Rethinking Route-to-Market in the Age of Optimisation with Rimshah Javed (Principal Originator @ Danske Commodities)

Hello, and welcome to another episode of transmission. Today, Q is joined by Rimsa from Danske Commodities, one of Europe's largest energy trading companies. In this episode, Q and Rimsa discuss energy origination, Danske Commodities' impressive energy trading volumes, and the role that they play in the Power to x project in Denmark. They also examine the key trends reshaping European power markets from real time trading and weather driven volatility to the growing influence of algorithmic trading. As always, if you're enjoying transmission, please feel free to like, comment, subscribe, and follow on your podcast platform of choice. Now, let's jump in.

Rimschel, welcome to the podcast.

Thank you so much for having me.

So before we get started, you're at Downsco Commodities now, but you were somewhere before that I'm sure a lot of our listeners will know and respect. And, maybe talk about that for a minute. So what was it like at Orenco?

So I was at Arango for four years, initially growing the route to market business and later scaling their software platform. And I was also responsible for their international expansion, and I've been with Danske Commodities for six months now.

Six months. So you went from small company to a massive company?

Exactly. Sixty people to six fifty people.

Wow. Wow. Thinking about Arrenco for a moment, were you working a hundred percent on battery stuff?

Yes. Okay. Standalone batteries, collocated batteries, but primarily batteries.

Okay. So, Renko, you were making sure Renko sold optimizer contracts and were doing offtake deals with big asset owners and whatnot. And then now at Dansigent Quantities, you do something similar but in a different sort of vein. Can you talk about what you do now and how that's different?

I think it's quite different. Now I feel like the role is quite trading focused as well, like a lot of importance on power markets and the interrelation of all the different markets. And it also includes all of the value chain within a market. So for example, we look at developers. We also look at suppliers. We look at other utilities and other energy trading houses, and we also look at consumers or corporate side. So there's a lot more width and, there's a lot more depth with regards to the knowledge of power markets as well and the interrelation between all the components and also quite a keen eye on regulation and the policy changes and how that's going to impact the markets.

And so let's talk about origination for a second because there's lots of different types of originators.

And, it's it's a very cool word, of course. So what what do you do as an originator?

So I would describe energy origination in simple words. For me, at least, it's business development, and it's a deal making role. And what it entails is that you are essentially connecting producers as well as consumers to various energy products and services. Now this could be quite simple, and you could think of it as sales, so more standardized products.

So for example, like the bouncing markets within Germany, there's a tender every year. Every year people bid for contracts. It's essentially a deal season, so that's fairly standardized at this point. But it could also be more customized products and services.

Some of that require quite, deep engagement with the counterparty because you kind of figure it out together as well, and there's no set product that you can just give off the shelf.

And, essentially, those are really cool deals as well. So I would describe that as a part key part of energy origination as well to find those products and services as well where they don't exist in a standardized way.

And I know you can't talk about any live deals, but can you just share some examples of customers that you work with at Danske Commodities and the kind of contracts that they're looking for or the the kind of problem that you solve for them?

I think to pick a really good example, I would describe, the power to x deal that Danske Commodities has done, and that's the largest power to x site in the world. It's for the production of e methanol, and power over here is a solar facility that's around two eighty megawatts. And the x l here is essentially that the clean energy is being used for e methanol for which there's a corporate offtaker as well. So there's a corporate offtaker who then uses this for transportation, and there can be other, use cases for that as well.

So the role DC has within this deal is that we are optimizing the whole power to excite. That includes on the solar site, the balancing agreement. For example, the forecasting of how you expect, the power to be and then managing that within intraday markets. And then there are constraints from the actual facility as well because, for example, there could be production targets or how much e methanol needs to be produced.

So you need to then consider all the different constraints. We obviously look at the power pricing, when it is it when is it most optimal to generate, from the solar as well as provide that power. So it's a whole optimization puzzle, and DC is the balancing party for all of the facility.

That sounds like an awesome project.

So they've got a massive e methanol plant and solar on-site.

But I assume the solar doesn't cover the base load of the site. Right? Because you need loads of space for that.

So it is a behind the meter, facility. So there's that optimization, and you're right in the sense that DC is the one responsible for making sure that we are providing, if I can call it, that base load power, or I would rather call it shape, which is consumption over time, and we are the ones following that pattern. And we are responsible for that. So either through the solar asset or by optimizing in day ahead and intraday markets and obviously buying power from the markets as well.

So is it is this site going online?

Is it online now?

Yeah. It went live last year. It's in Denmark, and it's the largest power to excite in the world.

Very cool. So they come to you and they say, hey. Dancer Commodities, we're gonna need a lot of power. We have some on-site generation.

We have a production profile and and all these other things. Figure it out for us, and let us just have some certainty around our power costs. Right? And then then then what do you do?

You go away to because Danzig we'll talk about Danzig commodities in a second, but you go away to the the teams behind you and say, I've got this big deal. How do we manage the risk here? So can you just talk through that?

