The art of origination: Offtake and risk in GB’s energy market with Josh Brown (SSE)

Hello. I'm Ed Porter, VP of Insights at Moto Energy, and you're listening to or watching Transmission, the podcast all about the business of clean power. And if there's one thing we're told constantly, it's that clean power is cheap.

But when you make money selling power, cheap power can be a bad business case. Projects live or die on one question. Can you make the revenue predictable enough to finance it?

Because in real markets, power prices don't behave. They spike. They crash. They go negative on windy weekends.

This is hard enough if all you do is sell the power you've already generated. But if you're building a battery, you're adding another layer of complexity. You buy and sell. You stack revenues across wholesale trading and balancing services, and you rely on peak pricing.

But as more batteries get built, those peak opportunities start to flatten out. The very success of the technology eats its own margins, cannibalization.

And all of this is happening all of the time. So how much risk should a developer keep and how much risk should the buyer take? And what happens when the market doesn't do what the spreadsheet promises? Should off takers have a limit to what they can handle?

Our guest today is Josh who runs Origination SSE Energy Markets, the team that creates the commercial terms for wind farms, solar parks, and batteries. Most of this conversation is about those contracts. Merchant exposure versus fixed revenue. Battery flaws that protect the downside but cap the upside.

Tolling deals that hand over the keys and the risk to the off taker. Agreeing on a headline price is the easy part, but internal approvals, risk committees, and then market modeling, these often take months and can be the hidden work for structured traders. That's why a battery toll can take nearly a year to sign even when everyone wants it to happen. So how do you turn volatile power markets into predictable revenues that lenders can live with?

Welcome back to Transmission.

Hello, Josh, and welcome to Transmission.

Hi, Ed. Thanks for having me.

Of course. Our pleasure. And to give our listeners some context, can we start off with who you are and who are SSE?

Sure. Yeah. So I'm Josh Brown and work for SSE. SSE are a clean energy utility, very active in, GB in Ireland, core markets across generation. So renewables, thermal plant, supply and networks as well.

And specifically your role? So specifically my role formally is origination team manager and I work in energy markets which is the central, I think we call ourselves the commercial hub of SSE. Okay.

So we are market facing and we also manage the power and gas positions for all our own assets and then also all the other commodity positions that we have and also third party assets as well which is kind of where I come in. So my team look at a bunch of different things, probably the main one is like PPAs, power purchase agreements. So route to market for solar wind hydro whatever then we we kinda wear multiple hats maybe a little bit different from other, you know, other peers.

So we do PPAs, do batch optimization, do structured products, which is we can maybe get into it. It's kinda off screen traded products.

And finally, we also do the green certificate trading. So we manage the green certificate position for the whole group. That's all the rocks, regos, geos, RGTOs.

Sorry. There's a bunch of acronyms there.

We are gonna come we're gonna come back onto these in a All those. In a moment.

Yeah. And that's it. I guess we're we're we're a front office role, so we're kind of out in the market.

I think that's that's the really important part. So this sort of concept of front office. So you're really in the market. You're the people trying to bring in loads of individual pieces of data about what's happening in the market.

Yep. What what are some of the key sort of trends or themes that are going on? And then having to make decisions on behalf of both SSE's asset base but also the asset base that you represent with clients as well and then trading decisions on top of that. And I think the thing that perhaps is really exciting for me and and why I really want to get into this on this conversation is that these are the roles where you really have to be right on top of some of those key trends to make these decisions that can make or break a quarter or make or break a year.

And before we get into that, I just want to ask one question first, which is a question that we get all of the time, which is from people who are just coming into the sector or excited about the sector. They will always say, how do I get a trading role? So what what does what does that look like?

In SSE, the way we do it, we have internships for university students to kind of get involved in or we got a graduate scheme, they get to see all the different parts of the group. I think that's really good, they're always very high standard. That's probably the best way now like kind of my experience, I just kind of fell into it a a little bit through, just kind of happenstance and and kind of right place, right time and and whatnot. So, yeah, I'd kinda recommend, you know, for kinda younger people to look at the graduate schemes, look at internships Yeah. Things like that.

And there's also sometimes a way of sort of working up through some of the sort of middle office roles. So roles where you might be looking at risk or you might be looking at say settlements, that type of thing, and then you kind of move up into more physical managing positions as well before sort of getting a trading or an origination role.

Yeah. Exactly. Yeah. I think it can be really beneficial when you're originating if you have that background sometimes because you kinda have to be a bit of a jack of all trades. So knowing some of those other bits can make you really rounded as well.

It's a really nice jack of all trades is a really nice description actually. So with that sort of big question ticked off because I know people love to ask it.

Okay.

Let's let's get into this. So first and foremost, what's SSE's take on batteries?

