Power marketing and energy markets with John Larkey (Senior Vice President of Power Marketing @ National Grid Renewables)

Hey, everybody. Luke here. And welcome to another episode of Transmission. Kyu is currently traveling, so I've stepped in with today's intro.

For today's episode, Kyu is joined by John Larkey, senior vice president of power marketing at National Grid Renewables. If you've ever wondered how large scale renewable energy projects secure financing, navigate power markets, and manage risk, this episode is for you. John has been in the energy space for over fifteen years, transitioning from engineering and power trading into power marketing, where he helps bring wind, solar, and storage projects to life. In this conversation, they cover how power marketing works, from securing long term contracts to managing exposure in volatile electricity markets.

They also dive into how corporate power buyers are reshaping the market, the rapid growth of data center demand, and why colocation is becoming such a critical strategy in the US grid. What really stuck with me from this episode is how the role of power marketers has evolved. It's not just about securing contracts anymore. It's about understanding fuel markets, transmission bottlenecks, and the second order effects of locational pricing.

So where does power marketing go next? As corporate buyers get more sophisticated, data center demand surges, and transmission constraints tighten, Are we seeing a fundamental shift in how renewable projects are structured? We'd love to hear your thoughts in the comments. And if you're enjoying transmission, please hit subscribe.

It really helps us to reach more listeners and bring more great conversations like this one to you.

Alright. Let's jump in.

Hey, John. It's been a long time. Welcome to the podcast.

Thanks, Q. Looking forward to it. Thanks for having me.

So, power marketing. Let's get straight to it. You you do power marketing at National Grid Renewables. What is power marketing?

Sure. So power marketing has a broad definition. I'm a re I think consider myself a recovering engineer and a recovering power trader. So I've been in the power marketing space for about fifteen years.

When you think about power marketing role, we look at everything from long term twenty five year contracts to secure revenue to build large infrastructure projects, whether it be a thermal generation, wind, or solar, to medium term and shorter term activities where you're really managing risk in the volatile power markets. So broadly speaking, power marketing covers, you know, a long, a lot wide range of of activities, from trading to contracting.

They, you know, really are designed to, as an asset owner to get projects built, and also to manage the risk associated with the commodities associated with those, projects.

I think the other element to power marketing you'll hear a lot of people talk about as part of the ecosystem is is in the wholesale markets, the trading and managing of energy risk between load serving entities, intermediaries that provide liquidity, and really making the physical and the financial come together in the electric industry. And so there's a lot that goes into that.

And we should probably clarify because a lot of our audience are in Europe, and so they know National Grid to be slightly different. So could you just clarify how National Grid and National Grid Renewables fit together?

Yeah. No. It's a good point, Q. It's always good to know your audience. So thinking globally here. So National Grid Renewables, the company I work for today, was actually acquired by National Grid, PLC, based in London in twenty nineteen.

Prior to twenty nineteen, we operated as an independent developer, owner and operator of wind, solar, and storage projects and became part of the National Grid family in in twenty nineteen.

To your point, National Grid is a large diversified energy company in the UK operating the grid as well as some of the massive interconnectors between between, the UK, Benelux, Norway, Denmark, and France, and and and and I think Ireland as well. And National Grid also, may may be, new to your audience, also is the largest importer of gas into the into Europe through the Isle of Grain, which is a facility National Grid owns today.

And in the US, in addition to ourselves as a National Grid company, National Grid has several utilities in the New York and New England area that are, investor owned utilities in the power and the gas space. So that's a thanks for, raising that. It's a good point.

And you mentioned Isle of Grain. I actually think Isle of Grain does not get talked about enough, but maybe we should do another podcast about that incredible site and the history of that place. It's phenomenal.

And has nothing to do with Grain.

And yeah. Yeah. Yeah. Nothing to do with Grain, which is always helpful. How wonderful English.

Okay. So for for you as a power marketer then, what does a transaction look like? Who do you who do you go between? Who do you serve?

Sure. So for for as a power marketer, again, as as a renewable developer owner operator, our activities in the power to marketing space, very early on before projects get built, you need to secure the revenue. And so the activities of power marketing, which often get referred to as origination, signing long term agreements, and just getting those in place to secure the financial revenue revenues necessary to pass the investment committee's approval to to invest in a project. So on the very front end, power marketing is involved on the contracting of those revenues.

I would suggest there's also an aspect of power marketing that's really about the markets themselves. So the analysis of where we're gonna build projects, what's the risk, and then that really layers into who are the customers and the types of contracts that you put in place to secure those revenues. So that's kinda early on before a project exists.

Once you invest in a project, takes a few years to get it built, and your power marketing activities at that point, if you have merchant non contracted positions, you may be exposed to movements in the marketplace that you're managing in the nearer term, looking out two or three years if if markets move materially one way or the other that you may look to hedge those positions.

