24 - Trading agreements for a brighter future (Vishnu Aggarwal - Deputy VP of Origination & Renewables @ SmartestEnergy)

[UPBEAT MUSIC]

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 him, which is very impressive.

[LAUGHTER]

So we could 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, there. 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, right, so we may have even seen each other in sports fields at some point in the past.

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?

I want to keep--

I'll just keep doing this.

VISHNU AGGARWAL: No--

So it's not you. It's me. [LAUGHS]

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 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--

VISHNU AGGARWAL: Um.

--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, so they supply small- and medium-sized businesses. And they've been with us for a number of years, and they've grown substantially at the moment, 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.

OK. Cool. At SmartestEnergy, lots of energy and money flowing through SmartestEnergy, in and out all the time.

How do you describe your job there? Can 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 maybe risk in the power, 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 risks. 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.

Can we talk basics for a second, right?

VISHNU AGGARWAL: Sure.

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, right, and then we come to smartest and say, right, it's--

we're going to create some power, and we need someone to buy it.

VISHNU AGGARWAL: Yeah.

And then what happens?

Yeah, so we'll talk to the customer and say, look, how do you want to--

how do you want us to buy it? Do you want to buy us--

firstly, tenor, 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 the agreements out 15 years. They tend to be projects that require bank funding.

QUENTIN SCRIMSHIRE: Yeah.

But typically, what? Two to three years is a typical PPA length?

OK, so I've got a wind turbine, and we're going to sign a three year deal where you're going. I mean, the wind is 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: You mean price?

Price levels, yeah. So if you're happy with the price in the current market, then, do you want to lock in that price for years? So we could propose a fully fixed price.

Taking all of that volume risk off them so pay is produced, if you will. So a 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 for about 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.

But also, to their volume as well. So they may say, Smartest will take whatever 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 you're--

You at SmartestEnergy, you've got to guess how much power my wind turbine is going to make based on how windy it is, which you don't know 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 the risk people 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 in Smartest. Say, we'll be happy to take that risk on at this price.

OK, cool. So I might have got a loan from the bank to build my wind turbine 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.

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

Yeah

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? Well, we're going to make up the difference in what you've committed to the market. How does that Work

Yeah. 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 the issues with force majeure issues where the plant breaks. So for us, it's about trying to forecast those periods.

Why?

Is a wind turbine breaking force majeure?

That's interesting. Because you could argue, if it was like otherworldly windy blew it over.

Yeah.

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

Well, it could be. It depends on--

it could be due to war or civil unrest for example, that 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 the 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? Because we've already sold that 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 a lot--

there's lots of background noise, hopefully everyone's OK though. So yeah, I might have signed a three year deal in 2020 to sell power for 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.

QUENTIN SCRIMSHIRE: That's 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 a 40 quid or whatever it is now, which is--

what is it right now?

For winter, 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, but you as the counterparty, you've got to find that difference of 400 and 500 pounds of megawatt hour.

Yeah.

Right.

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?

Yea, that's a really, really good question.

So we hedge that with market available products, for example, 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, really will play a critical role in managing these risks going forward. So historically, it's been less, so, right?

Of capture rates as we call them for wind and for solar have been relatively benign compared to now. But now with the scale of this capture rates--

What does that mean? What does the capture rate mean?

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

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 the sun is--

My wind turbine as an example.

So day ahead, we think it's going to be 80% of total windiness. 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, right? Because it may be windy everywhere. So there's a lot of energy on that system.

Which is the price down.

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 capped as the capture rate.

And what we're aiming to do is capture the base load price, right? 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.

OK.

But that's where flexibility can come in, right? So by contracting things like batteries, peak or 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 to use a peaking plant or a battery to discharge power to the grid that you were short.

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 it is the market that it is.

But hopefully, we can come at 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, 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 1, scope 2, scope 3. Scope 1 being emissions used for direct use of energy.

So for example, your direct use of natural gas through the grid.

There is scope 2, which is your indirect emissions. So maybe from your electricity that you consume. And scope 3 can be things that maybe from your supply chain. So you can use carbon to offset maybe your scope 3 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.

Renewable something origination or is that? What is it? What was REGO?

So it's a Renewable Energy Guarantee of Origin.

There you go.