On batteries, I think we are very supportive of them. We think that we need a lot more flex on the system as it becomes more renewables dominated. We are building our own assets. We've got one live. We've one that's being built at the moment and pipeline to come. And then we as energy markets have gone out and kind of contracted with third party sites as as well. So we see there being value in it, know, part of the motivation for us is trying to leverage what we're already doing on behalf of our group and try and kind of make money for it but, know, by providing services to to others.

And if you think about it you know we've got like a gigawatt of flex hydro that we've been managing for ages so we're quite good at kind of managing flex kind of products as well. So yeah, we see them as a kind of integral part of the energy system now. And then I guess the question is kind of like, it's hard when you look at the present and compare it to kind of how it might look in the future. We might not share everyone's kind of, view on curves, necessarily, but regardless, you know, I think the the amount of, you know, wind and intermittent renewables coming on means there's there's gonna be volatility. There's gonna be a need for them.

As always, trading teams should have different views on curves. And by curves, we mean sort of wholesale power prices or gas prices going forward. Yes. How how do you feel like you just just give listeners a flavor of somewhere that you might think you might differ from, say, another group? What was sort of the typical kind of viewpoint be of someone, like yourself when considering these transactions?

Yeah. So I guess it one would so sorry. I deferred to jargon there too early. But when I'm talking about the curve, I'm talking about a a kind of battery curve, which would be like your mean, know better than anyone, like, kind of an amalgam of different revenue streams. And then you you build them up and say, what is that per megawatt, you know, or per megawatt hour, I guess, you know, over over time.

And, yeah, I guess it's hard to pinpoint anyone because it's so it fluctuates and it's a self fundamentally, it's a self cannibalizing market.

So and then if you look at how much is coming on, I think there's question about kind of saturation of those markets. So that is a scenario that we consider. We're you know, we have a kind of fundamental view, but we take those different scenario views as as well. The flip side to that is this is gonna be a whole bunch of more renewables coming on and not commensurate build out of of grid. So that is gonna cause challenges there and that's gonna create more volatility as as well.

So And and I suppose one of the sort of you mentioned you do both assets within SSCs fleet themselves, but also you've got third party assets coming in.

I suppose it's been those third party assets come in. That's probably quite the the hard point. Right? Because someone will come to you and say, ah, Josh, I've got this battery and it's worth a hundred thousand pounds per megawatt per year. Yeah.

Would you pay me a hundred thousand pounds per megawatt per year?

Exactly.

So how how how do you deal with that conversation?

It well, it's it's a it's a negotiation. So, like, it's it's you kinda get used to kind of the the process of kinda trying to sieve out where you've got if you've got a fundamental different point of view, not much point to have much more conversation. So you can do like an early exchange of kind of high level price views. And if you're in a banding, then you go, right.

Well, there's maybe there's something to work out here. If you're, you know, you've a a floor at forty, and they've for at seventy five, it's like, well, like, good luck to you. You know? Good luck to Good you.

Or whatever. Yeah. And it's that's the same question, I guess, if it's a toll, as well because it's it's it's effectively what do you believe to be true or what do you need in order to get a return if you're a developer and, you know, backs off a number from that. And then for us, it's kind of like, what do we think is gonna happen?

What are we willing to underwrite? What's the upside? What's the downside? How does it play into our portfolio? How are we gonna manage this? And those kind of things.

I think this is a really fascinating part of it which is just that part you were talking about with the developer. So the developer from the originator's point of view, you're thinking what do they need in order to make their sort of business case work. So so so that's not every that's not what every number equates to. That that doesn't set the price of the deal.

But No.

It's something that comes into your train of thought is, okay, what do they need over here? And then on the other side, you're thinking, and how does this fit into SSE's portfolio and what sort of value to us?

And so you're kind of trying to find a There's a third part as well.

Okay. It's then what is the wider market doing? We could have a view and and and the developer has a view. If it was just us two in the market, then it's a case of it's a bilateral discussion, but we're not you know, there's other off takers as well. If your view is markedly different from that of your peers, then that's something you also need to consider as as well. What you might also like that spread I'm talking about, you might know might then go, well, it's not really worth pursuing this because there's enough depth in terms of like if they don't go with us, they've got another five or six they can go to or or whatever. And and kind of say that is another facet that we need to think about as well.

And this this is probably where it gets quite interesting, right?

Because if you're an off taker, so in if you're in your shoes

You could, in theory, win lots of deals, but that might not be good news at all because you might be sort of paying top of the odds effectively for every single deal. And then it turns out in next couple of years that all of those deals were were too high and you kinda made mistakes. So so so your role is very much like that balancing act between being able to listen to what's happening in the market, look at the curves, look at the projections, but then also to sort protect interest to make sure that you're not sort of winning too much as it were.

Yes. I think here's some of our colleagues wouldn't see it that way. They see the originators as, like, kinda golden gecko types. But, you know, there's, you know, there's it's and it's originate it's kind of like lead on bringing the business case forward into approval, but it's it's a it's definitely a team effort.

