Are UK Clean Energy Schemes Fit for 2030 with Sulaiman Ilyas-Jarrett

Hello and welcome to Transmission. Today, we're joined by Suliman Elias Jarrett who has been heavily involved in designing the key schemes for bringing on renewable generation in the UK. How do these schemes work? Are they fit for CP thirty? And do they need to evolve in the future? The conversation is slightly unusual for transmission because Suleiman hosts the Energy Revolution podcast and we share turns in asking the key questions.

So you'll hear slightly more of my views than usual. I hope you enjoy it. Let's jump in.

Hello, Simon. Welcome to the Moda Energy Transmission and Energy Revolutions Crossover podcast.

Thank you for having me. It's a pleasure to be here. And, yeah, interesting to be I was gonna say on this side of the table, but it's a completely different table. But effectively, the one that's being interviewed as much as I'm interviewing the other.

I I'm really looking forward to this, and I think you've got a wealth of experience in in the space. Just first of all, would you like to introduce yourself and what your role is within energy markets?

Yes. Very happy to. So I'm Sulemaan Elias Jarrett.

What do I do now is a very good question and one people keep asking me. I'll maybe start with what I have been doing. So I've spent most of the last, I think about six years in government.

So started at Defra for a very short period of time, but was always much more interested in energy systems. That's what I did my master's dissertation in. So then I joined what was then BEIS working on a sort of head of electricity flexibility markets within BEIS. Back when it was still a relatively early thing, which was quite exciting because we were relatively small team of very committed people that were interested in energy flexibility, how the different parts of the system fit together.

And then for the last three years, I've been in the contracts for difference team. First as kind of sort of head of thinking about future strategy and then head of sort of general policy and strategy for, I say that the CFD, really, it was renewable electricity delivery. So occasionally, that included things like GB Energy, particularly in its early days. We did some work looking at PPAs.

We did some other work, during the twenty twenty two energy crisis. But the the kind of the bulwark, the main thing that we focused on was the contracts for difference scheme. So working on sort of, yeah, policy and strategy for the the UK's flagship scheme for renewables.

Well, let's let's go there. If you're listening to this and you don't know what a CFD is, what have CFDs done for us?

So maybe I'll start with what a CFD is for those that aren't aware.

It's quite a clever concept which I can take no credit for coming up with. But basically, the idea is, if you are a large renewable generator, you are having to spend quite a lot of money upfront to build the project with a lot of uncertainty as to what your revenue will be in the future. That's different in some ways from the cost structure of, say, a gas turbine where you are having to spend money upfront, but a lot of the cost is operating costs. So you only spend money if you know that the market price is high enough and you spend that money on fuel.

You, you know, you buy some gas, you burn the gas, you get a profit from it. Renewables, effectively, you're paying most of that cost upfront, but then the the revenue that you then generate is further down the line. And so the idea with the CFD is, okay, what we what we think is that this is a a large scale long term project, and so you need a little bit of stability as to what your price will be in the future. So we agree with a a price with, developers, project developers, and I'll explain afterwards how we agree that price.

But once we've agreed that price, that's the price that that developer will will effectively receive for every unit of electricity that they generate. The smart bit of the CFD is not all of that money comes from government. What you do, for example, if you're a developer, is you sell your power in the market. Let's say we've agreed a price price of fifty pound per megawatt hour.

If the market price is forty eight pound per megawatt hour, we will top you up with the two pound difference. And similarly, the other way around, if the market price is fifty two pounds per megawatt hour, you will pay us two pounds per megawatt hour. And, you know, the government pays out more than it gets paid, so there is still a subsidy element to it. But I think it's a really effective way of leveraging effectively, UK spend.

It's actually consumer spend in order to get a high level of private sector investment. It provides some of that certainty for generators so that they can then go to a bank and say, look. I've got this fifteen year contract where I'm guaranteed a certain price. Can you lend me some money at a decent rate of return, or a decent interest rate?

And the bank is usually willing to do that. So that's what the the CFD is, the way that we come up with the prices through an auction to make sure that we're getting basically a competitive process to get the best price for consumers.

But, really, what the CFD has allowed us to do is to rapidly scale renewables in the UK, you know, from offshore wind to onshore wind to solar. There are other project types that have contracts for difference, but I'd say those are probably the main three that we've been been able to really scale. And I think we've been able to get them at a a lower interest rate than we would otherwise, and so that therefore brings down the cost of those technologies over time. And then the other thing that CFDs have given us is a sort of natural hedge against periods of high, gas prices.

