34 - How REMA is reinventing the markets with Ed Porter, Robyn Lucas and Alex Done (Modo special)

[MUSIC PLAYING]

Hello, Ed from Modo. You're joining us for a special edition on REMA with two in-house Modo-ers. We have?

Hello, everybody. I'm Robyn from Modo.

And I'm Alex, also from Modo.

We're going to be getting into all things REMA.

Can't wait.

It's going to be very exciting.

Let's get started. It's very exciting to have you both on. We're going to be talking about all things REMA, which is going to be hugely exciting, and is really quite a daunting topic because it's a bit of an exhaustive list of everything in the energy market.

It's going to be a good one. Maybe while we're talking about REMA, I'll get started there. Then I want to do something a little bit different, with a little bit of a quickfire round, just to get us started.

Why are we talking about REMA? It's essentially the biggest thing that's happened in energy markets since EMR, was the Electricity Market Reform, which introduced contracts for difference and the capacity mechanism, things that we know and love.

Let's move on to the quickfire round. I haven't given you these questions yet, but I think they'll be fun.

This is tense.

This is tense.

Yeah, let's go.

This'll be tense. So I think it's just fastest finger on the buzzer, off we go. Heat pump or hydrogen boiler?

Oh, heat pump.

ED: Heat pump, correct answer. Nodal or zonal?

Nodal.

Ooh.

OK. Interesting. This next one pivots a little bit. So David Cameron or Chaos with Ed Miliband?

Chaos with Ed Miliband?

ED: Chaos with Ed Miliband, yes.

I mean, that was my question. But no, Chaos with Ed Miliband.

Yeah, as would I, eh.

OK.

Cut the green crap. Hmm.

EV or e-bike?

EV.

ED: EV?

Oh, actually, no. No.

ED: E-bike.

Yeah.

I think I'm e-bike. OK. Next one, Modo. Or Modo on the Roof?

Oh, Modo on the Roof.

Modo on the Roof.

ED: Modo on the Roof? Interesting. I'm a Modo fan, myself. So standalone or co-located?

Oh, standalone.

Co-located, every day.

Ooh, really? Aw, no.

ED: Good.

Nothing better than like, a big battery on its own.

[LAUGHTER]

Two hours or four hours?

Two hours.

ED: Two hours?

Yeah, two hours.

ED: Two hours? Yeah. I think that's where the market is. Last one, you don't have to answer this.

Quentin or guest presenter?

I mean, we all know the real answer to that, I'm mean, I think.

Yeah, OK.

no comment.

Well, that's a big vote of confidence, getting into what is a difficult topic. OK. Let's get started.

Two things I've flagged. One, great place for grads getting into energy. REMA's going to set the path for the next 5, 10, 15 years.

So if you're new to the market, if you familiarize yourself with all of the different nomenclature and acronyms, and other unknowable language around REMA, then you will be very well up for the next 5 to 10 years, until the next one comes along.

Exactly, yeah.

The other thing is, there's a table halfway through REMA, which the consultation document which basically outlines all of the different options. If you read through that and understood all of those terms, you'd just be so well set up to understand the energy market as a whole. It's brilliant.

It calls out some other sort of schemes as well.

We were just talking about Dutch subsidies. You might not know what a Dutch subsidy is. I think many people don't.

ROBYN: It's a carbon tax in reverse.

Yes, very nice.

ROBYN: I learnt this morning.

Yeah. I think you could have a look at it and you could kind of have a look at a couple of other markets and get yourself up to speed quite quickly.

ALEX: Yeah, definitely.

It's a really good thing to read. It's a little bit long. Sort of 100 pages.

100-so-odd pages, yeah.

Yeah. But it's good. And then, which is a bit of an apology as well, it's a bit of an in-depth topic so we'll try and explain as much as possible what everything is. But if we kind of gloss over something, feel free to reach out to the Modo team and we'll try and explain it at a later stage.

ALEX: Yeah, indeed.

Yeah, great.

OK. So let's get into the big chunky topic, which is wholesale markets.

I think this is a great place to start. Let's start off with national, nodal, and zonal.

Who would like to take on? Robyn, maybe I come to you first.

What is national? What is nodal? What is zonal?

A national wholesale market, that means you're buying and selling power on a whole country market, so everybody gets the same price. There is one price for everyone, based on whatever market you're trading. For example, it'd be hourly, day-ahead price.