And then once you get into operation and managing the assets, then your power marketing activities become, on a daily basis, scheduling and managing that those electrons into the marketplace with those customers in the markets, and managing then any merchant exposure you have, either through, differences in volume, between your contracts and what you're producing, if you have maintenance, etcetera, and and or, events that don't allow you to have the electrons you expected, as well as anything that's merchant managing that, exposure in the financial markets and bilateral markets.

I think the other big piece, most what, you know, we're talking about right now is around the energy, components, which is the probably seventy percent of the revenue stream. You also have, you know, can have, capacity and ancillary markets and and renewable energy credits, which are other attributes that have to be monetized and managed. And so those all of those different product streams are part of the the broad umbrella of of power marketing.

So if you'll forgive me for, oversimplifying.

But back in the day when we could talk about coal, but let's talk let's talk about gas. Right? So when gas was dominating the system, for an originator, you had a really complicated job because you had to match gas prices and power prices on this long term contract. You had to hedge both. So, surely, for renewables, the job is half as difficult because you only have to manage the power side, the offtake side, and there isn't a gas element. I'm sure I'm wrong, but tell me why I'm wrong.

I think it's changed. I wouldn't say it's it's it's actually gotten easier for some of the reasons you've re you flagged, and I think it's getting more difficult because it's especially when you start talking about some of the challenges with batteries and ancillary services. But maybe just a a trip down, memory lane or history. Back in nineteen ninety six in the US under FERC, that's when the markets were deregulated under FERC order eight eighty eight. And that's really what opened up the power markets in in the United States.

Europe's got a, you know, has a a different, journey in terms of how power markets came to be. But what essentially was happening is the desire was, hey. Let's try to make the markets more efficient and not have these vertically integrated utilities, and so we're gonna provide access to the transmission system. And at that time, it became then a very, very bespoke market. So it was deregulated, but really the trading was very physical in nature. It was it was load serving entity or utility a engaging with their neighbors on a physical basis bilaterally to manage and share their resources to mal balance loads. So it was very physical in nature through the you know, in the here in US in the nine you know, nineteen nineties.

As you got into the two thousands, and and and to your to your point, it was very physical. You had to have fuel and and managing coal and gas. And and and then on the power side, it was very physical in nature. As the markets became more liquid and more participants were involved, you started to see the evolution of financial financial products and be able to settle things financially, and and really that's been the evolution that we're really on to this day.

As a power marketer in most places, your marginal unit is, and especially you talk about some of the bigger markets in ERCOT and and some of the the the European markets, your marginal fuel is gas. And, actually, as a power trader in the early two thousand, late nineties, and and in two thousands and two thousand ten, we traded more gas than we did power because you were so exposed to what drove the power marginal power price was gas. And so those markets are still linked. You you have to understand what's going on in gas, to really understand where the future of power is going.

As you've seen the supply stacks change and every every market's different, France with their nuclear fleets very different than, you know, ERCOT, Texas, which is gas dominated.

But understanding that supply stack and those marginal cost of, of generation is really what drives prices. And as a as a market participant, you need to understand, at a very deep level, not only for making investments, but also managing that risk near term or even in the spot markets.

So even if you're, I say only in inverted commerce here, only managing the offtake of power, You are by proxy taking a view on, other underlying markets such as gas or in Europe carbon or, whatever next.

I well, yeah, well said to you. Absolutely. You've got to you have to understand.

And and I I, you know, I I studied, businesses in in a graduate level, but but really a lot of this is fundamental economics, macroeconomics. Like, you have to have a you have to have an understanding of the supply and demand stacks at a at a at a market level basis. And what drives those, the cost of carbon, the the unique, peculiarities of every market and regulations that, drive what what those price signals are going to be. On a long term basis, it might be carbon policy in a in a particular geography, or it might be a capacity market regime. You have to understand all of those pieces to, a, make it a a thoughtful investment, and then b, to manage that investment and that risk, for the life of the asset.

And let let's just get an idea of scale for National Grid Renewables now. What's on you guys' books?

Sure. So we as I mentioned, we actually started, even at pre national grid ownership. We started as a wind developer in the in the in the Midwest United States, and then evolved into solar and storage.

Today, we operate roughly, just under three gigawatts of wind, solar, and storage.

Those assets are predominantly in the organized markets of, the Midwest independent system operator, commonly known as MISO.

The Pennsylvania, Jersey, Maryland, ISO p known as PJM, ERCOT, which is Texas, and then the SPP power pool, the Southwest power pool. We have some smaller activities as a renewable owner operator, outside of those, a a little bit into the southeast United States and the and the mountain west region. But that's kinda where we we operate today as a market participant.