We saw this to an extent during the twenty twenty two energy crisis. And, again, people wouldn't have felt it as much because most of the renewables on the system were pre CFD, so they were on a different support scheme. And so, you know, when the gas price increased, their prices also increased. But for those that were on a CFD, what we saw is hundreds of millions of pounds paid back into the scheme, because we've got that natural hedge where if wholesale prices go really high, developers have to pay back into the scheme.

Yeah.

And I think those are two there there there are some really interesting parts in there.

I think two that I'd like to pull out. So one, just on this kind of the the reason why people are interested in interest rates, it could sound like a bit of a dry topic. Right? But when you buy a a wind farm or a battery, it's it's CapEx heavy.

So you put all the money in upfront, and that means you generally borrow money to build the thing. So the materials might cost you a hundred pounds, but because you have to borrow money effectively to go into the scheme, there's a financing cost that comes with it. And if your cost of borrowing is twelve percent, then maybe the actual cost of it is a hundred pounds for the stuff and then thirty pounds for the financing, so a hundred and thirty pounds in total. If a government can step in and give security, maybe the cost of borrowing is seven percent, and so the actual cost in day one is, you know, a hundred and fifteen pounds.

And so it really, really does matter to give security to people building these things, particularly for the CapEx heavy stuff that that you can actually get that that confidence in what it looks like. And so, yeah, just to put some numbers on sort of how how that structure works. I think the other thing that I really liked is around just this piece around what the consumer actually pays. Often we see, you know, you you go and you see on a news channel, you see, oh, wholesale prices are here or wholesale prices are here.

It's big conversation about where wholesale prices are. Actually for CFDs, unless that wholesale price is negative and foreshadowing where we're gonna go with the conversation, but unless that wholesale price is negative, actually, the price that consumers end up paying is defined within the CFD. The wholesale price, whether it's ten pounds or a thousand pounds actually is irrelevant to what the price is that the consumer pays.

Yeah. And, you know, we'll get into bills in more detail later on, but I think when people see the policy costs on their bill, a a very large proportion of that is the older renewable subsidy scheme. So the FIT and the RO, which were a lot more blunt, whereas effectively, we will pay you a unit rate for every unit that you generate. Again, there's a case that particularly in the early days of the industry, something that was blunter was effective at getting the industry off off off the ground effectively.

Mhmm. But it does mean that it's more costly for consumers. And as you say, there is this interesting interplay between the CFD cost aspect of the bills and the wholesale cost. Because also even when we do see sort of an increase in, policy costs because, you know, bills do fund the CFD, the bit that you don't always see is that the wholesale part of the bill usually reduces as well because renewables are cheaper to run and therefore the overall wholesale price of the UK generally comes down a little bit as well.

So, yeah, the impact of CFD on the bills, it's not as often assumed in the media, oh, we're building all these renewables, Therefore, we're just layering loads of costs on bills. Again, I don't wanna get away from the fact that particularly if you don't get the right price, it can mean higher cost for consumers.

But if if you get a good price and crucially, because there is that kind of interplay between, yes, there's a higher upfront cost, but then a lower running cost for the technology, you can see the wholesale price amount decrease as well. And so the impact on bills can be, sort of neutral or negative depending on what and we can get into this later, depending on what your counter factual is.

Okay. And just, fit and RO, so feed in tariff and renewables obligation at the at the schemes.

One thing I've seen recently is is conversations from people saying that the the what we're using in terms of CFD today is very market driven. It's very much kind of really sharp commercial pricing. Some of the early fit in RO work was perhaps more innovation style funding, and we still have bills today picking up costs from fit in RO. So one of the things that I've seen them suggested is perhaps we could kind of take the fit in RO elements of the bill, which are very much around innovation funding, move that into general taxation, but still have CFD feeding into electricity prices. And that does all kinds of things in terms of lowering the electricity bills to enable people to go faster and bring in more EVs, more heat pumps, that kind of thing. Is is that something you've seen at all?

Yeah. It's something that's definitely been suggested, something we've looked at as as a we. I'm no longer in government that when I was in government, I looked at at at various times and other teams looked at as well in in the department. I think there was a broader question here.

And and then, again, I'm taking my pre government hat off and now thinking of some as someone that is just generally interested in the energy system about what it is that we decide to put on bills and what it is that goes on taxation. And historically, the mantra has always been anything that is related to electricity should go onto bills. And and there's a rationale for that. You know, part of it is the kind of Treasury's approach to, levying costs, for for services, which is that, you know, the person that is closest to using that service should be the one that pays.