There's a value an independent valuation scene. There's a risk team. There's a fundamentals team. There's the traders, the settlement, there's planning as, regs, all all those legal, you know, that that all comes into it.

So it's getting a a view that everyone's happy with kinda standing behind Which could be really hard.

That's often the hardest part in the Actually, we'd really like to talk about that which is that you might have a conversation with a client, it might go really well.

Let's say you both agree on a number And whatever that number is, it doesn't really matter. But from from that point on, you then still have to go to the rest of the organization and go through all of the sort of stage gates and approval gates to say, yes, we wanna take this on. And the reason why I'm asking this question is because I think sometimes there's an appreciation from the market that, oh, you could just get your offtake done quite quickly. You could kinda move very quickly.

I suppose for some types of deals, that could be the case. So let's say it's just a merchant deal and there wasn't much risk in it Yeah. That could be done quite quickly. But Yeah.

Something like a toll, which is very much your team committing to a certain amount of money for a fixed number of years Yeah. Loads more risk in it. So so what does that process look like when you're trying to take that deal through?

Well, you you try to front load a lot of that as well. So so we would make too many enemies internally if we just went out and just exchange numbers with people without laying the groundwork internally. So, you know, it's kinda like a lot of this swan kicking its legs under, you know, there's a lot of work in terms of getting the okay on structures, getting the okay on how that would be priced, if it was to go through how would it be traded, how it would be put into our systems, what contracts look like, variants on the contracts, if you have different views from developers on slippage risk or something if it's, you know, all these kind of things. So you've done a lot of the groundwork and then you'll have like a banding. But again, like this is all done within a kind of bubble and you have your own view.

It's kind of worthless until you've gone out and chatted to some people and find out, oh, are we on the like, first, have we designed a product that actually anyone's interested in? It's the most important thing, I guess. And then secondly, kind of are we aligned on our expectations on price? Does it work for both parties? Yeah.

So, yeah, we do a lot of work internally, then we do the chatting. It's like an iterative process. But then when you've aligned on something, it's still a long way to go, you know, probably not too different from other, you know, like our peers. We've got a very set, you know, for good reason, set approval process that we need to follow, as well.

And, you know, and also the contractual negotiations are very complicated, and and long as well. So that that sets off that journey as as well.

And just to give people a flavor, so let's say you're looking at a toll, would that be a week, a month, a year, five years? How long does it take?

From initial discussion to kinda getting the contract signed Maybe, like, nine months to a year. Okay.

I think we've we've sort of heard similar numbers, so that's definitely sort of where the industry is. But I I hope that will help both developers and yourselves so people won't come through and say, need a toll tomorrow. Yeah. But also it will help you in terms of people will know they need to come to you earlier to have these conversations.

Yes.

But on your analogy of the swan, are you are you the swan or are you the legs underneath?

Who am I? I I guess I'm I'm both. Like, well, we're we're we're both the originators are the kind of the top of the swan in that we're chatting to people. We're visible. We're in the market and and kind of feeding back stuff. But we're also part of the wider Okay. Okay.

This too much because because we're part of the team that that drives all that other work that goes on in terms of, like, getting to the stage where you could actually have that chat Okay.

If that makes sense.

And and you mentioned one thing that sort of is is really interesting around this, which is talking about sort of internal risks. So SSC obviously already have a lot of wind, for example, a lot of solar.

And so from when you're then taking a battery project into that type of portfolio

How does the group kinda think about that?

Yeah. It's a good question. It's it's it depends on the structure that you're contracting because I think if you're doing a a floor, for example, that's effectively it's kinda like a glorified kind of merchant kind of pass through one, but you're just given some kind of security. So you're you're you're benchmarked against industry wide performance, and you're always trying to do the best you can for for that asset. What's best for that asset might not necessarily be what's best for your own portfolio. So it's not always helpful to have that on on your on your books.

So you but you might do it because you think, you know, you're back yourself and you think you can just the right thing to do for that particular contract.

It's for that contract and just, you know, commercially, it makes makes makes sense.

For a toll, it's different. You've effectively been handed the keys, and you can kinda do what you want with it. So but you're obviously way more exposed to kinda downside, on it. So they then help you open up what you can do with it and give you more Options internally.

Options. Yeah. Exactly. Yeah. Yeah. So, you know, you might have a particular issue with a particular asset and you could do something which isn't on the pure for the asset making the most revenue doesn't make sense, But from a portfolio basis, it does make sense.

Okay. Interesting. We put a pin in something earlier around RIGO's, GUS, ROX. I'd like to come back to those sort of trading instruments. So what do those acronyms stand for? What do they do in the market?

Let's start with ROCs.