This is what we have now. This is the status quo. If you're in the North of Scotland, where you might be surrounded by a lot of onshore wind, you will have the same power price as in the South of England, where you might be surrounded by a lot of solar.

Yeah.

This is kind of the reason that this is not something that National Grid want to continue with is because it creates a whole lot of inefficiencies around constraints. Then we move to this kind of locational pricing, locational marginal pricing. One option of that is zonal.

One option is nodal.

In my mind, zonal is a kind of a node anyway. It's just a bigger node. But these are typically like, big zones. Something like the GSP regions that we're all quite familiar with through the existing network charges. Which are locational.

We've got zones, and they might be transmission zones. Then if we can go down to a finer granularity, we go to nodes. They might be something like the GSP points.

So 300, in excess of in GB. Each of those has a different energy price, based on what is in that node, what is in that zone, and the constraints that exist around that region.

Maybe a little bit on that nodal pricing. Effectively, there's no constraint between those two nodes. They'll clear as a set.

ROBYN: Yeah.

So you'll get a single price across those nodes. As soon as you introduce a constraint to that mix, you'll then get the nodes clearing at different pricing.

Yeah, exactly. So while you might while you might think, oh, I've got 360 different power prices, they're only going to be different when there is something creating a constraint. So that might be like masses of wind generation in Scotland. Or masses of solar generation in the South.

Mm, yeah. I guess taking a little bit of step back, why would you even consider this in the first place? I guess one of the big things that's come out in the REMA consultation is that my current trading arrangements aren't going to get us to net 0 fast enough.

One of the things identified there is well, we don't have any, I guess, real-time locational market signals. And I guess this move to zonal/nodal pricing is to really embed those in the wholesale price. Instead of just you'll do auto charges, they'll get updated every year, you've got these real-time signals for where to build assets of different characteristics.

Yeah, one of the really interesting stats that I've come across in this process is that in some settlement periods, some half-hour chunks of time in which power is produced or used, up to 60% of the market is re-dispatched. That's because of essentially, inefficiencies in this single power price, because of constraints around the country, and actually how much power can be shipped from place to place, because of the size of the cables and the size of the transformers. That's quite a significant amount of re-dispatching. Yeah, it's huge, yeah.

If that's done sort of close to real time by the system operator, inevitably it's going to be fairly inefficient.

Yeah. Operationally, that's just a huge challenge, yeah.

It's a massive challenge. And leads to all sorts of issues with large BM plants being dispatched over lots of small BM plants, which is bad for batteries. Whereas, if it was done in much more of a market way, it's supposed to incentivize much more efficient dispatches, according to actually, the supply and demand in a single location.

Mhm?

ROBYN: And therefore, incentivize investment signals for future infrastructure in each region.

Yeah.

My next question is going to be what do we like about it? But I think that's pretty much answered it, in that we like the real-time, market-driven price signals that tell you where to build.

That's great for things like storage, because you can move to different locations. Therefore, you can be where the grid needs you most.

Yeah, I think it's really, that is good for storage. Because you pretty much just need a field to be able to build a big battery. And a decent grid connection.

Where it's probably more of a challenge is something like a wind farm. Where you need to be where there's wind. Geographically, there are certain regions where that happens and there are some regions where that isn't.

Typically, where there's lots of demand and therefore, where you might want generation, you're not actually going to be able to build generation. It's not very windy, as well, it is quite windy in Central London. But less windy than, say, North Scotland.

Yeah, I mean, fundamentally, you can't build things, necessarily, where the price signals are telling you all the time.

Yeah.

In the same way that consumers can't just up stakes and relocate to where the electricity is cheaper. Yeah, it's definitely an interesting one. I think the other thing is how does how do existing bits of power infrastructure respond to that?

If you've built a wind farm in a place which is moving to locational pricing and the prices are very low there, how does that interact with the CFD? Is your business case falling out, off the floor if you haven't got one? Yeah, it's an interesting one for existing generation, as well as new build, I think.

Yeah. Dealing with that, those grandfathered sites, if they are under a different arrangement and they're exposed to different prices as compared to new sites, operationally that becomes a total nightmare, in terms of the systems that you're using to build and contract, and all the rest of it, and dispatch these plants. You'd make different decisions. Because they're essentially exposed to a different price signal. You know, how do you manage that going forward is going to be a headache.

I totally agree. I think let's leave the legal piece. Because I think that's going to be really it. So there's a couple of bits in there. It's like, how does this market work at its sort of theoretical best?