So, for example, if you need to tax people for roads, then as as far as is possible, then you should be taxing cars or something where it's people that are actually using the roads are having to pay the additional costs.

I think some of that way of thinking is slightly outdated, particularly because some of the things that we are now looking to do through our energy policies are not just about effectively procuring electricity.

They're about, social objectives. They're about industrial growth. They're about the competitiveness of kind of UK industry by having slightly lower potentially electricity prices. We've got very high electricity prices compared to much of the world. That's not really to do with renewables. That's to do with our exposure to gas and a few other things that we'll get into later. But I think there is this broader question of, you know, some of the things that we've previously assumed we should put on bills, is that actually the right assumption?

I think legacy, you know, fit and RO costs are a good example.

You know, my view is that probably a lot of those, it doesn't make sense for them to be on bills anymore. Effectively, they are costs which do not meaningfully change the behavior of consumers that are bearing them. And, you know, a lot of the value of of that initial burst of, as you say, more expensive, almost innovation funding was for the development of the industry, the development of the sector so that later on, we could get, you know, a more developed renewable sector that can give us better prices. Should that continue to be borne by consumers?

My personal opinion is probably not. But, again, there is a strong case for for keeping them on. Part of it, again, is, you know, I don't think treasury are particularly keen to take things off bills and put them on taxation, particularly at at the moment when we're already really struggling with, you know, potentially running a a deficit higher than Rachel Reeves is wanting to run. And so it's not a particularly popular argument necessarily.

And so I don't think it's necessarily something that will happen soon, but I think it's something that we need to look at. I think this is also the case when we really look at hydrogen and CCUS. That's where we really start to see these significant costs, which we're thinking about putting onto bills in various ways. And we saw this to an extent with, I think, the first hydrogen round, where effectively government looked at the price and was like, we can't put this on bills.

This is too high. At least for this first year, let's put it on treasury, at least for the first round, and then maybe it'll move on to bills later on. But my view is some of those things are it's not that they're not worthwhile investments, but they're effectively industrial policy. And should consumers be paying for industrial policy?

I'm I'm not sure. You know? Bills are regressive. Taxation, you can do in a much more progressive way.

But, again, I I think there is we've got a little bit lazy as a government about putting things on bills that possibly could be on taxation because it's a it's a bit easier. It doesn't show up on the balance books in quite the same way. Again, I'm not necessarily talking about the renewable CFD here. I think the renewable CFD makes sense where it is, but there is because we've got this mechanism to put things onto consumer bills directly.

I think at times we overuse that and that can eventually add up and layer layer costs for consumers.

Okay. Well, let let's let's kind of keep on then with the CFD side. So CFDs have got us, through to allocation round seven, which is, coming soon. Today is the seventh of August. So allocation round seven is on is on its way.

How much of CFDs evolved and do they need to evolve in the future?

Yeah. The the question of CFD evolution is a great one because the short answer is yes, CFDs do need to evolve, but they have been evolving really substantially from the very beginning until now. And so I think some people have this idea that the CFD is this static dinosaur that never changes. Actually, it's a very dynamic thing round to round.

And sometimes the the evolutions or the changes might seem small, but they can have quite significant impacts. I think the interesting thing then comes is to, you know, lots of people say, I think the CFD needs to evolve. The interesting bit is when you ask them how it needs to evolve, almost everybody has a slightly different opinion. And when we're talking about CFD evolution, I think we should distinguish between the evolution of the contract and the evolution of the allocation of the contract.

So the contract itself is kind of the deal that you get. So that's the thing which determines, you know, the length of how long the contract is, the kind of setup that you can have, like some of the rules around metering and colocation that we've reformed in the past to make it easier to colocate with battery storage or other assets. That's all done in the contract.

At the more kind of radical end, that also can look like things like deemed generation. So at the moment, the contract kind of says, we are paying you based on what you generate, and, you know, we use a market reference price to kind of figure out what's the price in the market, what's the price that we've agreed, let's pay you the difference. That's all kind of sort of defined in the contract. The idea of deemed generation, which was looked at by Rima but ultimately discounted, Rima being the review of electricity market arrangements was that maybe we don't pay people based on what they generate.