Thinking more broadly, we have development projects and assets that we see coming forward in the future, you know, over the next five to ten years, certainly in those markets, and and beyond those as well. And and today, to this point, we're we're focused just in the in the lower forty eight states in the United States.

I forgot to mention we're also a storage operator.

At this point in time, only in ERCOT. We've got about, just under four hundred megawatts, in operation in in the ERCOT marketplace.

So a big chunk of storage as well, and we track you guys, all the time at Modo. So Yes. National Grid comes a lot comes up a lot in our office.

Yes. Yeah. We've got a couple big projects down there, and you guys do a good job of tracking not only us, but a lot of other folks too, I know.

Alright. Can we talk about corporates for a minute? Because the offtake market, if you like, or the the the power purchase market or however we want to describe it, the world that you are in has been totally changed by corporate buying power over long periods.

And there's a few parts to this. Part of it is, part of it is the net zero agenda. Part of it is, electrification. Part of it is data centers and the growth in compute requirements.

So could you just give a broad overview about what's happening with corporate buyers and how they're starting to move this market?

Yeah. No. It's it's it's been fascinating, the evolution. If you go back, hell, not even five years, the the corporate you know, that the the market for renewables, it was kind of a few buckets.

It was mandated by, state or national policies. Right? Do you know certain mandates were in place? And that's what drove a lot of things.

As the techno costs, evolution and techno cost of renewable technologies has come down, either with or without subsidies, the economics of renewables have become more competitive.

And so, again, back to that basic thinking of, you know, supply and demand and and and macroeconomics, as renewables have become corp more competitive, they become more attractive to a broader set of market participants.

To your point, specifically the corporates and in in industrial space, A few years ago, they were, and again, you know, when, when, frankly, more projects were trying to get built and there was demand in some cases, corporates were in a strong position to actually contract stuff, which was net net positive relative to the energy value from day one. And so, their approach then was, hey. This is a good hedge to future energy prices.

And I've and they have decent leverage. And and so they were locking in contracts, you know, some of these basic, financial fix for floating, swaps to hedge energy risk and be able to claim additionality and be renewable. And so it was, you know, it was a very, financially attractive for corporates that had a good balance sheet and had a bit of a a vision to the future and some, you know, sustainability goals.

What's happened in the last couple years, Q, it's it's kinda crazy. And and even even in the last year, you know, you've had sort of crosswinds. On the one hand, you've had growing sustainability and scope one, two, and three emission goals for corporates looking at not only their direct use of of of, and and carbon, you know, trying to manage their carbon exposure, really driving that through their supply chain. And so you've had some folks very vocally and and and for all sorts of reasons, you know, economic and and and and stake other stakeholder reasons wanting to reduce that footprint, starting to drive that through their through their supply chains. So on the one hand, increasing demand, for renewables in in that environment, The economics still looking attractive.

Some of the sub subsidies in some cases helping out. You actually had, you know, the the Ukraine war and and how that drove prices and people realizing the real exposure that they had to, frankly, to thermal and saying, well, we've we've gotta do some things. And so they've had that happen, and be, you know, driving the CNI behaviors of how do we do more. And in the last year with the explosion of artificial intelligence and the demands on the the the hyperscalers and data centers that facilitate the the the growth of that.

There is a, you know, a bit of an arms race going on in that whole, part of the customer demand.

And and so while you you've had this cost, you know, latent corporate demand, you now have on top of it now the data centers and and what they're trying to do. And so that supply and demand imbalance that I referenced about five years ago where the CNIs were sort of dictating terms, it's flipped. There isn't enough supply of electrons, whether you're they're green, blue, purple, pick your color to meet the demand of the existing CNI, and now on top of it, this additional data center demand. And so it's really creating some interesting dynamics from a from a market perspective.

And, you know, I think the whole industry is trying to work through this. How do we get more electrons onto the grid faster to meet the needs of reliability, sustainability, affordability, and and, you know, some degree, some some level of, equitability as well.

So one of the things that's really struck me in the last decade or so is seeing the the evolution of the sophistication of power buyers, especially big corporates, whether that is, you know, Netflix, Facebook, Meta, Google, you know, the the the the big ones that get all the attention, but also industrial buyers that you wouldn't really think of that much who are big energy consumers.

Over the last ten years, they've they they used to go to suppliers or they used to go to a middleman, and they they've decided now, you know, we can manage this ourselves. We're gonna go straight to the generator. I think that's really interesting how well, what the second order impacts are of that change and the way that power and electricity is now really taken seriously as a key input into the the business case of any producer of any industrial or commercial entity, anywhere, really. So how how's the market changing now that the corporates and industrial buyers are going straight to source? What's that done to the market?

No. It's it's a really good point, and it's it's it's funny for, you know, being a little introspective here. I my how I got into the power markets business was literally because of that. I I started as a in a refinery in the early nineties in in California, And I showed up as a warm body, with an engineering degree at at a refinery, and and they said, oh, by the way, we have to shut the plant down. When the dot matrix printer comes through and it says, we gotta shut down, we have this curtailment contract.