That's a renewable obligation certificate. It's a subsidy mechanism where eligible assets get given a certificate for each megawatt hour, the amount they got varied based on when they came on, most sites get one and then suppliers are obligated to buy a certain amount of those, certificates each year based on their demand. And then, the price of those is also set as well. So the generator has those to sell as they wish and usually they're bundled with the PPA.

So you buy the power and the rocks. I guess that's that's what they are that that and then they're traded, you know, between, off takers. You know, we are, excuse me, like naturally long rocks. So we're usually a seller, of them and then you get people on the other side, that we would sell them to.

If they don't sell them, then the supplier can just pay the buyout, fund at the end of the year.

So you so your role in that is all of the rocks that come in from your fleet, you're then looking for homes for them?

Exactly. Yeah. Yeah. Yeah. So we're trying to sell them, across the curve. Liquidity is poor.

Well, not it's but there's a few buyers and people don't buy that far out kind of understandably because it's a big chunk of money to pay. But yeah, we we effectively got people who are chatting and just trying to sell those rocks to other other other suppliers.

Okay. Let's do Rigos Goose. Rigos Goose, so these are so rocks were kind of mandatory for supplies. These are non mandatory.

Effectively, a certificate that comes along with your megawatt hour of generation, you know, originally designed, you know, particularly with Regos just to show how much renewables were on the on the system.

Suppliers use them, buy them to match off against their demand and they use that for their fuel mix fuel mix disclosure as well to save over there. Renewable. What percent renewable or not? Yeah. Okay. We take all of those and we we sell them.

Again, we're long rigos, so we have are an active kind of seller of those.

And and that's because your generation fleet is larger than the demand you have. So Exactly. How you naturally become long Yes. The certificates. Yeah.

So so mentioned actually on the way in that you'd you'd caught Killian Daly's twenty four seven I did.

Yeah. Yeah. Asserts podcast episode from a few weeks ago. Yeah. What do you think about that sort of concept of a more sort of twenty four seven matching?

And maybe I'll just play it back to people a little bit, but essentially the way that the current system works is that as long as you match annually, you're okay. So you could use a rego from say the middle of the year when there's lots of solar To offset against a dark night in the middle of December. And so that works very well when renewables are sort of starting to come onto the system in like the early two thousand and tens, let's say. But as we get a more renewable system, perhaps it's not as true that a REGO from the middle of the year genuinely suggests that you're actually using a hundred percent renewable energy.

Yeah. So maybe just giving it that sort of phrasing, what what what did you think of the episode?

Yeah. No. I I think, like, our view is that it's a question of when and not if that we move to a more kind of hourly certificate system. I guess the bit in this maybe, I appreciate it's my own view.

Well, I'm sorry, a little bit concerned about some of the unintended consequences of of it. So I think it on we've seen very little evidence that people are willing to pay a premium during periods of green scarcity. So it's not windy, Dunkelflout or or, you know, whatever. Yeah.

You know, we say we've got flexible hydro generating in a pure supply demand sense that those regos should be worth way more than than everything else. Yeah. We've seen little evidence or I've seen little evidence that that issue that people are willing to go, wow. I really wanted to meet this level or or whatever, so I'll pay ten pounds instead of one pound for for my rego.

And so if you extrapolate that out, then what you're likely to gonna see is kinda just downward pressure on prices like if because of the concentration, you know, especially of solar or offshore wind, you know, soft windy offshore, it's probably a bunch of energy coming on, at the same time.

So generally, it might depress prices on, like, an average basis. It will also make it harder to kind of build in price into your business case as as well if you're trying to build a a wind farm.

You might already just treat them as a nice upside anyway, not really counting them. But you might build in something.

You'd say, well, it's probably likely I'll get a quid or a fifty p for them for for for How much is the how much is the rigo today?

Today for c p twenty four, we're in c p twenty four, it is trading about forty p.

Okay.

So they've come down What is CP twenty four?

Compliance period twenty four. So it's starting from April this year going to the end of March as any certificates that are produced within those.

Okay. That that period.

I think this is really interesting. Right? So you're saying for CP twenty four, we have this forty p rego. If everything was twenty four seven, I think you're absolutely right that the middle of those summer periods, that rego price is gonna be zero. And certainly in windy periods, again, it's it's gonna be zero. Yeah. I think it's really interesting when you say about the there might not be people willing to pay the premium for it.

I think in part that's sort of a self fulfilling prophecy because of the situation we've currently got right, which is that actually why should I pay more for it because today I can just buy a summer one and that's, you know, for the pity.

That's true.

Yeah. But I I think there also been some interesting examples of people like and I and I might sort of misplace the wrong names here, but so I think groups like Google and Microsoft who have traditionally kind of been they were some of the first groups to look at trying to do like a hundred percent renewable energy have now started to look at a more twenty four seven matching. Yeah. And and part of me wonders whether like where they go everyone follows.