Yeah. So I would say different things are important to different customers, and they have very different requirements as well. Now some of them are determined almost by let's say if they're a part of subsidy scheme. Like in the case of hydrogen, there's a hard two round ongoing, and the results just came out, and the government is the one dictating the requirements. So in that case, it's on us to work closely with our customers and counterparties to make sure that we are providing half hourly clean power and fulfilling the requirements that are on them to win, essentially the subsidy.

So that's how, for example, that would be in in a subsidy scheme.

Oh, so just on that. So these clean hydrogen projects, they're passing the responsibility of the clean bill onto you as the power provider.

Yeah. So there are not many companies who can provide that power. Right? So there are only a handful. So we are one of the counterparties they could work with, and then it's on us to figure out how we are going to meet at least the requirements to provide that power, what price it should be, and so on.

I've always wondered that because it's just very different jobs. It's understanding the electricity support supply problem and then making hydrogen are just totally different jobs to be done.

Exactly. And I think, especially, that applies to corporates as well. Oftentimes, there's an educational piece to be done as well because their business is not power markets or power. Right?

They might be a part of RE one hundred where they commit to, for example, having hundred percent clean renewable energy. But how do you get there? How do you get that clean energy? What does it mean?

What's the pricing? So all of these questions then come to us, and we work closely with our customers.

Alright. And then you so coming back to this hydrogen deal then. Sorry. I spoke spoke across you.

So this hydrogen deal, massive plan in Denmark, come to you and say, look. You gotta put you gotta put together some sort of plan for me. And then what do you do? Do you take it back to some some back office trading desk, some risk management team?

How how is how do you discuss that internally about how to manage that proposition?

So we have different, trading teams. We have an intraday team. We also have a strict a structured products deal. So depending upon what products we are talking about, we actually go to both of them.

They they basically for example, the intraday team would be experts on how do you optimize within the intraday market. There would be a day ahead team as well who would have a view on how things work across day ahead. And then there's a very close collaboration between departments. But, essentially, there are subject matter experts for each of their given areas.

And our job actually, our job is twofold. Right? One is to be the link between Danske commodities, all of the different departments and organization and the market. And one is also be to be the link between all the stakeholders internally.

They would have different risk profiles. They would have different thinking with regards to how to make things happen. And we also collaborate to make sure that, you know, the value overall is captured for the customer, and we are thinking in their interest.

And so that was a very cool supply contract. What about the other way around? What about when you're speaking to renewable generators or generators in general, and you're saying, right. We're gonna buy all your power.

Here's the deal. How do you structure something like that? And then I wanna ask you all about the firm and, we're gonna go down some rabbit holes. But let's just do the the PPA side.

Yeah. So for PPAs, producers typically, for example, want a pay as produce structure and, of course, want price guarantee. The longer you can go, the better. And DC offers from one year up to fifteen years, so quite a long tenure. And that's where we see here different requirements from different players.

Payers produce. I haven't heard that that terminology before. What does that mean?

So, essentially, we are paying them a certain price and the let's say you have solar or wind, it is producing depending on its profile, and we are also then managing the risk of that. So, for example, between forecast and actual production, that might not be the same, and you can't guarantee a certain profile. So we take essentially the intermittent power from the asset.

Alright. And then you gotta figure out who's responsible for the the difference between the expect the the shape.

Exactly.

Expected shape and, what they actually generate.

Yeah.

And we are the ones then who take that risk, and we are the ones who then manage that.

Yeah.

Yeah. Alright. Let's talk about Danske commodities for a second. I'm sure lots of our audience know Danske, but some of the the scale of Danske is pretty mind blowing. Could you just talk through some of the numbers?

Yeah. So Danske commodities trades over four hundred terawatt hours of power annually, and we are a power, gas, and certificates company. I'll primarily focus on power because that's where I sit and that's where I work. And we have about fourteen gigawatts contracted, so that includes multiple different asset classes, but broadly speaking, solar, wind, both offshore and onshore, as well as flexibility, which includes batteries, CHPs, as well as power to x, which is also a form of flexibility, but on your asset class. And then a breakdown of that is we also manage some of the largest offshore wind projects. So for example, Dogger Bank in UK, as well as Baltic two and three in Poland, which are roughly around four point five gigawatts. But, yes, these are some of the numbers just to put into context, the overall power traded, which is a huge number, but then also the asset business, which is which is actually a growing area within DC.

It's enormous, right, to, to think about Ireland's peak demand. It's like six gigs, something like that. Someone's gonna tell me I'm wrong. So apologies if I'm out by a little bit of it. It's like twice. It's two and a bit islands in generation Yeah. All going through Dan's Creek Commodities books.

Yeah. The volume is just staggering as well. And where does Danskeer Commodities come from? What what's the what's the story?

