43 - Trading renewable power with Julie Arnold (Head of Power, Gas and Emissions @ Dare)

But yeah, it's fast and you've got limited time. If you make a mistake, if something goes wrong in terms of you don't notify the correct volume or you--

the deal goes wrong in the system, there's consequences. You need to be on the ball all the time.

Hello, everybody. Quentin here. And this week we've got a real treat. We've got Julie Arnold on from Dare, which is a power trading organization, and we're going to talk about what is it like to trade power. What do these organizations do? How do they make money? And what do you need to look out for to get it right?

Now this is the first time we've had a real titan from the power trading world on. And Julie, I guess what I really liked about this conversation was her frame of reference covers the last 20, 25 years. Absolutely fascinating stuff. If you like it, do hit Like, Subscribe, and all that. It really means the world to us.

[MUSIC PLAYING]

Hello, Julie. Thanks for coming on the podcast and making it up to Birmingham. Welcome.

Thank you.

So for folks who are watching or listening, we've got Julie Arnold on today from Dare. And how do I introduce you? I don't want to say a veteran because that makes you sound old, but a titan of power trading. And we're going to answer some big questions today about how does the power market work, and how do you trade it, and how has it changed over the last 20 or so years where you've been doing stuff in it.

But before we get started, Julie, who are you, where have you come from, and what's the company you work at right now?

So I joined the power industry 25 years ago, just as the UK power market was deregulating. And so I've seen all the changes right from the very, very beginning. Prior to that, I had a previous career as a government statistician working for the UK government.

Oh, which government, by the way? Who was in then?

Blimey.

I put you on the spot now.

I can't even remember.

We'll edit this in afterwards. Someone. Anyway, I put you on the spot, so.

John Major.

John Major. Yeah, it probably was. So sorry, you're--

JULIE ARNOLD: 1994.

Yeah, it would have been Torys, wouldn't it?

JULIE ARNOLD: Yeah, probably John Major.

So you did that, and then you went to the energy industry, and you've seen a lot of change. And what companies have you worked out along the way?

So I started off in one of the old UK retail companies, and then after four years there, I went to RWA trading when they first entered the UK market. So I was working for them originally on the UK power desk. And I ended up staying for 17 years working on a various number of trading desks trading, as well as UK Power, I traded a bit of gas, CO2 when the market started in 2005.

I spent 10 years on the coal trading, running the coal trading desk. And my final four years there I was out into the Singapore office running the Asia-Pacific power trading business. I was trading Australian power and trying to pioneer the Japanese power market, which is one of my passions.

Oh, wow, we've got a lot to cover here.

[CHUCKLES]

OK, and then now you're at Dare, and what does Dare do, apart from fantastic branding and marketing, which--

JULIE ARNOLD: Not down to me.

--we respect very much. But what does Dare do in the markets?

So they're a relatively young company that started in 2016 and it was set up by two young traders, not from the power market, but still from energy. And I joined in 2020, and the company was purely a trading business. And I joined to set up the power trading and get us into the renewables markets.

So this was during the lockdown when I first joined. So the first six months was all online, which was quite an interesting time. And there was a lot of work to do to recruit the team, to start trading in all of the power markets across Europe, which we are doing. So now both physical and financial power trading.

So it's a company that's set up to trade? So were they before you joined, what else were they trading?

So they were trading the trade difference energy derivatives. So it's all financial trading that they were doing then, mainly in oil and gas products, but financially settled. So we don't have any physical assets, no physical delivery or proprietary trading.

Awesome. This is the first company that we've got on that started not from an asset background, but from a purely markets financial background. So this is going to be interesting. And then they brought you on and you built the power desk. And then how much power does Dare trade these days?

Well, I couldn't tell you the exact volumes, but we're trading in all of the European markets that have liquidity. So Germany, France, Switzerland, Netherlands, GB market, and as well as trading the futures. So we trade big volumes on the futures and forwards market. But we now also trade in the physical spot market in most of those countries as well.

OK, cool. And you guys are also doing some interesting things with batteries as well, right? Want to just cover that?

Yeah, so one of the reasons that the owners of the company wanted to get into power trading was to join the movement to the energy transition. They wanted to get into a renewables focused business. So a great way for us to get into renewable energy is to, we need to use our skill set. What are we good at? We're good at trading. So if we start trading power and then that gets us into doing more and more renewables, then we're using the skills that we've got to get there, really.

