What’s Next for Gas in a Renewable-Powered Grid with Tom Glover (RWE)

Hello, and welcome to transmission. Today, I'm joined by Tom Glover, UK country chair for RWE, owners of Britain's largest power generation fleet with enough capacity to supply twelve million homes.

Conversation covers the evolving role of gas generation in a renewables dominated system. The complexity of a transition to hydrogen or carbon capture and storage and how we can reinvigorate wind in GB. What caught my attention was this point that despite gas generation falling from a third of UK power generation today to potentially just five percent by twenty thirty, we'll still need roughly the same thirty five gigawatts of gas capacity. It's moving from a two shift workhorse to more like a strategic reserve. As the power system becomes increasingly intermittent and complex, can market mechanisms deliver the coordinated infrastructure that we need? Let's jump in.

Hello, Tom, and welcome to transmission. Thank you for having me. So, Tom, who are you, and what's your role within GB?

Brilliant. Okay. So I'm Tom Glover. I'm the UK country chair for RWE. RWE is one of the UK's leading power generators.

We generate enough power for about twelve million homes. We employ about over three thousand staff in the UK across eighty sites. We've got about ten gigawatts pro rata of power generation. So and that's across all technologies apart from nuclear.

So a major contributor. My myself personally, I've been with RWE for over twenty one years. I'm also a board member of our I I chair our renewables businesses in the UK. I'm a board member of Energy UK.

I chair the carbon capture and storage association. And so I've kind of been around the block in the energy industry, so quite a good view of the whole energy situation in the UK.

I think a huge wealth of experience in energy that's gonna be really helpful for our listeners to understand how you're approaching this and your thoughts on some of the topics that we're gonna come come across today. So I just get straight into it, what is the changing role of gas in the GB power system?

So RWE is the biggest gas generator in in the UK, and, you know, the the the role of gas has continuously changed.

You know, when we first built these power stations and started building twenty years ago, these were designed for baseload. All of them two shift now. So by two shift, I mean, they come up in the morning normally for the peak time and go off in the in the evening. And and the load factors and the amount of energy gas supplies already in the UK is quite low. So gas gas generation was about a third of the UK's power generation last year. So it's already gone from being, you know, down. And so what we what we see going forward, if you take the government's plans, so their their clean power plan twenty thirty, they they forecast that they could get to five percent of generation coming from gas by twenty thirty.

So, you know, that's a material reduction in the amount of gas we've got to do. So that that role becomes what I I like to say, like, fire brigade of the energy system, which is you still need it, but you need it much shorter amounts of time, but you need to turn up when it's required. Okay? And if you look at all the plans, actually, you need pretty much the same amount of gigawatts of gas that you've had for the last ten years.

So, actually, if you look at all the energy statistics, we've had about thirty five gigawatts of gas almost every year. It's been quite flat, and that is effectively forecast to go forward. So we need the same amount of power stations, but basically doing a lot less work. And, you know, and that is quite an evolution in terms of how how we're gonna manage and operate those going forward.

And that's that's good news from a carbon perspective. Right? So running those stations less means less carbon Absolutely. Which is ultimately the goal of this.

But as someone who runs those stations, there's obviously a commercial business case that's behind the scenes. And if you go from running, say, thirty percent of the year to running five percent of the year, then the number of hours that you're just generating and making that, say, standard profit on, that that's changing. So so how do you kind of keep those gas stations having a sustainable business model so they can be that fire engine of the the power system?

Yes. I think you've got to think about the different income sources that you get. So what we'll see probably is a much reducing income source from what we call the wholesale markets, and it'll be much more concentrated. So you're talking about some very short periods of very high prices that you need to try and capture, which means the reliability and availability of those power stations needs to increase.

And, obviously, if you're not there during this period, your penalty is gonna be huge. So there's gonna be a lot more focused on short term reliability. That's kinda like one, but the wholesale element of our income is gonna go down. We'll become increasingly reliant on capacity market income, so that's the market that pays us to be available.

And also things like ancillary services, so stability, frequency response, etcetera. So those kind of grid security type products. So we need to kind of kind of change our operations and maintenance strategies and our investment strategies to reflect that very low running, but still all required in that, you know, that that that two weeks of the Dunkerfleuptos, we like to call it, or that period of low wind and low solar. So it it's kind of a change for commercially, but actually a really important change technically for the way the power stations are Yeah.

And I suppose just on the ancillary service side, I think one of the really interesting things we see is that when we get kind of really negative prices or really low prices actually, sometimes the RWE stations, so Pembroke or Stathorpe are often still running when there's those low prices. And often that can be through things like needing to provide voltage control to to to the system.

Is that the type of thing you're you're describing as they sort of Yeah.

Absolutely. So when you look at those actions the system operators taking in the balancing mechanism, so the market used to balance the system, you'll see that some are tagged for transmission reasons rather than for energy reasons. And you do need a certain amount of inertia, frequency response, etcetera, on the system. Now, of course, the NISO is investing in different technologies to also provide that, whether it's grid forming batteries or, for example, we're just building the moment as a synchronous condenser down at Pembroke exactly to meet those needs.

So rather than always putting on a gas station to do it, we effectively have a big spinning mass that basically will give us that inertia. So there will be different different solutions. But but when you look at it and, you know, the the committee on climate change, the the system operator, all kind of modelers do actually see the gas stations are pretty much there for the foreseeable future in terms of capacity. But you're quite right.

So the gigawatts need to be there, but the megawatt hours less so. And so from a an environmental perspective, it's much better.

Okay. And maybe we've kind of just moved into saying Pembroke without necessarily saying what it is. So could you describe quickly Pembroke for our listeners?

Yes. So Pembroke is our largest CCGT, so combined cycle gas turbine power station down in South Wales in Pembrokeshire. And of course, because it's the end of a very long line with lots of interconnectors, it's quite important for system security. So we've we've got a project down there that is what we call our Pembroke net zero center.