Yeah. So Danskeer Commodities is one of the pioneers in algorithmic trading as well as short term power trading. So, actually, if you look at how the energy transition has, gone over time and if you look at how markets have evolved, we see the trend that they've come closer and closer to, shorter timescales in terms of trading. So at that time, DC, it was founded in two thousand five, and it, it looked into having, for example, using more modeling techniques like including weather patterns and so on in into its algorithms, as well as, for example, focusing on short term power trading. And we are acquired by Equinor now. So if you're a we are a fully owned subsidiary, and we are trading power, gas, and certificates.

And there's there's just been some incredible Danish businesses that have set up in the last couple of decades to do exactly this. Something about the Danes that know how to do power trading. You mentioned a trend of power markets moving closer to real time. It's actually one of the things that we talk about at Modo more than anything else. So our belief is, interesting to know your thoughts on this, our belief is that power markets are heading towards a spot market.

You can argue there is a spot market in power, blah blah blah. But in the same way that you can go and buy the commodities like, you know, Brent crude or something like that, As there's more storage on the system, we think that the the time period is gonna get closer towards real time, and that's gonna create some really interesting opportunities in the market. These spot markets will end up being highly liquid. And once you have spot markets and I I spent a lot of time speaking to investors about this because we think this is a big growth area in the next decade, is that when you have proper real time spot markets for power, then you can start you can start financializing assets in a different way, and you can move risk around the system in a on as paper risk rather than, you know, with physical assets or physical risk, for a bad turn of phrase.

And so we think that's really, really exciting, and there'll be lots and lots of opportunities for businesses to to to capitalize on that, to trade to trade power in different ways. You know, derivatives of the products on top. The market's gonna look and feel very, very different.

Yeah. I think it's interesting when you say spot market. So in US, when they talk about spot market, they talk about real time markets, which I think we're which you are referencing. In continental Europe, that's the day ahead market. But I'll answer that, based on basically what my view is, in terms of the real time market. I think I agree with you. And, also, something that we are already starting to see is, the opportunity.

The biggest opportunity is right at the start. So, for example, an event happens in the market. So the players who are quickest to respond are the ones who capitalize on that. And by that, I mean, are able to realize higher profits because, essentially, what we are seeing is with the trend that you are describing and also with with algorithmic trading.

So Apex is now saying that almost seventy percent of the trades on Apex are by algorithms, and this was just around forty four percent, in twenty twenty one. And oftentimes, it's algorithms and talking to algorithms and, you know, changing the market dynamics. So if we put both things on top, that shows that markets are getting faster and faster as well as they come to real time. And as volatile events happen, people are able to act much more quicker.

So the window for opportunity is getting shorter and shorter as well.

Yeah. I mean, the there's there's so many parameters to it, right, which is that settlement periods are are shrinking.

You just look at power, the wholesale power, settlement periods are shrinking. You got a five minute market in Australia right now. You got a fifteen minute market in our cart. We do thirty minutes in the UK, but that will come down over time. There's been over the last few years, there have been all all sorts of suggestions there. And then if you think about grid services or ancillary services or reserve products, you know, it's not that long ago that those were year ahead or season ahead. You know, season ahead, you know, twelve months ahead store contracts.

And then that's all headed towards day ahead or four hours ahead. So and and gate closures getting tighter. Settlement periods are getting tighter.

And it's really exciting because it should mean that there's more yeah. The the liquidity will move towards spot, and then the price discovery will be more real. Is that the right the right word? I don't know.

Here's my jet lag kicking in. But there's gonna be price discovery is gonna be more accurate.

Yeah. What do you mean by that?

What do you mean by price discovery will be more Well, I mean that if you've gotta buy say, buy a day ahead, say you buy any sort of contract day ahead, there's a load of risk in the time between now and delivery that you have to price in.

There is a is a is is a big unknown period. In the buyer and the seller meeting in the middle of finding a price, there's a load of noise on both sides, which is stretching the window of what that price should be. Whereas if it is just, here's the price now for the thing on the spot, then that that should shrink that window.

Yeah. It's interesting you're saying, using that example. Right? So, actually, already, we are seeing that the delta is also increasing between the actual capacity.

So, for example, we all already see days where there's a ten gigawatt of difference between day ahead and real time. And if, obviously, that's not traded out, we'd have a blackout. So we already see the delta increasing as well. And then on the pricing as well, actually, I think this was in our court this week where there was a spike, so a period of high price, and it was actually batteries that discharged during that period.

But then there was a later spike, which was much higher. But by then, the state of charge was zero. So that goes back to your point that it's essentially that difference as well between price discovery and the expectation of market as well to forecast, which is obviously challenging.

Yeah. I mean, the forecasters will make some good money. And, of course, there there will be a need for some in the things like storage, there needs to be some sort of long longer term commitment. Alright. We talked about markets heading towards real time, which love that as a trend. Love it. What other trends are you seeing in European power markets?

Yeah. So I think something that listeners won't be surprised by, there's obviously a lot of volatility. We have briefly touched upon that in terms of price. There's a lot of price cannibalization as well.