OK, cool. And so let's just cover something really basic. What is power trading?

I think sometimes people fear power from it because it's like a concept. You can't see it, and it's not the same as--

the same concept as if you're trading other commodities like sugar, or coffee, or coal, but it's exactly the same. You buy and sell it on an exchange, on a screen, in exactly the same way as all these other products, such as gold or wheat, all these commodities that you can trade.

The one major difference is when you get to delivery. So if you're delivering a physical commodity, such as coal, for example, you can deliver it in a window, a monthly window, whereas power has to be delivered in half hourly settlement periods. So that means you've got to be a lot more precise with your delivery.

You need to--

there's a lot more data involved because you've got all the half hour work to do. And that's why the price can be quite spiky as well because if you're buying and selling to deliver in one specific half hour without storage, I know we're going to talk about storage, but there's very relatively little storage at the moment.

So because the power--

because you can't really store electricity, of course, you can now with batteries, but we need a lot more of them. If you're buying and selling wheat or coal, as you say, you can store it somewhere, you can put it in a--

You can just put in a pile on the floor.

Exactly. Yeah. But with power you can't because you've got to turn up a generator and turn another one down to match it. OK, and that makes it more complex.

So let's go straight back to the start. So in the early, I'm going to say the early days, of when you joined the industry, the power industry, what was it like then because we were just--

the markets were just becoming privatized and there was a lot of change. What was trading power like back then?

Well, it really wasn't--

in the very, very early days, I remember when it first started in during 1998 when the domestic market deregulated, which meant that customers could choose which supplier they went to, and then you needed to be able to wholesale trade power, there was literally one trade a week in the very early days. And there was no screens to trade on. You had to telephone someone. When you did a deal, you had to write it down on a piece of paper.

And I tell some of the guys in my team that probably weren't even born at this time, and they just look at me like I'm crazy that we had to write down every single trade we did. There would be no way of doing that now with the enormous amount of data.

For me and probably for listeners, it's quite remarkable to imagine a world where you couldn't choose your own energy supplier, but even before that, what was the case before that, and then how did that change? So before power markets became private, what, was it like water? You just got a thing--

Exactly like water, yeah. If you lived in London, your supplier of power was London Electricity. And if you lived in Leeds, your supplier was Yorkshire Electricity. That's where I used to work on the retailers. Yeah.

And then they privatized the market and customers could choose, and then suddenly you had to create liquidity for this stuff--

Have to create a wholesale marketplace. And that's the first thing that the regulator needs to do is to create that place where the producers and the suppliers can buy and sell to each other, where they can trade with each other. And the other interesting thing about those days, which you've probably heard of, was the US companies all came into the market to start getting involved. So the likes of Enron, and Dynegy, and there was a number of them all, came in for a few years, and then left again at the demise of Enron.

Yeah, it was a spooky, spooky time.

JULIE ARNOLD: Interesting.

And so, all right, so in the late '90s, people were doing one or a couple of trades a week, buying and selling power. These must have been big, big deals. And then you--

you are calling the person up on the phone and saying, hello, I want this for this price, and then you are writing it down. And what, faxing it, sending in a post?

Well, you could still trade through brokers. So you'd still have the broker on the phone, and then you'd write your deal. You would then get it into your system at the end of the day and they would produce confirmations. I was having a big think when you mentioned that you're going to ask me this question about how has things changed from then until now, and there are so many things that's changed, but I've tried to categorize it into two main categories.

Oh, let's do it.

So the first category is to do with data and data technology. So that's one of the major changes. And most of the changes that we can see feed into that category. The other category is the fundamentals of the market, which is, again, divided into two.

One of the fundamentals that's changed is the types of generation. So we've gone from fossil fuels to renewables.

And the other fundamental big change is the growth of interconnectors and the growth of connectivity of power markets, which has been brought on by the expansion of the LNG market in the last 10 years. So it's connected.

And LNG being?

LNG is the liquid gas. So a global market. And as I'm sure you know and a lot people do know because they hear it a lot in the news these days, that gas is a big part of the power price. So the LNG gets shipped around the world and that's driven by global factors, and that impacts the price here in the UK, as it does in lots of countries.

