39 - Opportunities and future energy scenarios with Paul Massara (CEO & Chair @ Pulse Clean Energy)

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Hello, and welcome to another edition of Modo's podcast. I'm Ed Porter, guest hosting for today. Today I'm joined by Paul Massara from Pulse Clean Energy. Paul, passing over to you for a quick introduction to yourself.

Hi, good to see you again. So I am CEO of Pulse Clean Energy. So I've been in the energy industry about 30 years doing various things, including Centrica, RWE, and now I'm CEO of Pulse, which is a brand-new startup, essentially, but is backed by IMCO, a Canadian pension fund with $70 billion in assets.

OK, great.

Maybe that is a really good place to start, actually, some of that history. Well, I'd like to start with how the industry has been developing over the last 5 to 10 years.

What have been some of the really big challenges that we could have done better on? And what are some of the things we've done really well at?

Yes, so if you start about the things, I think, that have gone well, I mean, if you look at it in macro terms of the transition to net zero, then things like the CFD as a mechanism have worked incredibly well, actually, both for offshore wind and for onshore solar. They've worked. We've deployed huge amounts of capital. The cost of that has come down dramatically. And so that's got to be a big tick in the box.

I think there are other areas where they've been more challenging. So I would say we haven't necessarily got it completely right on the retail market.

And you've seen the loss of market entrants. And so I think there has been a problem in that market space, whereby we didn't do enough sensitivity and financial stress testing of those new entrants, and that's led to some problems when we've had this volatility.

And then there are other areas, which I think are in the balance. So I think the capacity market actually worked quite well.

It's a mechanism to make sure that the lights stay on and provide that generation uplift, that payment.

And in many sense, that's worked. I mean, there are issues with it. I don't think it encouraged demand-side response enough, and I'm not sure it helped new generation--

I think it was tailored too much to new generation and not old generation. But look, generally, I think we're leading the way in many of the mechanisms we've had.

Yeah I think that's actually a pretty shared view across industry, that although there have been some things you say that haven't worked as well as they should have done, we have tested things out quite quickly. We've got things to market quite quickly, like CFD and CM. And those have been quite a big success.

I'd be interested--

we touched very briefly there on just the number of energy suppliers that we've had. It seems like we've had quite a fluctuating number.

Is there a kind of--

do you think we're kind of reaching a sort of a right number or like a good number that we--

because we always said back in the beginning, oh, there was the big six. And then there wasn't the big six. There was many more than that. And now there are fewer suppliers having gone through the volatility that we've been through.

Do you think that number will kind of naturally fluctuate, or do you think it's a--

I think we're getting to a number where it kind of makes some sense.

We had a lot of new entrants coming in partly because the barriers to those new entrants were quite low.

But if you look at many of those new entrants, the differentiator was not on a product or on a service offering, particularly. It was really on price.

And what you saw was that worked well under certain regimes of lower prices. But as soon as you had high volatility, then that stress tests the whole model.

And so I think now, you've had a reconsolidation. So you've seen people like OVO who were originally the challenger now becoming the incumbent.

And I think the market really is going to require people who can have some scale in order to get the new services and products that we're going to need in people's homes. So that's batteries, EVs, and management of people's homes. I think that requires a certain scale. And so to me, I think we're getting to a stage where it's now more stable.

ED PORTER: Yeah. And that almost feels like, not to the vertical integration that we saw historically, which is where people might own generation assets as well as having a supply portfolio. But you're saying there might be some integration between being both able to manage the supply side of the business but also be able to install things like heat pumps or be able to do domestic work. So--

Yep.

ED PORTER: Yeah, OK.

I think that's right right.

ED PORTER: I think we've seen people like Octopus doing a big chunk of that as well as people like British Gas. Yeah, OK.

ED PORTER: Interesting. OK, so maybe let's go from the past, then, to the future and look for the next 5 and 10 years. And what are the big challenges that you see, and what are the things that we aren't paying enough attention to?

Yeah, so I think on that list, I think I'd have to put the whole issue of connectivity, and so i.e., the connections and how fast we're connecting both demand and supply to the grid.

And the problem is we've gone for net zero. We're pushing hard on the offshore wind. We should be doing more on onshore solar, which obviously we should be doing.

But all of that is coming with a connection problem. And so we're now getting a position in the marketplace where it's just taking so long to connect anything, demand or supply.

And I think the rules need adjusting. We've got RIMA coming out at the moment, which is looking at some of those things. And that's positive, but it will also add some other complexities, including the potential move to nodal pricing.