And as we mentioned, we are in the beginning of April. It's just spring. But already negative pricing is prevalent, during spring months, and it's not even summer. We obviously see that weather events are more and more important, which are driving volatility.

So, of course, we can talk about Dunkelflute, which is the German term for no wind and no solar. And in the German electricity market, that has a huge impact. But even if we take stand alone events, so for example, if you look at cumulus clouds, which if they're hard to forecast, essentially, it means that your solar output would be lower.

Cumulus, they're the big the big fluffy ones.

Yeah. Exactly. The fluffy clouds. Yeah.

Like, the the Simpsons episode clouds.

Yeah. Exactly. Yeah. That's the non meteorologist, our our our way of talking about it. Exactly those.

Yeah. So they have an impact on, solar that can happen within day. And, actually, within wind as well, there's a phenomena. It's like a traveling microburst, which is a cloud which is moving, at the same time having showers, which hits then the wind, the the blades.

And that essentially means if you look at the wind output during these events, it's extremely volatile.

So you could be making a trading decision, let's say, within a fifteen minute window. But in the next fifteen, that's already the opposing side. So it's very hard to predict that. What essentially it means is there's obviously we mentioned that the delta is increasing between day ahead to intraday, but there's a lot more volatility as well.

And essentially, it means that both trading is quite, trading as well as origination's job gets quite challenging.

It's funny because in the power sector, so much of the last basically, as long as I've been out of university, so last kind of decade and a half, when you ask when you ask the five whys, like, why did this happen, why did this happen, you always end up to this reductive position of, well, because of gas prices. Right? Because everything everything sits on top of gas prices in pretty much all the developed economies in the world, one way or another. And then we're heading towards a place where everything sits on top of weather. Yeah. And I don't like, I I quite fancy our chances at predicting gas prices.

I know it's a a perilous endeavor.

But predicting within day wind and solar, wow, that's a big problem to solve.

Yeah. Definitely. And that is also getting harder to predict if you put climate change on top as well and the presence of extreme weather events as well.

Power traders are all gonna have to become they already are, aren't they? They're all already what do you call them? Weathermen?

Weather Meteorologists. Meteorologists. Yeah. I know this term because of the past.

Why is that? We do even have weather we still have weather people. Right?

Anyway, they're all becoming weather people. Let's do another trend. That one was fun. So we've done spot we've done the move to spot markets, and we've done the weather impact and the volatility between day ahead and intraday. And there's those spreads, which is interesting. What else do you see?

So trading volumes, so so the trading volumes are decreasing as well and there but there's a lot more trade execution happening. And that's again down to basically algorithmic trading as well, and we already touched upon the pace of deals. But if you look at the trading volume, that is increasing, but the individual trade size is decreasing. And I think this is important because if you layer on top of that the previous discussion we had with markets coming more to real times or shorter blocks, let's say fifteen minutes, that also underlines that there's a lot more liquidity in the market.

And, essentially, there are a lot more players entering. So for example, hedge funds and a lot more players doing prop trading. Now often, it's it's it's thought like, okay. The players are only doing prop trading or financial trading.

There's just, like, a monetary value to it. Of course, that's true. But, essentially, that adds a lot more liquidity in the market as well. So let's say if we are going out and we just want to buy physical power or have a physical aim behind that, but there's no one to buy or sell from, how are you how are you gonna do it?

So having more players in the market is also important, and that underlines the importance of trading when we talk about the the deltas are increasing, but all the power is still being traded out. So that shows how how the system is working overall and the importance of that.

I got a couple of questions I gotta ask you based on that.

So what is prop trading?

So prop trading is essentially like proprietary trading, and what that means is that you can open positions in the market, but you need to close them and essentially have zero imbalance. Certain markets restrict this. So for example, in the case of Germany, you cannot do prop trading unless or until you have physical assets as well.

And And this means you're never gonna take delivery or you'll never you you never touch the physical world.

Right?

Yes. Exactly. You cannot so you can do both ways. You can still if you have physical assets, you that essentially means that you can, of course, utilize that.

But prop trading purely, yes, it is a financial construct, and it has nothing to do with the actual physical delivery of power. But in certain markets, you can do prop trading. So for example, in GB, France, Denmark, but again, that's where regulation differs and different markets have different rules around that. And a lot of hedge funds that are entering the space, they're, of course, looking at prop trading and not necessarily having a physical physical physical asset business.

The risk, though, is if you get caught on the wrong side, you can't run an asset and unwind your position, you're stuck.

Yeah. Because when it goes to imbalance, right, in markets where it's permitted, then you can be either on the right side or the Yeah. Or the wrong side. Yeah.

So the volume of the blocks is decreasing, but it's changing hands more or it's being traded more? Is that is that right?

Yeah. There's more trade execution. So more trades are being made even on, like, a fifteen minute basis or shorter granularity and so on.

Which aligns with our previous thesis about squeezing volume towards real time.

Alright. Very cool. Let's talk about regulatory stuff then. So so so you and Danske commodities are signing all these long term agreement. How how long is the PPA?