So if I've got you right, let's go down each rabbit hole separately, but we've got the data and the infrastructure around that which is interesting. The information flows.

JULIE ARNOLD: Yeah.

And then the second bit is the generation mix, and then this emergence of basically putting gas on ships, and on that completely rocking the whole market and changing it forever. Let's start with the--

let's start with the fundamentals, right? So we've moved from a fossil led--

I mean, it's still mostly, probably more than half of our generation is fossil, but I'm going to get pulled up on that. If you're listening, probably wrong. So we've gone from mostly fossil to towards renewables, and how has that changed the market from a trading perspective?

Yeah, well, when the market was in the original form in the late '90s and early 2000's, and we were as traders trying to make trading strategies to come up with ways to predict how the price would move in the future, we would build our analysis, and that analysis will be built from driven by costs of coal, costs of gas, and how that would look in the future.

So you would analyze which was your marginal generation and you would need to input how you thought the gas price might move in the future that would impact your power price, and that then known as trading dark spreads and spark spreads, which you may have heard of, so.

When you say marginal, that is the most expensive plant that's going to be needed right now. So for example, if--

what would be a good example? Not the most efficient plant, but a less efficient gas plant would usually set the price, the marginal price, right now, and that is the power price right now is set by the most expensive plant that's running, and you guys are trying to calculate what that is?

JULIE ARNOLD: Yeah.

OK.

Whereas once, if you move to a world that's 100% renewables, and I know we're going through this transition now to get to that point. I remember when solar and wind started to get built and there was the big publicity about, we're going to become a renewable--

a renewable world in terms of energy. And I remember thinking, well, that's impossible, that will ruin the market.

How can I trade because I don't know when the wind's going to blow, when the sun's going to shine. There is so much information that's needed to be able to predict the prices in the future.

And I just thought that's impossible. But when you start to look at it and you start looking at your weather forecasts, and your analysis on your weather, and bringing in all the data that we've got, that we've got these days.

Which ties into my first point, the data on when renewables are running, when they're not running, where they're located, how the wind is different in different parts of the country, there is so much data on all of this. And once you start to dig deep and look into this, you can make a pretty good effort to use that to predict future prices, and that's the journey that people have been going on in the last few years.

But there's an increase in complexity here, I guess, because there's a lot more variation in the inputs and a lot more complicated model. I guess, although because a gas--

a Combined Cycle Gas Turbine plant, so a CCGT plant, an efficient gas unit on the system, although it's a complicated bit of kit, it's quite--

there's some simplicity in how you model it, right, because you know what the overheads are, you can guess what the overheads are, you know what the gas price--

You know the efficiency, you know the startup costs, all of those--

Exactly.

But with wind, it's a different type of beast.

And then you've got the grid constraints and the locational matters, which again, are complex. And then interconnectors. Let's talk about interconnectors for a second. Wild ride with interconnectors.

They--

I still don't--

I would--

we need to get someone on the podcast to explain how those things work. That changed the market in a big way, didn't it? What are you thinking about now interconnectors on the grid and how does that change your trading power?

Again, it makes it so much more complicated. Back in the very first days of the power market, we really were an island. There was one interconnector into France for two gigawatts, and that was commissioned in, I think, 1986. And then there was a long gap. I think the next one was about 2011 before we got any more interconnection, but what it meant that there wasn't enough interconnection to constantly be flowing.

It would be constantly flowing, but you would get constrained. So you needed more interconnector capacity to flow even more.

So you got less--

if you had an infinite amount of interconnection, your price across where you're interconnected to, across into Europe, would be the same all the way across Europe, but that was quite constrained in those days. Whereas now, there's about seven gigawatts and we flow. So you can flow to Ireland, you can flow to Norway, or Netherlands, or Belgium, and there's more into France, so

We should have 20 gigs of interconnection by the end of this decade, apparently. That was flowing around the office last week.

And the difficulty for us with that is that you don't need just the UK data and the UK fundamentals to try and predict future prices. We need to know about the fundamentals across the whole of Europe. And that's why we don't just trade power in GB, we trade power in all of the countries that are connected.

And then with the LNG angle, we can be connected. We're connected to Asia. Our power price is connected to what's happening in Japan and Australia because of the link of the gas. So it makes it--

it's made it a lot harder to trade power in one country because there's so many of the things that you need to know.