But the biggest thing to me is connectivity. And I think especially when I have my Pulse hat on and look about batteries, it seems to me ridiculous that we classify a battery as a generation asset as opposed to saying it's a neutral asset. Which it's not generation or supply. It should actually be a situation whereby it can connect pretty much freely, but then it should have an active connection agreement, which can either be physically or financially constrained so that it doesn't cause problems on the grid.

And that, to me, would be a much better way. And then eventually, I think we're going to have to use it to move to use it or lose it on grid connections.

Yeah.

People cannot just keep on holding and rolling over grid connections because it's slowing down the whole industry. And if we really want to get to net zero, we need that facilitating infrastructure, those batteries and other things coming onto the grid in a timely fashion. So I think that's a big issue.

I think another issue we're going to need to start looking out for is the whole supply chain issue. So it's fine to say we're going to need to have batteries and connect them to provide flexibility, but there's going to be lots of questions about where we get those batteries, how those batteries are sourced, what are the parts of those batteries, and are they mined in the right places?

So I think the ESG agenda, I think the agenda to move more nearshoring or onshoring is going to grow because people are going to want to have some sort of certainty in their supply chain, especially as you've seen in the last 12 to 18 months where it's become problematic.

Yeah. Yeah, a couple of really good points in there. I think just to unpack one part at the moment just around the connections, I think this is something that has come up a lot.

And we've seen sort of great connections coming back potentially with dates out to 2037, which is a very interesting thing when you're then trying to think about doing net zero by 2035. Obviously, there are challenges there.

So there's obviously a big need to do something, and it's the question of, well, what is the right thing to do? You mentioned this kind of concept of an amnesty, and you also mentioned use it or lose it. Maybe we could just go over those two in a little bit more detail.

Yeah. So the amnesty is now out. I mean, they've got to submit, I think, to the end of this month, so that's literally, I think, two days' time.

But I think the indications we've seen on some of the [? presses, ?]

that that's like 200 megawatts. That's not a lot.

ED PORTER: OK.

Which is surprising because I think the incentives are there for people to hand back excess that they don't need.

I think what you need to have, then, is National Grid being much stronger in saying, look, guys, you haven't hit your milestones. You really haven't developed this project. You're going to get pushed out of the queue. So there has to be the carrot and the stick in order to make it work.

But longer term, look, we just need to have those reforms which classify batteries as a neutral asset and then use it or lose it, I think. And then dynamic--

I mean, I don't think those are difficult, actually.

I just think as an industry--

and it's not a case of apportioning blame. This is something that I don't think anybody really saw. And so the question, then, is how do we as an industry come together to facilitate what is the right thing to do for net zero and for customers?

Yeah, I think it was mentioned on a previous podcast, actually, that it's kind of--

of all the things that were complex 5, 10 years ago, we weren't thinking about grid connections being the thing that were going to trip us up. So yeah, it's definitely interesting to sort of see it being almost unanimous across the industry that that is a problem.

I also want to talk about the other part of the connection piece around just the concept of flexible grid connections. So in terms of when you apply to grid, you will have people who look at the connection and say, OK, well, how is this going to impact the local network? And one thing you're saying is, well, you've got a battery asset that's super flexible. Why aren't you using that to try and help you with your constraints?

Model it in a way where you don't see this as a hindrance to how you balance your grid and your constraints, but use it in a way that actually helps you to manage those constraints. Is there a little bit more that--

is that sort of, in a nutshell, how you see the problem, or is there more that we could be doing to show industry that we can be more flexible?

So I think there's two parts to it. A, when you're looking at constraint problems, should you be investing in additional wires, or should you actually be putting some batteries in there? That's the first investment decision. But then there's the second thing, which is around the connection agreement.

So I've got a solar farm. I'm sitting there with a solar farm. If I want to connect a battery there, it says sorry, that's more generation asset. Well, I'm never going to be using my battery to export at the same time I'm exporting peak solar.

ED PORTER: Yeah.

And so why not say, actually, yes, you can connect. We're not going to count it as connection generation. You're capped on the total. Say it's 200 megawatts export, that's all you can have. But actually, it's fine to have a battery in there as long as you never export more than 200 megawatts. So why is that a problem?

ED PORTER: What's the problem?

And so, to me, that's just some archaic rules which actually could be managed both contractually or financially d order to have a contract which says maximum load will be 200, or you put a physical constraint in there to say it's 200. But whether it's solar or whether it's the battery generating, who cares?

Interesting. OK, so let's move on to Pulse. And let's just talk about what Pulse are doing in the UK and perhaps more broadly. So what is the strategy for the GB market today?