And so as well as having the gas station, is you can argue is more of the older technology, We're also building a three hundred megawatt battery down there. We've got a synchronous condenser down there. We've got plans to do other things like decarbonize that that that power station, and we've also got a hydrogen project down there. So we're trying to kind of take our call it, I wanna say old fashioned, but more more, you know, the the kind of older technology and then upgrade it to make sure that it's future proof for both future system requirements and future environmental requirements.

Yeah. So if you go from, say, how that site would have run-in the teens to how it will run-in the future, Maybe the gas site's not gonna be running as often, but you might have the battery and the synchronous condenser running quite often to keep that good stability.

Yeah. And also depends on what technology we do. So I would like to see our site as kind of a big evolution. Right?

So many, many years ago, that was an oil fired power station. Right? And then we turned it into a brand new high technology CCGT. If we don't do anything on a decarbonization front, you're fully right.

The load factor will go down materially. But of course, we also want to look at decarbonizing it. So looking at either carbon capture and storage on the back of it or putting hydrogen through the front of it. If we put carbon capture and storage on the back of it, then its load factor may be a bit higher because it's then very low carbon generation.

But but of course, we're looking at the future. And so we're also looking at can we provide hydrogen to local industries? You know, can we provide system services for a cheaper way than a gas station? What are the opportunities for batteries?

So I I I think RWE strategy is continuing evolving, and we kinda look at the market and say, well, where's the new opportunities? And we'll just keep on evolving our fleet. You know? When I started in in the industry, you know, we had a lot of coal stations and a lot of oil stations and not many gas stations, hardly any wind farms, any soda farms.

Now, you know, all the coal is closed or the oil is closed, and now, yeah, we've still got majority of our fleet is still gas, but we've got heck of a lot of renewables now. And I just feel that that proportion will just change over time almost like our portfolio evolving with the overall industry portfolio.

And and maybe before we get on CCS because that is where we're definitely going Yep. I just want to go back to a comment you made earlier. So this comment around these large gas fired power stations that you've built that you're expecting to run baseload, you're now running in a sort of two shift pattern. So turning on in the morning, turning on the evening. As time goes on, that might get a bit more choppy. And from a sort of engineering but also commercial management perspective, does that make things really hard in terms of running those systems? How do you think about the sort of evolving role of those stations?

Yes. I think it it becomes hard much harder in a lot of different ways. So the first thing you're do is think about how you're gonna invest in that plant going forward. And so for each of our assets, we we try and look at the best investment strategy.

So we normally look at, like, decarbonization options. So can we convert them to hydrogen firing or CCS? Or we'll look at can we do some more outages to keep them running for longer in an unabated fashion? Or to be honest, do we just keep them as they are and run them to closure optimizing our hours?

Yeah. And each asset is different depending on its current age, its land availability, access to hydrogen pipelines or CCS pipelines. So each asset has effectively a strategy. Right?

And trying to make that investment within the uncertainty of do you actually believe the clean power plan is gonna get achieved? How many batteries do you think you're gonna have on the system? Do you think a hydrogen pipeline is gonna turn up? Do you think carbon capture and storage is gonna be there?

Do you think nonpipeline transport of c o two is gonna be there? These are quite difficult things to decide on how to even invest in the first place. And then once you've got your kind of your let's call it your power station investment set up, how you optimize it is quite interesting. So as you say, it's gonna be quite choppy.

So in in very high periods of wind and solar, it may be we go for weeks without being needed, maybe even months. Yeah? And then you've got to have a preservation strategy. You can't just leave these systems, you know, full of water.

They'll start, you know, rusting and stuff, so you have to preserve them. And then you've got to think, well, it might suddenly need to come out of preservation quite quickly. So how do we get them out to respond? And then and then I said earlier, the value of those periods when they're required are gonna be extremely valuable, and not being there is gonna be extremely costly.

So kind of optimizing that is quite interesting. And then I think the other thing is is the the way that it works on on these turbines is it's a bit like an MOT on your car. You know, you get so you get well, it's actually not like MOT. An MOT is like your annual it's like like a service.

Right? So you get a number of thousand miles or a number of thousand hours before you have to do your next service. And, of course, we can change when those services are required by how many hours we run. So we can fully optimize that and say, well, do we just run it as soon as every time it makes money?

Or do we say, actually, the next service is really expensive, so I need a margin before I run to contribute to the next service? So it is a complicated challenge. I I must admit that companies like RWE are are gonna be excellent to it, of course, because I would say that, but we had to we had the same challenge when we went to coal closures. So when we did the coal closures, we ended up with limited hours, limited amounts of coal, limited sulfur buckets, etcetera.

So to be honest, we we're really good at doing the optimization. And so it's difficult, but but I'm sure we'll raise the challenge.

And you mentioned one thing in there which was sort of you you talked about these stations. You said they had like a a bucket of hours. I think you described it as is is that something that you're thinking about spending? So so do you know that you've got a certain number of hours you can run for before that station is kind of at end of life?

And no. I think it's a bit more like I don't know what they say, end of life. I like to use, you know, triggers broom. Okay.

You know? Yeah. It's the same broom, but you place the handle and the brush. So it's the same power station, but I can replace all the parts.

Right? So I I don't really see an end of life per se. What you have is certain investment choices to make. So roughly every eight thousand hours of running, you've got to do a service.

And roughly every eight hundred starts or twenty four thousand hours, you've got to do a major outage. And those major so called c outages they're called, you know, they can cost somewhere between fifteen million to forty million depending on the scope per unit. So that's quite a big decision.

So the always question is is do you do the outage or do you effectively rushing your hours? So do you say, well, I don't wanna do the outage. I'm running to closure. And in which case, you can rushing your hours and say, well, I'll just do do those hours and then close. But that's the decision. You can always refurbish it and keep on going.

And it's a really nice kind of a little bit of a segue into kind of how the batteries might be how battery the battery fleet might work in GB in the future and that you're trying to optimize for a number of hours and a number of starts. Well, if we have a real a really quick shortage, say for an hour or an hour and a half in the GB system, then it might not make sense to spend one of our starts for the the gas fleet to start up. May maybe actually we can lean on the battery fleet to do the very shorter pieces and actually have the gas fleet running for slightly longer.