Potentially, I think we should bear in mind that they've got very deep pockets compared to kind of your small to medium enterprise kind of business. And and I think that's the second area that we're a little bit nervous about is it kind of like people go, that I was willing to just do a bit and pay a couple of quid for a rego and say to my customers, I'm a hundred percent green. But if I'm getting, know, opening myself up to accusations that I'm greenwashing or whatever, I just won't bother.

You know, it it it we don't wanna dissuade those guys and maybe that's a job for a supplier to help kinda balance that out.

Yeah. But, again, just come back. We we think this is probably something we will have and and and it's kinda fine because I think it makes sense from what you said how you kind of positioned it at the beginning. But and then on on the first point as well, kind of like building into the case because some people are arguing that regos should be a means of helping to deploy more renewables.

I mean, that's not what they were designed to do. They were designed to track renewables on on the system. But if we follow that view of, like, kind of the price becoming so spiky and just downward, people aren't gonna get that. So then people aren't gonna build that into the case. They're gonna need a high strike price or or whatever. Like, it's all marginal, but it all builds into a a broader kind of case as as well.

I think the bit that I'm excited about is that if the world comes true, the the rego at say winter evening is in the Dunkelflaat as you suggest is quite expensive. Let's say it's ten pounds. Yeah. But the day before when it was really windy, was worth zero pounds.

The bit that sort of excites me about this is that the and obviously from an SSC perspective, obviously got a lot of pumped hydro. Right? So all of a sudden the sort of the if you if you had flexible regos, that pumped hydro is then being fairly valued for the flexibility it brings through. Yeah.

And I think that's quite exciting. Yeah. So I I I hear exactly what you're saying which is that for a lot of small businesses that are already very squeezed in energy costs, I'm not really sure necessarily that the owner should fall to them to sort of find themselves to be green or not. Yeah.

But I do think we should find better ways to value for batteries and for pumped hydro.

Again, and I think this is this is hopefully like a short term issue, but, like, we recently had, Ofgem change the the registry, and it it was a pretty simple change. It didn't go well. So it make me a tad nervous about, like, kind of and this is a pretty simple system moving from that to kind of, like, a much more complicated system of tracking rigos and going, well, that generation then went into that battery. That battery's got a round trip efficiency of eighty four percent. So you put one Rigo in, you got point eight four back out, you know, and then the kind of Leno went there and and stuff like that. It's all totally doable and all possible.

It's just You are right to raise the point that, like, new systems, more complexity.

I've seen that Rigo terminal before. It's not. It's it's like, it's fair to say it was designed at a time when, like, the the sort of current complexity of systems didn't exist.

So Yeah. Exactly. Exactly. I think that's a good way to put it.

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Enjoy the conversation.

Let's go back from then the really sort of specifics as the cert side to much more of some of the key themes you're thinking about as a trading team. Yeah. So as you're kind of, you know, for, say, twenty twenty five, what are the that you're that keep on coming coming onto your radar that you keep on looking at?

My answer would be framed within kinda like an origination lens. Okay. Because the the traders are you know, we've got the kind of EMC guys just deal with stuff like right now, hour ahead, kind of day day ahead. We've got EMC is the s Energy management center. Sorry.

Yes.

It's always deferred. My wife hates it. It always deferred to jargon and acronyms, but you got those guys, you got, and then you got prompt and curve teams looking out in across different horizons. I won't pretend to know exactly what those guys do, but they're always managing the portfolio, and then looking at kind of, macro politics and stuff. They always seem to be looking at what's going on in China and stuff like that as as as well.

Within our world, we're trying to look at, you know, so we take the PPAs as a, you know, as an as an example.

We'll be thinking about say AR seven, we'll be looking at that. So this is the next round of the CFDs. We'll be looking at kind of who's likely to prequalified, kind of how much do we think is gonna go through. Do we know them?

You know, if not, can we introduce ourselves and stuff like that? We'll be thinking about based on the rules of the CFD, kind of what kind of structure do we need to offer. It's usually pretty standard with, a CFD back site. So you'd offer, like, a route to market PPA. We're just covering the imbalance at a day ahead to delivery position at a fixed price. It's quite a big market there for those sites and now CFD is twenty years, potentially get a twenty year kind of contract.

So we'll be looking at them thinking like what we're talking about earlier. What's their incentive? How are they funding it? Are they funding off balance sheet? Are they getting financing? If it's financing, do they want everything locked down? Are they willing to float some stuff?

Do they want Norrigo prices locked down now?

So so much of this is sort of your ability to understand the risk on their side.

Yes.

And and really, like, when we kind of boil it down, it's really how you allocate the risk between these two parties. So how much risk are you gonna take on and be paid for taking on and how much are gonna leave with them?

Yeah. Exactly. Yeah. So so and and it's kind of quite a specific example because there you're just talking about we say it's called like kind of warehousing that risk. So we are warehousing that day day ahead risk, the imbalance risk.