Depends. We can do, like, five years, ten years, fifteen years, and then that depends on the asset owner, of course, where they need contracted revenue. And especially for projects that are not built, they prefer oftentimes longer term, agreements so that they can take them to FID. But for existing assets, we're also hearing shorter term deals, where asset owners don't necessarily need as long.

So then how do you manage so you're gonna sign a fifteen year PPA with a wind farm in Scotland, but then there's a massive question at the moment about zonal pricing. Who's on the hook for that?

I think it's, again, going back to where I mentioned that even we work closely with customers. Right? They won't have an answer to this. We also don't have an answer to this.

So that essentially means you need to have some flexibility within your contracts and also with your relationship and basically agree that depending on how market circumstances are changing as well, you have an opportunity to basically speak to them and obviously discuss, in a reasonable manner. So there's a lot of uncertainty, zonal pricing, being one of them, that we need to account for. And, actually, there's a more and more interventionist role that governments are increasingly playing as well. So we need to factor in all of these all of these things.

It's a prime example of how this locational pricing question has been buzzing around for years now, but it's been material certainly for the last, let's say, eighteen months. It just causes it it slows down capital movement so much, and it slows down agreements because how how do your lawyers and counterparties law lawyers get comfortable with this? I mean, how how do you even how do you even write that down?

Yeah. I think it's difficult. Right? Like, again, the the thing is it's uncertain for both sides.

It's not like one party has information which is giving them any edge or giving them any any advantage. So it's essentially an acknowledgment of all of these uncertainty. And something that's closely tied to what you're saying is if you look at the market as well, the fundamental reasons people are doing trades, they are static and they're the same. So for example, an asset owner needing a long term PPA.

But even if you look at the market, there's a lot more volatility, a lot more changes, a lot more movement, and it is then our job to be essentially in the middle and match match the two. And that's always been something that companies like ours basically, it is our business model. It is challenging, but it is it is what we do.

You're matchmakers for generation and supply. Tinder for wind farms. Put it that way. Alright.

So, I lost sorry for interrupt.

You lost marketing team to put that somewhere, but let's see if it gets approved.

Let's talk about some of the big wins. So you talk so there's some big wind farms that you guys are doing offtake for. When you when you when you sign a four and a half gigawatt wind farm, how do you know that you can you can get rid of that power?

Yeah. So I think that four gigawatt, four point five gigawatt number, it's divided across Dogger Bank and Baltic two m three. But even if, let's say, we take whatever capacity, they're fairly large on its own. So that is essentially where trading markets come in.

Right? Like, we have talked about liquidity. We have talked about, like, trade execution and all these different, parameters. So for example, I would say the first challenge already starts where you have a forecast, and then you have an actual delivery.

So that is the balancing puzzle, and we are the balancing responsible party. So we already need to start thinking at that point because the challenge isn't just that the power will be produced. The challenge is also it might be different to what we think it will be produced. And then you can use different, channels.

So for example, interconnected trading, if there's a lot of surplus power within the country, which means we simply cannot find buyers, who are willing to take that because there's abundant supply. That's where interconnectors, are used. And but let's say even the interconnectors are like, you know what? Like, the neighboring countries have enough.

That's where then the curtailment factor comes in. And, yeah, with regards to, curtailment as well, if you look at that initially, it was not that big of a topic. So in Germany, again, regulation required remote controllability.

So the ability to be able to, phase down these assets as well, solar, wind, and so on. But it is becoming a bigger and bigger topic in market. Even in markets where it's not required by regulation, players are more interested in being able to do that. And that is because we are seeing a lot of times where there's an abundant amount of renewable energy and there's simply too much surplus to to get absorbed.

Seems a shame to tell them down rather than take negative pricing. But I would say that because I'm a battery guy.

Yeah. But that's also where, I guess, this is the thing. Right? Like, you see in in the in the GB grid as well, even places where there's solar obviously follows a certain profile.

Right? But it can be windy across days. And if the grid connection is so constrained that there's simply no more capacity, it is being turned down. But that's where I think p two x projects, like power two x projects or energy intensive industries like data centers and so on, they have an important role to play as well along with, of course, flexibility in batteries.

One problem that we are seeing a lot is, you know, like the hard one hard to subsidy scheme. Now we're there. The government wants the power prices to be low. Like, they want them to be cheap, so they don't have to give too much subsidy.

But on the other hand, in CFD, it is being set at a higher price, and now they want to increase that from fifteen to twenty years. So that is making it challenging as well because we want to work with the, obviously, hydrogen players, and we will. But there, we need to provide a low price. But to the the PPS side, we need to provide a higher price, and the government is you you get what I'm trying to say?

