determine 243 00:19:27.200 --> 00:19:33.880 dispatch And if you think dispatches only of wind and solar in a renewable energy 244 00:19:33.920 --> 00:19:37.519 world, what's the point of a marginal price. I think that's a too 245 00:19:37.559 --> 00:19:41.920 simple view of the world. We're going to be dispatching storage. We're going 246 00:19:41.920 --> 00:19:48.640 to be dispatching electrolyzers, We're going to be dispatching ev chargers. We're going 247 00:19:48.680 --> 00:19:52.599 to be dispatching the kind of the cooling systems in data centers which should be 248 00:19:52.680 --> 00:19:59.160 overbuilt with some thermal storage capability in them. This is where our flexibility comes 249 00:19:59.200 --> 00:20:02.000 from. You don't think that's going to be done with a spot price. 250 00:20:02.599 --> 00:20:06.799 I have no idea what other kind of control mechanism you're intending to use. 251 00:20:07.640 --> 00:20:12.000 The Norwegian energy system was built around water. There is no gas in the 252 00:20:12.039 --> 00:20:18.279 Norwegian electricity system. They actually built a CCGT and never used it, didn't 253 00:20:18.279 --> 00:20:23.000 like it and dismantled it. So the Norwegian electricity system is basically a zero 254 00:20:23.119 --> 00:20:29.759 carbon water fed electricity system. You've got hydro which is run a river, 255 00:20:29.920 --> 00:20:33.400 you've got reservoir hydro, and you've got some pump storage, and of course 256 00:20:33.400 --> 00:20:37.279 there is some interconnection as well, and that grew in importance. What's the 257 00:20:37.359 --> 00:20:41.319 marginal value of water? Well, the marginal value of water is if I 258 00:20:41.400 --> 00:20:45.000 store it now and use it later. The marginal value is the value if 259 00:20:45.000 --> 00:20:49.240 I use it later. So you can create an economic marginal cost. If 260 00:20:49.319 --> 00:20:53.839 you translated that to a system of wind, sun and batteries, that you 261 00:20:53.880 --> 00:20:59.279 could still engineer a marginal cost because it's the opportunity cost, and we would 262 00:20:59.319 --> 00:21:03.759 probably have a biomass fueled or a biofuel OCGT fleet at the back end of 263 00:21:03.759 --> 00:21:08.480 this system. This is a hypothetical system, and the marginal value is always 264 00:21:08.480 --> 00:21:11.480 well, if I haven't got the storage, I'm going to have to fire 265 00:21:11.559 --> 00:21:18.559 up my biofuel OCGT and that's the marginal cost. So because of the possibility 266 00:21:18.559 --> 00:21:22.000 of storage, you can create marginal costs even if it looks as if the 267 00:21:22.039 --> 00:21:26.640 marginal unit at the time has got zero marginal cost. So Steve that the 268 00:21:26.720 --> 00:21:30.519 one thing that you haven't mentioned today is flexibility. And I wonder what your 269 00:21:30.599 --> 00:21:34.839 views and this are in other ways. Do we need a flexibility market going 270 00:21:34.920 --> 00:21:37.920 forward? Or how do you see it? Yeah, I used to be 271 00:21:38.279 --> 00:21:41.720 this is somebody else's phrase, but I used to be part of the energy 272 00:21:41.799 --> 00:21:45.640 only Taliban. I used to believe that we should have an energy only market 273 00:21:45.759 --> 00:21:49.720 and that will reveal the value for capacity and the value for flexibility, and 274 00:21:49.880 --> 00:21:55.640 people would start trading options that allow you to kind of hedge the value of 275 00:21:55.640 --> 00:22:00.480 that flexibility forward. I don't think I can say that stuff with a straight 276 00:22:00.559 --> 00:22:03.839 face anymore. We've been so burned by the price spikes. I think the 277 00:22:03.920 --> 00:22:08.920 political tolerance of the level of price volatility that that would entail in a high 278 00:22:08.960 --> 00:22:15.559 renewables world isn't credible. But I still firmly believe that supporting just capacity is 279 00:22:15.599 --> 00:22:22.599 not