If you look at, you know, a site that's got a rock, they'll be looking for a fixed price. So on a on a pay as produced basis or whatever they produce, whenever they produce it, they wanna get fifty quid, sixty quid or whatever it is.

So when we're thinking about that, again we're thinking about the market, we're thinking about price risk, we're thinking about how would we hedge it off, we're thinking about volume risk, capture price is or capture rate, is a huge one as well that think people should be more aware of because it fluctuates a lot and it can absolutely hammer you. So we're thinking about all those kind of things and then we're also thinking about or even if we think we we're valuing it fairly, what's the market doing? Because the market could be not considering those things, pricing it higher or they could have other motivations to mean they price it more aggressively than us as well. So yeah, we're trying to think about all those those bits as well.

So Josh, on your key roles as a team, you're looking at a lot of the themes that are coming through in a particular year. So what are some of the key themes you're seeing in GB this year?

So on the PPA side of things, we're seeing a bunch of people getting CFD contracts. So we're getting a lot of people coming in looking for route to market PPAs where where you're sorting out the imbalance cost and that ranges from, you know, your sort of farms with people who may be new entrants to the GB market. So you also like bring them on a journey. They might be used to wherever Spain or, you know, Italy or something like that through to offshore where you're dealing with, you know, a lot of volume and quite rightly a lot of scrutiny.

So you gotta figure out there and all all the interplay of of the different elements and make sure you're super tight on the on your how you set your store out of your contract with them. So a lot of it comes down to like kind of thinking about, I guess, again, thinking putting yourself in the shoes of developer, what are they gonna need from both their own perspective operationally? What do they if they're getting financing, what are they gonna need and trying to second guess that a little bit. Otherwise, we're getting quite a buoyant, kind of merchant market looking for like, fixed fixed pricing for, you know, you got big funds who have kind of a bunch of assets just looking for like fixed one, two, three year pricing as as well.

I guess just going back to the CFD, if it's not as successful for everyone, you could see a pickup of corporate PPAs which has been pretty quiet in the last couple of years. You know, it's kinda like a seesaw of corporate PPAs and and CFDs. So again, that's kind of like figuring out who who those people are and stuff like that.

And that's and that's essentially for a wind generator rather than, signing off take agreement effectively with government. Yeah. You're saying, I'm not it's not gonna go to government. This is gonna go directly to a particular corporate, a Microsoft or Google.

Yeah. Exactly. Yeah. Yeah. And so then there's, like, there's other stuff within that. Like, it can be virtual or it can be physical, and that's talking about how it's settled and stuff like that. That can have huge ramifications for structuring and who's responsible for what and all that kind of stuff, but I won't bore you with that now.

Yeah. Yeah. But but but essentially for for listeners, this this is all kind of working out sort of how to allocate the risk in these structures.

Yeah. Exactly. Yeah. It's kinda uncertain, you know, the market has predefined structures where that's pretty well known at at the outset, and then you get new things thrown up that might kind of like, you know, I guess how negative pricing is is managed is way more of a hot topic now in PPAs than it was a few years ago because of their increased prevalence and the, you know, the the amount that probably gonna be on the system. So that's a key risk is like who's gonna sit on that and how and how is it managed and what happens if someone doesn't do what they're meant to do and those kind of things.

And suppose with the corporate PPAs, I think it's quite hard. Right? Because you kinda say, well, look, why am I signing up to a PPA to pay you ten pence per kilowatt hour when I can see the market rate is sort of, you know, a negative number? Yes. And so I feel like, you know, why why am I tying myself into this sort of corporate PPA if I could actually just be going to market and getting it for less?

This is the thing. And then it comes back to earlier discussion about kind of them wanting the green power as well because it's like how much did you want it at that time? You know, negative prices usually coincide with a lot of renewables on the system as well.

There's a push pull like kind of degenerate needs some form of security otherwise, it's not a deal worth going into and they can't get the financing. So, you know, it all of them has this kind of knock on effect.

And then in the batteries, we're seeing, a lot more competition as well in terms of like kind of seems like there's more people able to toll and floor, that seems to be quite a fluid situation and there's a fair few batteries around, you know, even with people given their some of their contract you know, capacity market contracts back, there's still a lot coming on.

So what I guess what we're thinking about there when we're looking at it is that all the other kind of like fundamental risks but also we do put quite a lot of stock into kind of the developer themselves, have they built a battery before? You know, I did have that experience either here or in another country and stuff like that because it's not easy, you know, to do to build them and operate them and stuff like that. So you wanna make sure that you're kind of putting your time to something that is kind of gonna come to fruition.

And this is then this is I suppose dealing with almost like the simplest version of this which is like a standalone asset. Right? You can then go into colocation. So you could put a battery and a solar site or a battery and a wind site together. How how do you think about colocated projects?

Again, it's probably like the the RIGO answer. It's kind of a question of when and not if.