That's exactly that's exactly what I would think. I mean, I think at the end of day, like, zero to four hours, assuming we can get grid forming batteries and and inertia from other sources, you know, from a zero to four hours, why would you ramp up a big complicated bit of gasket? That doesn't make any sense at all. But, you know, there is gonna be periods, two weeks, three weeks, when you need these things running, and all our modeling shows this.

And so then then batteries are no good, you know, once you get past your eight to ten hours.

I I I I don't quite I don't quite agree. And maybe maybe I'll say why, and then you can tell me. Yeah. Yeah.

So the the period that you're talking around in terms of say a two or three hour period in a winter, which is very difficult to deal with. So you've got no wind, very low solar. It's winter, so it's high demand as well. And you're absolutely right that you need terawatt hours of of generation effectively to get through that period.

And I totally agree with you that a battery can't be say, charging for three weeks to discharge for three weeks. That's very much not the role of batteries. But what they can do is that they can work within days and they can reduce the size of the largest demand peak. And so you can better manage the shape of the demand, which means you might need slightly fewer gas units to get through that three week period.

Is that is that a is that a is that an okay amendment?

To some extent, right? So I think the problem is is the marginal cost of your gas station doesn't really gonna change during the day because it's good because gas is quite a flat daily product. Yeah. Maybe some weekend shift.

So basically, as soon as I put a gas station on, yeah, the the marginal price shouldn't really shift during the day. Right? So your optimization of batteries is gonna be off whether you buy my gas now at nine o'clock at night or four o'clock at night. So the the the amount of optimization is is limited.

And when when we look at it, we're talking about periods where you might only be getting fifteen to twenty percent of renewable generation on the system.

So something's gotta do the eighty percent. Right? And bat and batteries just trimming between, you know, off peak and peak. That will that will stop me having to to to shift my CCGTs.

Definitely. Right? So it means the amount of shifting I have to do, but the amount of actually megawatt hours doesn't actually change over that two or three week period. In fact, the batteries have got an inefficiency.

So The number of megawatt hours are on net demand. So so and, you know, all the modeling that we've done, all the modeling I see, still need this thirty five gigawatts ish. I mean, thirty to forty gigawatts is the modeling range, I think. But I I think you still you you you still need it.

And it's particularly for that period that is beyond the batteries, beyond things like pump storage. You actually just need a megawatt hours megawatt terawatt hours of energy, and there's not really any other sensible way of of doing that.

Yeah. Okay. I think this is a really interesting part of the system. Let's move on from gas and the role of gas to an adjacent part, which is CCS or maybe CCUS, and perhaps you can kind of clarify that for me. But CCS hasn't had the best track record in GB to date, but how is it going to come into the market? How might it change how gas units run? I I think you're talking about a new technology.

I'm not gonna say an emerging technology because it's well proven now that this is possible to do around the world, but it is not a cheap technology. We have to be really honest with ourselves that this is the one of the last things you should be doing on the system. Right? You should exhaust all the cheaper options first, and then you should go to CCS and hydrogen.

But even if you do that, if you look at all the again, all the modeling done by most people, you need, you know, a decent amount of what we call abated technology. Right? CCGTs. And most people have ten gigawatts plus out of that thirty five gigawatts of of gas.

We're still saying the majority of it remains unabated, but you need probably about ten gigawatts. And, again, there's modeling inaccuracies depending on your views of nuclear and various other technologies. So you need this technology. And in fact, need CCS to meet overall climate stuff across industry.

Right? So so in reality, it definitely makes sense in the cement industry. It definitely makes sense in refinery, yeah, in the glass and and steel sectors.

Does it make sense in the power sector? It's definitely the marginal technology. So we should avoid it where possible, but most of modeling says you need it. So this is stuff that we know is needed, and we know it's definitely needed by twenty thirty five, twenty forty.

Right? But it takes a long time to develop a business, to develop a business case, to develop storages. So that's why we have this managed process through the in the UK. So this is the the so called cluster process where, basically, we're we're trying to develop carbon capture storage in clusters and then go wider out in pipelines.

And so, yes, it has been slower than we would all like. I I don't think it's necessarily a problem because at the end of the day, we should go slowly with the expensive technologies and make sure that we're only doing it where we need to do it. But I mean, year has been pretty strong for CCS. We've had, you know, the FID, so the financial investment decisions for for the two track one clusters.

We've had the first FID for a CCGT with CCS up in Teeside, so we can see that now coming. I think there's been a delay in what we call the track two, so this is the second lot of clusters in in in the process mainly due to lack of government funding and lack of government support. As chair of the CCSA, I can tell you that the industry the the developers who wanna get into industry, the oil and gas players who wanna do it is booming. We're our highest ever membership, you know, over a hundred members of the carbon capture and storage association.

So, actually, the ambition for industry and the need is there. We think the government to kind of particularly under the comprehensive spending review to make sure there's sufficient money to keep this industry going. And it's a developing industry, so it's not gonna it it's it's like offshore wind in the early stages. Let's go slowly.

Let's go carefully, but let's keep on going on the track and and, you know, is there there's certain industries that can't do without it.

Okay. And I I I think there's in the energy transition, there have been somebody wants to describe this to me. We've gone from, like, uncertainty to certainties, and I really like that for certain things. So like for example, batteries.

If you go back to twenty fourteen, batteries, bit of a question mark, quite expensive. Would we use them in the grid? Not sure. Now we've delivered so many of them between five and six gigs, and we're probably gonna be over thirty gigs by the time it gets to twenty fifty.

We have certainty around how much they cost, how they deliver, how we connect them from a technical perspective. It's very doable, and we know exactly kind of how they work. I think that the really interesting about CCS is that although it's proven in some parts, I don't I don't yet feel like I have a date in mind for when I see that on a on a power station in GB, and I can point it and go, yes. There we go.

There Well, I mean I mean, there is a date because So what is that?

There's the net zero T side project by BP, which has gone to FID. Okay. So, I mean, I I don't know their project timelines, but we must be talking three or four years before you'll see the first one on the system storing c o two. So so there is a date.

There is a project. Yeah. And there's lots of projects in development as well. So I am convinced it's gonna get there.