And it's going in one direction, right, which is more interconnection, more globalization of these markets.

And more and more data. And I find that quite exciting. I'm a mathematician by trade. So data and numbers are exciting for me. And I must say, if there's anyone looking at careers that's a mathematician or a engineer, it's a great industry to get into because there is so much data and technology. It's just very exciting and there's constant change.

Let's talk about data now then. So data and information flows, let's talk about the last 20 years. So we were doing pieces of paper, faxes, and telephones. What's changed?

There was pretty much no data in those days. So there was a lot of advantages if you were a big generator because you knew what--

you knew the fundamentals of your plant. You knew when you'd be switching on, switching off. Whereas if you were a pure trader in those days and you were missing out on that information, you're at a disadvantage.

So the government then redesigned the market. There was a big redesign in 2001, the new electricity trading arrangements. And that's when they brought in the spot market. Before then there wasn't a physical spot market that anyone could trade.

So what's the spot market?

The spot market is the very front of the market. So the spot market is typically, it's not--

it's not a very tight definition, but it's typically trading for today and tomorrow, whereas the opposite is what you mentioned earlier, curve trading. So curve trading is typically trading further out into the future. And generally traders will be either a spot trader or a curve trader at any one point in time because they're quite different.

Spot traders or curve. Do they sit-in different--

all right, a few big questions here.

On your trading desk, is there a ton of--

is it like it is on the films, there's a ton of screens, everyone's on two, five phone, cellphones.

People are there's a paper airplane flying around.

That's how I imagine it. Do you have these people sitting separately? Do you a spot trading desk and a curve trading desk?

Yeah, we do, but we try and all sit as close together as possible. So you want to squeeze that as many people and have as much sharing of information, and talk about the market, and help each other, and it's a fun place to work.

So to be clear, right, your business model at Dare is buying stuff at one price and selling it at another price and making money between those two things, in simplest terms. That's what a trader does, right?

Absolutely. And I always say to the analysts in the team, I've got a number of young analysts that came from outside the industry at the early part of their career. And I always say to them in a simple way, you have one job, and that one job is to predict the future.

So everything that you do is going to predict the price, whether that's in the next half hour, the next day, the next week, the next year, the next three years. Every single thing that you do, focus on predicting the future. If only it was that easy.

If only, yeah. And the thing is, there's a lot of people all doing the same thing, betting against each other, right?

JULIE ARNOLD: Absolutely.

So let's go back to the--

I was interested that you talked about spot and power curves, or curve trading, is that right? Spot is now, that's stuff trading for now or tomorrow. So it's real, almost real time.

Some people call it short-term, some other people call it spot.

Is spot an acronym? or is it--

No, spot, like on the spot.

QUENTIN: Oh, on the spot.

On the spot.

OK, right. And then curve, what's curve trading?

So curve is just the future. So that can sometimes be called futures trading, forwards trading, curve trading. It's just different terminology that all mean the same thing.

Is that me buying and selling power for delivery in the future?

For delivery, yeah. So you could trade--

now you could trade 2024 delivery. You buy and sell 2024.

So I can buy now power for a year's time, and then in that year, I might want to sell it again, then buy it again, and sell it again?

Right, OK. And then these standardized contracts, is it do you buy a month, or do you buy a week, or a day?

There's different terms. Normally how markets are structured, and this will be the same in other commodities as well, you'll get more granularity. I'll introduce a new term for you. Granularity is the length of the period that you're trading. So half hourly granularity, if you're trading a half hour, or monthly granularity, if you're trading a whole month.

So normally the closer to the spot you get, the smaller the granularity is. So we'll have the first couple of days, you can trade hours or 1/2 hours. The next day, you can trade day ahead as a whole day. The next week ahead you can trade as a week, and the month ahead, you can trade as a whole month. The quarter ahead as a quarter and the year ahead is a year, and it tends to roll out to bigger and bigger granularity the further out along the curve you get.

And the market's always happening. Are you trading power overnight, or is it just 9:00 to 5:00, or how does it work?

Well, some companies will do the 24-hour shift. We do extended shifts at the moment. So we're typically be starting very early in the morning and trading through till midnight where the most activity takes place.

QUENTIN: Wow, OK.

But we have--

people were taking turns. We wouldn't expect them to come in for all those hours every day.

