Modo Selects - Trading Agreements for a brighter future with Vishnu Aggarwal (Deputy VP of Origination and Renewables trading @ Smartestenergy)

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- Yeah, when the wind doesn't blow, or the turbine is broken, what do we have to do? So we have to go out and replace that power that we thought we were going to buy from that wind turbine.

- Because you've sold it on to someone else, right? And so, you've got to buy it back from the market, not at 40 quid, whatever it is now.

- But that's where flexibility can come in, by contracting things like batteries, peaking plants, you can manage those price periods. At the end of the day, each electron that's in your-- that comes out of the wires in your home or your office is indistinguishable to another electron.

How granular do you want to go? And that's something that SmartestEnergy have been pushing for quite actively is-- certificates are already issued monthly. Why are we not matching on a monthly basis?

- As we get further down the rabbit hole here, we're going to see the reasons why is the market that it is. But the decision's been made.

VISHNU AGGARWAL: The decision's been made.

- Who makes that decision?

- Hello, everybody. And welcome back to another installment of the Modo Select Series, where we revisit some of our earlier episodes. This Modo Selects is with Vishnu Aggarwal, Deputy VP of Origination and Renewables at SmartestEnergy. If you're enjoying the podcast, please like and subscribe. It really means the world to us. Let's jump in.

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- Vishnu Aggarwal, thank you for coming on the podcast.

- Thanks very much for inviting me.

- This is a world first. We've got the first person who's come on the podcast who's brought graph paper with them, which is very impressive.

[LAUGHTER]

So we can tell that you're a trader, and you do lots of maths and lines.

- Yeah.

- Thanks for coming up. And you're in the Birmingham office today, and you're based in London, right?

- Yeah, I'm based in London. I'm originally from Birmingham, so it worked out really well, coming down today.

- We just found out that we went to rival schools. So we may have even seen each other in sports fields at some point in the past.

VISHNU AGGARWAL: Yeah.

- But, yeah, so do you want to tell us what you do and what the company you work at does?

- Sure. So, yeah, I'm Vishnu. I look after the renewables trading and origination teams at Smartest. And SmartestEnergy is a supplier trader.

We've been around since 2001, where we started out as a PPA aggregator. So aggregating PPAs of all range of sizes, so from a single stick turbine in a farmer's field to large offshore wind farms.

- PPA being a power purchase agreement, right?

VISHNU AGGARWAL: Yeah.

- I'm going to keep-- I'll just keep doing this so--

VISHNU AGGARWAL: No.

- --it's not you, it's me.

- No worries. Yeah, it's a power purchase agreement, so a contract to buy an amount of power for a set duration of time under a specified kind of pricing mechanism.

QUENTIN SCRIMSHIRE: Cool.

- Yeah.

So, yeah, so Smartest did that for since 2001. So we're celebrating our 20-year history at the moment.

And then, in 2008 we launched our retail business. So that's supplying mainly businesses, large industrial and commercial businesses with power, and mainly on a flexible basis as well. So that's B2B business customers there.

We also-- we're behind a lot of other suppliers that you may see in the market. So we provide market access services to them to enable them to access the markets.

- Can you say who, or give us an example?

- Yeah, sure. So one company, for example, is publicly traded. So I can talk about them. So that's U Energy Group.

So they're in the SME space. They supply small and medium-sized businesses. They've been with us for a number of years, and they've grown substantially at the moment.

And particularly in markets like this, where commodity prices are so, so volatile, and the markets are so illiquid, it's really important to have a trading partner that can support you in efficiently hedging what you need to do as you sell contracts.

- Cool. And so, SmartestEnergy, lots of energy and money flowing through SmartestEnergy in and out all the time.

VISHNU AGGARWAL: Yeah.

- And how do you describe your job there? We call you a trader? Or do you do more or less than that, or different to that? And which bit do you specialize in?

- Yeah, so I sit within the trading team.

And the trading team basically takes on risk from any contract that Smartest sells. So within any contract, there's different types of risk. And the primary risks are price and volume, two types of risk. And we sit managing that.

So from those contracts, there may be risk in the renewable certificates. There may be risk in the power, or the gas. And I sit within that to manage that and look after the teams that manage that and put in place the contracts.

There's also contractual risk. So we spend a lot of time dealing with legal, making sure that our contracts cover what the customer wanted it to cover.

And, yeah, making sure that the risks they wanted to transfer to us are transferred. So that's really the role of Smartest is to take on risk from a customer and, yeah, decide where that boundary is between the customer and Smartest.

- Could we talk basics for a second? So how does a PPA work? How does a power purchase agreement work? So let's say, we build a wind turbine-- one wind turbine on a windy hill in Birmingham.

VISHNU AGGARWAL: Yeah.

- And then we come to Smartest and say, we're going to create some power. And we need someone to buy it.

VISHNU AGGARWAL: Yeah.

- And then what happens?

- Yeah, so we talk to the customer and say, look, how do you want us to buy it? Do you want to buy us, firstly, the tenure. Do you want us to buy it for one year, two years, 10 years, 15?

And on what basis? Are you--

- What's normal there? What's a rule of thumb? Do people generally do one, two, three, 10, 15? What's average?

- That's a good question. It's all over. I mean, we have agreements out 15 years. They tend to be projects that require bank funding.

QUENTIN SCRIMSHIRE: Yeah, OK.

- But, typically, two to three years is a typical PPA length.

- Cool. So I've got my wind turbine. We're going to sign a three-year deal where you're going to-- I'm going-- the wind's going to blow, I'm going to generate electricity, and you at SmartestEnergy are going to buy it. And then, what else is involved and what other things are you thinking about?