Yeah, so, I mean, it's unusual. I've spoken to a number of platforms, and this is the one that I really wanted to join. And the reason for that was, A, because of the team. B, because of the source of capital, that they're a big fund. But more than that, I think it's their approach and their ethos particularly towards ESG and thinking about longer-term life of assets and how we can facilitate that transition to net zero.

So what we did was we acquired the Green Frog assets. That was about nine sites that were diesel generators.

The initial thing was to move them off of diesel and look at other oils that we could use, which we've done. But now we're going to look--

we're repairing those, and the first couple of those will come in January next year. So we're moving those to batteries.

As well as that, we've acquired some other sites, so we've got about 250 megawatts that's contracted and being built at the moment, literally.

And then on top of that, we've got a right of first refusal for a further 500 megs from Green Frog.

And on top of that, we're in discussions with multiple other players where we're signing up volume. So that takes us well into a gig by 2026.

I'm glad you did the maths. I was struggling.

I was trying to sort of just tally those up in my--

OK, a gig.

PAUL MASSARA: Yeah.

So a gig by 2026--

that's actually a pretty significant portfolio you'll be--

Yeah, yeah, and I think we're investing in understanding the market. We're investing in how we manage EPCs. We're investing in thinking about site locations as you move towards locational pricing. And we're thinking about batteries and battery technology. So what's the right duration? What's the chemistry?

I think those are the areas where we think we can differentiate and have a view.

And that's the bit that we're keen on. I think we'd also look at pathfinder projects. And one of those is of interest to us right now. And in the longer term, because we're there to really aid the transition to net zero, we see flexibility as a broad thing, which means in the longer term, I think we would be interested in looking at long-duration storage. And also I think we'd be looking at electrolysis as well.

ED PORTER: OK.

Either of those, I think, fit in our model in the long term.

OK. All right. So to ask some questions from there, so one thing that's really interesting is the move from having diesel sites in the position that they are today and then adding in import capacity to those in order to turn them into a battery asset. Have you found that to be a challenging process in terms of getting the input capacity to match the export capacity?

Yeah, no, that's been relatively straightforward. And to be honest, Green Frog have helped us a lot with that. And that's part of the acquisition position. So that's been pretty easy so far.

That's good. And I suppose that's a bit of a bellwether for as we go through, say, the gas resets and we start to bring off some of those older assets. You'd imagine that some of these sites, probably they're a little bit space constrained. They've probably got quite good export connections, but they might be looking to do something similar around getting the import connections and then swapping over to battery

[? side. ?]

So that's good to hear.

I think the second question is interesting around how you're seeing that longer-duration storage market. So how do you--

when is the right time for Pulse to look at that? It seems like the million-dollar question, but a million dollars is probably not the right amount of money.

It's probably much bigger.

So, look, I think it's early days scouting it. I think what we can see is that there's going to be a need for some sort of long-duration storage because you're going to see a lot of batteries coming out for two hours and four hours or even longer. You're seeing it in the States. But, I mean, they aren't the most cost-efficient level at that kind of duration. And so we're going to need longer-duration products, and we're going to need to even have some interseasonal kind of storage.

And so the question for us, really, is what is that technology? What is it going to be? And then what is the framework? So what is the CFD plus a cap and a

[? floor ?]

mechanism? Or how is the government going to need to encourage people, which they will to begin with--

we'll come back to the CFD discussion about wind. You need to encourage people with new technology, but then eventually the market will take over.

So, look, this is 2024 outwards, but I think we're scouting that market because, A, it's going to be needed for the transition and B, It's going to impact, actually, the battery market. Because if that additional volume comes on, it's going to impact with the economics. So [? they ?]

need to be aware of it and at least be studying it, but it's not--

I don't wake up every morning thinking about it day one at the moment.

Yeah, some really good points there, right? So if you fund a lot of long-duration energy storage and you put that on the network alongside short-duration storage, the long-duration storage, just because it can do 100 hours doesn't necessarily mean that every charge and discharge will be 100 hours long. It will have a look in the short-duration space as well.

And so when you bring a lot of funding to that space, there'll be a natural sort of competition that will come in between sort of short, medium, long duration, as well as the electrolysis piece that we were just talking about.

PAUL MASSARA: Yep.

No, I think that's really interesting. And so sort of going one step beyond the regulatory piece that you're looking at, when you say you're scouting long-duration storage, is there anything that you would look for? I mean, so one thing that people might look for is sort of pilot projects or pathfinders being successful. What are the kind of things that you would look for as a positive indication about the storage techs that are out there?