And if you curtail, you save a couple million dollars a year. That's like, oh, okay. I guess that makes sense. And not realizing that's not what refineries do.

But to be con Yeah.

But to be competitive in that market, it it was necessary. This was back in in the early nineties when PG and E had demand response, and you could save a boatload of money on your demand charges.

And and remember getting called by the corporate vice president, at one point saying, why are you doing this? What the hell? Why are you shutting the refiner down? And it kinda walked through, hey, I've just showed up, and this is but but I think the point you're raising what's evolved is, as as the markets have changed and as technology has evolved and and as people are always looking to become more efficient, yes, you can shut a steel plant down. You'd you'd you'd prefer not to or an aluminum smelter or, packaging facility. How you how you do that operationally and process process process you're a process guy, I imagine. Process wise process wise, how you do that, you can change because now you get market and price signals that allow you to respond and and be more thoughtful about your consumption of energy.

It's not just, you know, you just run twenty four seven and whatever the price is, the price is. Because as the markets become more sensitive and have price signals, it allows consumers or industrial consumer behaviors to change. And so, whether it be the technologies on being able to shut down certain motors at the very, you know, demand side management level, people can be more thoughtful and more surgical in their use of energy as as an industrial user. And because of that, it requires different skills. It's you know, if they really wanna go do this themselves or outsource it to a a party that, you know, has to have all the smart meters and the be ability to manage the demand of the industrials, you know, that, you're you're you're seeing that those behaviors change in the and and how people operate change.

You know, I I think just to continue, and then I'll I'll pause here. You're starting to see the same thing at these virtual power plants on the power side as well, where people can sorta aggregate across various small generators to look like a a full power plant. And so you're seeing the technologies, evolution, and and connectivity, of managing assets, and whether it be demand or low or generation.

And the markets, you know, you you need the market signal price signals and the rules to be there, but you've you're seeing that evolution change how people can operate.

John, just to to talk about that for a second. Now you, I don't know this for sure, but I get the impression you've been around a bit longer than me. Right? And, well, I was still I was still a baby when you when you're talking about selling demand response in the nineties.

But my point is so I I used to work at a demand side response company before before Modo, and, I loved it. It was brilliant. It was like the wild west. We used to go around and speak to big industrial customers and say, hey.

You're using loads of power. We're gonna help you save some, and we'll split the difference. Right? And, you know, I actually I share your sentiment for DSR.

I think DSR did a lot to educate industrial, commercial, and corporates on their energy use and figure out you know, the it made it important to them. Hey. We need to be thinking about electricity usage a bit more. So, hats off to DSR for that.

But the reason why I raised this is that even in my short existence in this space, in the last kind of decade and a half, we've had there was, like, the term general flexibility. We had virtual power plants. We had aggregators. We had demand side response.

We now have edge so something edge, I heard.

Edge is back in vogue now ten years later. I've been almost talking about edge ten years ago. It's edge I was talking about edge again. It's fine.

Just like bell bottom, bell bottom, everything else are coming back.

Yeah. And then, of course, optimizers is the is you know, optimizers is the new thing. And so all of these terms describe businesses or things that were too early, I think, personally. I think if you're doing demand side response in the in the naughties, you're probably too early.

Right? The the regulations and metering and all of the other stuff to some sort. As the question is, you you've been looking at this thing for a while. And every time this kinda gets revamped with a different name, but it's the same kind of principle.

Do you think that the time is now for flexibility and demand wise side response, or do you still think it's too early?

No. It's a it's a really good point, and I think you're you're you're absolutely correct in terms of the the maybe being a little early for its time. In terms of now, I think it's it's different. And here and here's and here's why. Again, back to the economic drivers.

Renewables as a stand alone, they're the lowest cost electron, full stop. Wind, solar, in most places on the planet, from just an electron basis, it's the lowest cost.

The challenge so that's that's a positive, net positive, and and, you know, and and and I think that's generally recognized.

The The sun doesn't shine twenty four hours a day.

That's not gonna change. Right? So how do we deal with that? Wind, is a little you know, it's diurnal in different places.

It it has a profile, but it so the variability of that lowest cost electron is a reality. And so what's different now is if we're truly focused on reliability, affordability, sustainability, and equity, the the the economic piece, wind and solar are a big component of that. But now we've got to address the reliability component. And so this this reality of more variability in the supply stack is now forcing not forcing.

It's now with that change, it's now requiring other changes in the markets. So to maintain the reliability component with assets that are now disparate, and and and so what, is starting to happen not as quickly as I think we'd like is you've seen the evolution of storage technologies to complement that. The market rules to enable all of this are were are still, you know, adapting. You know, I I think you're sitting there in Texas.