Then there's also, how do we actually move from the market today to the market of tomorrow? Let's say it's a nodal one. And manage all the legal ramifications that come with that process.

Interesting.

One of the things that's kind of hidden within the national nodal and zonal piece is self dispatch and central dispatch.

To describe a little bit about the market how the market works today, effectively, we are self-dispatch up until gate closure. Which is where individual dispatchers of power plants essentially hand over control to National Grid ESO.

National Grid ESO takes us through, all the way through the settlement period, in terms of making sure that the grid balances. So it's enough.

This is when plants get re-dispatched via the balancing mechanism. They put in prices via the bid offers, pairs.

Then National Grid will say, OK, we need you to turn up or turn down. That is a fairly automated process.

Yeah.

So within the kind of national versus nodal.

National level, there's a lot of self-dispatch. Then you pass it over to National Grid ESO, who manage the constraints.

Within a nodal system, you're essentially putting all the information into the clearing process. And the clearing process decides who should run and who shouldn't run. Within all of that, there's a handover of how you decide which assets are going to be running.

From a national single price to a nodal central dispatch. I think those are the options. One of the things that comes up a lot on nodal is around liquidity, and just how do you manage this.

Is there enough liquidity at each node?

And how might that work? What do we think? Do we think that's a sufficient reason not get into nodal?

Yeah, it's come up a lot, this liquidity question.

I think part of it, in my view, is that engineers, economists, mathematicians, analysts, love the idea of nodal pricing. Because it means more data. It means like, efficiency. But in practice, I think it's maybe a little bit challenging.

And this idea of liquidity and centralized dispatch, I think, is potentially to the detriment of nodal pricing. And I think this is, in my mind, where zonal pricing feels like a nice compromise, right? Because it's not so complicated, that you have to move to central dispatch. You could reasonably still do self-dispatch in a zonal world. And you still get some of the benefits of locational price signals and constraints manage themselves ideas.

It sort of feels a little bit like a halfway house. If you're going to go for it, you should probably just go for it. There will still be inefficiencies in a zonal model that you're trying to get away from with nodal pricing.

Yeah.

You say if you're a fan of self-dispatch, the place we're probably is zonal.

ALEX: I'd imagine so, yeah.

But if you're willing to enter into the center of dispatch argument, then you might end up in nodal.

Why do you think we need central dispatch in a nodal model?

Good question.

ALEX: I think it's just the operational complexity, right?

Complexity is definitely one answer. The other thing for me is, it's when you do that central dispatch, really what you're dispatching around, for me, is to get lowest cost for the system. That needs to take into account the constraints that you have on the network.

If you allow self dispatch to continue rolling on after you've done that original central dispatch, then the people who are doing self-dispatch, it's not clear to me that they would understand where the constraints are in a system. So I think if you want to get liquidity in a nodal system, you need to repeatedly do auctions and central dispatch. That gives you liquidity.

Yeah, that liquidity question is if you've just got one auction at the day ahead. Then you go all the way to sort of gate closure now, before real time. And the ESO or FSO, or whoever is running that optimization of everything, has that 24-hour period.

Then yeah, you've only got one auction. Things are going to change from that day ahead period to the hour before and you will have liquidity issues. But as you say, if you refresh that position quite a few times before real time, and have, I don't know, three intraday markets, for example, you do get a lot more liquidity.

The other thing is, you can trade across nodes. Right, there's nothing to stop you having something like a financial trading arrangement, Yeah where you buy the rights to transmit power from node to node. And you can get your power from a different neighboring node or further away.

Yeah, presumably there's a whole host of weird funky options there as well, right?

Yeah. Financial options which then allow more liquidity and the ability to hedge and deal with the risks associated with that kind of nodal model.

To maybe put that an example, if you were a generator and I was a supplier of energy, we could have a conversation six months out where we agree a financial arrangement that sets a wholesale price.

Then, even though we haven't actually traded the power until much closer to delivery, we could actually hedge some of our wholesale risk by a sort of a bilateral agreement.

We're kind of saying you still can hedge in this world of nodal pricing. Which is one of the big question marks.

Yeah, I think that is fundamental. You have to be able to hedge power. In whatever arrangements we come to with these wholesale markets, you've got to be able to hedge power effectively, a few years out.

Everybody needs to be comfortable with the mechanisms of doing that. And the risks associated with all that, and the risks of doing that need to be sitting with the right people.

Yes, yeah.