Yeah, so I think we're looking at those projects which have got sort of government support already. And we're just trying to understand the technology. I mean, to say we're scouting is probably a bit early. I do think this is something that people need to have an eye on because it affects your existing base.

And I think it will present some investment opportunities. But as I said, I think that's '24, '25, '26 out before that becomes really interesting to us.

Yeah, OK, totally agreed.

Then to pivot a little bit, so to go back in time a little bit. So we first met when I started off on the [? graduate ?]

scheme at Empower, which is a long time ago.

But I think that has changed a little bit. So with the big six, as they were, kind of changing in terms of their--

just in terms of how much of a role they play within the market, I think there's a question mark about who sort of holds the mantle for bringing in the next sort of generation of graduates and new starters.

We're kind of in a world where there's less market power. It's sort of less concentrated. I just--

I wonder whether you've got any thoughts about what could we be doing to bring more grads into the space?

Have you seen any of that with Pulse? I mean--

Yeah, so Pulse is a bit too early for that. I mean, I think in time, that may be something we can get involved in.

To me, you asked me before what are the things that we've missed out on. And in a sense, I think that we've looked at the transition to net zero and said, look, we're setting the pace in many ways across the world in terms of some of the things we're doing.

But what we haven't done is we haven't tied that back into both our skills and our supply chains.

And so the fact is we're going to need thousands and thousands of engineers to connect things, to build things. We're going to need thousands of engineers to connect heat pumps. And we're going to need thousands of engineers to fit batteries in people's homes eventually and to EV Chargers and--

I could go on and on and on.

And what we haven't done is we haven't created those technical colleges. We haven't said to people, don't go and get a degree. Actually because some people, that might not suit them.

ED PORTER: Yeah.

What we need to say is for some people who are much better applied to doing that, we should have had a training route that would have said, hey, you can play your role in the transition to net zero by getting involved in this kind of training, and we're going to train you up to be x, y, and z.

And [? they ?]

would have been great jobs. They would have been locally based. It would have helped with leveling up.

And to me, we still haven't quite got that right.

We should be able to say, look how many air source heat pumps we're going to have to connect. It's going to be in the millions a year.

There's no way we've got that kind of a skill base to do that right now. And so to me, there hasn't been the joined up thinking.

And I think it comes down to government. I think it comes down to some of the new players coming in the market to think about that. Because otherwise we're all going to be paying for that in additional cost for connecting stuff and just getting stuff done.

Yeah, I think that definitely makes sense. And in terms of filling that role, so it's not so much this is something that a single company needs to step in to fill. You're saying that there's a broader piece here where more funding to bring people in to do the sort of wide range of roles within the energy sector, that feels like a sort of a no-regret decision that we could make.

Yeah, totally. I mean, I think the energy industry has always been there ready to partner as long as it's had the frameworks and the signals, the long-term signals. I think we could do much more to work with people who are thinking about going to university to say, actually you don't need to do that. Come on an apprentice training course. Do this. We'll teach you and train you and bring you up the skill set to actually things that we know you are going to need jobs for in the next three or four years.

Yeah, OK.

All right, so moving, then, on to some of your other roles. So I know that beyond Pulse, you do a lot of additional work as a sort of nonexec, but also a sort of advising to some of the boards that are out there for growing companies. Just to give people an idea, what does a nonexec director do?

So a nonexec essentially sits on a board, is part of the team, I think, but has that outside view. And so I always term it as a critical friend.

ED PORTER: OK.

So you're there to support the management team.

You're there to bring your knowledge and skills and contacts. But you're also there critically to question them and to probe and to push.

And so I think the best relationships are ones where you can have an open dialogue and you can bring experience, but you're also willing to say, actually, no, that's too much, or I've made that mistake. I'd advise you to look again, and why not try it this way perhaps?

So I think it's that kind of relationship. And to me, they can bring a lot of value to companies.

OK. And in terms of--

you have now seen a number of these businesses.

If I could ask you for things where you've seen something where the sort of founding team is doing things really well, what are the sort of indicators that you really like?

And I'll also ask the opposite as well. So what are the--

are there things that you look at and you think, oh, that looks like a mistake? That looks like a red flag?

Yeah, yeah, so I've done a lot of work with startups and mentoring startups and advising them in the past. I should clarify I've stepped back from a lot of my roles now to concentrate on Pulse, and the only other thing I'm doing now is chair of sovereign housing, which is a big housing.