Okay. Exciting exciting space.

Yeah. Let's move on to a second part of technologies that that potentially could change how things operated and and operate. And you mentioned CCS on on Pembroke, but you also mentioned hydrogen as a sort of feedstock to it. So how do you think about hydrogen's evolution in the GB power market? Yes.

So in in the GB power market, again, it's it's a last resort type type fuel. And I'm I'm I'm maybe kind of think about hydrogen from two perspectives. I see about hydrogen to power. So using hydrogen as a as a low carbon fuel source in in gas turbines or gas gas engines.

And I also think about it as a flexible demand or a demand source in terms of electrolysis in order to provide hydrogen to industry. So so starting with the first, I mean, look. In in my in in my view, there's no point putting green hydrogen into a gas station. Right?

The if you if you actually go through the efficiency of taking wind power, making into hydrogen, putting it into a gas station and producing power, I'm pretty sure. I hope that batches will beat it many, many times over. Right? So so but that's quite different from maybe blue hydrogen.

So so the way I can, like, think about it for blue hydrogen versus CCS, blue hydrogen is like precombustion CCS. Right? So you make blue hydrogen by having carbon capture and storage.

So it's like pre combustion CCS, or you capture the the carbon after the power station. So that seems that's a little bit like local dynamics, which one makes sense. So if you've got lots of industry wanting hydrogen and you've got some hydrogen stores, it may make economic sense to have blue hydrogen just used in a gas turbine when peak peak supply is required rather than having a dedicated CCS on the back of the power station.

Okay. And and just for listeners, blue hydrogen, where does blue hydrogen come from?

So it's basically methane. So so old fashioned gas put put through an a a process that basically separates that into hydrogen and carbon dioxide for storage.

Okay. And perhaps there's the same question as the CCS side, which is, like, when do you think we'll kind of get hands on data about that scheme like that running in GB?

So blue hydrogen, that's the that that that's part of the FID that was done for track one in the northwest. So that will be extremely soon, and it's been done around the world a lot. So that's not not a problem. For for they're may talk about green hydrogen a bit and what we do see that useful for.

So green hydrogen for demand is, you know, we've had what was called the hydrogen allocation round one, yeah, which was basically to make green hydrogen electrolytes. So that's making hydrogen via electrolysis, and a hundred and twenty five megawatts of that was successful. So we'll start seeing those projects come online now. We're currently running what's called hydrogen allocation round two, which is trying to get over seven hundred megawatts of green hydrogen produced.

RWE has two projects in that, and that's using electrolysis to provide clean hydrogen to refineries, basically, or our or our projects. So these are refineries that already use gray hydrogen, so dirty hydrogen, basically. And so we are basically decarbonizing them by providing green hydrogen. So those are coming.

They the again, the technology is quite well known, electrolysis technology. I think at scale, that's that's becoming a bit of a challenge. So RWE is building its first a hundred megawatt one in Germany at the moment. So, you know, when you learn, I mean, you know, as batteries rolled out, you learn as you actually roll out big projects, but I I think that's coming.

I think there is some challenges with green hydrogen. The cost is still very high. So there needs and it's like it's a bit like with batteries. Right?

You spit chicken and egg. The costs are high until you roll out a lot, and then you get economies of scale and the price will come down. So we have to we have to see that actually happening in practice. And of course, there's some people think it will and point some people think it won't.

I think you have to just actually start deploying it to see whether the cost comes down or not.

Okay. Yeah. I like as ever when we think about these things that the new technologies it's that sort of those first few data points that become so vital to working out whether this is gonna be a smaller part of a really big system or whether this is gonna be a, like, a really big thing. And from RWE's perspective, I think it and and the size of RWE, it makes total sense to to sort of see and have access to that data and work out whether this is something you really want to roll out everywhere or whether this is something that's a smaller fraction.

I I I think that's right. Like, the you know, if if I get I'm something like the old man, but, like, know, when I started the industry twenty five years ago, wouldn't have guessed where we'd get to today.

So we're all we're all gonna be wrong. Right? So what so what we know is in twenty five years time, you might still be working. I'll be retired. We'll all be looking back and going, oh, if we didn't get that right. So you have to have little projects in every technology, and then you'll work out which one runs and which one doesn't.

Yeah. And that's I think that's a very natural kind of way of doing things in terms of small incremental stages of projects. Let's talk about one that's not a small incremental stage of project. Let's talk about one that's kind of a big switch in the GB power system.

So moving us on to a debate on national or zonal pricing, which is a very a very big change. And I should just just say it's the fourth of June today, and we are expecting a decision in q two. And so by the time this airs, we could very well have a decision one way or the other. And so, just for context, so if someone's saying, well, why is Tom talking about that thing that, was announced, a month ago?

And we have talked about zonal and national at length as an industry, but also on this podcast as well. We've had sort of pro national, pro zonal people on. I think the thing I I really wanted to get to with this is when that decision comes through, which whichever kind of way it goes, I'm really interested to kind of understand how like a group like RWE would try and make the most of it. So if we're in Reform National, which would be a change to today or if we're in a zone or like, how how do you make the most of it?

Yeah. Yeah. Thanks. And just for the record, I am like, a pro national, but I'm more pro decision now.

Right? Okay. Yeah. I I I I still think zonal is not a good idea, but, actually, we need decisions.

Right? Because uncertainty is is is worse, and we might get on to what that means going forward. So so how does RWE deal with it? Look.

I mean, I think I'm gonna sound relatively confident here. I mean, if you actually look where RWE's plants are, they're predominantly below the Midlands in the UK. Right? So, actually, from a zonal perspective, actually, we've got a lot of power stations in the south, and we have got some in the north.

But in if you actually look at it, what is roughly expected to happen is wholesale prices in the south will go up slightly and wholesale prices in in in kind of above some kind of boundary depending where you draw the zone on the north will go down significantly. So so, actually, when you look on a wholesale price level, probably RWE is probably one of the better protected generators from that change. So so I think that's maybe number one. We've always had our power stations towards the the kind of Midlands to south exactly because we thought that building power stations in the north was not the the most clever idea.