QUENTIN: OK, OK.

We're not that hard.

It sounds kind of exciting, right, because there's--

because it's very win or lose, it's up, down. It's--

oh, there's something about it, and there's that instant gratification or pain.

Well, it is exciting, but it's hard. It's competitive. It's complex. It's not easy.

And then so what--

you talked about intraday trading. Why is the market different and why is the way that you buy and sell power different?

Well, I guess the main reason that intraday is different is because it's going to get delivered very soon. So if we were trading now and we're trading for three hours ahead, in two hours time you're not going to be able to trade that period anymore.

So we've got to be able to shift it?

So you need to know what you're going to do with it. And that's probably one for another day.

[LAUGHS]

But yeah, it's fast, and you've got limited time. If you make a mistake, if something goes wrong in terms of you don't notify the correct volume, or the deal goes wrong in the system, there's consequences. You need to be on the ball all the time.

I was going to say, right, because if I'm like--

if I'm EDF, or Centrica's British Gas, or one of these big supply companies, or what, Octopus, I can buy and sell this power, and then I have a whole--

there's a portfolio of demand that I might have some flexibility behind it. So if I end up in a position where I need to--

I've bought power and I need to get rid of it somehow, I can unwind it with a physical asset or fit something in the physical world, but I guess for you guys, you're in the nonphysical world.

So you've got to make sure there will be a buyer for it later, or I guess that's set by the price, isn't it? It's probably a market mechanism for that. So let's talk prices for a sec because the market's been pretty bad.

Don't ask me what the price is going to be in the future.

QUENTIN: Yeah, what's the price?

Because I'm not the person that's predicting that.

[LAUGHS]

What's been going on recently? I mean, isn't it just bonkers? There's some days we've seen prices above 1,000 pounds, a couple of thousand pounds. We've seen negative price. What's going on?

I mean, this is really the result of the renewables. So you will have noticed, and I've been much more aware this year than I have in previous years, that when it's very, very cold on those cold days that we've got cold days now, it's not windy.

And if the generation is wind generation, a lot of generation is coming from wind, the generation isn't there. So the price is going to be very high when it's not windy.

So you've got a double--

you've got a double whammy, where you need a little power for heat and it ain't windy enough.

So that's why we need more batteries.

We do need a lot more batteries. And what about--

how does a price become negative in the power market?

Price becomes negative when there is too much generation and the grid is required to pay somebody to switch off the generation. So you can actually, as a generator, earn money by--

say if you're a gas generator, you are scheduled to run, you can earn money by not running if there's a negative price--

Because you get paid to not run?

Yeah, you get paid to not run, and it makes sense, supply and demand. Yes, all markets don't have negative prices. I spent a lot of time working in the Japanese market, and the current rules didn't allow for negative prices. But they've got a big problem in the future because if the price signal isn't there for people to switch off generation when there's too much of it, you're going to be--

you're going to have an imbalance.

It has to be dealt with.

So price goes negative, you get paid to switch off or to turn down. This is the thing, right, you can imagine all the "Daily Mail" front page headlines about people being paid to switch off. But what we're saying is actually it's a useful tool?

It's market economics. It's supply and demand. Yeah.

Interesting. We even saw day-ahead prices going negative at one point.

JULIE ARNOLD: Yeah.

Can we just talk about exchanges for a second? I'm going to say in the olden days now just to trigger you, but so now we've got exchanges like Nord Pool, mainly day-ahead liquidity exchange, and then we've got EPEX, EPEX SPOT, which a lot of--

there's a lot of intraday liquidity on that. What did we do before the exchanges and when did they turn up?

So they turned up, I can't remember the exact year. I was probably trading coal at the time when those exchanges appeared, but prior to 2001, though the market design was completely different. It was called a gross pool mechanism where every piece of generation had to go through a centrally cleared mechanism. And so that you didn't need a spot market for trading physical in those days.

After that when there was a spot market created, it's going back so long now that it's quite hard to remember what it was like at the time, there was a continuous half hourly market. So you could trade all the individual 1/2 hours in the GB market. It was called the APX at the time.

And it was just like, it wasn't an auction or a cleared exchange, it was just buying and selling with each price moving on screen, as any forward market would. So they didn't have that sort of--

do you know that concept of bidding in this the time of day where the exchange is clearing, it was different. And then they got introduced and they got bigger.