But in terms of the startups, I think you get a feel for it, and you see it--

after you've seen so many startups, you get a feel for what's going to work. And for me, it's the critical position of do you have a team that can actually--

not only is technically good and so has some competitive advantage for the team.

B, I think has to have that commercial skill. And so, so many times, we see people at university who've got a great idea developed in the lab but have got no idea how to find the route to market, find market fit, get that market, and then deploy it. And so to me, that's often the big gap.

And then you want to see that drive and that ability to--

but also the ability to listen.

And so just having hubris and just having, I'm brilliant, I'm amazing, but not being able to listen, to me, would be something I wouldn't be interested in. Because this is about learning, re-evaluating yourself, and being both driven enough and have enough self-belief to move forward but also being open enough to think about--

see, what am I listening to? What am I getting wrong?

Yeah, I think it's fascinating. And then to ask a question around the timing of that, so you come in and you start to work with the team. What does that sort of typical process look like?

Yeah, so I would come in, and typically what I'd done in the past was to say, I'm going to invest in you because I think it's important to come in at that base level. And so you share on the upside, but you also, if you lose, you share on the downside.

And then you'd have some sort of option agreement that would vest over a period of time. And then you would work with the team.

And then, for me, that was having a regular call every two weeks and really focusing, OK, what's going well? What's going badly? What are the key roadblocks?

And often, the issue with startups is focus. You're short of time and you're short of money, and those both come back, essentially, to money and time.

ED PORTER: Yeah.

And so you need to focus.

And there's many smart people who could do many things.

The reality is why are you going to win in that marketplace? And so keeping people to focus and deliver an execution is really, really important.

And then there's the skill of building the team around you, where you have complementary skills. I mean, we always talk about it in a big boardroom, about building it, but it really matters in a startup because there's so few of you. You need to have that complementary skill set.

So you need that strong enough alignment to be able to move forward and get stuff done, but you need the strong enough challenge to go, hang on a minute. Is this--

are we overegging stuff, or are we really thinking about it?

Yeah, so it's that balance of drive with experience to give you--

to make sure you're covering most of the bases, and then hopefully it moves forward from there.

And I think that's where advisors can come in and help, quite frankly, because they've seen it--

repeated patterns. I don't have to be the smartest guy in the room to see, once I've seen a pattern 30 times, to go, hang on a minute.

ED PORTER: This looks familiar, yeah.

And the other thing is I've made loads of mistakes, so I can go, oh, hang on. I did that. I wouldn't do that if I were you.

[LAUGHTER]

Yeah.

And so one thing that I think is sort happening in the startup world at the moment is just the change in sort of the macro conditions. So the move in interest rates is obviously--

is going to have an impact on how people operate as businesses. Do you have people sort of trying to think about what that will mean for their businesses?

Yeah, so I think it feeds into the whole funding view. So VCs are now pulling back a bit.

ED PORTER: Yeah.

And so now they're being a bit more cautious. I think the VC market's an interesting market. There are times when they're flush with cash, and they run around investing in everything that moves, and it pushes up valuations. The founders think they're the next rock stars.

ED PORTER: Yeah.

And you get this sort of cumulative thing. And then it can reverse, and suddenly the funding can pull back. So to me, you stick with the core belief on are you doing--

have you found--

are you finding a market niche? Are you solving a problem that's a problem for multiple people? And are you fixing that, and are you growing a sustainable business? If you're doing that, you're always going to get funding.

ED PORTER: Yeah.

And I think especially in clean tech, that although it's probably going to be colder, the reality is clean tech is here to stay for the long duration because we're going to need it. And a lot of the innovation isn't coming from the big companies. It's going to be coming from startups. It's going to come from people who have got a passion to drive and can see a different way of doing something.

Yeah. Yeah, people would often say sort of energy is slightly insulated from other markets in that regard. But obviously, when the cost of money goes up, you still need to be able to be in a niche, be solving a problem, be generating a profit to be able to survive--

PAUL MASSARA: Yeah, absolutely.

--when that changes. OK, no, that's really interesting. I'm sure lots of people listening will be taking notes.

OK, so to move on to a role that you held previously and in the context of the wider winter this winter where there's been government support, your role--

you were on the Committee for Fuel Poverty. So is there any sort of insight from that role that you sort of would reflect on now, given the winter that we're in with prices escalating?

Are there things that we could have done?

Are the things that we could have done more of in the run up to this winter? So, for example, the sort of 18 million pounds million on public awareness campaign on saving energy, that has drawn some comments. Some people think it's--

well, some people think it's the nanny state, and then some people think that it's sort of a much-needed tool.

PAUL MASSARA: Yeah.