- Yeah, so then the customer really has to say, well, are you happy with where market levels are at the moment? And if so--

QUENTIN SCRIMSHIRE: Do you mean price?

- Price levels, yeah. So if you're happy with the price look at the current market, then do you want to lock in that price for that year? So we could propose a fully fixed price, taking all of that volume risk off them. So pay as produced, if you will. So unit rate for every megawatt hour they produce.

Or if they say, well, actually, we're agnostic to that. And we want to take an index, for example, they may choose to take the day ahead rate every day throughout three years, two or three-year period.

And so, it's a question of how much risk they want to take to the market price, is one, but also to their volume as well. So they may say, Smartest, you take all of the risk of our volume, the production. So we don't know when it's going to be windy, when it's not going to be windy. That's your domain.

- So you at SmartestEnergy, you've got to guess how much power my wind turbine's going to make, based on how windy it is, which you don't in the future. You've got to figure that out. And then, you're going to buy that at a certain price. That's where you and the risk people come in come in, right?

- That's exactly it. I mean, it's a very, very difficult problem to solve. And not only-- even if you can guess when it's going to be windy and when it's not going to be windy, there isn't tradeable products out there in the market to be able, for us, to offset that risk, if that makes sense.

If you think, I don't know, it's going to be windy, in three weeks time for one hour, is there a market to be able to sell that power for that particular hour? There isn't. So that's where the transfer of risk comes in and Smartest say, well, we'll be happy to take that risk on at this price.

- Cool. So I might have got a loan from the bank to build my wind turbine.

VISHNU AGGARWAL: Yeah.

- And that bank loan might have been conditional on me passing off all of the potential downside of this to you. And then SmartestEnergy, you're then taking the risk from me from the bank, if you like. It's all gone through me to you.

VISHNU AGGARWAL: Absolutely.

- And then, what happens if it goes wrong? So say my wind turbine, I think in this winter it's going to be really windy. And then, I don't know, a blade falls off.

[LAUGHTER]

And so, I can't produce power.

- Yeah.

QUENTIN SCRIMSHIRE: You then have committed to buy that power from me. But I can't produce it. So therefore, how are you going to find that power? Where are you going to make up the difference in what you've committed to the market? How does that work?

- Yeah, that's a really good question.

That's part and parcel of renewable generation or any generation, really. There's obviously times where there's maintenance. There's issues with force majeure issues, where the plant breaks. So for us, it's about trying to forecast those periods.

- Wow.

Is a wind turbine breaking force majeure?

That's interesting. I guess it could-- you could argue, if it was like otherworldly windy, and blew it over.

VISHNU AGGARWAL: Yeah.

- I don't know. That's an interesting question.

- Well, it could be. It depends on-- could be due to war or civil unrest, for example, that it fell over.

- Just to be clear, wind turbines don't fall over, in general. This is all rather silly. But, yes.

- They're fairly stable. The main worry we have is when the wind doesn't blow--

QUENTIN SCRIMSHIRE: Yes.

- --as we saw in 2021 last year, super historic low levels of wind against rising prices. So that goes back to your question really is, when the wind doesn't blow or the turbine is broken, what do we have to do? So we have to go out and replace that power that we thought we were going to buy from that wind turbine.

- Because you've sold it on to someone else, right?

VISHNU AGGARWAL: Because we've already sold it on to a customer or the market at that point. And especially in times like this, where prices are hugely increased from a year ago. If that customer is signed a year ago, then that cost of replacing it, that power for us is huge.

- So, for example, I might have signed a three-year deal-- so there's lots of background noise. Hopefully everyone's OK there.

So I might have signed a three-year deal in 2020 to sell power from my wind turbine at a price of, I don't know, 100 pounds a megawatt hour. That's high, isn't it?

- That's for 2020, COVID year, yeah.

QUENTIN SCRIMSHIRE: Listen, 40 quid, right?

- Yeah.

- And then, two years down the line, my wind turbine has fallen-- has had an issue, and it can't run. But you've already sold that power. And so, you've got to buy it back from the market, not at 40 quid, whatever it is now, which is, what is it right now?

- So for wind, it's 500 plus. I mean, probably by the time this goes to air it's going to be out of date whatever I say. But it's, yeah.

- So not only am I out the money the 40 quid from my wind turbine, which I'm quite sad about.

VISHNU AGGARWAL: Yeah.

- But you as the counterparty, you've got to find that difference of 400, 500 pounds of megawatt hour.

VISHNU AGGARWAL: Yeah.

- So, yeah, so your role in this exchange is one of a lot of risk. And so, how do you hedge that? How do you manage that risk?

- Yeah, that's a really good question. So we hedge that with market available products, for example. So where we can find matching products to what the forecast is, then we'll go out and trade that.

We can also utilize shape and things like that that we have in the market or through other contracts. So we can manage it as a portfolio effect.

But then, also, flexibility really will play a critical role in managing these risks going forward. So historically, it's been less so-- the capture rates, as we call them, for wind and for solar have been relatively benign compared to now. But now, with the scale of those capture rates decreasing--

- What does that mean? Sorry, what does a capture rate mean?

- So assuming a certain amount of energy forecast for the day ahead.

QUENTIN SCRIMSHIRE: Yeah.

- How much of that is captured from the day ahead baseload price. So the average price for that day, due to the shape of that production, how much of that is actually captured. So, for example, for wind, when--

- Let's use my wind turbine as an example. So day ahead, we think it's going to be 80% of total wind in this.