We've been talking about real time co optimization for at least five years. You know, it looks like it's on the horizon now. It's probably longer, but it, you know, looks like the end of twenty twenty five, the price signals and rules to enable storage, at least in the US markets, not fully defined yet. Clearly, the price signals aren't.

And so I do think that the demand side management, colocation, if we start thinking about the load growth, which hasn't happened in a decade plus in many places, with electrification and and and the the new AI and data center demand, the market rules are gonna have to change and for us to continue to find this balance of affordability, reliability, sustainability, and equity.

And so I do think the time's different.

I think tech I think s curves in technology and exponential cost reductions like we've seen in solar panels, for example, are phenomenal forces of nature. And I think that that particularly the s curve in battery cell costs is is actually brute forcing battery energy storage into places that none of us even imagined.

And in order to and which means that there's so many more batteries coming on the network than than pretty much any of us thought five, ten years ago. So the second order effect of that is pushing, regulatory change to help these things make sense.

And the beneficiary of that regulatory change and all the other things around it, as you talked about, also includes demand side, also includes flexibility. Because if it if it helps batteries, nine out of ten policy changes that help batteries also help flexibility and demand side response. So I think batteries are the force that is actually pushing through the changes required for demand side to really feel the economic the advantages of being a large load or a large demand user and the flexibility around that. So I totally agree with you.

Hey. You you did talk then briefly around colocation. I know that you've been spending a lot of time on colocation. So let's just talk about that for a second.

What's happening with colocation?

Specifically around generation and load, which is a big topic. And in Europe, actually, it doesn't get talked about enough. But since being an Englishman in in America, I've been surprised how much talk there is about collocating load and generation.

Sure. No. It's a really good point, and it's it's very topical for for the industry for a few reasons. So if you take a step back to, hey, we've got increased demand for electricity, kind of full stop, whether it's from demand data centers, industrial load, reshoring its, you know, electric vehicles, etcetera.

The challenge we have in the in the in the US markets, and I can't speak to Europe, intelligently. I I I love Europe and but, and used to work there briefly in the UK, but I I don't know the market so well anymore. So my comments, I'll have to keep to US, specifically.

The challenge we have in the US markets is that while the demand is growing, we have an you know, since World War two, we have aging infrastructure. We haven't reinvested in transmission in a material way. There's been piece bits and pieces here and there. We have retiring fifty year old coal and thermal generation for either environmental or just economic reasons. We're trying to build more generation, whether it's thermal or renewables or people are talking about nuclear and certainly gas, etcetera.

The interconnection process, is it can take, five to seven years. And so, you know, that's in the in the just on the supply side. And so we've got this challenge of the supply side not being able to ramp up quickly.

Pretty much in all markets, ERCOT's a little faster in certain ways, but generally, the the most of the markets struggle with bringing things on faster just because of the process process and the way the rules, you know, how they bring things online.

At the same time that you've got this massive growth that, you know, in some cases, forecasting potentially fifty percent load increase or desire to do so driven largely by data centers, but not only them.

Certainly, you've got large load growth in, you know, certain certain areas around hydrogen and other industrial processes. But to meet those needs for electrons in just the current state, never mind a growth state, one of the ways you can do that, and this gets the colocation the way they do it today, it's they they run these studies in in series, not in parallel. So if you're looking to bring a a data center online, and I'm looking to bring a a solar project or storage online, they don't get and and they happen to be near each other. They don't get studied independently.

I'm sorry. They get studied independently as opposed to if you come and say, hey. I've got a solar plant, and I need the, I'm looking to do some behind the meter colocation for load that I can self serve. So you need to really think about the net load and the impact on the transmission system. It allows the utilization of the transition existing transmission system to be more efficient and can allow some load to come online more quickly if you think about really from a net load perspective.

That's sort of the some of the background. The challenge is the rules and the processes don't exist.

I'll be saying processes the rest of my life after this podcast.

Processes You know what's funny, though?

Yeah. I think what if you really wanna be English, you'd say processes.

Processes. Processes. I'm really I'm really bastardizing enough to anyway, hopefully, their listeners understand.

But the processes or processes to to bring load and generation online and think about it as a net impact to the system will allow, a more efficient use of the system, right, versus overbuilding it or taking a much longer period of time to bring these things online.

The rules don't exist in place today to do that, so there's a big push at the federal level with FERC.

A lot of the industry is pushing to, hey. If we really want to move forward, this we need to think about collocating net impact to the system and have the the rules in place to allow that.

There is another impact of that, which is if I just think about nodal prices, for example. Right? So your your your price at different locations on the network.