Where do you stand on that?

So let me take a step back first. I'd say the energy transition, which we've talked about, is super important. It's only going to work if we can take everybody with us. And so--

because you're only going to have both the political and societal support if you can bring everybody with us in that journey. And in a sense, you can imagine a world where now we have many more physical assets--

a car, a battery, air source heat pump.

Actually, that's a whole lot of CapEx that has to be put in a house. Once you've got it in, actually you can become pretty much energy sufficient.

But that doesn't apply for the people who are the poorest in society. And so the question is, how do you bring those people on that journey? Because they haven't got the capital to invest in all those physical assets.

So I think bringing people with you is super important. You overlay that, the Ukraine issue, and the volatility we've seen, and I think it's a real problem. We've been saying for a while now that actually it's a no-brainer to invest in energy efficiency. If you look at the trilemma, energy efficiency is the single thing that solves that problem. It hits affordability. It hits CO2, and it hits security of supply. If you're not using the stuff, you don't need to import it.

Yeah.

And so to us, they should have been spending much more money. The government should have been spending much more money on energy efficiency programs that had gone out and actually solved this problem. If they'd done that, the problem would have been less. And so I see it very much as an immediate problem, which is the government have to do something to support people, and they have done that to support bills.

I think an information program is useful because, again, are people aware of everything in there? Are they aware of their options? Are they aware of their choices? So that's an important aspect of it. But ultimately, that's sticking plaster. You have to get to the longer-term position, and the longer-term plan has to be about moving to net zero products, and it has to be rolling out these new products that we're talking about, and has to be energy efficiency.

And that means actually not only in the houses that we're building. The government decided that they would change the housing efficiency rating but wouldn't change it till 2025. Well, we could have changed it instantly. We've been building houses for the last three years that could have been more energy efficient that we're now going to have to retrofit. And so, to me, there's a whole bunch of lined up thinking.

And unfortunately, I think it's the case that politicians like to cut ribbons. They like to cut the ribbons on a power station or on a wind farm or something else. It's less sexy to invest in energy efficiency for Mrs.

[? Meggins ?]

on 54 Acacia Avenue. But actually, that's what we need.

Yeah. Yeah, and it feels like a great missed opportunity where we have, say, a hundred new homes going in, all with gas boilers, when perhaps air source heat pumps in a new home would be the sort of most efficient insulation. That seems like

a-- it seems like a great missed opportunity to me.

Yeah. Now, just to be fair, the Social Housing Decarbonisation Fund, which is aimed at social housing, is helping that. And I think actually with my other hat on as chair of the Social Housing, you can see how that mechanism can work because social housing companies are set up that there's an administration and a governance role. They're used to deploying things and getting stuff done. And if something goes wrong, they're going to stand behind it. And they're going to be here for the next 30 years.

And if you can get that kind of money flowing, then that helps the issue with supply chain, with training, and that brings down the cost for everyone so that when you then come out to the wider market, some of those benefits hopefully will help others.

OK. There was one point in that last piece where you were talking around how people can invest in their own home. So they could put sort of solar on their roof, and they could get an EV that goes in next door to it. And I know it's something that was sort of often talked about within RWE a very long time ago around how if you had a lot of homes all putting solar on their roof, you'll get a split between the people who can afford to put solar on their roof and then the people who can't. And then you sort of then have a question of, well, how do you then recover your costs from running the grid?

PAUL MASSARA: Sure. Sure.

If it can't come through a typical unit rate that people are sort of used to paying because people are avoiding that with solar on their homes, then all of a sudden you get this greater and greater problem of grid charges being levied on people who can't afford to put solar on their homes. Feels like that's one of the big things that we're trying to grapple with at the moment. Was that--

to what extent was that discussed, and how do you see that playing out in the future?

I think it was less discussed. I think we were aware of it. I do think it's a risk.

And the reason it wasn't discussed fully was because it's not happening to such an extent at the moment, but it's kind of one of those things that you know is going to happen. So the future of the market could well be a position whereby the marginal cost is very, very low of power, actually, because it's more or less 100% renewable.

So the marginal cost on the day is very low, but actually the physical costs of the battery, the air source heat pump, the EV are actually really high. And then you're still having to pay your insurance products, i.e., connection to the national grid. So somebody has to pay that. And you can't smear it across lots of kilowatts. You have to smear it across less kilowatts. So you end up with a high fixed charge.

So the fixed charge moves up and up and up.

You have to pay for insurance. You have to pay for your fixed assets. And the low cost is very marginal, is a low marginal cost.