VISHNU AGGARWAL: Yeah.

- And, therefore, we think we can capture-- there's going to be a price of something. And then--

- So you sell 80% of that production day ahead.

But the hours in which it is windy, the price is depressed. Because it may be windy everywhere. So there's a lot of energy on that system.

- Pushes the price down.

VISHNU AGGARWAL: Pushes that price down in that hour, let's say. And that capture rate, the differential between that hour and the average price for that day is the capture rate.

- What we're aiming to do is capture the base load price, right?

VISHNU AGGARWAL: Yeah.

- We don't want it to be too windy everywhere, and that will drop the price, and then we don't capture quite as much.

- Exactly.

But that's where flexibility can come in. So by contracting things like batteries, peaking plants, you can manage those price periods. Because when it is super windy, you can then charge your battery, for example. And when it's not windy enough, then you use a peaking plant or a battery to discharge power to the grid that you were short.

QUENTIN SCRIMSHIRE: Cool.

- Yeah.

- So I want to talk-- I think we've done the trading side. I want to talk about-- so two things, carbon and certificates, which we've never talked about much on the podcast before, and I know you know a lot about.

And this is a topic which is actually very controversial when you get deep into it. And I'd imagine that as we get further down the rabbit hole here, we're going to see the reasons why is the market that it is. But, hopefully, we can come out the end of it with an idea about how it all fits together.

So can you explain, please, what the carbon market is and what this certificate market thing is?

- So you have to break it down into two different markets.

When you have a carbon market, which is essentially a certificate issued for the amount of carbon that you would have saved having built a particular project. So it's an assessment of the, let's say you look at a forest, for example. It's the amount of carbon that would have been sequestered having developed that particular project.

Those units of carbon, so per ton, is an instrument that people can use to offset various types of emissions that they may have. And there's three main scopes of emissions that people look at. So scope one, scope two, scope three.

Scope one being emissions used for direct use of energy, so, for example, your direct use of natural gas through the grid.

There is scope two, which is your indirect emissions. So maybe from your electricity that you consume. And scope three can be things that are maybe from your supply chain. So you can use carbon to offset maybe your scope three emissions, for example.

The other type of certificate is what we call energy attribution certificates for things like the REGO, which you may have heard about.

- What is it? Renewable something origination or something? What is it? What's REGO?

- Yeah, so it's a renewable energy guarantee of origin certificate.

QUENTIN SCRIMSHIRE: There you go.

- Yeah, so that's--

QUENTIN SCRIMSHIRE: But is that-- so we're going to jump around here, but I think it's natural.

- Yeah.

- So I'm going to ask another question that will hopefully feed in. So what does 100% renewable power mean?

So if I go to SmartestEnergy, and I'm a business that really matters to me that my electricity use is renewable. And I sign up to 100% renewable power supply contract with you. So you're going to supply me with the electricity. And we use it for, I don't know, the office, and the aircon, and whatever, and the party.

VISHNU AGGARWAL: Yeah.

- So how-- when you say it's-- not you-- when the company says, the supplier says it's 100% renewable, what does that mean?

- Yeah, so what that means is your electricity is backed by renewable guarantee of origin certificates. So what is renewable? So this stems from a directive, an EU directive, renewable energy directive back in 2001. And that's evolved over time. But basically legislating that in order to claim that your supply is renewable, you need to use a guarantee of origin certificate to do so.

So how does it work in practice? It's a book and claim system. So each renewable generator, so going back to your wind turbine, for every megawatt hour they produce and put into the grid, they can book that energy as per megawatt hour as a for one REGO.

QUENTIN SCRIMSHIRE: Example, OK. So you book now and claim later, is that how it works?

VISHNU AGGARWAL: Well, then the consumer claims.

- And then the consumer claims.

VISHNU AGGARWAL: So the consumer says, I've taken this much energy off the grid and matched that with the guarantee of origin certificates and claims the renewableness that energy. Because at the end of the day, each electron that's in your-- that comes out of the wires in your home or your office is indistinguishable to another electron.

- That's the thing. So this office, for example, we got 100% renewable deal.

VISHNU AGGARWAL: Yeah.

- But when it gets to, I don't know, a very cold Wednesday in December, it can't be 100% renewable because there's gas running. There may-- hopefully not coal, but there might be coal burning, there might be other stuff running.

VISHNU AGGARWAL: Yeah.

- And so, does this mean that what my supplier does-- I can't remember who our supplier is-- but what they do is they supply us with the electricity that's from the open market, and then later they account for it and buy back the carbon or buy back the certificates as if it was 100% renewable. Is that how it works?

- Yeah, so, well, not necessarily later. They could be hedging that forward. But what that means is they are matching it on an annual basis. So that's the current legislation is you match it on April to March compliance years.

- Oh, so across the year. So my electricity-- our electricity consumption as an office across the whole year, you have to recover all of that in megawatt hours or carbonness by buying certificates to cover it.

And that means that sometimes we might still be using power from carbon-- from emissionsy sources, like gas or whatever. But we're going to cover it-- not cover it up. That sounds like-- yes, that's bad. But we're going to cover our position later.

- That's exactly it. And so, the certificates themselves are issued on a monthly basis.

So that's an aggregate of the renewable energy they've produced on a monthly basis. And then, those certificates are used to match the consumption on an annual basis.

QUENTIN SCRIMSHIRE: So on a physical basis, 100% renewable power isn't really 100% renewable power, right? But on a commercial-- but if that carbon certificate system really worked properly, on the whole you could recover it, and you would still be neutral. That's the idea?