So maybe that's the first bit of risk management is you you try and set up your portfolio. You also see your portfolio, so it's balanced. Right? So we do have a geographic spread.

So we do have wind farms in the north of Scotland, and we do have all the way down to the south and in Wales and in East Anglia. So also having a geographic spread hopefully means that, you know, what what what might win, what was might lose and you and you kinda head yourself that way. And then I think the other thing that we're now trying to do is obviously on maybe on two fronts. One is encouraging the government to understand the protections that are required in order to keep investment low cost in the UK.

So we are obviously working very hard with the rest of the industry to to to work with the government. So if they go with zonal, what are the what we call the protection and grandfathering mechanisms that are put in place that will make our investment still able to be made and importantly made you know, able to made a very good price for consumers. So I can have the what I call the protection package. Yeah.

It's that's one thing we're doing than anything we're doing is obviously big company like RWE, like all the other people in the market, we're doing lots and lots of modeling of what a zonal market could mean and what the prices could be, so that when we're doing investment decisions we can put those into our investment decisions and work out you know, does it all still make sense?

And you have a kind of almost a unique position as maybe not unique, that's not quite right, but, ultimately, he's active in lots of markets. Right? So so not all markets are national. So you do have the ability to be able to say to groups in other markets, what have you seen in zona markets or even going even further in nodal markets?

And you can Even more than that, say, my previous role was chief commercial officer for our global renewables business.

So I've actually done investments in nodal and zonal markets.

Okay.

So so I've actually this is this is why it kind of I must get a little bit frustrated with lots of people in the UK who have theoretically saying zone were a good idea, but have never actually done investments there. I have done investments in those markets, and I can tell you they don't. They're not good. Right?

Good. Okay. From an investor perspective. And and and and and the reason for that, if I just really, really broadly explain how it feels to be an investor.

So the problem with zonal or nodal markets is the price you get at your node or your zone is dependent on what the demand is near you, what other generators build near with you, and more importantly, what transmission lines are built away from you? Now I have no control over either any of those three elements. I don't have a controller who builds near me. I don't have control of what demand gets located near me, and I definitely don't have any control over what lines get built near me.

So, basically, you're you're putting the risk with the person that can't control or or or influence any of those things. So therefore, they have to risk price them. Right? It's quite simple.

You just go, it's uncertain. Investors hate uncertainty. They risk price them, and therefore, it ends up being more expensive. Right?

So that's that's the reason why investors don't like it in in summary. And and if I give you my experiences from the ERCOT market, so this is a nodal market. When when I was the chief commercial officer, we sold two brand new five hundred megawatt onshore wind farms, identical technologies, identically built. One had what we call a hub swap.

So that is a swap that protects you off the nodal price to the hub, and one didn't. And therefore and the same buyer bought them off us. And so you could back calculate effectively the discount rate that they applied for the one with the zone on the nodal price risk. And it was over three hundred basis points higher.

Okay. Right? And if you look at all the analysis of anybody done, if you get more than fifty basis points move on the on the WAC, so on the weighted average cost of capital, zonal benefits of zonal disappear. And so that's that's effectively real life experience in a real market, and I get the, you know, one of the the pro the pro Zonal people say, oh, well, it won't stop investment.

I agree. I've never said Zonal would stop investment. It just increases the cost of investment, which effectively is no good for consumers.

But in that example you were describing, is there a you're really saying, well, look.

If you can actually hedge this this properly so you can have an ability to take your price back to hub Yep.

Then actually you can deal with that risk. Was it was that essentially what you're saying?

Yeah. That's exactly right. So so if you had what's called financial transmission rights, which are basically hedges, which basically swap you out, then indeed you can get rid of that risk. Okay.

The problem was the practical experience around the world is FTR's, as they're called financial and financial rights, have only ever been offered by ESOs for about three years, but it takes me more or less three years to even build the power station. So it's not a hedge for my thirty year lifetime. You you So it's kind of theoretical when people talk about these kind of hedges. They don't really exist in the real world.

When you say ESO, you mean the electricity system operator of the various regions.

Normally in most markets that have a zonal or nodal market, the system operator offers out these financial transmission rights to try and help investors hedge.

Okay. But obviously, that's them taking financial risk. Yeah. And so therefore, they're normally they normally theoretically talk about it at the beginning, but when their risk committees work out the risk, they end up not offering them out. Okay. So it's like a theoretical thing you could help you, but in reality, we don't actually see it happening in in real markets.

Okay. And I think that's really that sort of if the decision is made and apologies if decision is made and this is coming out after then, but I think a lot of the the debate that's gonna happen in GB over the coming months will be around, okay. If we do go to a zona market, like, how do we deal with things like financial transmission rights? How do we make sure that we do the grandfathering correctly so that investment both for wind or storage is kept is is is kept happy and keeps on moving through.

I think it would be remiss of me to not sort of offer the the side. So you were mentioning that investors find it difficult in a zonal market. I think if I were to read some of the zonal side and say, well, why are they thinking about this? They would think much more from a cost to consumer perspective.

And so there is a balance here between the right thing for investors and and what is perceived to be the right thing for consumers. And to your point on cost of capital, if cost of capital is much higher, then that has a bad impact on consumers. But also if that higher cost of capital doesn't necessarily materialize because things are well managed in the transition, then perhaps you could end up with a world where the cost to consumers is lower and risk of kind of going down the rabbit hole of of Zonal. Just that that that's kind of the things that people are thinking about in terms of this debate.

I think we have got to a good point to leave national versus Zonal.

A jolly good idea.

To actually ask the question then in another way. So if if for your point of view that that shift is not worth the effort Yeah. How do we reduce costs for consumers in GB?

Yeah. I mean, I think it's absolutely critical. I mean, the the absolutely simplest way, right, is if you look at all the net zero technologies, whether they're batteries, renewables, nuclear, whatever, they're all upfront capital technologies.

Right? And so the the biggest lever you have is to get that cost of capital down. So if you look at any modelling, that's the way you do it. And to get cost of capital down, you need to make all the investments as riskless as possible.