credible either. We need lots of different types of capacity. We floated 280 00:22:22.640 --> 00:22:26.319 an idea a few years ago of a kind of capacity mechanism that's an adaptation 281 00:22:26.400 --> 00:22:30.839 of the US market model. In the US, they have this concept in 282 00:22:30.839 --> 00:22:34.480 some markets like New England, of reliability options. So the idea is that 283 00:22:34.519 --> 00:22:40.480 the spot energy price can go high, but if you sold a capacity contract, 284 00:22:41.119 --> 00:22:42.240 you have to give some of the money back. So it's a one 285 00:22:42.240 --> 00:22:47.599 way CFD maybe a strike price of three hundred dollars. If the spot price 286 00:22:47.640 --> 00:22:52.480 goes to four hundred dollars, you pay back the one hundred and I like 287 00:22:52.680 --> 00:22:57.000 the idea that capacity is physically an option to deliver energy. But it's no 288 00:22:57.160 --> 00:23:02.599 longer just the peak demand that drives the need for capacity. It's the interaction 289 00:23:02.680 --> 00:23:08.680 between the renewable generation and the demand. So the duration of those capacity scarcity 290 00:23:08.759 --> 00:23:15.359 periods is changing. We need longer duration storage, and we need capacity, 291 00:23:15.519 --> 00:23:18.000 some of which is capable of dealing with kind of within a ramps. For 292 00:23:18.119 --> 00:23:22.799 some of it's capable of dealing with very fast changes. So the nature of 293 00:23:22.839 --> 00:23:27.000 the capacity need is changing. In the old days, you built a fleet 294 00:23:27.000 --> 00:23:33.519 of ccgts and ocgts and they cover all of your capacity needs. For seasonal 295 00:23:33.599 --> 00:23:37.559 storage, frequency response, for within a ramping, everything was done with the 296 00:23:37.599 --> 00:23:42.720 same set of technologies. We probably need completely different technologies for all of those 297 00:23:42.759 --> 00:23:48.319 different things now. So the short term stability might be done with grid forming 298 00:23:48.440 --> 00:23:55.079 converters and synchronous condensers, the kind of within a ramping. Some of it 299 00:23:55.160 --> 00:23:57.599 might be batteries, but some of it might be pump storage or some other 300 00:23:57.640 --> 00:24:03.279 long duration storage. The kind of seasonal storage. So you get your energy 301 00:24:03.319 --> 00:24:06.599 from the sun in the summer and you use it to heat your homes in 302 00:24:06.599 --> 00:24:11.240 the winter. Maybe you do that with aquifers thermal aquifers, you inject heating 303 00:24:11.880 --> 00:24:15.480 in the summer and get it out in the winter. So we need mechanisms 304 00:24:15.519 --> 00:24:21.400 that reward all of those different time frames for flexibility. I'd like to think 305 00:24:21.440 --> 00:24:25.039 they could be set up around option contracts, one way or another. And 306 00:24:25.079 --> 00:24:29.160 we come up with an idea a few years ago of decentralized reliability options where 307 00:24:29.160 --> 00:24:33.839 you choose your own flexibility reference market and your own strike price. But I 308 00:24:33.880 --> 00:24:40.119 think increasingly we see that capacity support needs government backing, so we probably need 309 00:24:40.160 --> 00:24:45.599 to move to some kind of more targeted flexibility support rather than just capacity support. 310 00:24:45.640 --> 00:24:48.799 And there's a lot of work needs to be done in this space. 311 00:24:48.400 --> 00:24:52.880 Steve, then maybe just sort of as a last question, just talk a 312 00:24:52.920 --> 00:24:56.640 little bit about how you see the whole future of the market, because you 313 00:24:56.680 --> 00:25:02.960 know the other possibility courses that we go back to that completely centralized approach that 314 00:25:03.000 --> 00:25:06.480 we had fifty years ago, I think we'll end up somewhere in the middle. 