- Yeah, so it depends on what granularity you want to look at.

So is it 100% renewable on an annual basis?

Fine. But how granular do you want to go?

And that's something that SmartestEnergy have been pushing for quite actively is to get to net zero, we need to push that matching to a more granular level. So we need to move-- certificates are already issued monthly. Why are we not matching on a monthly basis?

- Matching on a monthly basis rather than-- yeah, OK.

VISHNU AGGARWAL: Rather than annual. And then move to-- the government needs to move to issue these certificates on a more granular basis, so that we can go all the way down to hourly, half-hourly matching at some point. But the instrument needs to evolve to allow us to do that.

- So there's two questions coming up. The first one we're going to talk about, I want to ask you who issues these certificates, these instruments of carbon, and how does all that work? And then the second bit I want to ask you, which is a two-sided question, what is really good about this system and what is not so good? So there's a lot coming, just to pre-warn you. You can put all that in your RAM.

VISHNU AGGARWAL: Yeah.

- So, firstly, who issues these certificates and who decides the rules?

- Yeah, so the original rules were from the EU, in Europe anyway. So it's not just confined to Europe, but the original EU rules in Europe were developed in 2001.

And what that said was each member state of the EU has to set up an issuing body.

That's a body that's responsible for verifying the energy that somebody wants to issue REGOs-- or guarantees of origin, as they're called in Europe-- against.

And then, they're responsible for issuing those. And then, they then are available to be bought and sold from that point.

Now, that's in Europe. Similar schemes are available internationally. There, certainly, there's bodies like the International IREC Association that where a country has not mandated an issuing body, they'll go and step in to that country, set up robust processes and procedures to issue these certificates.

And then, as soon as that country then becomes a bit more developed and decides to establish an issuing body, they'll step out of that country, but providing an advisory capacity to that government should they wish to. So that's how the certificates are issued.

- So there's a central entity that issues these certificates.

VISHNU AGGARWAL: Yeah.

- Are they a physical certificate? Do you get a piece of paper? Do I, with my wind turbine, get a piece of paper in the post and I've got this shiny thing and I can go and trade it with someone else?

- They're digital. So they're like a-- yeah, a digital certificate. They did, to be fair, they did used to be on paper. I remember, yeah, almost nine years ago, trading Irish certificates that were on physical pieces of paper. That was a lot of postage.

QUENTIN SCRIMSHIRE: [LAUGHS]

- But, yeah, they're all digital now.

- Cool. And so, what's the unit of a certificate of a REGO? Is one unit one ton of carbon, and how do we make sure that the certificate really does mean that? So what-- because there must be nuances.

We're going get into the details now. There must be nuances about how these certificates are issued and who gets them and all that stuff. So let's talk about that. What's a unit for a certificate?

- Yes, so energy attribution certificates are quite different from the carbon certificates. And there, the unit of measurement is per megawatt hour.

QUENTIN SCRIMSHIRE: Per megawatt hour.

- So what that's saying is one megawatt hour of wind or solar has been injected into the grid.

And that's the beauty of these certificates. They describe exactly what has gone in, so where it's come from. So that allows consumers to then choose.

So we're sitting here in Birmingham, and you're saying, well, I'd really like to be powered by, for example, wind from that hill.

So you can go out and specify to your supplier, I'd really like to be supplied by that wind turbine. And you know exactly what you're getting because you've bought the certificates from that wind turbine. If that makes sense?

- Makes sense.

And so, I get it on the wind turbine, the generation side. So I've got my wind turbine. And I get my certificates. And then someone else buys them from me.

VISHNU AGGARWAL: Yeah.

- What about on the other side? So what about big industry. What's their role in this? So say I'm a big steel manufacturer, or I'm around the corner of here, Jaguar Land Rover, for example, uses loads of power for a very good reason to produce cars. But they still use a lot of power.

So how-- do they have to buy those certificates from me?

No. How does all that work?

- Yeah, so typically-- so, I mean, many of our customers are large industrial and commercial customers like you mentioned. So what they would do is come to us as a supplier and say, look, I want a renewable tariff.

And then they would specify what type of renewable they'd like. So would they like to be sourced from wind, solar, hydro? They like more baseload assets.

They like location-specific, technology-specific, assets, newer assets, things that have been built in the last five years, for example. And they can make those requirements known. And that then influences the supplier on their procurement activity and influences their purchasing strategy and projects that they then go and buy going forward.

So what they're doing is really making quite a powerful decision. So for their consumers, they're saying, well, our consumers really value the fact that we're producing this good using 100% renewable electricity. And they're then stimulating that market by participating in that market, driving demand for it, and therefore price as well, which then goes on to the developer of those projects.

- And so, here comes the difficult question-- a double-sided. So what's really good about this market? What does the market get right? And what's really-- what are the hot potatoes that we need to improve on here?

- Yeah, definitely. I think, so what's really good is it's a market-based mechanism. And that lends itself to the examples you just mentioned. So they can play an active part in deciding they want renewable consumption. So it's about democratizing energy, firstly. And that's what it lends itself to do and stimulate the market.

So it also means that in a traditional subsidy mechanism world, where the subsidies are borne by the taxpayer or smeared across all consumers, then those who want to play an active part in a low-carbon future can take some of that-- the cost away from the taxpayer or other consumers. So it works really well in that scenario.

Where it could be improved, for sure, it could really be improved in the granularity. It could be improved by legislation to move to, say, what we call full disclosure. So what we'd like to see is every single megawatt hour that you consume is accounted for.

So, currently, only the renewable energy part carries a certificate. Why does the coal or the nuclear not?