We as SSE I think have looked at it but we're not well, maybe we're actually we're doing it on one of our sites in Ireland. But in GB I don't think we're actively pursuing it. Not because we got anything really against it, it just didn't seem to kind of work for us.

I guess at its core it makes sense if you look at it purely from trying to make the most of your grid connection and your your kind of CapEx and your development costs and stuff like that because you you got your land agreement, you know, you're sharing your infrastructure, all that kind of stuff. You've got people on-site at the same time. You've got a good connection that, you know, you might be over planted, you might have more than what you need but it helps reduce costs.

I think the bit that we get approached a fair bit about it like by developers and a lot of them are really good and kind of like kinda know what to sometimes when we ask them like kind of how do you see this operating in practice, they maybe haven't they don't really know. And so I think it's kind of like the people may be underestimating the complexity of how these two things will interact together.

And I suppose that's from a it's partly from a commercial but partly from an engineering perspective. So you kind of both want to know which markets you're going into, how you're gonna trade it. But then you also need to know things like where are the meters? What's the power flow intended in each circumstance?

Yeah, exactly. Yeah. You know, and and usually in in our experience, every time we've been approached with a developer with a colocated site, they're completely separate. So they're not, you know, say it's a solar and battery. The solar isn't going into the battery. They're just two independent sites next to each other.

This would be AC coupled.

Yeah. Yeah. That that kind of share of a a a common kind of export or and import point. But even then still how that all interacts and then, you know, if they're both independent BMUs, acronym, balancing mechanism unit, kind of like figuring out how that's gonna work and how you can a second guess what you could do with your battery if it's sitting low in the hierarchy of things because your solar has a CFD. You might finance it on saying, right, the solar is just gonna fill its boots and whatever and then the battery will sit second order.

But then if you're trading that, you're trying to figure out, well, how much am I gonna be able to put into the BM and and stuff like that, you know, how it all ties together. I'm sure there is ways of doing it, like, you know, there there are these collocated sites and stuff like that, but it's it's complicated. I think it is is a so so at the moment, we're we we don't have any, on our on our books.

And I guess at at this very moment, we're focusing on kind of standalone battery Okay. Sites.

And to ask one final question on this. So when with your battery capacity that you're looking at, is there sort of a fixed amount that a trading organization would want to have? We sometimes hear that sort of people have an appetite for a certain amount, but then not perhaps for more.

As an originator, this is like a pervasive question that we get. How much is too much wind? How much is too much batteries? How much is too much x y zed? I think it comes back to, like, kind of, you know, that that wider team that I mentioned earlier, like, kind of getting a view of, kind of what what do we want. You're you're never gonna get the ideal portfolio.

So it's kinda just trying to kind of work out where you'd like to be ideally. And if you're long something, can you externalize it? You know, so with batteries, you know, the structured products that I mentioned earlier, there's a growing market there of of trading kind of bare head spreads on batteries as a means of hedging out your battery exposure and stuff like that. So there's other things you can do with that portfolio. So, yeah, the way we've seen it is or viewed it sorry is that there was a capacity level that we were happy to take on just to meet a kind of core requirement of our wind exposure.

And then anything other than that has to stand on its two own two legs kind of commercially. Other utilities might look at it differently. I think some definitely do considering how active some have been, you know, it seems like they've put a lot on their books. But, yeah, a utility will have a, well, they will. They should. I would expect them to have, you know, a level they're trying to get to. And then after that, it's gonna get tricky.

Also, you know, shouldn't, underestimate that kind of resource requirement as as well that, you know Actively trading these assets. It and and systems and and your contracts and selling them and all that kind stuff.

On top of kind of the latest trends. Right? So if a certain asset's working in a certain way, okay, why has it changed to do that?

You can automate a lot of this, but, actually, it it kind of does pay, I think, from having watched it for a while

That that these strategies do change and they do vary depending on kind of which market conditions come through. Yeah. And there is some that you can automate, but also you do also need to have a bit of a strategic view behind it to make sure you're actually looking in the right direction.

Yeah. I think so as well because I think also, like, you know, if you've got automated views on things, then the market can start figuring out what you're gonna do in those circumstances and kinda second guess what someone else is gonna do as well. So it kind of then because you're effectively competing for the same part of value. So it's so you're not only second guessing that, but you're also second guessing what the others and and kind of am I being too predictable as well.

Yeah. It's a fascinating part of of origination. I'm gonna move us on to our final two questions. So is there anything you'd like to plug?

Not in particular. I think I other than just to say, you know, we're not particularly good at marketing ourselves, but, you know, we we do have a big portfolio that we've contracted with through our PPAs and batteries, we've got over two gig of batteries we've contracted in the last couple of years, eighty three gig of CFD backed assets and stuff like that.

So it's kind of just to say, you know, if you are developing a site like that just to reach out so we can have a chat.

Very good.

And all these things, they just start off with a a simple chat and then Exactly.