Another massive. These exchanges are huge.

And all the way across Europe, they've all got--

all the countries have the exchange now.

I've got to go off piece a little bit here. We've got to talk about trading coal. It sounds absolutely fascinating. So you have to--

was this non-physical or is this physical?

Personally, I was trading financial futures and options, but the team, we traded physical as well around the world.

And was this when we had our own coal mines or was it coming in--

like, does it come on ships, and then do you have to put it on trains, and how does all that work? Do you have to pay to transport it?

Oh, absolutely, yeah. The freight market is another function in commodity market, dry bulk. So you could trade, and the team did trade, the dry bulk freight and the freight derivatives as well. So yeah, I started trading coal in 2005 when it was a very immature market, very relatively new market, only just started to go on screen then.

But yeah, we would trade big physical boats full. And yes, we did have--

Boats full of coal?

JULIE ARNOLD: Big boats full of coal, yeah.

A bit like trading--

Like a football field size ship full of coal.

And then you'd buy that and then you'd sell it. And then I guess you'd have a node Drax power station or one of these big units with Ratcliffe-on-Soar would need to burn it. And then you'd--

And there were a lot of coal mines in the UK then. So we had a--

when I was at RWE, we had a coal-fired power station in South Wales, and a lot of the coal would come from South Wales, as well as from Russia.

Oh, wow.

But that's all gone now.

OK, one other question on the physical stuff then. So these--

for example, the pellets that Drax burns and there's a couple of other, is there a market for those pellets?

The biofuels market. Yeah, there is a market. Yeah.

I am not totally up to date with what's happening in that, but I think there's a cleared wood pellet product. I may be wrong.

Absolutely, you can trade anything. There's an everything product, right?

And when I used to work for the government as a statistician, I worked in the agricultural industry. So I was in the grains part of the government. And obviously, people, you know you can trade wheat, and oil seed grape, and barley, and oats are all tradeable products, but you can trade in potatoes, and egg trading, and there's all sorts of things you can trade these days.

And then all the derivatives on top, the non-physical on top. There's a market for everything. All right, so one other thing that gets me is to start a trading company, or trading house, or something like there, you got to have so much conviction that you're going to beat the market. And that I find fascinating in itself.

And it's also, it's costly, right, to get into--

to play in these markets is expensive. So can we just talk for a second about how that were. I mean, how much money? If I want to turn Modo into a trading company, you know, what kind of money do we need behind us to get--

You do need a lot of money, especially now. So if you wanted to trade power, or gas, or whatever you wanted to trade on an exchange, every time you do a trade, you need to pay the exchange money to secure that trade, which is called a margin payment. So let's say as an example we're going to trade Q2 power, and we're going to go and buy Q2 power on the exchange, the power exchange.

As in next quarter, next quarter?

April to June is Q2. You can go and buy that. That very night you will have to pay the exchange a number of probably a few 100,000 pounds as a margin payment. And what that's for is that if between now and when you sell out that position your company gets into trouble or goes bust, that the exchange can cover the cost of trading out of that position.

And because we've had such high prices and such high volatility recently, that price of those margin calls has exploded, and it's a bit of a vicious circle because it's so much more expensive to trade now, there's higher risks involved for trading--

Pushes the prices up.

Well, it pushes the cost of trading up. And that means that people, they want to trade less because the risks are higher and they have to trade less because the cost is higher, but that then pushes down liquidity. So if liquidity is lower, then the volatility increases, so.

I wanted to get to this at one point because the simple way of looking at traders is, they're just skimming, they're taking money, they're just buying something cheap and selling it higher. They're not providing--

they're not actually adding value to society, right? That's a very basic way of looking at it. And I'd imagine, it's quite a common thought, but then what we're getting at here is that liquidity that traders provide as participants in the market is actually--

it's actually a common good for the market, and for end consumers, and prices in general.

Of course I would say this, but the way I would explain that is, if you really simplify it and assume you've got generators that generate and sell, and you've got retailers that sell to consumers that need to buy, and so the generators sell into the wholesale market, the retailers buy.

What happens if the day that the retailer needs to buy for their customers, the generator isn't in a selling mood, or he is--

it's not the right time of the year that they've got volume to sell or the price isn't attractive to them at that time. And that's where the traders can be useful to be, there's always someone to buy and always someone to sell every day. But then, like I said, I'm probably biased.