Maybe we pay them based on what they can generate in any given point in time. And, basically, within the terms of the contract, you are effectively determining what we pay you for and how. And so all the questions around what risks are we exposing your project to on a day to day basis, a lot of that thinking happens within the contract. And, again, there have been things that have evolved within that, but there's, you know, potential things that you could evolve outside of it.

The next set of reforms or potential evolutions is around the allocation of the contract. And effectively, that's the auction at present. We, you know, we run CFDs through a competitive process. We say, you know, we've got a set budget.

Everybody bid in.

There is a a mechanism which I can talk about if your viewers are interested, but I don't have to go into.

We'll we'll add it to the show notes.

Okay. Great. About exactly how we arrive at that price, but, effectively, it's an auction. I still think that auctions are the best way of of reaching an effective price because there is inherently this information, asymmetry between, developers of projects and also government where, you know, we can't tell you exactly what each project should set its price at.

And so the best way to get that kind of price formation or price discovery is through an auction where there is a credible risk of losing out, and therefore, you have an incentive to tell us something that is close to your real price. Again, there's lots of challenges with that in that, you know, it gets into effectively aspects of game theory where everybody's trying to figure out what price should they bid at, what's the most competitive price, what everyone else is going to bid at in order to get as much as they can out of the auction. And we in government are trying to set the parameters in such a way that we get a good price for consumers.

But, you know, in theory, it doesn't have to be an auction. And and at times, there have been other things that are proposed, things like the hurdle CFD, which would effectively be government set a price. Anybody that can meet that price gets a CFD.

The idea of a negotiated CFD has been thrown around as well. That's something that's been looked at for specific technologies.

Again, my view has been that neither of those offer a better solution than auctions at the moment, partly because of effectively this this asymmetry of information that if we set the price, we're probably going to set it slightly wrong. Similarly, if we negotiate a a CFD with a project, it's very labor intensive. It's very time consuming. And, again, there's only so much information that we can extract from developers without being able to test it against something which for which there is a credible risk of losing out.

So the in the design, I think maybe the critical question that all builds to is, is there enough robustness within the the design for CFDs to get us to that kind of clean power twenty thirty, that transition system.

Are are they fit for purpose enough to do that? Because obviously every design has pros and cons. Right? And we can we, as like like the Riemann conversation over many years, we can kind of talk about deemed versus CFDs as they are today. But do you think that we have enough robustness within the design to get us to where we want to be in terms of Clean Power twenty thirty?

Yes. I I think we do. I think it will be tight and, you know, allocation round seven is a challenging one in the you know, we talk about CFD evolution. Actually, there's quite some significant evolutions in allocation round seven, like, you know, the longer contracts, but also more in the allocation space as well, where there is, you know, the secretary of state has this new ability to kind of see bids before deciding exactly where to set the budget, and also that projects which don't have aren't as far along in their, planning process are able to bid into the CFD.

Those are quite significant changes. They they sound quite small and technical. But basically, what the, sort of government is running up against is the fact that we want to buy a lot of stuff in order to make clean power twenty thirty, but also for the CFD to work and still be good value for consumers. You still need that competitive tension.

And so through allocation round seven, and I think this the the same will be true of allocation round eight, is kind of what can we do with the existing framework that we've got to increase the amount that we could theoretically buy if the price is right, but maintaining that, oh, actually, if if if developers basically try to take government as sort of a a a captive buyer where they need to buy every project, then they will they will price projects maybe higher than consumers, should be paying for them. And so I I do think that everything exists within the CFD that can get us to two thousand and thirty.

But, yeah, my my former colleagues will be working really hard to make sure that for every auction, it's designed exactly right to get that balance.

The question is to post two thousand and thirty as well and the sort of long term, do you need something that looks radically different? But I think particularly for the medium term, the the CFD is is is the tool that we've got, and I think it's got everything that it needs within it to deliver on two thousand and thirty.

For people thinking about AR seven, and hopefully we get this, podcast out before, AR seven is is completed. But a lot of them will be thinking around negative pricing. Mhmm.

Because the CFDs in terms of one of the evolutions we've seen is that, it used to be the case that you would be paid your contract, for difference in the case where the prices went negative and you'd still be topped up to the strike price that you agreed. In the later rounds and more recent rounds of CFDs, that's not always been the case. So how have you been kind of evolving CFDs to think about negative pricing?

Yeah. So I'll I'll answer this, but then I wanna flip the script and and get the mode of you of negative prices. So the negative pricing rule has changed.