So why do you not have to also procure those certificates as well? And so, that will really drive further change and also allow consumers to dictate what the future grid mix looks like.

- So rather than a REGO, an EGO, where every bit of generation has a number on a certificate which says how much carbon you produce for that.

- Well, like a guarantee of origin like they have in Europe. So it's called guarantee of origin because they issue them for nuclear. They issue them for other things.

- Is this market doing-- here comes the simple question. I think this market is supposed to help us get to net zero. And does this market help us get to net zero?

- So this market allows us to make those claims that we want to make. And it's a voluntary-- completely voluntary market.

Now, could-- is there legislation that could help us move quicker to net zero? Absolutely.

So the future renewable energy directives, for example, RED II in 2018 then looked and said, well, each member state should look to target 32% of all energy coming from renewable sources. So it actually helps put targets on things and then helps account for those times.

- Because you've got a unit of account.

VISHNU AGGARWAL: Yeah. And then they went even further. At the moment, they're looking at--

- 32 is not that high, is it?

VISHNU AGGARWAL: It's not. It's not.

- When have they got to do that by?

- That's 2030.

QUENTIN SCRIMSHIRE: 2030.

- But they are--

QUENTIN SCRIMSHIRE: Come on, guys.

- They've got the new Fit for 55 strategy, which it improves that to 40%. But it still--

- Fit for 55, but the number is actually 40. What's the 55? Is that 2055?

VISHNU AGGARWAL: I'd imagine so.

- [LAUGHS] Yeah. And so, these certificates, can we start-- can we now go out and buy-- can I go and buy some certificates? I've got a bit of money in my pocket, just win the lottery. Can I go and buy-- I really want some certificates.

- Yep, if you found somebody willing to sell you those certificates.

QUENTIN SCRIMSHIRE: So it's not like a-- is it a regulated market, or can anyone play in this market?

- It's not regulated in that sense. So anybody can come play in that market.

- So this-- because this is-- we're talking about the market. So generators buy-- because I imagine it's not just suppliers who take part in this market. Do you have other traders who say, oh, I could buy now, sell later, because the price is constantly moving around, right?

VISHNU AGGARWAL: Yeah.

- And so, what drives that price?

- Yeah, so we find other actors in the market, just as in the power market and the gas market. So there's other liquidity providers and traders.

What drives the markets? So you've got similar fundamentals to power and gas.

So we looked last year, super low levels of wind, more than 40% of all guarantees of origin are issued from wind. So that really pushed prices up as wind was a lot more scarce. So you have the fundamentals.

- So then it wasn't windy enough?

VISHNU AGGARWAL: Yeah.

- Yeah, cool.

- When your turbine on the hill didn't blow quite as much as you'd expected that year.

QUENTIN SCRIMSHIRE: Got it.

- And then, on the consumption side, what's demand doing? So, I mean, that picture's really, really increased. So you may have seen by switching your energy at home, the offerings you get, by and large, a lot of them are 100% renewable tariffs.

- It all make sense to me here. But the big-- the thing that if you read the newspapers aware about REGOs, the argument is the price of REGOs is so different to the price of the actual carbon, if I've got this the right way around.

So for people who produce-- if you want to go and buy actual renewable-- the good energy piece, which is, if you want to buy actual renewable power, doing that costs way more than just getting a certificate for it, because there's more certificates than there's-- I don't know. What's the argument about why this market isn't right? What's going on there?

- Sure. So we need to get away from the carbon in it. So that what they are, they're energy attribution certificates. So they show you that one megawatt hour was gone into the grid, and one megawatt hour was taken out of the grid.

The way-- the pricing is reflective of consumer demand. And that's the way that-- there's pricing is not. It's not reflective of the cost of carbon because, obviously, in a project, then whoever is developing that project has a commodity they can sell the power for. They have the subsidy. They have other things within that thing. They're not just selling that certificate, if that makes sense.

And I think where some of the arguments really fall down is the understanding of our electricity system here in the UK. So our electricity system in the UK is such that you could set up and be a supplier and not have-- you don't have to be vertically integrated like you used to have to be. You don't have to have your own generation and supply just your own power to somebody else. It just simply doesn't work.

We talked about the intermittency issues before. You get to balancing. You need to buy power from somewhere else.

So the whole concept of saying, well, you can only supply renewable energy from plants that you've bought from doesn't work as a supplier.

QUENTIN SCRIMSHIRE: Yeah.

- So you take an example of Orsted, for example.

QUENTIN SCRIMSHIRE: Right, because you need a secondary market for it.

- You need a secondary market. So Orsted, they're divesting their supply business. They're very little supply now in the UK. Huge-- one of the largest renewable producers in the UK.

QUENTIN SCRIMSHIRE: Yeah.

- So in that argument you'd say, well, what happens to the renewable energy that Orsted produces? If they sold all of their energy on the exchange day ahead, are we saying that simply doesn't exist anymore because they haven't got a supply business to send that on?

QUENTIN SCRIMSHIRE: So this is complicated, isn't it?

- It's really complicated. But, fundamentally, the consumers can choose how to get their renewable energy. So they could go and sign a corporate PPA, for example, they could sign a PPA. And we've already discussed the risks involved in that. It's a risky proposition, but they could do that to--

- So Modo, we could go to a wind turbine owner and say, we're physically going to buy your-- we're going to buy your power, a bit like what like Microsoft, and Alphabet, and these big data center providers are now doing, aren't they?

- Yeah. But then, you've also got to get comfortable with the fact that you're not going to 100% renewable all the time.