Who are able to handle those risks.

That's the classic risk 101, which is allocate risk to people who are able to do something about it.

And you take it off the people who can't.

Yeah, exactly. Exactly. Put under that bucket supply obligation. But let's not go down that road. Ask me at a later stage.

I think the other thing to say on this is perhaps it's just, how much of this is theory? Alex, you touched on this. How much of this is theory, versus how much of it is kind of something that actually works? I think maybe here we've looked to the US a little bit.

Yeah, the US has a lot of nodal pricing. We've got zonal in Sweden, and Australia, if memory serves. It's one of the more widely-seen market designs in practice.

Then when you compare that to the as available versus on-demand market, which is entirely theoretical, we haven't ever seen that rolled out in practice. It makes zonal and nodal pricing look like pretty reasonable, I think.

That's really interesting. Yes, it's something that's been proven and works in other places, which is a big thumbs up. We should definitely say that.

Has it worked that well, though? There have been various reports about it not working that well in Texas, for example.

Yes. Regen put out a paper about there has been a lack of renewable investment, despite the fact it's got nodal pricing.

I think that nodal pricing is often used as a way of not investing in transmission infrastructure. Because we can really, really optimize everything to within an inch of its life.

Therefore, we don't need to build any new transmission infrastructure and delay all those costs. But actually, we need to build a load more renewables. And we need some copper in order to transmit that power. We do need to invest in the transmission system. That's going to be the case whether we have nodal pricing or not.

It's really an interesting point. Or actually, strangely enough for REMA, which is exhaustive on all things energy markets, it actually doesn't link too much to how the market is going to link strategically and in a forward-looking way with transmission build-out. And things like nodal the markets are so reliant on what connections exist to be able to move power and to clear things in a unified way.

How does that affect the future transmission arrangements?

I'm not sure it's mentioned.

ROBYN: The hedging products that you're using?

ALEX: It's really not, is it?

Yeah. I've got 37 key cards or key notes, from a BEIS event. Actually, it's not on one of them.

Yeah, nobody's just said build more connections between Scotland and the North of England.

Yeah, yeah. It's interesting. It's interesting. OK. Alex, you very, very sneakily snuck in something around split markets.

Oh, I did.

I think we should wind back to it.

One of the things that was put forward was this concept of as-available and on-demand markets.

Essentially, anything that's renewable generator would be in the as-available market. That would have its own price.

This is all pretty confusing, isn't it? Because the concept with the current market arrangements is that everybody bids in at that short-run marginal cost.

Then we decide the clearing price, based on how much demand there is. But with renewables, operating costs are basically zero.

Your big upfront cost is where, essentially, you spend most of your money through the life of the plant.

That, I guess the argument for as-available versus on-demand is that renewables should be remunerated at their long-run marginal cost, i.e. to recover the CapEx. Whereas, stuff that burns fuel, like CCGTs, for example, should be remunerated at their short-run marginal cost. This as-available versus on-demand market essentially gives you that sort of dynamic.

Yes.

It is confusing, though.

I think the thing for me that confuses me the most about it, and we should also say that it doesn't look like Baringa/National Grid ESO. Are looking at going down the split market. But it's an interesting concept that you have these two clearing prices for as-available renewables and on-demand flexible generation.

It's not clear to me how you categorize things like storage, that go between these markets. Which traditionally charge from high periods of renewable generation to dispatch into high periods of demand or replace things like CCGTs. OK.

Coming very quickly back to that, though.

I think the concept, conceptually, it works. We haven't seen it in practice. But the thing for me is that essentially it just embeds a CFD-style mechanism into a wholesale market.

Which you can do, but it doesn't mean you should do it. I think that's really the takeaway.

ED: Exactly.

To me, it raises another question about how you would hedge the power of a long-term renewable site.

Because that's very much currently linked to the gas price.

Because it's all linked to the overall power price, which is usually set by gas, which is the marginal plant. So how do you go ahead and hedge your renewable PPA for five years, when you're not facing the same points?

Arguably that's one of the reasons it's been suggested, is to remove that marginal cost. Well, gas setting the marginal price. But yeah, two sides of the same coin, right?

Yeah. I think it's a really good segue way into off the wholesale piece and into some of the market mechanisms that we're seeing today.

Three ones I'd probably choose to touch on, say one, CFD, two, capacity market. And three, the kind of up-and-coming cap and floor that we may or may not see some news on at some point soon. Maybe let's talk about CFDs to begin with.