So now I think from allocation round four, if you have periods of negative pricing, then effectively you are not paid for your units of generation. Used to be that I think it was before that, it was if there was, more than six hours, you would then not get paid. Whereas now, it's kind of effectively immediately if prices, go negative, you are not paid for every unit that you generate.

And and this came about through part of our actually, this is something that, you know, I started to think about with the then CFD team before I was in the CFD team, when I was in the smart systems and flexibility team. And thinking about the way that the CFD can distort market behavior slightly because you're creating this incentive for people to generate at all times even when the system doesn't need it because they need to generate in order to get paid. It doesn't matter if the system has effectively, you know, got all the electricity that it needs. They will still try to generate.

And then, NISO now basically would have to pay them to turn down through the balancing mechanism. And we just didn't think that was necessary an an efficient allocation of risks and costs in the energy system. So the decision was made to basically say, okay. If prices are negative, we are not going to pay you to generate electricity.

And, again, it's kind of this in principle, what risks do we think that developers can and should manage? We think that, you know, it doesn't make sense for them to be providing energy to the system when they when the system doesn't need it. And so by not having that guarantee, it creates this incentive for them to try to avoid those periods of negative pricing as much as possible. And that can be done in a few ways.

It can be done through, for example, trying to have on-site flexibility like storage, which means that you can effectively shift when you're exporting to the grid. It can also be that you try to build a project somewhere which is slightly less correlated with the rest of the fleet. And, again, obviously, there are limitations in the ways that projects can do that. But we just kinda felt in principle, what we wanted was the price that people were getting paid was as best possible to reflect what the system needed at any given point of time.

Mhmm. Okay. Interesting.

Like, we obviously spend a lot of time looking at the the sort of that growth of negative prices. I it's just really interesting you sort of talk about the the thing that system needs. I when I think about negative prices, I don't necessarily think about sort of the way the CFDs work for those elements.

I think negative prices could use a kind of rebrand, and the rebrand is that they are a call for flexibility. Mhmm. And so I think seeing negative prices in the system is quite a good signal that we need a bit more flexibility coming through. And obviously, storage is one element of that, but this could be any kind of flexibility.

So it could be consumer led flex. It could be, running, energy into industrial processes that are electrifying. But, essentially, it's a it's a call for kind of both demand and flexibility. And so I think from a sort of economics point of view, I think people get very upset about negative prices.

But, actually, I think we should probably lean into them a bit more.

Yeah. And I and I think I should say that I don't think negative prices are a bad thing. I think that they can be a very real signal of what the system needs. I think the problem comes when government policy is artificially creating periods of negative pricing when they don't necessarily need to be there.

Because, effectively, the consumer is paying for a generator to generate at a time when it's not needed, and then NISO is paying to then turn that down. So, yes, there is a negative pricing signal, which is great for batteries, but, effectively, it's consumers paying for it through the backdoor where we're we're creating a signal through government money, basically saying, yes, generate now. And that creates this negative pricing at a particular point in time. I think if you see negative prices come up just because there is a surplus of electricity on the system, that's fantastic.

I think it's more the question of, you know, are we as government, artificial? I say artificially, you know, the whole electricity market is very heavily designed. It's, you know, it's not a free market in the way that most people think of it, in that we've got the capacity market, we've got balancing markets, which are, you know, designed by Nissan. You've got local flexibility markets.

You've got the CFD. So that this idea that there is a a real ethereal market which exists kind of separate from government intervention just does not exist. But still, it's this question is, are are we creating incentives where they shouldn't actually be there? And, crucially, are consumers bearing an additional cost because of that?

Okay. But I'm I'm curious just on negative pricing because I know that Modo basically, your predictions as to the number of periods and negative pricing that we have in the future is slightly higher than some of the models that I've seen. And so I'm just curious what, from the mode of view is behind those assumptions. Why is it that you that you think that negative prices are going to become sort of more and more frequent?

Yeah. It's it's an it's a really interesting one and one that we talk about internally quite a lot. I think if you go back ten years, then you look at kind of negative price forecast then, and people said, effectively, they wouldn't happen, which is always interesting in sort of the world of energy forecasting, right, to to take a look back. And I think that we are data driven very much in our forecasting. And so when we look at markets across Europe or globally, we see negative prices coming in Germany, France, Spain recently in the last year. We obviously see them in GB, and Italy.

It's really interesting that these markets have now started to ramp in terms of the number of of of negative price, hours that have come through, but also the depth of them as well. So if you look at, say, Spain, sort of they're not very deep. So there are a few that have come through in the last, few, last year, which is something like three hundred or four hundred instant instances.