QUENTIN SCRIMSHIRE: Yeah.

- If you're looking-- it depends on the granularity that you're looking at. But that's not always possible for most people. If you're sitting in London with you're living in a one-bed flat, you can't go and feasibly go and sign a corporate PPA. You can't go and put solar panels on the rooftop.

[INTERPOSING VOICES]

[LAUGHTER]

QUENTIN SCRIMSHIRE: No, we certainly can't.

- Yeah.

- So what about this-- there's a hot potato at the moment about Europe. So there's going to be a decision soon about REGOs, guarantees of origin, about how we trade with the EU. And is this related to-- is this because of Brexit, or is it-- OK. And so, what's all that about?

- Yeah, it's a good question. So, actually, we've had the decision. And that came out on Wednesday.

But, essentially, in the UK, we were able to import guarantees of origin from Europe. And what that, along with importing the renewable power and that sort of it, you would also be eligible for an exemption to various schemes, so the subsidy scheme or the small fit scheme, and the larger fit scheme, the CFD scheme.

Now, the reason that came about was because of EU state aid rules. So it was part of the agreement that the UK had to make with the EU as being part of the EU. So since we left the EU, that's no longer applicable. You don't need to apply these exemptions anymore to European power. So

That's always been since Brexit a controversial point, because why are we-- why are we still applying them? So it's certainly something that we've questioned. And now that decision has come.

QUENTIN SCRIMSHIRE: So what's the decision? That we do--

- So the decision is that the EU guarantees of origin are no longer eligible for exemptions in the UK.

- So that means that our market for these certificates is now just a UK market, not-- we can't trade with Europe on this stuff?

- Yeah. So there was two decisions made. And the second decision was we'd actually unilaterally not accept any EU guarantees of origin certificates at all.

- So we can't buy-- we can't cover our carbon-- so I'm steel producer. I can't buy carbon-- sorry, stop me. So SmartestEnergy, who's my energy supplier as a steel producer.

VISHNU AGGARWAL: Yeah.

- SmartestEnergy now can't go to a German wind farm and buy the certificates and then offset it over here. Is that how it works?

- Yeah, so they can't go out and buy--

QUENTIN SCRIMSHIRE: Buy it anymore.

- --from them, and then import them into the UK. And that's-- yeah, that's what--

[INTERPOSING VOICES]

QUENTIN SCRIMSHIRE: Is that good? Is this good? Or is this bad?

- There's arguments for and against. So for, that definitely helps our UK production. Incentivizes more development in the UK.

QUENTIN SCRIMSHIRE: Yeah, good.

- Which is good. Good. Bad, look, we're, over the next five years, we're expecting to double our interconnection capacity, right?

QUENTIN SCRIMSHIRE: Yes.

- So what-- we're importing all this energy from connected countries.

- And it gets the interconnection-- the carbon certificate can't get through. It's like a--

VISHNU AGGARWAL: So what color is that energy?

- [LAUGHS] Yeah.

VISHNU AGGARWAL: Because with the capacity in, I don't know, 2030, theoretically, over half of our energy could come from abroad if we were just importing full-time.

QUENTIN SCRIMSHIRE: So 20 gigs or something like that, isn't it, of interconnected, or maybe more?

- Yeah.

QUENTIN SCRIMSHIRE: Yeah.

- It's going to double. So what, are we saying that that energy is gray or brown? We don't know what color that energy is.

[INTERPOSING VOICES]

- So and then, that has a knock-on effect for consumers. Because if you're a corporate, and you can choose where to domicile yourself. You can domicile in Europe, or you can domicile in the UK.

And if you can't guarantee that you're going to be able to source what you need and have 100% renewable supply, because you want to help the net zero transition globally, then-- and you can't guarantee you're going to get it, and you can't guarantee you're going to get it at a suitable price point.

QUENTIN SCRIMSHIRE: Oh, this is so annoying. Yeah.

- Why--

QUENTIN SCRIMSHIRE: We need--

- It's going to affect your decisions where you're going to set up.

QUENTIN SCRIMSHIRE: This doesn't make any sense. Because then, the interconnecter who buys-- because the interconnecter's got a trading team. What, they're going to have to buy 20 gigs worth of on both sides, across the interconnecters, 20 gigs worth of REGOs and net them off against either side? I mean what the-- how is this even going to--

VISHNU AGGARWAL: There's no mechanism.

- How is it--

VISHNU AGGARWAL: That's the point. So that's where there's a bit of a gap. And, certainly, we can see from historic consumption of EU and UK certificates, it's huge. The demand in the UK is huge.

QUENTIN SCRIMSHIRE: It's almost as if being related to Europe was a really good thing. [LAUGHS] By the way, that's the first Brexit comment on this whole podcast in 22 podcast. I can't believe I did it.

[LAUGHTER]

Yeah, so all right. So that is complicated. But decision's been made.

VISHNU AGGARWAL: The decision has been made.

- Who makes that decision?

- So it's really curious. So the department that makes the decision is the BASE. So, Business and Energy and Industrial Strategy.

QUENTIN SCRIMSHIRE: Yeah.

- So on one hand, they've, obviously, they made a decision on energy.

QUENTIN SCRIMSHIRE: It's our government? Our government has made this decision.

Our, yeah, our government on energy. But then, it's the same department that's responsible for business as well. So they're also putting up the price for consumers of renewable energy.

- Because the steelworks is going to have to pay more, because it's going to be more scarce supplies of these certificates in the UK, which is going to push energy prices up for big industrial consumers, the same people that they--

VISHNU AGGARWAL: So the decision is removed--

- What a mess.