Right? So there should be an absolute focus by the government to say, how do I make investors go into these technologies at the least risk possible? So that's kinda like the overall macro thing they should be considering of. Because if I've got a you know, my my next probably offshore wind farm is three billion just for one project.

So if I can get the cost capital down on that, it's all upfront. The amount it reduces electricity prices by under the CFD is huge. So that's the first thing to say. Then some more practical stuff.

What can you do? So one thing we've talked about is lengthening the tenor of the contract for difference. So that's the the contract we get to secure our revenues for our renewable assets. So the moment is set at fifteen years, but the lifetime of our assets now more like thirty years.

So we're only securing fifteen years of it, and the rest of it, the last fifteen years, I've gotta take merchant risk, decide whether I've got zonal pricing or what I've got. So I'm risk pricing that quite heavily. So the longer you make that CFD, the lower the prices. And and and I'm absolutely convinced that if you lengthen CFDs, say, to twenty five years, which is more like the international standard now, the reduction in bills will be higher than what you'd get under the theoretical reduction under zonal, and it would take one stroke of a pen as opposed to disrupting a whole industry for five years.

So I think so that's one answer. The second one, which is the more controversial one, and Energy UK, which I sit on the board of have done a good paper on this. So I would also point your listener to that for a much better explanation. The other one is actually we've got a problem with electricity bills at the moment where we don't really have the principle that polluter pays.

So all the levies of being clean sit on the people who are being clean as in using electricity, and those who are continuing to use fossil fuels like gas aren't getting taxed for cleaning themselves up. So we don't have the incentive to move from gas to electricity naturally in the market. Electricity wholesale prices are still above the magic three times as I call it. So, ideally, you want electricity prices to be maximum two and a half times higher than gas prices.

And just for the listeners, why is that? That's because it's roughly the efficiency of a heat pump. So if you want people just to to change from a gas boiler to a heat pump, you need to get that ratio of gas to electricity right. So it's a no brainer to put a heat pump in.

But the gas people aren't really paying for their emissions at the moment. Now I think it's too controversial and potentially too regressive to just put those livers onto gas because, unfortunately, there's there's a whole part of society who maybe can't afford to insulate and put and change from gas heating. So I think you're looking at maybe trying to put into taxation, which, of course, is very controversial given the government, of course, but its current spending issues can't really put up tax. But I think that's another way of really doing and making sure it's a progressive energy system.

Yeah. And I I think that's something that is is really important because definitely in terms of our modeling, we've definitely found that we have we see both in the market today, but we will see in many future periods a lot of negative pricing coming through. And that's quite an odd concept particularly around like contracts for difference because in your contracts for difference, might have a strike price that say seventy pounds and you get paid that seventy pounds unless that day ahead price, which is called the reference price, goes to a negative number. And so sometimes if we if we don't have enough demand on the system, we can get these kind of phenomenons where more negative pricing comes in.

And then you've got your I'm gonna forget the number you said earlier, but let's say three billion pounds that you're investing into to wind, and that kit's sort of not generating even though it's windy and really focusing on getting more demand on the system is really critical for this thing working well.

Yeah. I was in more smart demand. Right?

More smart demand.

So that's probably what I always say. To get an achievement bells, we do need to just finally start this smart metering. Right? And all our modeling and, you know, all our modeling shows that we do need all these heat pumps, all these EVs, all the home batteries, interacting in the in in the system in order to make all this manageable.

So so we make some quite robust assumptions on what that's gonna look like on the demand side. We need all this EV demand to move. We need all the heat pumps to move. We need the home batteries and the home solar, but we still need all this wholesale stuff as well.

And, you know, the big part at the moment is, of course, we're still not getting smart metering into the home. We're still not getting the policies right on the demand side. And I I think you're fully right. And one of our big concerns, you look at the clean power plant, which is the government's plan for twenty thirty, it's very supply focused.

And actually, by twenty thirty, they assume hardly any increase in demand, maybe like ten terawatt hours. But they're generating a load more electricity with twice as many infrastructures. Infrastructures. The the risk we've got by not encouraging demand is we invest twice as much on the supply side.

So the pounds doubles, if you like, in my pound per megawatt hour, but the megawatt hour remains the same. And yet we still wanna end up with a cheaper bill. So from our perspective, perspective, we would vast really encourage the government to look at even more demand side for more flexible demand side, but just more demand side generally. Yes.

And particularly that transition away from gas to power. Exactly. Yes.

Okay. Good. And then let's move on from reducing the cost to consumer or perhaps I mean, this is very much linked, but the power system, as we get into the future periods, you talked earlier about how there'll be a two or three week period where you might have to rely on gas.

But in that winter period that you're describing, the thing that you would lean on, if not gas, would be say wind generation. Wind has had a bit of a an up and down few years in terms of costs increasing within the supply chain.

And particularly, had allocation round of CFDs where it didn't clear because the the price was was set too low. The cap was set too low. How do we get wind back on a track to be a really successful part of producing energy into the GB power system?

Yeah. And we probably need to, like, first of all, split between onshore wind and offshore wind. So onshore wind was successful in the last CFDs and is rolling out a fine on the onshore side. The big challenge is to do more in England and in Wales, actually.

So we still got most of the onshore wind being doing in Scotland, which maybe as we kind of hinted earlier for those listeners who who aren't gonna if they you know, you don't really want that much more generation in Scotland, right, because of the amount of transmission required. You want more in England. And one of the big things we've seen in terms of a positive development on the onshore side is obviously now we can do onshore wind in the u in in England, which was obviously bit of a moratorium for the last ten years. But it will take a long time for those projects to come to to to fruition.

But I I would say onshore wind continuing to roll out. It can be competitive in the right location versus solar. Has a different profile. And as more solar comes in the system, the capture price for solar will become more challenging, and and having a portfolio of onshore wind will also be be very good.

So that's kind of easy. I think the the the headwinds, I think you're really talking about on the offshore sector. And, look, it it is a challenging environment now. And as you said, we effectively have had three failures of of auctions for offshore wind because we had a r four, which then the project had to rebid in.