So that's--

What is that? So we're going to jump around here, but I think it's natural. So I'm going to ask another question that will hopefully feed in. So what does 100% renewable power mean? Right? So if I go to SmartestEnergy and I'm a business that it really matters to me that my electricity use renewable, and I sign up for 100% renewable power supply contract with you. So you're going to supply me with the electricity and we use it for, I know, the office, and the air con, and whatever, and party.

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 certificate. 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 for one REGO, for example.

OK. So you book now and claim later? Is that how it works?

VISHNU AGGARWAL: Well, then the consumer claims.

So the consumer claims?

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

That's the thing, right? So this office for example, we're at 100% renewable deal. 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, mate. Hopefully not coal, but there might be coal burning there. Might be other stuff running.

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

Also, across a year--

so my electricity, our electricity consumption is an office. Across the whole year, you have to recover all of that in megawatt hours or carbon and this by buying certificates to cover it. And that means that sometimes we might still be using power from carbons--

from emissions, these sources like gas or whatever.

But we're going to cover it up. Not cover it up. That sounds like--

Yes, that's bad. But we're going to cover our position later.

That's exactly it.

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.

So on a physical basis, 100% renewable power isn't really 100% renewable power, right? But on a commer--

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 already issued monthly. Why are we not matching on a monthly basis?

Matching on a monthly basis? Rather than--

Yeah, OK. Well, OK.

Well then on 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 warn You can put all that in your RAM.

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 Iraq Association that where a country has not mandated an issuing body, they'll go and step into 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 they should they wish to. So that's so that's how the certificates are issued.

So there's a central entity that issues these certificates? Are they a physical certificate? Do you get a piece of paper? With my wind turbine, do you 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--

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 are physical pieces of paper.

That was a lot of postage. But yeah, they're all digital now.

OK, cool. And so, what's the unit of a certificate of a REGO? It's one unit, 1 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 to 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?

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

QUENTIN SCRIMSHIRE: Per megawatt hour?

So what that's saying is 1 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, right? 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.

OK, makes sense. Makes sense.

And so, I get it on the wind turbine--

like the generation side. So I've got my wind turbine, I get my certificates, and then someone else buys them from me. What about the other side? What about big industry?

What's their role in this?

Let's say I'm a big steel manufacturer or I'm around the corner. 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.

Do they have to buy those certificates from me? How does all that work?

Yeah. So typically--

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 then influences the supplier on their procurement activity, and influences their purchasing strategy, and projects that they can go and buy going forward. So what they're doing is really making quite powerful decisions.

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 this 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?

VISHNU AGGARWAL: Yeah.

And what are the hot potatoes that we need to improve on here?

Yeah, definitely. I think, 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? So that will really drive further change, and also allow consumers to dictate what the grid future, grid mix looks like.

So rather than an 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 the--

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 completely voluntary market.

Now, is there legislation that could help us move quicker to net zero? Absolutely. So the future renewable energy directives for example, they too--

in 2018, then looked and said, well each member state should look to target 32% of all energy coming from renewable sources.

QUENTIN SCRIMSHIRE: Right.

So it actually helps put targets on things. And then helps account for those times.

You've got a unit of account? Yeah.

And then they went even further. At the moment--

It is not that high, is it?

It's not.

When do they got to do that by?

That's 2030.

2030?

But they are--

Come on, guys.

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

Fit for 55? But the number's actually 40? What's the 55? Is that 2055? I think.

I'd imagine so.

OK, yeah.

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.

Yeah, if you're finally found somebody willing to sell you those certificates.

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.

OK.

Anybody can come play in that market.

Because this is--

we're talking about the market, right? So the generators, by--

because I'd imagine, it's not just supply as you take part in this market. Do you have other traders who say, oh, I could now, sell later. Because the price is constantly moving around, right? And so, what drives that price?

Yes, 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.

I mean, it wasn't windy enough.

Yeah.

Yeah. So when your turbine on the Hill didn't blow, quite as much is as you'd expect it that year.

And then on the consumption side, what's demand doing.

I mean, that picture's really, really increased, right? 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 makes sense to me here, right? But the thing like, 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, but the good energy piece, right?

Which is like, if you want to buy actual renewable power, doing that cost 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 certificate. So they show you that 1 megawatt hours got into the grid, and 1 megawatt was taken out off the grid.

The way the pricing is reflective of consumer demand. And that's the way that this pricing it's 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, right? We talked about the intermittency issues before. You get to balancing. You need to buy power from somewhere else, right?