315 00:25:06.759 --> 00:25:11.240 I don't see governments taking responsibility for making investments and owning assets. And 316 00:25:11.319 --> 00:25:17.359 I also don't see governments wanting the operational responsibility. It's very nice to have 317 00:25:17.400 --> 00:25:21.559 an agency to blame if things don't happen as the politicians or as the populace 318 00:25:21.599 --> 00:25:26.440 would like. I do not see a kind of a renationalization move, but 319 00:25:26.559 --> 00:25:32.920 what we see is increased intervention in the power markets, both operationally in terms 320 00:25:32.920 --> 00:25:36.920 of directed investment, but also in cloring back some of the revenues. So 321 00:25:36.960 --> 00:25:40.839 we're seeing quite a lot of the European Unions one part of its emergency measures 322 00:25:40.839 --> 00:25:45.839 this idea of effectively a revenue cap. I see a lot more interventionism in 323 00:25:45.880 --> 00:25:51.920 the financial and operational aspects of the power markets, and that basically make it 324 00:25:51.960 --> 00:25:56.200 an uninvestable without there being government backed contracts, whether it be for renewables, 325 00:25:56.240 --> 00:26:02.319 for nuclear or for other types of flexibility. So I don't see government ownership, 326 00:26:02.359 --> 00:26:07.440 but I see government intervention becoming rife in the next decades. So the 327 00:26:07.519 --> 00:26:12.440 days of liberalized power markets, which determine investment, those days are gone for 328 00:26:12.480 --> 00:26:18.559 the next decade or so. Wow, fascinitying conclusion. I'll probably end up 329 00:26:18.599 --> 00:26:22.160 with more questions than answers, but that's how this podcast works. Steven, 330 00:26:22.279 --> 00:26:26.839 thank you so much for coming onto the show. Oh it's great having Steve 331 00:26:26.920 --> 00:26:29.839 brilliant. Thank you very much for taking the time. I'm very glad you 332 00:26:29.920 --> 00:26:33.400 asked me. Nice to talk to you both. Lan, what's your thoughts, 333 00:26:33.119 --> 00:26:38.799 Well, Chard, I'm going to quote the Bible and aligne from the 334 00:26:38.839 --> 00:26:45.920 Philippians to twelve. You need to continue to work out your salvation with fear 335 00:26:47.039 --> 00:26:53.240 and trembling. And that fear and trembling that's how we should reform the market 336 00:26:53.359 --> 00:27:02.480 and not be like politician totally bombastic and wanting to change. Nobody forces the 337 00:27:02.720 --> 00:27:07.279 hundreds and thousands of energy trader every morning to open their screen. That's something 338 00:27:07.400 --> 00:27:15.480 natural. That's people optimizing their economics and taking risk or mitigating risk, and 339 00:27:15.160 --> 00:27:21.319 market there are an absolute marvel. So I agree totally. And so what 340 00:27:21.480 --> 00:27:23.720 I would say, if you're going to change things, you have to change 341 00:27:25.240 --> 00:27:30.559 really quickly, because the slower you do the change, the more risk you 342 00:27:30.640 --> 00:27:37.039 create for every market participant, and risk means higher price for everybody, and 343 00:27:37.119 --> 00:27:40.640 it actually slows down what you're trying to do in the first place, which 344 00:27:40.799 --> 00:27:45.319 is reduced the overall dependence on fossil fuels. So That's the message I would 345 00:27:45.319 --> 00:27:49.599 say to about you. It has to be quick, and my fear is 346 00:27:49.599 --> 00:27:53.000 it's not going to be quick. Yeah. And the second thing is it 347 00:27:53.039 --> 00:28:00.880 has to be baby steps and not big leap into the unknown, because we 348 00:28:00.000 --> 00:28:04.200 know what we wish to destroy and we don't know what we're going to get. 349 00:28:04.680 --> 00:28:08.599 Now, what I got from this interview is, first of all, 350 00:28:08.960 --> 00:28:12.720 people talk about power markets, but in fact they are a very different one 351 00:28:12.799 --> 00:28:19.119 from another. You've got centralized versus decentralized. You've got subsidies or tax for 352 00:28:19.200 --> 00:28:23.400 all types of fuels and sometimes not even well coordinated. So in fact, 353 00:28:23.480 --> 00:28:29.640 the markets are going to give you prices, but these are gross prices because 354 00:28:29.720 --> 00:28:33.759 net prices will have a lot of additional costs. Who's going to add itself 355 00:28:33.799 --> 00:28:37.759 to the price of energy. At the end of the day, everything is 356 00:28:37.759 --> 00:28:42.920 subsidized and everything is tax and it's hard to know the real price of power. 