We had complete nonsuccess in a r five. A r six, we've obviously, unfortunately, had the very sad news of of the Austed Hornsey projects of not going ahead, which I'm sure must have been a very tough decision for them. So, actually, we've been procuring less than a gigawatt a year of offshore wind, and yet the clean power plan says we probably need seven to eight gigawatts. So that's that's tough.

And and and and if I kinda, like, maybe split the discussion into maybe two, one is, like, the global headwinds that are in the the market and then maybe the local ones. So so globally, look, the the supply chain has been squeezed. It was very clear the OEMs weren't making money, and so they had to adjust their prices in order to to have a sustainable business model. So they've adjusted that.

We've also had so that's all put push on supply chain. We've obviously had globally a lot of people wanting to deploy this kind of technology. So generally supply chain, whether that be wires, whether it be offshore platforms, transformers, commodity prices generally have all gone up in prices. So we've had globally prices going up.

And then we've also had what I call the kind of the risk off investor issue, which is what we're seeing is investors are becoming a lot more value focused and a bit less ESG focused. So generally, their investment discipline I mean, we would always say out of b, we've had strict investment discipline. But generally speaking, the investors are requiring us to increase our returns. So these are, like, global headwinds that means the cost of offshore wind is going up.

And we don't currently see that that that changing.

There's also a cost of capital point to your earlier your earlier piece around how important the cost of capital is and that we're now in a a five percent type period, whereas if we go back say six, seven years, the cost of capital was significantly lower.

Just to become at five percent. So so you so you can put money in risk free UK government bonds, treasury bonds for ten years and get four point three percent. Right? A few years ago, it was like almost zero.

Right? So if if investors can put it risk free at four point whatever percent, then for any debt, they now want six percent, six percent plus. So for equity, they want ten percent plus. Right?

So you're so so that just drives the whole market into Another part of a headwind.

It's a headwind. Right?

But if you look at even with those price price things up to a certain amount of penetration, it's still absolutely clear that offshore wind is required, and it's one of the cheaper technologies to get to to net zero. So it's still required. Right? So I think we've gotta kinda take those are global headwinds, but we all still realize that we can have a discussion about is it fifty gigawatts, sixty gigawatts, eighty gigawatts.

I think that's a reasonable discussion because at some point, it becomes over penetrated, but we're way off Yeah. That that level. So we all agree offshore wind is required despite those headwinds. So now we just need to work out how to make it cheap to deploy in the UK.

And then and then I look at the UK specific headwinds, and this is as the government what what I spend a lot of time saying to them, look. You can't sort the global headwinds, but you can sort out the the the UK ones. It's especially the same. To invest in the UK, you just need to make it more attractive than Germany, Netherlands, USA.

Right? You don't need to make any more than that. So the government needs to have absolute strict focus on making the UK the most investable place. And the way you do that is policy certainty, best auctions, simple.

Yeah. Keep it really simple. And, you know, one of the whether it be zonal pricing, whether it would be the the kind of supply chain issues we now got to deal with, redesign the auctions again, redesign the CFD again, changes to our transmission charging, etcetera. All these things are unnecessary.

Right? So it's kinda like we kind of there's the bit we can't help, but we're still managing to make a little bit of a meal of the stuff we can help. So my view is is we need to make those decisions, and we won't get back into which one is the right one. But you need to make decisions and make them quickly.

Give investors certainty, and then the cost of capital will be as low as possible, and we'll be able to deliver those wind farms as quickly and as cheaply as possible for the consumer.

If I can pull out just one thing, I I know we have kind of closed that box, but I I just want to bring out one one sort of element on that, location because you mentioned it on terms of having more onshore wind in England and Wales. Yep. There's also a slight problem that you can get, say, a wind farm that's on the very north end of Scotland, and then it can be expensive to build transmission. And oftentimes, that transmission can be constrained, and so you might not be able to get the full benefit of that wind farm in Scotland down into demand, whether that's in Scotland or England. So the how would you tweak the way that CFDs work today to try and achieve that goal that you want, which is perhaps less at the very north tip of Scotland and perhaps more in England and Wales?

Yeah. I mean, unbelievably, we've been solving this issue for at least thirty years in the energy system. So we have something called transmission network use of system charges in the UK. And even today, it costs you forty pound a kilowatt per year to connect to the north of Scotland, and you get paid to connect in the south.

So there's already a huge disbenefit for connecting in Scotland. We don't need zonal prices to do that. We've already got locational transmission signals under an existing system. So so my my tweak would be that is actually not harsh enough.

If you actually updated that model so you just took the current model and just updated it with current parameters and you factored in the full cost of what we call the bootstrap. So these are the big transmission lines we're gonna have to build from Scotland down to England.

Then actually the the the price in Scotland should be a hundred pound per kilowatt per annum, which is much higher than what most people forecast zonal prices. So our view is you should update the transmission charging so that people connecting in Scotland see the full network infrastructure cost of their decisions. And you may actually still find that makes economic sense. We we've actually one of our latest f I FIDs was indeed an onshore Scottish wind farm in the north of Scotland. And even considering our view of where transmission charges could go, it was still more economic than a solar plant in the south because of capture prices and lots of other complicated reasons. But I think you just need to update the current transmission charging to make sure there's a very sharp signal about where to put your power stations, but one that's more investable because it's more less variable, more fixed, etcetera, etcetera.

I think that for listeners, I really hope they're getting a sense of some of the really big and challenging and multifaceted things that are being considered, the knock on effects of them, but also how people within the industry are really thinking about them. And I think we could talk for way longer on this, but I I will move us on to our final two questions. Good.

Yeah. I see not a zonal for anybody.

Yeah. And so is there firstly, is there anything you'd like to plug?

You know, we talked a lot about energy bills and and and the problem for for consumers.

And I think all of us within the energy industry all know that all these grand plans, all these investment stuffs will come unhinged if we don't get down consumer costs, and particularly those who are struggling. So I would make a a plug for anybody listening if they do have a spare five minutes to go onto the Fuel Bank Foundation website and make a donation.