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

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. Very little supply now in the UK.

Huge. One of the largest renewable producers in the UK.

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?

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

It's really--

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. And that's a risky proposition. But they could do that to--

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

Yeah. But then you also got to get comfortable with the fact that you're not going to be 100% renewable.

QUENTIN SCRIMSHIRE: Yeah.

Right? If you're looking. It depends on the granularity that you're looking at. But that's not always possible for most people, right? If you're sitting in London, 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 a rooftop.

Don't do that harm. No, we really--

we certainly can't.

So what about this--

there's a hot potato at the moment about Europe, right?

There's going to be a decision soon about REGO guarantees of origin, about how we trade with the EU. And is this related to Brexit.

Is this because of Brexit or is it--

OK. And so what's all that about?

Yes 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.

Along with importing the renewable power, lots of it, you would also be eligible for an exemption to various schemes. So the subsidy scheme, the small fit scheme, and the larger fit scheme, the CFD scheme.

Now, the reason that came about was because of the EU state overrules. 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 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 won't buy--

we can't cover our carbon. So I'm a steel producer, I can't buy carbon.

Sorry. Sorry, stop me. So SmartestEnergy, who's my energy suppliers. I'm a steel producer.

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

Yes they can't go out and buy them anymore and import them to the UK. Yeah, that's--

Is that good? So is this good or it's bad?

There's arguments for and against, right? For that, it definitely helps our UK production. Incentivizes more development in the UK.

QUENTIN SCRIMSHIRE: Yeah good.

Which is good.

Good.

But look, we're over the next five years, we're expecting to double our interconnection capacity, right?

Yes.

So what--

we're importing, we're importing all this energy from connected countries.

And it gets the inter connector. The carbon certificate can't get through. It's like--

So what color is that energy, right? Because--

Yeah.

--with the capacity in 2020, 2030, theoretically, over half of our energy could come from abroad if we were just importing full time.

20 gigs or something like that, isn't it, with inter connectors? Maybe more.

Yeah it's going to double.

What are we saying? We're saying that energy is gray or brown. Like, we don't know what color that energy is.

That's tricky.

All right.

And then that has a knock on effect for consumers, right? Because if you're a corporate--

and you can choose where to domicile yourself, right? You can domicile in Europe, you can summer side 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.

Oh, this is so annoying, yeah.

Why--

why--

it's going to affect your decisions, right? Where are you to set up?

Doesn't make any sense. Because then, the interconnect who buys--

the interconnect's got a trading team, right? What? They're going have to buy like 20 gigs worth on both sides across the interconnect. Just 20 gigs worth of REGOs and net them off against either side.

I mean, what the--

There's no mechanism, right? That's the point. So that's where there's a bit of a gap. And certainly, we can see from historic consumption of the EU and UK, certificates.

It's huge. The demand in the UK--

So much as if being related to Europe was a really good thing. No, really. It's the first Brexit comment on this whole podcast, in 22 podcast. I can't believe I did it.

Yeah, so--

all right. So that is complicated. But the decision's been made?

The decision has been made.

Who makes that decision?

It's really curious. The department that makes the decision is the base.

Yeah.

So business, and energy, and industrial strategy.

Yeah.

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

It's our government that's made this decision.

Our government on energy. But then, it's the same department that's responsible for the 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 can push energy prices up for big industrial consumers. The same people that they--

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, right? In pounds. Because we all pay--

even though, historically, prices of 50 quid for wind.

Because everyone's now paying 350. The value of that wind is now 350 not 50.

Yeah.

So you think that the value of the low carbon of it should also increase. But oh, it's complicated. I guess, the wider the difference between the value of the certificate and the power price, they get to a point where it becomes silly, right? 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.

Well I think, the price just reflects what the demand is at that time.

For the certificate?

For that certificate.

For the certificate?

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

Which might happen, right? Because this other numbers are so big. How big is the market for these certificates? What are we talking about here?

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

110 terawatt hours. What's that compared to the overall?

Terawatt consumption of the UK is about, I think, 270 terawatt hours.

So it's a third?

Yeah. About 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 2/3, doesn't have a REGO in it? I doesn't have any ego related to it?

Not anything, yeah.

OK, cool.

All right, 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, but I'd be keen to hear what it is.

So 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 PTAs since 20 years ago. We classify most of them as a standard.