What's a good example here? Say West Texas, right, in the Panhandle where you've got tons of wind. I know you guys are active there. You've got tons of wind that is essentially some of the day getting getting zero negative pricing because there's not enough load there. And you've got load that wants to be connected next to the wind because that's where all the abundant power is. But because they're not being studied at the same time or the system studies, are done, as you say, in sequence, not concurrently or not together, you can end up not putting load in the places as quick enough as you want where you really want it. And then that that would stimulate more demand, would stimulate more wind in areas where there's already loads of wind.

So yeah.

It that's a great example, Q. And and I think the other thing where I thought you might go with it, the other which I'm sort of glazing over here. The other change or, you know, this is where rules and and things have to be sorted out.

How that load gets served in the incumbent utilities and load serving entities, it it does change a a bit of the the contracting and stuff there. And and and so you like most things, you there's a little bit of resistance to people seeing that perceiving that as a potential risk and things. So there are some other factors, but your point's correct if we want to, you know, see in economic growth, which I think is always a positive thing as long as it's done responsibly.

How you, you know, make that happen, colocation, around between load and generation is one way that can really, you know, address help things happen in the next, you know, five years.

So you don't have to spend long on the Internet to find stories of, data centers or Bitcoin miners being collocated next to inefficient coal or open cycle gas or things that from a engineering or molecule efficiency perspective, you probably wouldn't say is a is a is a great idea on mass.

So could you just talk about that for a second? What what what's happening with collocating thermal assets with big loads?

Yeah. I I I think it's a good point. I mean, this is not, you know, the whole, I'm sure you've had or will have different discussions on cryptocurrency, so we're not gonna go there. But but you did see here in the last few years exactly what you're describing where very nimble, industrial load in the form of of of mining of Bitcoin were able to fairly quickly go to places where there was negative pricing or stranded electrons and go put their, you know, their their Bitcoin mining operation located right next to that and and capture the capture those electrons.

The difference between that, because they're very price elastic and sensitive, they can just shut off when prices spike. So the the reality was they weren't they were basically at the wholesale level, and so they were exposed to the price spikes that you might see in ERCOT or any other market. And when those happen, they just shut down, and it's just flip the switch.

Most industrial operations, certainly data centers and the the the majority of the growth, and they aren't just flip a switch. Hey. Prices go high. We're shut.

And so it requires the colocation model looks more like a how do you go behind the meter? Have a cert a higher level of predictability and and a combination of not only maybe a an intermittent resource or a thermal load, but also backup in the form of have either batteries, or being able to go to the grid with a, for the two percent of the hours of the year that you might need to to to address, running your facility, where today the the there really isn't an option to do that. You're either a wholesale demand, and you get charged for your full demand and just economically just doesn't work.

And so, you know, there's some other changes that will have to happen in the in in the markets to not only allow this net load and treat it if you treat it as net load and then have the tariffs in place and the rules for the large loads to operate as a a net load to the market as opposed to a two hundred megawatt load, you know, three hundred sixty five days a year.

So while I've got you on, I I I wanna ask you about virtual PPAs, which is a term that's banded around a lot, but means different things to different people. Could we just talk for a second about what a virtual PPA is and how you guys contract with them?

Sure. So we talked about earlier, you know, historically, wholesale power was initially traded at the physical level. It was very you know, you had to schedule the electrons from a to b, and it was it was a physical only.

A virtual PPA is something that evolved in the last decade, and, really, it's a financially settled transaction where, two parties, in this case, if I'm a generator and and you're the customer, we agree to a fix for floating swap and say, I'm gonna deliver electrons to you, dear customer, into the market, and you're gonna pay me, you know, forty five US dollars for each electron that may or may not have a wreck. That's a whole other piece that might be in bed you know, bundled in there or not. And then you're gonna take the risk on the floating price. And so if, if for an hour, you're gonna pay me forty five dollars for Electron and the price happens to be forty dollars, we're gonna settle where, actually, it's a five dollar it's a five dollar settlement.

What this does is it gives you a bit of a it gives you a hedge of, hey. My my guaranteed costs are forty five bucks.

It's not gonna go above that. For me, it gives me a certainty I'm getting at least forty five dollars for my electron as long as I produce it.

So the VPPA structure was a, elegant financial way for parties to to transact.

What it introduced, and and this is the fact to kinda evolution, it introduced something that's very, in this in the US markets and and and maybe I'll in the Europe as well in certain cases, this concept of basis risk. So historically then that settlement for that fixed for floating swap, you you probably not gonna do that at the project node. It's just too volatile and just just, you you know, from a a marking of the market, etcetera. And so you normally do that at a at a at a hub.

Well, now you're introducing this concept of basis risk between the hub and the actual node and the value of the power, the the power being produced at the at the node of your project versus the hub where you're settling. And so that basis risk has become really, in a very complicated and important part, in some cases complicated part of the the managing of the risk on who has that and how you manage it.