So that's another question for you. I'm gonna throw in another trend here, which I think one of the things that you and you can all this is already evident in the UK. Regardless of your politics, the direction of travel in the UK has, over the last few years, trended towards governments taking more active roles in markets. So stepping away from just letting the market decide, and governments are either stimulating markets or pushing markets in one direction to achieve some sort of goal, whether that's some social responsibility or grid resiliency or ideally some level of, carbon reduction, one would hope. And to do that, governments are designing subsidy schemes, sometimes in places where they contradict each other. So seeing as you guys at Downsview Commodities cover both sides, which is the supply of power and also the purchase of power, how do you deal with problems like hydrogen subsidies, which are designed to stimulate hydrogen production at a low cost?

But the ultimate goal is to limit the cost of the taxpayer. Right? One of the parameters is limiting the cost of the taxpayer. So you want low production costs.

But then also on the other side, on power production, you have CFDs, which are tending towards longer duration. And there's a whole lot of rule changes which can often counteract that primary goal. Do you kinda see where I'm getting at here? What how how do you think about playing both sides of that complex structure?

I think that's where the contradiction is. Right? Like, even within I agree that the government is taking more of an interventionist role. Even in the example of the GB grid where you've described, like the har one, har two, the price needs to be low, but the CFD side is higher.

Yeah. So what we are seeing is that, for example, corporates, they are the ones signing the PPA. And essentially then, if you are a one signing PPA, you are competing with the CFT, which is setting the price, which is which is high because we are not seeing as much activity of PPA with by the utilities because they don't think that that on a stand alone basis, that's a viable business model. So that is, again, adding to the challenge.

And I think you took the example of GB. I would say even within EU, there's a clean industrial deal that they launched, last month. And what now they are also talking about this. Right?

They want to decrease the power prices for industry to make industry more competitive. So manufacturing, let's say, steel, chemicals, so on. But if the price signal is too low, the developers don't have an incentive to build their projects. So now that that deal says the the way they'll solve it is through more PPAs and more CFDs, which is or more subsidies, which compete with each other.

Now for the PPA side, they again have an answer, which is that they want to encourage more PPA activity in the market by the EU warehousing risk, which essentially means that it is encouraging poor risk management practices. Because the newer players, they might just want to win business. Right? They might just think, okay, let's just sign a couple of these deals, and we'll see how that goes.

And we also how that went in twenty twenty two, and players did that.

Could you could you expand on that in twenty twenty two for our listeners? What what do you mean by that?

Yeah. So in twenty twenty two, when the gas crisis happened, the power prices increased increased drastically. It was, of course, a highly volatile and unprecedented event that caused it, but it essentially means we saw a lot of companies going out of business. So in the UK or GB grid alone, we know that more than thirty, suppliers have gone out of business since twenty twenty one up until now, with one actually going out of business, I believe, just two weeks ago.

And what that means is the market there's a lot of risk in the markets. There's a lot of risk within trading. And to have a viable business model, you need to use right risk management practices. And if, for example, the EU is now warehousing risk, it is it is again competing with market solution.

So it's just going back to earlier what we were talking about, the interventionist role of the government and oftentimes how it is their own practices are creating, misincentives in the market.

It's such a tricky one, isn't it? Because I always wanna start for the principle of let the markets figure it out. But it's not a level playing field. You you really need a level playing field.

I don't think there's so many aspects. So I just think about the GB market. So many aspects of GB market that are not level for new entrants or new technologies, I believe. Now I'm gonna ask you a question.

If you could answer like I'm a five year old, would be good. So what in your world, in power markets and origination and pass it moving risk around, what is hedging?

Yeah. So I think this actually ties in closely to what we spoke about just now, like, with regards to risk management. So hedging very simply means that you have now locked in one position, any trading position in either direction. You then need to make an opposing trade.

So that means now if you have lost money on one side, you will gain it on the other. If you have gained money on the other side, you will lost it on the other. But, essentially, that is canceling out your position, and it could be an effective risk management tool. So this could be done through different ways.

So, for example, bigger trading companies have more opportunities, because they can have bilateral relationship with other trading houses and have those deals bilaterally. You could also do it through exchanges or through portfolio.

But a common misconception is that, you know, hedging is just a risk management tool, and it's always good. But the hedging needs to be done correctly as well. And we spoke about the gas crisis, but there are also examples where, for example, from Sweden, where there were massive wind parks, they had locked in PPAs, so essentially a fixed price. And as a hedge, they had a short baseload hedge in Germany.

Essentially, what that means in very simple terms is that they were betting that the power prices will fall, and then they will buy back cheaper power. But we all know what happened in the gas crisis. The power prices spiked. So that's essentially where the short baseload hedge that didn't work as it was intended, and that was a massive loss on the books as well.

So I think with regards to hedging as well, you need to think about different things. You can even think on a portfolio level, for example. A simple example could be your batteries are a hedge against your renewables. If the market pricing is flat and you have hedged the position, the renewables will be prof profitable.

But if it's a volatile market, the batteries would be so they cancel they cancel each other out as well. But, yeah, it could be done in multiple ways.

It's like an equation, isn't it? And you gotta make sure it balances at the end of the day or whatever your your period is.