But they're they're not very deep, so they're not sort of minus a hundred or minus two hundred. Whereas if you look at Germany, you can see much deeper negative pricing coming through. And they're a really interesting phenomenon because if you just think everyone behaves sort of perfectly rationally, in an economic world, they shouldn't happen too often. The trouble is that markets don't always work the way you think they might, and so you have some really interesting behavior that comes through.

So a classic example of an enterprises would be a nuclear plant doesn't want to shut down. And so instead of shutting down for a half hour, it just runs through at a negative price. That would be a more old fashioned example of negative prices, but one, that that that can definitely drive, drive them to occur. You've also got solar or wind over generation, that's probably a more recent example, can be driven by subsidy schemes.

So we mentioned CFD, RO, FIT, the older subsidy schemes are more likely to drive it. You've then got things like domestic behavior, and domestic behavior doesn't react to a market signal because your wholesale so your price that you pay as a consumer is whatever twenty four pence per kilowatt hour, that corresponds to two fifty pounds per megawatt hour.

You you that is not linked in a dynamic way to what's actually happening in the market. And so if I have a solar panel on my house, I'm not going and sort of watching the, at two o'clock on a, on a sunny afternoon, the prices are going negative, so I'm gonna turn it off. In fact, my, my domestic rate is telling me keep on generating. And so you have all these kind of, elements of sort of inefficient market design that creates these dynamics to come through. And in until we kind of get those dynamics right, there there'll still be this misalignment.

And so the the in answer to the the negative price question, the the main thing is it's data led. And so we are seeing that coming through in markets and and we're getting quite close to with our forecasting, we're getting quite close to what is actually coming through in markets. So we're very happy with that. But the sort of underlying to that is this kind of lack of sort of pass through of what's actually happening in the wholesale market to what, say, an end generator or an end consumer is seeing.

Mhmm. Very interesting.

And I'm curious to what extent do you see these negative pricing periods as being part of a transition period or transition phase and to what extent you see them being a a long term feature of the market. And part of the reason I say that is in I know for a lot of models that kind of assume that there will be fewer negative pricing in the future, it's because they assume on the demand side, you're gonna have loads of hydrogen electrolyzers or flexible heat pumps or EVs that are able to soak up that kind of excess in supply.

So, yeah, curious as to how your sort of medium term model differs or doesn't differ from your long term model.

Okay. And there's lots of parts to this. So, certainly with things like RO and FIT retiring, there will be, less sort of subsidy pressure creating negative pricing. That will happen at different stages in GB as well as across continent as well.

Obviously, these regions are connected via interconnect as well, so the the whole piece is is linked. In the long term, it really does come down to, some of those key elements. So how fast do we roll out things like renewables and how fast do we roll out things like demand and flexible demand? When I look at GB, for example, for say the last month, you know, we we June's probably a better example than July.

In June, we had sort of many periods where we were getting down to zero and potentially negative prices, and that's with a solar fleet that's sort of mid teens. In the next five years, we're taking that solar fleet from mid teens to potentially, by twenty thirty, somewhere between fifty and sixty gigawatts. So we're ramping up generation really quickly, but we the big question for me is, well, what's actually happening on demand? Is demand gonna keep pace with solar?

And it's not just solar, by the way, because it's also onshore and offshore wind. So we're we're ramping those really quickly under CP thirty, clean power twenty thirty, but we might not necessarily have the same speed from demand. And so that's another thing that can kind of drive this behavior is, the the balance between supply and demand can move too quickly on the generation side and not quickly enough on the demand side. So that interplay between demand and and generation for me is a critical part for the the long term view.

Certainly, the anticipation is that demand will grow quite quickly. Now not all that demand is the same. So if you have, some very flexible demand, so let's say a battery on someone's home or a battery, that's in in the market, then that can react to these prices and that will remove negative prices. And we see that happening in other regions.

It also happens in GB. So that we're very excited about. We think we're gonna get something like forty to fifty gigs of batteries by by two thousand and fifty. So a a big number and definitely one that can help, reduce negative prices.

The hydrogen electrolyzers is a really interesting one. Sometimes sort of touted as having lots of flexibility. I think it's a really interesting question because you're gonna put a lot of CapEx into that project, and you're gonna want to run it as much as possible. And if you only run it for, say, sort of ten, fifteen percent of the year, you're probably gonna be very unhappy with your returns.