Well, the problem with that is that affects the people in fuel poverty the most. And so eventually, we're going to need to think about that. And that's why I think one of the things the government will have to look at in time is a social tariff, whereby they protect the people most in need.

And I think, actually, that's probably the way to get us out of both the price cap and then freeing up the market completely.

And we should observe the fact that when I first came into the market, I think everybody believed in free market economics, and we saw it as a free market. And we said to the rest of the world, come to the UK. It's a free market.

It doesn't feel so much like a free market. We've got CFDs. We've got a fixed regulated cap.

And so to me, the market feels very artificial in that way. Now, it works, and maybe we need to have that in order to get the capital to flow for the transition. But at some stage, we need to think about, how do we get back to free market economies?

That's the difficulty, isn't it? It's kind of, how do you--

you can have the energy-only market, like Texas, amongst other markets, but it's sort of the growing hand of government. So you start to bring in CFD. You start to [? be ?]

in the capacity market. Then you start to think about, well, how does electrolysis work? How do I pay for that? And how do I fund long-duration energy storage?

PAUL MASSARA: Sure.

And by the time you've paid for all of those things, then if you're then a technology that's not getting paid, you're sort of thinking, well, the portion that's being settled by just the energy-only market, I'm really losing out because I'm not getting a payment like other sort of parts. So it's the kind of--

this difficulty, once you start regulating, it then becomes very difficult to come back from it and leave investor confidence whole.

Yeah, and the problem with that--

and I agree with that completely. The question really is, though, would we get to the energy transition and those new products unless we have some sort of mechanism to get capital in? Because right now the risk capital probably wouldn't have been there to do offshore wind, and yet we've known with the CFD, it's been a massive success, and the cost of that has come down dramatically.

And so the question is, how can we use those market formulas withinside some sort of government support to enable us to get going on some of these transitions? But I think it's complex, for sure.

OK, so two more questions. The first one is on the difference between the US and the UK market. So is there anything from your experience in the US that we could look to and things or ways of working that we could do differently in the UK that would sort of improve the way that our energy market works?

Yeah, so I think we--

just to be clear, Pulse is centered mainly in the UK at the moment, but we recognize that other markets are now beginning to move. And so again, we would be scouting and understanding, what are those markets look like? When would be a good time to potentially invest in those in the future?

And again, we would come back and say, the US isn't one market. There's multiple markets in there, and the markets are playing in many different ways. So PJM in the Northeast is different from ERCOT and it's different from [? KSO. ?]

So I do think that the Inflation Reduction Act is going to have a major impact. I think it's going to lead to a step change both in batteries, but I think, importantly, in terms of actually hydrogen because of the subsidies.

So I would have said up until the last four or five months that for the last three or four years, Europe was leading in the idea of hydrogen. I think that may now switch, and you may see the US taking the lead in hydrogen just because the amount of subsidies. And I think you're going to see battery supply and battery development in Texas, in particular, and other markets grow very rapidly now because you can get 30% to 50% CapEx back.

Which is a massive boost.

Which is a massive. And so if you look at a supply constraint position of can you get the batteries, you're trying to do something here in the UK.

You go to buy a site or a ready-to-build site and A, the premium for that's gone up. B, the connection charge is now a long way away. And C, you've got to make sure actually you can get somebody to actually build it for you. And you've got to get a hold of the battery.

ED PORTER: Yeah.

And so people who are talking about pipelines near term I think are often unrealistic about all of those things coming together because there's going to be a lot of batteries sucked into the US.

Yeah, and it's something we've seen, right? So at the start of this year, we were tracking battery build out, and we had battery build out roughly level with where it said it would be. And then over the course of the last two quarters, we've sort of--

we've fallen somewhere between sort of 500 and 750 megawatts behind in terms of where we should have been for batteries being deployed.

That hasn't stopped us being--

because we're now at sort of 1.8 gigs of batteries being deployed. We have more than enough to meet the dynamic suite, so dynamic containment, moderation, and regulation. So there's been huge growth, but what you're saying in terms of supply chain is definitely--

it's definitely impacted us.

I promised you two more questions, but you did mention hydrogen, and I would love to pick your brains just very quickly on hydrogen. In terms of hydrogen and its role in the power sector, how would you see that? How would you see hydrogen coming into the power sector?

So I think I kind of come back to the transition to net zero.

And in that, I think about what are those areas that are hard to abate or hard to change that are going to require something different of batteries. So I start from that point. And I'd say, well, if you're looking at ferries, if you're looking at some flight, potentially, if you're looking at some industrial hub areas, if you're looking at probably some rail for long-distance heavy movement of equipment, you're going to need to have some sources of other power sources.