We're doing supply deals since 2008. Classify those as standard.

So anything that doesn't fit into what we call standard process is origination. So something which is more complex and maybe straddles the PPA and supply boundaries. So corporate PTAs, 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, let's see. We had Peter Vance 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.

OK.

We use energy trading, risk management systems to make sure that we've captured all the risks that we have inherit in all the contracts that we sell.

That's the ETRO, isn't it? When people talk ETRO.

Yeah.

Yeah.

That's--

yeah, that's ETRO systems. And other kind of risk reporting metrics as well to help us manage and understand our risks as well. Because you can only address those risks once you've understood them.

Do you have to, in the same way that a supplier has to--

you need credit cover, and you need to post collateral, and you have to go all that kind of stuff? It's quite expensive business, isn't it--

Yeah.

--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--

Sorry, the REGO--

the emissions- we're going to call it emissions. Because the emissions are demand?

Yes, as an emissions world covers voluntary carbon and compliance carbon, as well as REGOs guarantees of origin certificates as well. So yeah, for sure.

Depending on who you're trading with. If you're trading over the counter, there will be collateral requirements 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, 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 North Pole or whatever? Where do you trade REGOs? And where do you trade carbon?

Yeah. So similar to power as well. The safe power is OTC. So over the counter as well.

There's a lot of the market in carbon It's OTC.

And REGOs as well. So in the similar vein to curve power, if that makes sense. And then, you call up another buyer. It's kind of a side deal, right? Like a bilateral deal between you guys, rather than going through an exchange? So 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 to 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.

OK, so cool.

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

And carbon's in vogue at the moment, isn't it? I mean, the price is--

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?

Yeah.

It was like, I remember when we first we're going to do Brexit. And I think one of the cells and the government about Brexit, we've done again, but was that we would put a cap on carbon price 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 a price. And then it got to--

what do they get to recently?

So about 80.

80 euros.

80.

So what's going on in carbon, well, because this is wild.

So I think what you pointed out is compliance carbon. So European allowances EUA's or UK's. So since Brexit, we've pulled out of the EUA scheme and created our own UK annual allowance.

What does EUA stand for?

UK Allowance Scheme. So it's carbon allowances, effectively.

The price 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 right.

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 either you're going to relax policy, so then your 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. 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 price going up doesn't necessarily mean--

that probably means bad. It means we're burning more stuff.

VISHNU AGGARWAL: Or it could mean that there's an anticipation of change in policy.

QUENTIN SCRIMSHIRE: Or, yeah, yeah.

VISHNU AGGARWAL: So we could be increasing the targets, for example, yeah.

QUENTIN SCRIMSHIRE: Cool, makes sense. Want to ask you that one last question, now. What's going to happen in the future? Where is this market headed?

And the stuff that you do--

VISHNU AGGARWAL: Yeah.

QUENTIN SCRIMSHIRE: What are you excited about?

VISHNU AGGARWAL: 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 a hydrogen target, 10 gigs of low carbon hydrogen by 2030.

And they 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 my 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 covered that on a podcast before?

QUENTIN SCRIMSHIRE: Yeah. I know we haven't, but we're fans of Michael Liebreich's ladder, and have been following that very closely. Yes, you've got the green, blue, gray--

VISHNU AGGARWAL: Multiple colors, yeah.

It's mainly electrolysers, but from green sources. So how do you prove that what's gone into the electrolysers is actually green? Well maybe you can use a Rego. But you've got to make sure that Rego can then be used, going forward, does it get double counting?

And then what happens to that hydrogen? 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. It's going to be hugely exciting, I think.

QUENTIN SCRIMSHIRE: And the exchange rate that we sell on. And the proof of exchange rate. Because it's like storage. This is cool.

VISHNU AGGARWAL: But then also, if people are going to want to move to hourly 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, right? Because that corporate wants 100% renewable, and you need to be able to make that happen.

QUENTIN SCRIMSHIRE: Very cool, and very complicated.

QUENTIN SCRIMSHIRE: We've got a lot of work to do. I just want to officially--

Thanks for coming on.

VISHNU AGGARWAL: No, thanks very much.

QUENTIN SCRIMSHIRE: And it's been awesome having a chat. We've talked about a lot here today.

I guess there's a couple of things that you would 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 the subscribe button, it means a lot to us. All right, thanks very much.

VISHNU AGGARWAL: Thanks for having me.