You used the example earlier of West Texas. So West Texas for those who don't know, very famous for having lots of cows, lots of oil and gas, and and lots of wind and and solar, actually. Not a lot of people, not a lot of load, although that's changing. So you have massive amounts of generation, and and, in that area.

If you try to move that power to, a hub, the value of that power at the node gets discounted because there's only so much that can flow through because of the laws of physics through the existing, transmission lines. And so the value of that electron at the node is lower than it is at the at the hub. And as you get more and more wind and solar and and and and no new generation in that area, that basis widens. And so basis risk becomes a very important part of understanding where you put, generation and assets.

That's why you've seen a lot of storage, and I know you guys are familiar with this. Storage opportunities to go and help manage where you get these very localized situations where you can, manage some of this volatility. So if it's low pricing or negative, I'd love to charge get I'd love to get paid to charge a battery, you know, where it's actually negative pricing. Someone's gonna pay me to take those, and then I can inject those electrons in the future.

So that's where you've seen a use case in the last few couple years of batteries to help manage that, dynamics in the in the power system.

You've talked a lot there about basis risk. And just a comment really that in Europe, we're talking a lot about how to move to locational pricing of some sort. And, of course, in the US, there's lots of nodal markets, and it as somebody who's seen both, it just blows my mind how cool nodal markets are. I mean, I must say.

But then there's the second order effects of locational pricing such as basis risk that, as you say, have been around in quality markets for for basically forever, but we haven't really got used to them in in power markets. And they create all all sorts of, complicated phenomenon to man phenomena to manage later down the line. And so for just a note for our European listeners who are you know, we're in in in Great Britain, we're arguing about whether zonal or nodal or something else, and it looks like zonal is where we're headed. And, how how you how you slice the pie locationally has a huge impact on not just, you know, how many prices you have, but the relationship between those prices and then all of these contracts that sit on top of it.

So, we could see a lot more talk about basis risk in Europe in the decades to come.

No. I think you're absolutely correct. And maybe, I I I I you're you are absolutely correct. And I think as people are thinking about market design and how you then manage commercially in those markets, those are really important.

Basis risk is, you know, in in the commodities has existed for a long time, but but but to your point, you know, the market structures and the nodal markets, in Europe don't aren't in that, at that stage today. I have a funny story. If we got a minute here, I'll share it just to to highlight basis risk.

Yeah. For sure. Do it.

In in, late actually, around two thousand six, I was on the Powerdesk here, and, you know, the markets were kind of evolving. We had, you know, the PJM, ISO, SPP were all or account were all functioning.

I remember having a conversation with the company who exists today, who you, all your listeners would know. I won't mention them, but, I saw they had applied for a wholesale power markets license.

It was a technology company. I found the phone number, got a call the guy, and I said, hey. What what are you doing? Why are you in the power markets?

Like, I don't I don't understand why you have a wholesale power market.

Said, oh, well, we have these this technology, and we have exposure to markets. So we think we gotta understand it. And so there's some wind farms, and we're buying some power there, and we have we have some load in another state. And I said, oh, wow. That's interesting. How do you manage basis risk? And he said, what's basis risk?

So they had literally signed a twenty five year contract as a hedge to their energy.

Again, they were pretty flushed with cash. Had no idea, like, what they were getting into. And so it it you know, like every industry, as things evolve, you know, it's really important to to think through that. As you mentioned, these, you know, changes have real impacts to to the markets and risk, and you as a as a market participant, it's really important to understand those.

Yeah. I think that's really good point, Q, and I think, you know, whether you whether you talk about zonal or or locational nodal pricing, it it will change because, you know, nodal is just a a a a smaller a larger segment, than than the nodes.

You can have basis between, locations. You will have, you know, differences. And and so, yeah, how those markets and how people, managing them will will change, which is interesting.

To all to if you listen to this in Europe, we need to talk about basis risk more in this whole, or otherwise conversation in Europe. Anyway, so now to my two favorite questions. The first one is your chance to plug something. So if there's anything you wanna tell our audience who tends to be European and American and Australian battery bobs, this is your chance. And then the second question to tee you up is about your contrarian view. But firstly, what do you wanna tell us about?

So I think a couple things that come to mind too. I think the you know, particularly for mature markets and economies, and it kinda mentioned this earlier, you know, kinda post World War two, we've had a lot of investment in infrastructure that's aging. And so the reinvestment and and in new generation, regardless of of what the technology is, is is necessary. And particularly around transmission, there is no energy transition without investment in transmission.

And if you were gonna make a t shirt, you know, no transition without transmission would be what I would put on that. And I think in this market, we're starting to see, that the recognition of that, being driven by the challenges of of, you know, demand not being able to get online and how do we address that.