Yeah. Yeah. And I think within Europe, that's quite challenging as well because the markets are physically connected through interconnectors.

But we spoke about regulation. That's where regulation is not is not the same. And we touched upon the politics as well and how political the topic of energy is becoming as well. Right?

So even in the example of twenty twenty two or years to come, for example, it it is possible that the the tax system isn't unified either. So one company might be making a lot in one country, but that essentially might be a hedge against what they're making in another country. So now if one part gets taxed, you essentially your hedge is not working how it's supposed to work as well. So the regulation adds a further complexity to, to the equation as well.

Yeah. Undoubtedly, as you say, energy is getting more political.

Hopefully, that doesn't mean swings from one side to the other on policy every four or five years because that's gonna make life pretty difficult.

So we've we've talked about a few trends, and they've been fascinating to discuss.

How about the future of PPAs? And what you know, if you fast forward five or ten years, what new structures are coming on the market? What's everyone talking about at the water cooler? What's what's hot right now in PPA world?

Yeah. So I think at this point in time, at least, corporates are valuing additionality. We briefly spoke about that. But also extending that to a five, ten year lens. Right?

Like, grids are also What does that mean, additionality?

Additionality means that if you're a corporate and you have you have, let's say, fixed price for a power purchase agreement, you obviously want to fix your price for your operations, but you want it to be linked to a new asset, a new build solar or a new build build wind.

Can we give an example? Let's let's say I'm, in a supermarket supermarket chain. Yeah. Big orange supermarket chain with an apostrophe.

And I I've got the, you know, two hundred supermarkets over around the country, and I need to supply them with renewable power because I've promised to do that. What's the context of this additionality?

So additionality would be if we come to you and we say, hey. There's this perfectly built solar asset. It generates really well. Here's the half hourly data from the past three years.

You will say, no. I don't want this because I then cannot say that this was built because of me. You want a new asset, a new shiny asset that you provided the for and the actual building of the asset. So you can say that this asset was built because of me.

That's that's pretty legit. That's very kind of honest, and that's the right way to do it. Sounds like they're doing it the proper way. Right? Is that is that good? Is that a good thing?

This is my personal opinion. I don't think of this as good, especially if that is a hard requirement because if you want like, we all want the energy transition to happen. Right? And we want that the grid is green.

Essentially, that means that there could be a well functioning solar and wind asset. There's nothing wrong with that. It works as it's intended to, but the appetite to have a PPA tied to that is lower. And, essentially, then, of course, it's possible that you got the return on investment from that.

So there's not even investment risk, but these are well functioning projects that are then not as much in demand. And, again, you could, again, tie them to a structure, right, like, have a three year PPA or a shorter term PPA. Yeah. And we do do see that trend actually.

So projects then start coming off, CFTs or subsidy schemes. The market looks for shorter PPAs, for them, like even the developer side.

But you end up with this weird shiny object syndrome thing Yeah. Where everybody wants a new asset to put their logo on or whatever.

Exactly. And right now, if you think about the grid connection issue as well, and, again, we are not in the zone of pricing world yet. That means most of these assets are built being built in similar places as well. That, again, further complicates the picture as well.

Yeah. Interesting.

But, actually, going back to what you said in terms of trends, I think I, changed the subject a bit there. Of course, there's this, need for additionality at this point in time. But as the grid gets greener and greener, and in certain parts, in continental Europe, if the grid is more than eighty percent green, it counts as fully green. So you could be consuming from the grid, and you could have hundred percent clean operations or operations running from clean energy.

And that's where the link between consuming physically green power, is also increasing. So we already see that with the har one and har two subsidy schemes where you can't just have a financial PPA and have a financial contract or just buy regos or certificates to show that you need to have physic you need to consume physically green power, and corporates are starting to value that as well. And I think that physical link between markets will also grow.

I guess it's a good thing that corporates are doing.

Their approach to saying, what actually stands to reason here? Like, what what makes sense? It's like the the dinner table conversation. If you're trying to explain to your family that you've got green power, but it's kind of with certificates.

And then in the winter, it's not really that green, but then you make up in the summer. It's all a bit complicated. But it's good that the corporates are thinking, yeah, let's let's do this properly. But I get the, there is an opportunity cost in that.

Yeah. Let's get to the last two questions, my my and my favorite one. So firstly, anything you wanna plug? Any projects or news that you think our audience should know about?

Yeah. So I would just say just, if anyone doesn't follow the Danfel commodities LinkedIn, please do. That's where our marketing team is quite active. They obviously share new deals such as the Power two x project, which was a new, new thing. And, obviously, a major, major news items in terms of how, for example, the grid is changing.

What's that one called, that project?

Kaso. So Kaso is the solar solar plant that is with the Power two x project. Sure. Yeah.

And we also have a lot more exciting deals as well. So, yeah, do follow LinkedIn of, Danske commodities.

Alright. Yeah. Head straight from this podcast to the LinkedIn and and click follows those guys. And now for the contrarian view. So what's the thing that I bet you've got loads of these. But what's the thing you believe that not a lot of other people believe?