Before you know. We love, you know, a bit of a joke internally that, you know, originated as just glorified kind of chats basically.

That is Yeah. I mean, it's it's not a joke.

It's it's apt.

Yeah. Yeah. Yeah. For sure. Okay. And what is your contrarian view?

Well, yeah, I think I I mentioned this to you. I think I've been a little bit contrarian, the whole way through this. But I would say one thing that has kind of very recently come onto our radar, And I might completely make a picture of of describing this because it's quite complicated. But one of the things we're potentially seeing is the amount of CFD backed assets that has a the the one hour kind of negative price rule coming on.

What we think it means is that when you get, their head price clearing kind of close to around close to zero, you could see liquidity dry up at that stage because the market would know that these asset, if it clears above zero, that generator is gonna get their CFD. So they're gonna be incentivized to generate within day regardless of what happens to the within day price. So you might not be able to sell all that volume at their head and then within day, everything comes on that wasn't cleared. Yeah. Pushes the price down for the wind within day that maybe down to the strike price level. And as an off taker, you're settling your contract on the day ahead price Yeah.

And you're getting hammered by by this dry up in liquidity there. So it it yeah. I mean, that that that is it. So so kind of we we've just started to to notice it.

We we have mentioned it to Desnas. There could be things that kind of alleviate it like p four six two, which is looking to change how BM pricing is structured and and stuff like that. But the quantum of the of the impact on on a, say, an offshore wind deal is pretty significant. And so, yeah, as is it it could catch quite a few people out there if you're a bigger off taker.

I I love this. We've been talking about this internally for ages. This is part of the problem that happens when you get regulatory design that that does something like an arbitrary limit on power prices at zero in the day ahead market. People will then go and trade around that. So as you say, that volume might not come through in a day ahead, it might come through in the intraday. And then you have problems in your market because you're not having a sort of that there's not a fair process going on between those two things. And I think the thing that's really interesting for me is then, okay, so take a step back from this.

If you tell me, and I'm just a straightforward trader

That I'm gonna have a price of zero in day ahead, but I'm gonna have a price of minus sixty in intraday. Well, you know what I'm gonna do. Right? I'm gonna sell it in day ahead and I'm gonna buy an intraday.

Yeah. And so there's a question that's like how much does that play through and how much does that kind of correct this imbalance? Yeah. You mentioned p four six two might fix this problem.

Yeah. I actually think p four six two makes it worse and we should we should I'll just say what p four six two is. Essentially, if you imagine there's kind of three markets as you get close to delivery, you have day ahead, which is day ahead. You've got intraday, which is in the day before delivery, and then you have the balancing mechanism, which is right before delivery, typically just the hour before delivery.

So as you get closer to delivery, you kind of move from one market to the next market.

Essentially, what we're saying is you might have one market in day ahead, one market in intraday, and then because of this rule called p four six two, you might then not be allowed to have a negative price in the BM. And so your price and I'm gonna get my fingers out here, which is not gonna work at all for an audio recording, but essentially you could have a price of zero to in the day ahead and then drop down an intraday and then whipsaw back up in BM. Yeah. And all of that is perfectly logical behavior that people would take. But my god, it's a ride because it's all driven by subsidies sort of meddling and meddling in sort of price formation.

Yes.

And I think it's I think it's a real risk. I don't think people really understand it.

No. Totally totally agree. And I think so say you do, to say some sites win AR seven and they get twenty year contracts and people lock in, you wouldn't afford of that. And then that means that off takers gonna get could get hammered with it or they, I mean, it's just there.

So either it's there, it's recognized and it means that when they're coming, the developers coming to market for that fixed price, was two pounds fifty is now four pounds fifty five pounds You're talking about the risk premium that you're Yeah, sorry, yeah, this is the discount that they would be applied to the settlement, the IMRP, this kind of day ahead price.

And so then you follow that backwards either they've agreed to strike price with the government, they've gone into the auction mount, they didn't know about this and the returns are worse for them or they build it in and they need a higher strike price.

Yeah. And then then that has a circular kind of effect on the thing. Doesn't it it still then creates more volume coming into this So but I guess on the flip side, could be good for batteries.

Could could be good for batteries.

Yes. TBC, I think Yeah. Maybe the day ahead the interesting part, I think the p four six two bit I think is Yes. Not. No. Agreed. The that is a fascinating place to leave it and I think if if you have if you have followed this conversation through from sort of all the offtakes and all the risks and then you're thinking about how the various things clear within day ahead and intraday and you're enjoying that conversation, you are probably on a track to become an originator.

You're well suited. You are well suited. You're good at chatting.

Yeah. Yeah. Absolutely. So you're well suited. Josh I wanna say thank you for coming on. Thank you for shining a bit of a light on what is such a sort of opaque area. It's been a pleasure to have you.

Thank you very much for having me. Really enjoyed it.