And so the actual amount that you're going to be running those electrolyzers is a really interesting question. How flexible will they be? I think the same thing is also true of EVs and heat pumps. So EVs and heat pumps, you know, when we look at the data, they're not as flexible as you maybe might first imagine.

Certainly for EVs, people have very specific charging that they look at. Heat pumps, you you generally tend to see consumption sort of spiking morning and evening. And so it's really a question of how does that demand come through and how flexible is it? So in the long term, that's the thing that we're trying to balance in our forecast.

Great. And, yeah, I definitely agree on the electrolyzer point as well. I think that people often assume that they are primarily electricity system assets, but, really, they are, you know, in industrial investments that wanna produce something, which they then sell to industrial consumers a lot of the time. So they wanna get as much production as possible rather than kind of sitting around and waiting for a good time to use them. And you mentioned batteries. And, again, I'd like to get your view as to how the battery market has evolved over the last sort of five to ten years from, you know, when I was working on it for sort of five years ago, it was still a more nascent market. Now it's starting to get into a bit of a a flow.

So, yeah, great to hear your reflections as to how you've seen that play out.

So, yeah, the the battery market's a fascinating thing. I would say that I've kind of dedicated my my working career to to being on batteries. I think the thing I would say, and maybe I'll break this down into kind of three sections, is battery markets have moved from being a relatively unknown thing to being a known thing. Now this is this is really important because when we think about how energy markets transform, we always kinda look to the future and we say, well, which are the texts that are gonna come through?

Which are the texts that are gonna we're gonna base our future system around? And there's a lot of sort of innovation work in the in the early stages to try and work out, okay, so where do we place our bets and and and which ones are actually gonna scale and deliver? And the the really interesting thing about batteries is that with the technology that they bring through, we now know how they work. We have very, very good data on their performance from, say, early twenty twenty one to today.

Early twenty twenty one, if you look across, say, Texas, California, GB, and Australia, so four of the biggest battery markets, you had around four gigs total. That number today is probably like thirty gigs. So circa sort of a ten x, delivery over five years. That is the behavior of a market which is scaling but is also very known.

So there's sort of the fact that it is something that financiers come back, asset owners come back, grid operators want on their systems. All of those boxes have been ticked, and now we're just moving to scale it faster. So that's probably, I would say, the first thing, that that's that's known and I I would say arguably for other techs, they're still relatively unknown. Doesn't mean the drawbridge is up, doesn't mean we'll never have those techs coming into the market, but it does mean that they haven't ticked all those boxes that batteries have.

And so that's why we have a lot of confidence in terms of, the battery forecast coming through. I would say another thing is the how batteries operate.

So when batteries first come into the market, they often do ancillary services. So they work really hard to keep frequency at the right level, and you only need a gig or two gigs of batteries to do that in in any particular market. And so that's a really interesting thing for batteries to first do and they're much better at doing that than say gas units. And so they're cheaper and so great, they come in and do that as their first service.

You can think about this in terms of phases of operation for batteries. The first phase is doing that. The second phase is going and doing energy trading. And now we look at those developed markets, so California, Texas, Australia, GB.

They're all now mostly an energy trading market. So batteries have been doing the frequency response and then they move over to energy trading because the energy trading is the thing that gives them the best returns in the market today. I would say the third phase that is coming is kind of extra services. So, going beyond just frequency and energy trading, we now see things like, grid forming inverters going onto batteries.

So that's the ability to provide additional services to the grid and not having to rely on necessarily having spinning gas units. And so I would say there's kind of a third a third thing coming for batteries, soon and we're starting to see the sort of green shoots of it.

People like Zenobi's Black Hillock is a great example, but we also have many others in the market looking sort of the additional services that batteries can provide. I'd say just the last one, I promise kind of three parts, and then the third part is sort of maturing of the market. So early days batteries, it was sort of evangelists and enthusiasts working on it and the sizes were a couple of megs, a couple of million. And now we definitely see a maturing of it.

And so we're seeing sort of toll structures or financing structures coming into battery offtake agreements. And this is where people are signing up to five, ten year agreements with millions on the table to say, I believe this technology is gonna make this amount of money over five or ten years. And so that to me is a is an evolution of the market in terms of maturity. The the big financiers, the big funds can now step in, pick up these assets.

They can see it as a kind of tech of the future, and so they're now starting to come in and and and drive this kind of securitization of the space. So those would be my those would be my three.

That's great.