As it relates to, I think batteries specifically to your point, the role for batteries, I think, in each market is going to look different and is gonna continue to evolve as you used, I think, so eloquently the s curve kind of a technology curve reference earlier.

As those costs come down, where storage plays a role or can play a role in the gen in the generate generating stack, and and at the transmission level or, co located.

Those use cases are changing and and will continue to evolve. The challenge is the market rules and policies need to enable investments in those sorts of technologies. So I, you know, I I when I participate in conferences and, you know, different, industry things, I always encourage people, you know, what are you going to do about it? Like, it's one thing to say, oh, you know, getting involved and and, and in in the industries and and making those policy changes happen is really important.

Because if you don't, you know, if you individually or as organizations or companies don't, advocate for those things, then who's going to? So I think it's really you know, the call to action is, hey. If you're, if you're in this space and you happen to be, in the battery energy storage system space and and and and and whatever market you operate in, the market rules need to support and enable the value that that technology can bring that that, didn't need to be there. Otherwise, it's it's it's gonna be difficult to make those investments and bring them forward.

So that would be sort of my, my friendly call to action, if you will.

Alright. And how about your contrarian view? What's the thing that you believe that you reckon not a lot of other people believe?

So, I I so I I I know this is supposed to be focused on energy, and I'll come to that in a minute. I I I'm I'm I'm gonna go out on a limb and say Nottingham to win the EPL this year. It's probably pretty contrarian.

Not as contrarian as it is in most years, but I I think they have a chance sitting to where they sit today. So, all kidding aside, though, good luck good luck to them, but, having a good run.

I I as much as I believe in AI load growth, and I do, I you know, if you sort of a trip I think I question whether it's as as massive as it's being projected.

And I I say that for a couple reasons. One is sort of historical, and you alluded to it. I've been around a little longer than you. But in two thousand, we had the dot com bubble, you know, and everything was gonna be dot com x y zed and and a bit of a collapse there. And and, you know, Enron and WorldCom, they kinda got wrapped up into that for different reasons. I remember vividly in two thousand eight, oil and I'll never forget in April of two thousand eight, Goldman was calling for oil to go to two hundred dollars a barrel. That that it was about a hundred and sixty at the time.

They literally called for a hundred dollars a barrel right when it hit its peak at one sixty.

And what really was happening, this goes back to really understanding the inch China had a massive commodities run up to the Beijing Olympics. The Olympics were happening in summer of two thousand eight. They basically shut everything down because of the smog. And so in April, when Goldman was calling for two hundred dollars a barrel, it basically peaked at one sixty and ended up almost, I think it was a tenth of that a year later. I think it almost went negative at one point at Cushman.

So you have things that cycle. We had the polar vortex here in the US. You had Yuri. You had the Russian invasion.

Things that cycle. We had the polar vortex here in the US. You had Yuri. You had the Russian invasion, of Ukraine in two thousand, twenty two.

There's gonna be unpredictable things. I'm not arrogant enough to sit here and say, you know, or or dystopian enough to say what's going to happen, in the next five years because things that neither of us know are gonna happen or will happen and it and, you know, impact the market materially.

AI load growth will have an impact. I just am not sure it's, you know, the two x growth that they're talking about. I think when your grandmother starts talking about AI and and the taxi driver and everyone else, you start to wonder if it's a little bit overcooked. And I while I believe in it, I think they'll get more efficient. And so I think there's growth there. Maybe it's half of what they're projecting, so it's still meaningful, but it I think that might fall into the contrarian bucket. So I'll leave it there.

As you say, yeah, when you're taxi driver or what what's that phrase? Is it I I that's our famous phrase to do with the Wall Street crash in the nineteen twenties, isn't it? When you're, like, your shoe shiner or something is telling you the stocks to pick, you're in trouble.

It's a bit like that.

Exactly. Yes.

Yeah. It does it does feel like we're in one of them, doesn't it? That that's for sure.

So alright. John, just wanna say, always lovely to speak to you. Thanks for joining us on the podcast, and I hope it gets a bit warmer where you are now. It looks absolutely freezing. I should have started with that.

We we are below zero, Fahrenheit today here in Minneapolis, Minnesota. So it's, it's a winter wonderland and very cold out there. I will see you in Austin soon.

I will be Oh, you will?

Yeah. Yeah. I'll see you. It's you're going to the air cop summit?

Yes. Yeah. Yeah.

Excellent. Well, actually, I that's a I should be talking about this as well. My turn to plug. If you're coming to the ERCOT summit, we are Moto Energy is doing a big, drinks and celebrations and general networking hangout bonanza, afterwards.

So if you haven't found out about that yet, you should come down and, come see us. Even if you're not going to the summit, if you're in Austin, Texas, come and see us. It's gonna be a blast. John, thank you very much.

I'm gonna see you in a couple of weeks' time. And, until then.

Cheers. Thank you.