- It's removed 30%, 40% of supply out of the UK.

- The value of a renewable generator has increased in pounds, because we all pay-- even though, historically, price is at 50 quid for wind.

Because everyone's now paying 350, the value of that wind is now 350, not 50. So you think that the value of the low carbonness of it should also increase. But, oh, it's complicated.

VISHNU AGGARWAL: Yeah.

- I guess, the wider the difference between the percent-- the value of the certificate and the power price, they get to a point where it becomes silly. If the certificate was only a 0.01%

of the power price, it would be silly, I think. And if it was a bigger percentage, it would be a bit more rational.

- But I think the price just reflects what the demand is at that time.

QUENTIN SCRIMSHIRE: For the certificate?

- For that certificate.

QUENTIN SCRIMSHIRE: For the certificate.

- So it reflects the consumer demand for that. So if people aren't willing to advocate for renewable energy, then, yeah, the prices will fall.

- Which might happen because this other number is so big.

VISHNU AGGARWAL: Yeah.

- Who big is the market for these certificates? What are we talking about here?

- So in terms of the number of REGOs issued per year, you're looking at 100, 110 terawatt hours per year.

QUENTIN SCRIMSHIRE: 110 terawatt hours. What's that--

- That's on the--

QUENTIN SCRIMSHIRE: How does that compare to the overall?

- The overall consumption of the UK is about, I think, 270 terawatt hours. So it's--

- A thirdish.

VISHNU AGGARWAL: A third.

- Yeah, about a third. So about a third of all the power that we generate has got REGO related to it. And then you have-- the rest of it, the other 2/3, doesn't have a REGO related-- it doesn't have any EGO related to it.

VISHNU AGGARWAL: Doesn't have anything, yeah.

- Cool.

The next thing I want to talk about is how you do market access. So I know you've done a lot of work as an originator. And the word-- origination is a word that is bounded around in our industry.

VISHNU AGGARWAL: Yeah.

- But I'd be keen to hear what it is.

- Sure, yeah, it's a bit of a catch-all word, really, isn't it? So how we look at origination in Smartest, so we look at anything that's non-- what we call non-standard. So we've been doing PPAs for since 20 years ago, classify most of them as standard.

We're doing supply deals since 2008, classify those as standard. So anything that doesn't fit into what we call standard products is origination. So something which is more complex and maybe straddles the PPA and supply boundaries.

So corporate PPAs, for example, origination, things with flexibility, things that are a lot more complex, batteries, peaking assets, that kind of thing as well, and market access. So that's something that I talked about before that we provide route to market services for suppliers, for generation portfolios, for other actors in the market.

- And so, lastly, we had Peter [INAUDIBLE] on recently. And SmartestEnergy, of course, is, you guys use the origami energy system. What other kind of systems do you use to get your job done?

- Yeah, so that's a system that we use on the flexibility side for sure. But we also use quite sophisticated forecasting systems. We use energy trading risk management systems to make sure that we've captured all the risks that we have inherent in all the contracts that we sell.

- That's ETRN, isn't it, when people talk about ETRN?

VISHNU AGGARWAL: Yeah.

- Yeah.

VISHNU AGGARWAL: That's, yeah, that's ETRN systems, and other risk-reporting metrics as well to help us manage and understand our risks as well. Because you can only address those risks once you have understood them.

- Have you got-- do you have to, in the same way that a supplier has to-- you need credit cover, and you need post-collateral, and you have to do all that kind of stuff.

VISHNU AGGARWAL: Yeah.

- It's quite expensive business, isn't it, to prove when you trade on an exchange.

I want to ask you about exchange in a second. But to prove that you can get a seat at the table. And so, do you have to do that in the carbon world too?

- It depends on the instrument. So, yeah, I mean, there's--

QUENTIN SCRIMSHIRE: Sorry, the REGO, the emissions world. I'm going to call it emissions, because that carbon and--

- Emissions, yeah, so the emissions world covers voluntary carbon and compliance carbon as well as REGOs, guarantees of origin certificates as well. So, yeah, for sure.

So there's, depending on who you're trading with, if you're trading over the counter, there'll be collateral requirements that that other party may have and we may have depending on the credit suitability of each counterparty. And then, of course, if you're trading on the exchange as well, then you'll have collateral requirements, initial margin, and variation margin that you'll have to post day to day. So similar to the power.

But, yeah, I mean, talking about collateral requirements, that's one of the reasons why companies choose to use companies like Smartest for market access because you're concentrating the collateral requirement to one person.

QUENTIN SCRIMSHIRE: Yeah.

- And then you're effectively writing a contract that allows you to get market-reflective rates by doing that. And so, you really rely on the credit capability of that market access provider to go out and have credit lines with everybody in the market, or as many people in the market, to ensure that your pricing is as efficient as possible.

- So where do you trade this stuff? Is it like, of course, powers on APEX, or Nord Pool, or whatever. Where do you trade REGOs and where do you trade carbon?

- Yeah, so similar to power as well. So power is OTC, so over-the-counter, as well. So there's a lot of the market in carbon is OTC and REGOs as well. So in the similar vein to curve power, if that makes sense.

- As in, that's you call up another buyer. It's a kind of side deal, like a bilateral deal between you guys, rather than going through an exchange, it's lots and lots of them.

- Yes, it can be bilateral. But they can be facilitated by a broker. So the brokers would aggregate the interests and do it on a name give-up basis. So say, OK, you're matched with such and such, and here it is. Go away and sort the contracting out.

QUENTIN SCRIMSHIRE: Cool.