Again, personal view, I do not think that the government inter intervention is creating the right signals. I do believe in r and d investments. I'm believe in that strongly because a lot of innovation that we see happening, governments play an active role in that.

Oh, I'm gonna challenge that. But, yeah, let's let's let's we can get to get to yours, though. I'll be more interested in my chat.

Yeah. So that we see not just in energy, but other, other industries as well.

But, again, at this point in time, it is not I think there's almost a desperation. Right? Like, we had the year twenty twenty two where extreme prices happened, and there's a pressure on government as well because there is a need to have more affordable energy for consumers, but also industry to make prices more competitive. But the people making the decisions are not necessarily the experts in power markets.

And oftentimes, I believe by the time things reach them, they're simplified to an extent because these are very complicated subjects even while we are talking about it. Right? We need to pick up one topic, make sure we are not thinking about four other things which are associated with it, and just talk about that to be able to make sense out of things. So I don't think the people making those decisions are necessarily the experts, and we see that interventionist role and we have talked about some of those contradictions, then essentially the role of markets is being challenged more and more.

Could you give some examples?

Yeah. So I think we briefly spoke about the subs hydrogen subsidy scheme. So that's where the power prices need to be lower. But the subsidy scheme for, renewables or the CFD, that sets a higher price.

So already you see a bit of a gap between the two. Again, looking more towards continental Europe. If you look at the clean industrial deal, they want to make power prices cheaper, but that's through building renewable projects. And if the price signal is too low, developers will not do that.

And, again, there's another interventionist approach there, that they want more CFTs, and they want to encourage more PPAs by essentially having fair housing risk, which is creating poor risk management, encouraging poor risk management practices. So these are just some examples of, the contradictions that we that we see.

Yeah. It's almost as if the energy trilemma this is kind of in the twenty tens. A lot of the talk about the energy trilemma, so security supply and cheaper bills, the lower cost to consumers or, making it economic and then low carbon. Then it was all some sort of harmonious circle.

And I think what was missing was a big fat number in the middle of it, which is that there's a massive capital cost of doing this that needs to be distributed either in power prices or upfront or in something. And I mean this in a in a in in a kindest, most positive way. It's like the everybody's woken up from the party with a hangover and realized, you know, we we've got a this is a massive allocation of capital, and somebody's gotta pay for it. I thought I thought it was funny you mentioned.

One of one of my, if anyone ever asks me this question, one of my bugbears is the allocation of r and d spending in the UK.

I find it crazy how much money gets given out by the government to in r and d projects for stuff where you have to write this big long report. Sometimes you have to go to a consultant, right, to get these to to to get the to pass the test, on these scoring matrices, to get the points, to get the money from the government for whatever it is, some, you know, new energy storage technology for that uses a different type of glass or something, often something that doesn't never makes any sense anyway.

You have to do this big, long report and assessment and application, which is not actually creating value for the economy at all.

And then there's hundreds of thousands, even millions of pounds that get allocated in this way. And I I actually think that the problem with that is that's money that could be spent elsewhere in the economy, whether it's on the NHS or something like that. And I just think as somebody who has the privilege of running a business that invests incredibly high numbers of pounds, lots of money into r and d, I think the government just is is totally getting it wrong. The whole thing needs reform.

Yeah. But that's a problem with the process. Right? Not necessarily technologies that could be, you know, paving the way for a more sustainable future or whatever you want to call that. I think even if you look at the solar industry, right, it was built on the back of the Chinese government providing that r and d investment within China.

Mhmm.

And, obviously, Germany played a role as well by having a rooftop solar program back in the eighties, nineties, creating that high demand and then working closely with Chinese counterparties. But there was a huge role by government as well to bring it to this point where we see the CapEx decreasing for for not just solar, actually, for batteries as well.

So I think there is a role for government to play, but, again, what you're highlighting is that the process aren't necessarily always the right ones.

Yeah. My specific bug bug bear was with the that small part of yeah. In what's it called? UK r and d, is it still called that? UK research and innovation, it's called?

I know what you're talking about.

Honestly, it's like free money.

It's like a money it's like a money gun, right, that that gets allocated to the worst projects and companies who companies that many companies only exist for this money gun. So you're not a real company. If you if you if your customers aren't giving you money, then there's something wrong.

Yeah. It's a UK government grant. I know which one you're talking about. Yeah.

Yeah. But, yeah, again, that's a that's a niche sliver. And you're right that state support in China has but it's essentially been the differentiator. Yeah.

Wow. That was a fun, contrarian view. Thanks for bringing that. So, Rimsha, I wanna say a massive thank you for coming on the podcast.

I really enjoyed this conversation. And if you listen to this, of course, you gotta get straight down to commodities, LinkedIn and click like. And also follow Rimsha on LinkedIn and hear more from her. Thank you very much for joining us.

Thank you so much. It was really a fun discussion.