CFD is a contract for difference.

ED: Thank you, Robyn.

Yeah a lot of wind is built using CFD contracts. That's where when you're going to build a plant you say, OK, I need to get, I don't know, 40 pounds per megawatt hour guaranteed over the lifetime of this project. It's indexed to the day-ahead price.

What that means is, people, the price for the power they generate is somehow referenced back to the day-ahead price. So that what this, in practice, you get an awful lot of liquidity, a lot of volume, from these CFD sites, bidding into the day-ahead auction. Then whatever the clearing price is, then referenced back to that initial one that they bid into the auction.

If in my 40 pounds per megawatt hour example, if the day-ahead auction clears above that, the renewable generator pays it back.

If it clears below, they get topped up. Essentially, they're guaranteed that 40 pounds, but they don't really get any upside for the huge prices we're seeing at the moment. But they equally are not exposed to really low prices.

These are 15-year contracts. The key thing here is revenue certainty. Bringing down the cost of capital for renewable investment.

And it's been really successful.

Yeah, it's impeccably successful.

We've had a huge amount of wind built.

Yeah, yeah. It's what, 27 gig, I think it is? Isn't it?

Yeah, yeah.

ALEX: It's loads, yeah.

I think most people in the market would say CFDs have been really successful. I think people, if reading the room a little bit, would say that there's some things we could do to improve them.

Yeah, they do definitely. Meaning that there are inefficiencies in the market. One good example of this is we often get negative imbalanced prices when we have very low demand and loads and loads of wind on the system.

That negative imbalance price is purely a result of the CFD contracts that those plants have, because they are guaranteed that revenue. So to turn them off you pay them. So they're not getting zero. They're getting actually money paid. This is why most wind plants in the BM will have negative bid prices.

Yeah. Then, the other thing that you mentioned earlier, because the CFD payment works on the price you sell power into the market. A lot of people with CFDs will be trading the day-ahead market and not trading their power out long term, right?

Mhm.

Which if you're a supplier looking for liquid markets to hedge your positions in, you don't have all of the CFD pool to take the other side of your trade. So you've inherently got less liquidity in your market than your hedging.

Which I guess is another, I'd say, downside. But natural conclusion of.

Yeah, there's nothing to stop those CFD plants trading in different markets.

No, no.

But I guess there's a bigger risk between the price they stay secure in those longer-term future markets and the day-ahead market, which is where they eventually get their price set.

Yeah. Maybe Alex, to take your point as to the consumer side, imagine you're a consumer but your supplier is only able to hedge in day-ahead.

ALEX: Yeah.

You'd be effectively facing a different wholesale price for every single day. That would be kind of--

ALEX: Expensive.

Expensive or very volatile, quite difficult to work out how to price that in an effective way. So suppliers do need to hedge to give you that certainty of a price.

But the way the CFD works, it pushes everything into day-ahead. OK.

ALEX: I'm sorry, one last point here.

Go on

There's also been some question about should wind be doing more ancillary services? Or should stuff with CFDs be trying to do more ancillary services?

Yes. Yeah, we've seen very little wind participate in certain types of ancillary services. I'm thinking here, dynamic regulation.

Yeah.

I know the system operator we're expecting some wind sites to go into deal.

If we look back at ODFM from the pandemic, that was loads of--

sorry, Optional Downloads Flexibility Management, that was there was loads of solar, loads of wind in that.

We were sort of expecting a similar thing with a new response, reserve services, right?

But we haven't seen it. I think there's part of that is the--

People aren't really incentivized to go out of their CFD.

Exactly. You have quite a comfortable position you're in. Why would you go and look for additional stuff outside of it?

Especially when your CFD's 15 years and your ancillary service contracts are 4 hours, right? No sense from an investor point.

Right. I think the thing, just to be clear about which way we're leaning here, I think we're trying to say that actually there's a lot of flexibility within renewable generation. Particularly wind.

There's a lot that could be done and could add lots of value to the system.

We're just saying that the way the CFD is structured at the moment is not necessarily bringing the most out of wind. We think there's more that you could get from it.

Which really highlights the absolute key point of REMA. Which is that you have to create suitable market arrangements, such that all the things that you value societally are reflected in the market.

That is really what's happening with the discussion around the CFD, right? Is that we're saying we actually value flexibility a lot more than we've given credit for in the past with our existing arrangements. So how can we change that and make it better?