Okay. I love it. And we'll put a link into the show notes as well so people can find their way there. Yeah. And then my final question is, is there anything that you believe that is a contrarian view? So so something you believe that the majority of the market doesn't.

I don't know if it's contrarian from the majority of the market. It might be contrarian from government policy. So let's let's maybe put it like that and maybe lots of your listeners were ringing and go, we agree, hopefully. So if I go back a few years, we were all absolutely convinced we all needed better planning and more strategic planning for the energy system.

Right? So I remember I did a speech about three to five years ago, I made this point we need more strategic planning. K? And now we seem to have kind of gone on to what I people talk about a system architect.

And, you know, an architect tends to be quite detailed plans, right, as opposed to a strategic planner, which tends to be more strategy. And it does feel to me that we're going really detailed. So if you look at, like, the clean power plan twenty thirty, it talks about and the action plan. It talks about how many megawatts of what technology in which zone.

Yeah. And then that's gonna feed into the connection plan, and we're gonna say, well, that's how many megawatts in each place we're gonna have. That is really detailed. And as we have said earlier in the podcast, we'll all get it wrong.

Right? I guarantee you what actually happens in ten years will be completely different to what we all forecast. So one mind deciding that this is the way we're gonna go, I really worry that we'll either not invest in the right things or it'll be too expensive. We're not allowed.

So in my view, we're not allowing the market. I still believe the market has a role. Maybe in the in the dim district history, used to work at Enron, so maybe people shouldn't take my advice. But I do think the market should have a role where possible in order to get consumers down.

So I I do think we need to when we all ask for strategic plans, will you take a step back now and say, have we gone a bit too far? Or well, I do believe we have in terms of architecture and detailed design, and how do we get the market to still work in this? And this is why I'm still kind of a believer of we still need competition within areas. We still need clear signals.

We still need auctions that have enough technologies and enough geographic diversity in there and different technologies. You know, we could have a long debate about what role batteries are gonna have versus hydrogen generators versus gas, and we'll all be wrong. But the wisdom of the market will work out who's right. Yeah.

And I think I think that would be my kind of like key takeaway while I sit there as the old grumpy man now that just the industry kind of take a step back and go, did we really want this level of detailed planning? And is that gonna end up to the right way to bring the system forward in a competitive way?

Okay. I'm gonna extend this question by by one more. So we had, Julian Leslie, who is the chief engineer, amongst other roles from NISO on, and that podcast is actually released tomorrow. And he was talking about the strategic spatial energy plan, which people call SSEP.

And I asked and this is bad because this puts me in, we're both in the sort of the the grumpy old man role here of, like, challenging these things and saying, well, look, is that actually gonna be the way it comes through? And I said exactly that. I said, well, look, what happens if you say you 're gonna build a a transmission line that's gonna enable five gigawatts of say, electrolysis in this part of the country? What happens if as of tomorrow, say, oh, god, electrolysis, didn't kind of work out how we thought.

And what do we now do with that sort of five gigawatts of transmission that we've built? And I think that the general view was that a lot of the decisions being made from an architectural perspective are no regret. And so if the connection's there, then the technology will come in some form. What do you think?

Yeah. I mean, I actually agree with that bit a little bit more than I would expected you when you when you introduced the question. So so I'm a bit I was a bit perplexed about the way we look at broadband versus electricity.

So, like, for broadband, we did, like we just all agreed everybody needed broadband. Right? And so you rolled out streets at a time to superfast broadband, and it didn't matter if the house had a eight year old who was, you know, only maybe used the mobile phone or whether it was somebody who had got three people working at home with three kids like mine, either two kids like mine using computers too often. You just rolled everybody out to the standard on expectation that everybody at some point want super broad super fast broadband.

Being in mind electricity is even more existential, if you like.

Why aren't we doing that everywhere? Like, why aren't we rolling out our whole electricity network to assume everybody has an EV, a heat pump, a solar, and a battery? Right? And therefore, I do actually agree that building more transmission and more distribution is a kind of a no regret.

Right? So that part of it, I'm kind of in agreement with. I think where I kind of struggle a little bit is things like connection queues where you're deciding which technology in which order and which maturity connects in which order, yeah, with no competition between it. So, you know, you could have a fifty megawatt solar on a north facing slope and a fifty megawatt one a week later on a south facing slope, and the north facing one will win according to the ESO.

I mean, that is to me where you're not allowed in the market, you should allow the market to trade between those connections. The the southern one would pay a lot more for the connection than the the novelty one. As an example, you're not allowing smartness in terms of hybrid connections. So we the orderings like solar or battery or wind, but, like, no recognition for hybrid solutions.

A lot of the queues assume that you're gonna have, you know, five gigawatts of solar, five gigawatts of battery. So I think the bit they're doing on getting the transmission distribution to invest, I kind of agree. It's almost like build the wires and they shall come. If you built it for electrolysis and electrolysis doesn't happen, I'm sure some data centers will put themselves at the end or I'll put a battery there or something. So I yeah. So I'm kind of whim on the wires. In fact, I would go even more faster.

Modernizing the society requires us to build a lot of wires, and we just need to kind of get over it a bit And get it done.

And get it done. But that's kind of different. I'm talking about competition on the on what what generators connect into that. And actually, we've got an evolving issue on the demand side where all issues we've had on generation where we've all kind of we had this rush, haven't we, of the how many is it now?

Six hundred to seven hundred gigawatts of connections that need need sorting because everybody realized the value was in the connections. It's really interesting. We're now seeing that on the demand side that everybody is now hoover up demand connections because they've all realized if they wanna build a data center or a battery or a electrified, they need the demand connections. So now the rush is on demand connections.

But that that's slowing down our whole modernization of our economy, isn't it? So we the wires and the connections, I would go really I would be really aggressive on it personally because I just believe in electrification, and this is the future as much as broadband is.

Tom, you've been a fantastic guest. We're gonna have to wrap it up there on time, but that was a brilliant overview of what is going on within the market, some of the critical points of the debates, and I think listeners will have a really informed view of some of the nuance that's going on within the energy market. So thank you.

Thank you for having me and apologies about the stuff on Zonal.