- Yeah.

- An then, I also-- I know we're running out of time. I want to ask you about carbon. So we've done a lot of talk about REGOs.

VISHNU AGGARWAL: Yeah.

- And carbon's in vogue at the moment, isn't it? I mean, the price has jumped in the last year. I think it's dropped quite a bit since then. But what's happening in the carbon markets? What's changed?

VISHNU AGGARWAL: Yeah.

- Because it was like, I remember when we first were going to do Brexit, and I think one of the sells in the government about Brexit within again, but was that we would put a cap on carbon prices of 16 pounds, I think it was, or 12 pounds, something like that, back in the day.

And at that time, the European carbon market was about 20 or 24. And the UK government was saying, OK, to encourage-- stimulate growth, we're going to put a cap on the price. And then it got to, what did it get to recently?

- So we've been up to 80.

QUENTIN SCRIMSHIRE: 80?

- That's right, yeah.

QUENTIN SCRIMSHIRE: 80 euros?

- 80 euros, yeah.

QUENTIN SCRIMSHIRE: 80 euros. So what's going on in carbon? Because this is wild.

- So I think what you're referring to there is compliance carbon, so European allowances, UK EUAs, or UKAs. So since Brexit, we've pulled out of the EUA scheme and created our own UK annual allowance.

- What does EUA stand for though?

VISHNU AGGARWAL: UK allowance scheme. So it's carbon allowances, effectively.

And, yeah, the prices have been absolutely volatile for various reasons. So what's really pushed up the price is that commitment to net zero and pushing that transition forward. And that's really, really meant that people priced in the value of carbon a lot more.

But then, it's been super volatile. So as we look at the changing nature of policy with respect to current environment. So there's a lot of talk now of stimulating coal plants, for example, across Europe.

And that changes the requirement of carbon, that you need to buy more. But then are you going to relax policy, so then prices fall? So it's been super, super, super volatile.

And then, having moved away from the EU instrument and now having our own, it's even more illiquid because there's less market actors that need to buy it, because we're not looking at the whole of Europe, we're just looking at only UK participants as well.

- So surprise, surprise, the more fossil fuels you burn, the more carbon you need. And there's a fixed supply.

VISHNU AGGARWAL: Yeah.

- So I guess, am I right in thinking that if the carbon price is going up, we're probably going to currently, or in the near future, be burning more fossil fuels, because there's more requirement to cover the position or the emissions?

- Yeah, that could be a reason.

QUENTIN SCRIMSHIRE: So carbon prices going up doesn't necessarily mean-- that probably means bad. It means we're burning more stuff.

- Or it could mean that there's an anticipation of change in policy. So it could be--

QUENTIN SCRIMSHIRE: Or, yeah.

- We could be increasing the targets, for example. Yeah.

- Cool. Makes sense. I want to ask you one last question now. What's going to happen in the future? I mean, where is this market headed? And the stuff that you do, what are you excited about?

- So what am I excited about?

If we touch back on the guarantees of origin market, I think that's hugely exciting going forward. So we've just seen this year a paper from National Grid on hydrogen. So there's, as you know, there's a hydrogen target, 10 gigs of low-carbon hydrogen by 2030.

And they've really-- they've put out a paper saying that guarantees of origin will be key to this transition. So looking at effectively stimulating that market, allowing people to claim hydrogen, whether through the grid or through the bus. So we could get to a stage where people could say, well, actually, I'm taking this bus because it's a green bus, versus this bus, it's not a bus.

So that's hugely exciting. But, also, the potential for interoperability between the certificate scheme. So how do you claim that hydrogen is green hydrogen?

There's different colors of hydrogen. I don't know if you've covered that on a podcast before, but--

QUENTIN SCRIMSHIRE: Yeah. I know we haven't, but--

VISHNU AGGARWAL: You haven't. OK.

- But, yeah, we've got-- we're fans of Michael Liebreich's Ladder and I've been following that very closely. Yes, so you've got the green, blue, gray.

- Multiple colors, yeah.

QUENTIN SCRIMSHIRE: Yeah.

- So you've got-- so green is meaning electrolysis, but from green sources. So how do you prove that what's gone into the electrolyzer is actually green? Well, maybe you can use a REGO, but you've got to make sure that that REGO can't then be used going forward, as you get double counting. And then, what happens to that hydrogen?

- Oh, yeah.

VISHNU AGGARWAL: Do you then go into transport? Do you need to transfer that into some transport certificates? Or do you put it back into the grid? So you need to then cancel the hydrogen certificate and put it back into REGO, for example. So that's-- the interoperability between different energy sources is going to be hugely exciting, I think.

- And the exchange rate that we sell on, and the proof of exchange rate. Because it's kind of like storage. It's-- this is cool.

VISHNU AGGARWAL: It's exactly the same. But then, also, if people are going to want to move to early matching on the certificate scheme, then there will be an hourly price for the REGOs. And that would be another market that batteries, for example, can participate in, because it's an additional revenue stream to consider.

QUENTIN SCRIMSHIRE: Yeah.

- Because that corporate wants 100% renewable. And you need to be able to make that happen.

- Very cool. And very complicated.

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- Yeah.

- We've got a lot of work to do. I just want to, officially, thanks for coming on.

- No, thanks very much.

- It's been awesome having a chat. We've talked about a lot here today.

- Yeah.

- I guess there's a couple of things we've mentioned that we'll link to in the comments. And anybody who is listening to this, let us know what you think. And do hit that subscribe button. It means a lot to us. All right. Thanks very much.

- Thanks for having me.

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