Yeah. OK, that's a really nice wrap. OK, let's move on. Moving from CFD to the capacity mechanism.

The capacity mechanism is effectively where people get capacity contracts to build plant that is flexible. You can also build a plant that's kind of less flexible. And that will get you a sort of a large D rating.

Which means you get a very small portion. But effectively, the capacity mechanism pays for a flexible plant. That can be carbon-intensive plant. But it also can be sort of low-carbon, net-zero suitable plant.

What do we like about the CM? What don't we like? What would we like to change?

In my mind, the CM is literally just a subsidy. It is a way that the intention was to build more gas power stations. It's not really ever worked to build more gas.

No capacity market event has ever actually happened. It's just purely a subsidy. It would be nice if it was used more in practice, I think.

OK.

For events. It's meant to be to ensure we have enough capacity on the system so that when demand is high and margin is short we have an additional source of capacity, in order to make sure the lights stay on. It's about security of supply.

But there's a lot of plant in the CM which are also in ancillary services, if we think about batteries and those ancillary services. Frequency response take priority in capacity market notices anyway.

It literally just acts as a subsidy. Which doesn't mean it's a bad thing. I just don't think it's really doing what it was meant to do so.

As a follow up, to that if we were to try and change the CM so it was a suitable for like a Net Zero world, are there things we could do to it?

Yeah, I would put carbon in it. Some element of carbon into it.

You're saying carbon pricing isn't doing enough right now to dissuade investors from getting into low-carbon tech, and actually we should bring a more explicit carbon price into the way the CM clears?

Yeah.

ED: Yeah.

There's been loads of like, Dieter Helm said there was the two-stage capacity auction, which is where you do it in batches of technologies essentially, right? There's countless ways you can do this in the CM. There's a CM plus, I think, that was suggested in REMA, where you do scalers for different sort of different plant characteristics.

Maybe you'd get a scaler for how quickly you can respond and how long, what duration you can respond for, and your location. Maybe there's some sort of--

did we say Dutch subsidy scheme here? Where you can get a scaler for how carbon intensive you are.

ED: Yeah. Just to be clear on scaler, it's like a multiplier.

Yeah. The opposite of a D rating factor almost, as it boosts how much revenue you get. Think of it, I guess for those of you familiar with the Irish market, like the DS3 system services, where you get a fixed payment. Then it multiplies up, depending on how quickly you can respond.

Nice.

For example, you could say you would do it in a carbon-intensive way. So you'd say, if you're going to be emitting x sort of carbon for kilowatt hour generated, you would get whatever scaler of 1. If you were a battery, let's say, and you weren't emitting carbon, you could get 2, 3, whatever it might be.

Yeah, exactly.

So there might be some sort of offset. So you get D rated because your duration is not as long as say, a CCGT.

In that case your CCGT would not get D rated. Because essentially it can go forever, provided we don't run out of gas. But your battery gets a massive D rating if it's only an hour long.

Exactly. But then the sort of scalers we're talking about here would say that actually, if your asset is kind of more ready for net zero and is a low-carbon asset--

ALEX: And it's faster response, yeah.

And it's faster response, then it might build back up. I think the people, what people would say is that you might confuse people a little bit in, and you're getting two mechanisms in the market. So one is a carbon price.

The other is bringing things like carbon prices into CM. It looks like you're addressing the same topic twice. Is that the right way of doing it?

My response would be we're trying to build a net zero system. So as much carbon as we can put in, the better.

ED: Exactly. I think that's a really good point.

We shouldn't be trying to build the absolutely perfect energy system that never has any faults. What we should be trying to do is we're trying to build a net zero system as soon as possible.

If that means we make a mistake in the first year or whatever and we overcompensate or under-compensate something, as long as we actually build stuff that gets us to a net zero system, I think we'd all be broadly quite happy with that.

I'm not about overshooting. Yeah.

Yeah, not sure you can, but you can overshoot in it, yeah. OK. OK, great. Then the last mechanism to talk about and then we're on to a wrap-up piece.

Cap and floor. Cap and floor, for everyone, is essentially assets are allowed to make whatever revenue they would ordinarily make. If their revenue drops below a floor, it is then topped up to that floor. If their revenue goes above their cap, then their revenue is actually brought back down to that cap.

OK. All the revenue is sitting within a band--

Exactly.

--to allow investment decisions. They all like that, because they're always guaranteed a certain revenue at the floor. Then we don't get into difficult questions around while your wind farm is making over 1,000 pounds a megawatt hour because it's being set by the marginal price of gas right now.