No.

Well, you probably are biased, but I do agree with you. So all right, Modo's become a trading house. We have posted load of collateral as margin on the exchanges. We've raised a load of money.

We're ready to go. And then now we're ready to trade. What makes a good power trader? How do we get--

how do we win?

Yeah, that is another big question. And the answer to that question again has completely changed over the years. I must say if I was a brand new power trader now, I don't think I'd be very good at it.

[CHUCKLES]

The skill set is completely different now to what it was, and that's mainly been driven by the amount of data and the technology that has come into the market in the past 25 years. So when the new trading arrangements first went live in 2001 and you could get the BMRS data, created a big data set.

Then in 2011 REMIT was introduced, which is the regulation where all generators of power have to notify the market of any changes or outages in the plant, and that created lots and lots more data, and bit by bit more and more data, there's more weather data now. There is data for whatever you want. There is an infinite amount of data. There's too much data.

So the challenge now, in the old days the challenge was there's not enough data, we can't see what's going on. Now in a way there's too much data because if there's too much data, unless you organize it, catalog it, sort it, work out which data is the most useful data and then visualize it in a very quick way so that you can implement trades very quickly on your reaction to new data coming through, unless you can do that effectively, you can't compete, and it is competitive.

So 20 years ago everyone wanted more signal. And now they want less noise.

Yes, so the good traders, in answer to your question, I would say, if I was advising you and you just left university and you said, I want to be a trader, what do I need to do, I would say, your best ideas--

the best plan would be to become an analyst, so that you can learn and understand where all the data comes from, how to organize the data, how to understand the data, how to model the price, how to model plant behavior, how to predict the future. And if you understand that from a very, very detailed level, then you can use that to predict the future.

But that's not the only angle. So you could be good at data, you could be good at coding, you could be good at all your analysis.

But I've seen lots and lots of traders, I used to get heavily involved in the RWE graduate program. I was very involved with that from the very, very early days when I started on the coal trading desk. And I've had many, many graduates and young analysts work in my team. So I think I've got a good angle on trying to spot who is going to be the successful traders of the future.

And it's now more competitive than ever. The skills required for the most successful trader, it's not dissimilar to the top professional athletes.

So people who are completely driven. They are passionate about the market. They've got a really good attention to detail.

They do not get bored looking at loads of data and trying to work out what the answer is. They keep going, and going, and going, they never give up. They want to be the best. They want to be the most accurate. It's having that drive. And you can really kind of spot that inside people, yeah.

And it's only the very best, like with a professional tennis player or a professional 100-meter sprinter, it's the ones that dedicate the time. And some of the guys they don't even get a lunch, they don't take the lunch break because they do not want to miss a thing in the market. It's their whole life, it's the bread and butter.

Wow. Well, what a great experience to come and work on one of these desks.

I've got to bring it up because of course you can buy stuff cheap and sell it high, but you can also end up losing money on trades. Like, this is the risk, there's a risk involved in this business.

It's much easier to lose money than it is to make money, for sure.

I was going to ask you about that. So in order to make money, you've got to have some losers, right, because you got to take some risk. And how do you guys make sure that you're always net positive?

[LAUGHS]

Yeah, what's the game there? And it must be very tempting for traders to think, oh, I'll put more on, I'll put more on because I'm not going to say it's not--

it's not a casino because the House doesn't always win, and it's not random, although some randomness in there. How do you as a business make sure that you're here tomorrow, and here the next day, and here the next day?

Well, apart from training, and hiring, and bringing on the best traders that we can, and ensure we've got the best success, and having the best analysts to do the work that's needed to make ourselves succeed, there's very tight risk controls, and that would be most of the companies that trade in have very, very strong risk control functions in their business, and that's any prudent operator of a trading company would have that. So there's different measurements and different companies will use different measurements to say how much risk people are taking.

People will get questioned about why they're doing things.

If it starts to turn wrong, they can be in a place where they can discuss it and work out what to do with their manager or with their colleagues, but they will also have limits in terms of volumetric limits as well. So you wouldn't be allowed to keep going more and more, hundreds more megawatts on the book. That just wouldn't be able to take place. And there's lots of checks and balances all put in place, and techniques for that are very, very common and standard these days.