And I think electrolysis and hydrogen is going to be it, which means you're going to be centered near those centers. I don't think you're going to be shipping hydrogen around, particularly. And so then, I think there are pockets where it's going to fill in.

Yes.

I don't see it as being, we're converting the grid to hydrogen tomorrow, and that's the way it's going to work in replacing gas.

I just think you're going to have these pockets around specific locations, and those might be industrial locations, or they're going to be around user points. So at ports, you could see it for marine. At airports, you could see it, potentially, depending on where different fuels types come.

So I think that's the pockets. But once they're there, they're going to play into the flexibility market at the time. So they're going to be--

they're going to want to be generating at the peak position for when power prices are cheap.

And then the question is, how do you build storage around that and make it work? So lots of uncertainties.

ED PORTER: Yeah.

But I think it's got to play a role, and therefore, again, having a mind on it is useful.

I think that feels like the right approach, right? So it's a kind of a broad approach. We recognize that there's a role to play, and we recognize that hydrogen is used today. So you bring green hydrogen in.

It goes into those spaces. You also sort of flag up a couple of places where there aren't plugs--

so flights, ferries, that makes sense where you bring hydrogen into. And then you kind of take it to clusters, and that seems like a logical piece.

The bit that was a bit of a head scratcher for me is when you take it into the power sector, you need to run it through an engine. And if you're only going to use it for sort of one or two weeks a year, you have to buy the engine.

PAUL MASSARA: Yeah, sure.

And then the engine sits there for--

and I suppose for that to all be true, you either need a very good capacity market payment, where it's paid to be the security and the insurance policy that you were talking about earlier, or you need some [? recently ?]

incredible pricing to sort of make back its CapEx over two weeks. So I always find that a bit of a head scratcher.

But I think the important thing is to say, well, it's the approach. The approach is to say, we'll look at it. We'll consider it as time goes on, and not to sort of--

not to rule it out too soon.

And so I don't see it coming in just to do flexibility because I don't think that's going to be enough. Otherwise, it's not going to get the capacity utilization it needs--

--quite frankly. So there has to be a layering of things which allows it to say, actually, I can earn this revenue for this, and I could do something else.

ED PORTER: OK.

So that's to be shaped. The answer is, I don't know.

ED PORTER: Yeah.

But I think it warrants understanding or learning, and I do think over time, it's going to be interesting.

Yeah, I think there's definitely a role for sort of the fast followers in this space to see what's working and to pick up--

PAUL MASSARA: Yeah, totally.

--and to bring capital into those spaces when they're being derisked.

PAUL MASSARA: Yeah.

OK, moving on to a final question. And this is to say that if you were starting your career in energy all over again, and you weren't allowed to go to work for Pulse, and you're not allowed to work for Modo, those are the two--

PAUL MASSARA: Those are the two best things.

Those are the two best things. No, they're the easy outs, so let's chalk those off.

Where would you look to? Where do you think is a really interesting space that someone coming into the market could really sort of cut their teeth?

Yeah, so I think there's definite--

I mean, we've covered things like long-duration storage and hydrogen. I think those are interesting. I do think that there is--

we talk about physical storage. The fact is, we haven't really seen demand-side response take off in the marketplace in the way that we would hope for.

And therefore, I do think that there are some roles to be--

there's some interesting areas to play in, both in how do you manage it for the home. Because, look, nobody wants to wake up in the morning thinking, oh, have I traded tomorrow, and what have I got to do with my battery tonight? That's not what they're going to do. They want somebody to manage it for them and keep it simple.

Now, that retailers may do that, the energy suppliers, but they may not.

And then the other area is when you look at large users.

So if you're thinking about data centers and other things, what is the potential to create virtual storage in that way? And I do think that's a potentially growing market.

And then the other thing I finally would say, look, I've been involved in this market for 30 years, and it has never been dull. It's never been boring. It's always changing. And the challenge now, as we move towards net zero, I think it's an amazing industry for people to get involved in. You can actually put your head on the pillow at night and go, I'm making a difference, not just now, but for my kids and for the future.

That's a brilliant end, a brilliant final note. I'll just say thank you, Paul, for coming on to the Modo podcast. You've been a great guest, and I'm sure we'll keep track of Pulse and everything that happens over the next few years. 1 gig by 2026--

I have that bookmarked, so I will send you a message and find out how it goes.

OK, brilliant. Thank you for listening to this episode of the podcast, and hopefully we will see you soon.

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