Two things. Where this has been used and where it's been suggested. Where it's been used, at the moment, is mostly on interconnection business cases. But where it's being suggested is long-duration energy storage.

Yes.

Your longer duration energy storage people are saying the way the markets work at the moment doesn't really incentivize us to build. It would be great if there was a cap and floor system to give us that investor certainty. Alex, to your point, lowest cost of capital.

Yeah, exactly.

All of a sudden, you have more long-duration storage that you think you need for a net zero system starting to come to market. What do we like about it? What do we think the challenges might be?

One of the questions I would have about it is how you set that reference price. Where does that cap and where does that floor come from?

This is such a dangerous game as well.

Incredibly. Because I mean, essentially, you get into a position.

It's suggested, in REMA, they change them every year. That is bonkers.

You look to Australia, and they have these marginal loss factors, which essentially determine how valuable a certain site is depending on where it is in relation to transmission infrastructure, right? The Australian government changed those every year. And you were seeing solar projects drop from like, 12% IRR to nothing, right?

Yeah.

It's really, really difficult to get funding. This idea, yeah. That's not instilling investor confidence.

If it's done properly it will. But if it's done badly it's investment hiatus for a long period. Like, it's very scary, I think.

Yeah.

Depressing, in a sense, I think.

I definitely agree. I agree with you. It maybe comes back to the point we were saying earlier, around you might need to make a couple of mistakes to make a net zero system happen.

There's that argument to it. But also, there's this other trend that's coming to the market. Which is like, this growing hand of government, right? So going all the way back to EMR, we had renewable obligation and feed in tariff before then.

Then we had capacity market in CFD. It's growing in a bigger portion of the markets. Revenues are being made up by government-led things. Now we're talking about cap and floors.

What, like an energy price cap?

[LAUGHTER]

Energy price.

It's like regulation begets more regulation. We keep the growing ball of hand of government things is getting bigger and bigger. Does that concern you?

Massively. Yeah.

ED: OK, why?

It feels very like government should have as little to do with setting the price as possible. It creates all sorts of inefficiencies and weird goings on because of the mechanisms of what the government has put in place. They couldn't foresee the impact of those things when they were put in two, three years ago, if we think about the energy price cap.

It's unintended consequences?

Yes, absolutely.

I think the thing is, with the cap and floors, is that before we decide the cap and floor mechanism, we have to decide what technologies are allowed to get them. Then you have a sort of a paradigm, where the government are not only choosing the levels of which carbon laws are set. But they're also choosing the technologies that benefit from those things.

I think one of the things that REMA did quite well is that they weren't really bullish on first of a kind technologies that we haven't seen commercialized. My only sort of concern with the cap and floor mechanisms is that they start getting rolled out on things that might not be technologies that actually help us get to net zero in the way that a free market would essentially guide us there.

It just goes against everything that [INAUDIBLE]

could have ever put out is all about technology.

Exactly, yeah.

It's the need of the system. And the system has certain things that it requires. And your technology can provide some or a combination of those.

But it's not really for government, or anyone else, to dictate what that technology should be. It should be market driven. And the market will deliver on what the system requires.

Yeah.

It's a really good point.

There's plenty of ways we can go from there. I think just on the first of a kind, new techs coming to market, I think there is a role in government in guiding them to the point where they are at a size and at a level of readiness where they could actually try and participate.

I think yeah, at that point, there is the long duration fund and other competition, which is running alongside REMA. Which I think is why long-duration storage hasn't really featured in REMA that much. There is a whole other program. WORKS, which has been pushed into.

Which is part of the 10-year plan. And Amir, from BEIS, was on that side of the storage and speaking very well about it. And I think yeah, there's a good place in the market for that to come up.

Moving onto where we would conclude.

The big question is evolution or revolution? Of everything, everything we've talked about--

He's been working on his soundbites.

Yeah, you've been writing those soundbites, yeah, yeah.

Yeah. So Alex shamefully passed me that yesterday and I thought it was excellent.

ALEX: Thank you.

So I've got it in bold, on my notes. But I think you make a really good point. Do you go evolution?

Do you go business as usual, plus a couple of changes? It all kind of works. There are some problems, but we should change things a little bit. Or would you go revolution? Do you say actually, to do a net zero market really well what you need is a nodal market and it needs to be centrally dispatched, et cetera?

Yeah.