OK, good. As long as no one can bet the farm. That's a thing.

JULIE ARNOLD: Not at all.

All right, I want to come back to storage because we are storage people, right? So what are you guys doing in storage? What Dare is doing is growing fast, you're taking a lots of new people. And you got into power a couple of years ago, and now you're expanding beyond that. What's the story there and how does storage fit in?

Well, storage is a very attractive part of the renewable space for us because as we've talked about before, more storage is needed to prevent the--

to reduce the volatility between the negative prices and the spiky price. The more storage we have, the better--

the more renewables we can build, the more wind we can build, the more--

so we can see there is a big gap in the market for storage.

Again, we wanted to use our skill set. Dare is, as well as being a modern trading company, that we are a technology company as well. We build and maintain all of our own systems and technology. A very strong team there. And we felt that with both of those skill sets, a great way for us to enter the renewables market will be to start with batteries and battery optimisation. No doubt we will go a lot further into other parts of the renewables space, but that's where our skill set lies and that's where we can really bring in the advantages, I think.

So you're moving into the physical world in power, which is a big step. And once storage is the most--

I don't know, I think it's very exciting from a trading perspective. And then beyond that, bigger things, wind portfolios, and all of that.

JULIE ARNOLD: The sky's the limit. Who knows.

The sky's the limit.

Cool.

But if I got this right, you guys are--

you're an optimizer as well now? So you're optimizing physical assets?

Yeah, so we have our own optimization platform, which is being built by our tech team and some of the analysts from my team.

And we think that we can really make a difference.

Because we're a relatively small company and quite dynamic, we can move very quickly, and we can make bespoke front ends for different clients.

But we also, we've got a good angle on the analysis. So we can show different types of analysis for whatever the client wants to see. Where is this income from? And in each battery unit that we're optimizing as much or as little information as people want to see, we've got the flexibility within our system to be able to do that.

And the proof's going to be in the pudding, right? But if I got this right, the competitive advantage of you guys is, you're markets people through and through rather than coming from the other angle. And that'll be interesting to see how that plays out.

I think you've covered it in your podcast before, and we spoke to you before about the cannibalization of the ancillary services market. And we think that we know that's happening already. And we think in the very not too distant future most of the income for battery assets will come from pure wholesale market trading.

And that's why it's crucial for asset owners to have a company looking after their interests in those markets that really knows that you know how hard it is, you've worked out how much data is needed, how much technology, fast technology, is needed to be involved and to be competitive and successful in those spot markets. So we're kind of future proof in our optimization offering.

Well, yeah, absolutely. If we're going to have, let's say, 20, 30 gigawatts of batteries, I believe it'll be much higher, but everyone tells me I need to stop saying that out loud, and then that's a couple of decades. Then it's going to be--

it's going to be a merchant-led market. And so the winning optimizers will be merchant-led, and the world of optimization is still very, very young.

So it's really interesting to see how that's going to play out.

I'm very aware that we've gone well over time here, but it's been a fantastic conversation. I just want to ask you, we always give everyone an opportunity to plug something. So is there anything you want to plug while you're on?

I think I've already plugged it. I think the importance of the wholesale market in the battery optimization space is the thing to plug. I think looking at purely ancillary services, there will be some ancillary services, and then that they're likely to change, but predominantly the commercial skill set, I think--

I'll tell you another way of phrasing it would be, if I had my own battery that I invested my money in, and I was to trust someone to optimize that or to bring in revenues from that in the market, I would want someone with the best traders, and we've talked about this.

Someone who is passionate about the market, who has the attention to detail, who understands every little bit of the market, the fundamentals, the flows to other countries, the LNG market around the world, every single piece of the jigsaw you want someone that is on it all day long. They're going to bring in the best amount of money for you in the future.

Right. Well, you heard it here first, right?

JULIE ARNOLD: [LAUGHS]

OK, everybody, we've just run out of time. So Julie, I want to say a massive thank you for coming on.

JULIE ARNOLD: Thank you.

We could do loads more episodes around coal, and physical, and all sorts of stuff, but maybe it's something for the future. But thank you very much. And for those listening, please do Like, Subscribe, hit all the good buttons.

It means I get brownie points on Monday. Thanks very much.

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