357 00:28:44.720 --> 00:28:48.799 No, you're right, but what is clear is you need to create 358 00:28:48.279 --> 00:28:56.000 an incentive to make sure that the system stays up and that we build renewable 359 00:28:56.119 --> 00:29:00.960 assets at a fast level in the coming years. And reflexion after the conversation 360 00:29:02.200 --> 00:29:07.039 was what governments and regulators if they really want to change things for the better. 361 00:29:07.559 --> 00:29:10.039 The best thing to do is open up as much as you can to 362 00:29:10.160 --> 00:29:15.079 demand side, so otherwise your deregulation to demand side, to allow to demand 363 00:29:15.640 --> 00:29:19.039 to respond to what's going on the supply side, to really make sure a 364 00:29:19.079 --> 00:29:25.599 price action works. And to enable stuff like storage in the system. You 365 00:29:25.799 --> 00:29:30.279 get rid of all the barriers to storage in certain countries you've got grid charges 366 00:29:30.319 --> 00:29:34.440 on it, allow vehicle to griate all this type of stuff. That's the 367 00:29:34.480 --> 00:29:40.039 type of thing that is So it's basically for me about enabling flexibility of work. 368 00:29:40.200 --> 00:29:42.599 That's what I took out of it. I'm totally with you. And 369 00:29:42.799 --> 00:29:49.160 the price signals that the market said are so important because when we saw in 370 00:29:49.279 --> 00:29:56.480 April negative prices in continental your hope, or where you see negative prices in 371 00:29:56.559 --> 00:30:00.720 Texas, that is the price signal, which is and to market pot sipon 372 00:30:02.160 --> 00:30:07.160 to invest in more batteries. We need those markets and we need them to 373 00:30:07.279 --> 00:30:12.319 deliver the price which is as close as possible to the economic reality. Agree 374 00:30:12.359 --> 00:30:17.759 totally. And you actually talked about that pricing in the nineteen twentieth of April, 375 00:30:18.160 --> 00:30:22.200 where really across continental Europe you had so much renewables in the system, 376 00:30:22.319 --> 00:30:26.240 lots of sound, lots of wind, and prices where zero. And this 377 00:30:26.279 --> 00:30:27.839 is not on a weekend or any you know, this is not a working 378 00:30:27.920 --> 00:30:30.119 day across Europe. You sort to say, well, what's that going to 379 00:30:30.200 --> 00:30:33.039 be like in five years time if you build out lots more meals? You 380 00:30:33.039 --> 00:30:37.960 know what re comment from. That's why I go back to making sure that 381 00:30:37.640 --> 00:30:42.200 you allow those batteries you just talked about to come into the system effectively and 382 00:30:42.240 --> 00:30:49.319 efficiently without delay. Well job, I think it was a great conversation Geki, 383 00:30:49.680 --> 00:30:56.960 but we enjoy Geeki sometimes not everypiso, but sometimes. And we thank 384 00:30:57.200 --> 00:31:02.960 Stephen for coming onto the show. Really great performance, and we thank our 385 00:31:03.000 --> 00:31:07.200 friends from Aquila Capital to support us. Very good. Thank you very much. 386 00:31:07.400 --> 00:31:11.400 Fun I took to you in two weeks time. Look forward to it. 387 00:31:11.759 --> 00:31:15.200 Thank you for listening to Redefining Energy. Don't forget to rate the show 388 00:31:15.279 --> 00:31:21.680 and subscribe on Apple, Podcast, Spotify or the platform of your choice.