Great, great soundbite. There has been a lot of chat about throwing the baby out with the bathwater when it comes to REMA. That's really this idea of complete revolution.

Do we need complete revolution? Are our markets that broken? Or can we tweak some things around the edges?

Maybe we bring a whole load more of flexibility dispatch and ancillary service provision into the balancing mechanism. We have a really big functioning flexibility market. It excludes quite a few technologies at the moment, although we are opening it up.

Could we do more with what we have and refine some of those bits? It feels like industry would be far more comfortable with evolution, as opposed to revolution. But I feel like probably the FSO, BEIS, Ofgem, are very much on the revolution side of the fence.

I think so. I'm going to press you for an answer. Where would you like to see it?

OK, so with my data science hat on, I'd love to see revolution.

This is the thing, right? You come back to this point, which is like, engineers--

The energy system is made of very smart people who really like complicated stuff. But I think from investor point of view, actually getting to net zero quicker, I think it's an evolution. Because I think we need MVP agile development. We need to get there quickly. The best way to do that is test to see what works and move on.

I think there's also an investor confidence piece around that. I think, Alex, maybe you were saying this earlier.

If we revolutionize everything, no one's going to want to invest here. Particularly with interest rates and everything else.

Yeah.

Yeah. Yeah.

Like we said earlier, cost of capital is going to be one of the biggest costs over the next 25 years. As we get to net zero. Spooking the market by going to this Frankenstein of ideas that haven't been tested around the world.

I like that, Frankenstein of ideas.

Is just terrifying. Yeah, maybe that's a bit too much, actually.

It'd be like Frankenstein's Monster, right?

ALEX: Yeah, OK.

Yeah, yeah. OK, it feels like--

ROBYN: What do you think, Ed?

Yeah, it feels like you're giving me a data science revolution. And you're giving me an evolution.

No, I think it should be evolution.

ED: You think it should be evolution?

Part of me would love to see a revolution. Because I just think the systems involved and the optimization and the data, and it would be really cool. But I think we need evolution, not revolution.

I think it's a good answer. I think I might be in the same boat. I feel like for a podcast, we should probably disagree.

I can disagree if you want.

ED: Yes, disagree. Disagree.

OK, great. I think that's a really good place. So then to move us onto the final part of this.

It's a two-part question. One is, what are you most excited about within REMA?

The second part is, what's the one market change that we've talked about that you think should be top of the list and we should definitely do? Maybe, Alex, I come to you first on this.

What am I most excited about? I think it's going to sound daft, but I'm just really excited to be working through the process. As in like, being in the industry as something.

Essentially, the tides are turning. I think that's a really exciting point to be looking at the market. I think there's lots of really interesting ideas at play and working out how they all fit together and doing the mental maths and jumping through hoops there is really interesting.

In terms of the things that I think I'm most excited about generally, in the REMA consultation? Probably the operability side of things. The whole operating net zero system is, in terms of voltage control, inertia, frequency response reserve, all of the ancillary services is super exciting.

Obviously I'm biased because I like energy storage. But I think that's just such a huge opportunity for storage. Yeah, that's the thing I'm most excited about, is just that movement from traditional thermal generation doing 95% of the ancillary services, to all of that moving into flexible cool new innovative tech.

Then the second part of the question. What's the one change that you've read about that you would like to see happen?

I'm going to go and say it. I want zonal pricing. I think it's cool.

Yeah. Yeah, OK, nice. Robyn, over to you?

I think I would like to see more carbon featuring in our pricing. Having it in the BM is not in one of the REMA cards that I've seen. But having more of a feature of carbon in the pricing of stuff, as well as the carbon tax.

I mean, the geek in me would really like nodal pricing. Just because I think it would be really interesting to see, model those nodes, model the data, how all of the loads, and see how people cope with it. And things like the Modo leaderboard will get infinitely more complicated. And that would be quite fun to work through.

OK, brilliant. That wraps us up. Thank you both very much for talking REMA. You know I love REMA, so it's great to have people that are willing to talk to me. You don't have to threaten a podcast to get us all to do it.

But that's been really good. Thank you for bearing with us. If you'd like to ask us more questions, please do. We're happy to do a deep dive into any of these parts.

Ed is particularly happy to answer any questions.

Yeah, yeah, not too hard. OK, brilliant. Well, thanks very much. Thanks for listening. And we will--

ROBYN: See you next time.

See you next time.

Thanks for having us, cheers.