And one more follow-up question, if you don't mind, which is around the kinds of financial backers behind battery projects and how they've been able to get comfortable with wholesale market revenue being more and more of where they're getting their, returns from. And I say that partly in the context of looking at it next generation in that there are not many generation assets which now build purely based on wholesale market kind of predictions.

You know, we've talked about renewables but even gas turbines usually if they're trying to build, you know, in the UK they'll be looking for a capacity market contract as well.

And so for for for generation, for a long time, the wholesale market hasn't really been sending that effective investment signals.

What's that what that's meant as well is that you've tended not to get institution investors backing projects unless they've got one of these longer term contracts.

With batteries, I remember a little bit of time ago looking and there were fewer sort of institution investors, more kind of private equity, for example, who had a different risk appetite. Is it that that's changed? And and now those kind of institution investors that, you know, previously weren't willing to go into it are willing to go into it? If so, is it because actually the sort of upfront costs of batteries are lower because they're more modular and easier to scale? What differentiates batteries from generation in being able to get those different kinds of capital if they are indeed able to?

Yeah. I think batteries are a bit of an odd one out. So you've talked a little bit about the sort of the role of government in in supporting various technologies coming to market. So as you say, gas peakers will get a capacity market contract. Obviously, batteries also get a capacity market contract, but, gas peakers get, say, ninety percent of the capacity market contract, whereas batteries might get, say, fifteen percent. So for battery owners, capacity market contract is not that important, whereas for gas peakers, it can be everything.

You then have different types of tech. So you have renewables have CFDs, interconnectors have cap and floor, longer duration storage might effectively have a cap and floor, type contract, your hydrogen has a dispatchable power agreement.

The list kind of unfortunately does go on a bit, and so the the sort of role of the wholesale market has been diminished.

And even in that world where the wholesale market is diminished because of the low cost of batteries and the speed that they can get deployed at and the ability of the technology, even in that world, they have still, in an unsubsidized way, have been able to compete to the level that has attracted the investment that's meant that they've gone from zero gigs to, you know, five to six gigs in GB today, and that's happening globally. So that should tell you a lot of what you need to know about batteries, that they are seriously competitive, and they are working to very much bring cost down for consumers, reduce carbon, etcetera, etcetera.

So so that takes me on to the types of investors that are looking at this. And, yes, there is this very good performance in wholesale markets, and investors do not generally like merchant. But if the economics are there, they're willing to back it to a certain degree depending on the the type of investor. So equity and debt will be different.

But also, if you don't wanna take any merchant risk, then you can also pass it over to people who are experts in taking merchant risk. So you have these utilities or the trading houses that have dealt with price risks, since time began effectively. And those are the groups that are very happy to take on the price risk. They understand the market.

They're very willing to take risks. That is their that is their business. And they're very very willing to take it and say, okay. I will give you, a fixed return, and you can trust me based on my my counterparty rating, my credit rating.

And then the financiers go, well, okay. I don't actually have to understand this part over here. I can purely just say that, you know, company a is such a a mature, business that I can I can look to lend money against that as as as well? So so there's lots of different ways of of sort of slicing this up depending on risk appetite.

Mhmm. And it's it's a good point that you raise around the sort of relative fragmentation of the market effectively that lots of different technologies have different schemes. And the the role of batteries within that is something that we thought really heavily about in government partly because or a few reasons. One is that you don't necessarily want batteries to have something like a CFD because the whole idea is that they should be exposed to as much volatility as possible because that's how the whole business case is built.

And secondly, you you don't want government to be overly prescriptive as to the kinds of ways that you're setting up the project. And and so I think there has been this huge tension within government for a long time, which is which route do we go down? Do we go down a route where we we try as much as possible to have technologies compete against each other and sort of, you know, pair back some of the individual schemes? Let the you know, try actually make the wholesale market work as a way to send effective signals?

Or, actually, do we go down a route where we say some of these large CapEx projects, we know we kind of want them, and therefore, they're all gonna have separate schemes, and we've kinda tended towards that second one to a degree. And batteries have kind of, as you say, don't wanna say fallen through the cracks because there is capacity market, etcetera.

And, also, there is an element to which there's a degree of intentionality. It's where you you don't want it to be overly certain. But I do think there's a risk that comes with that, which means that the overall technology mix that we end up with doesn't have enough batteries because they are effectively playing a slight disadvantage. And so things which are larger generation technologies are privileged against more demand side things, when when it all comes out the wash.

I would say the battery sector is very proud to be effectively not subsidized and to be sort of standing on its own two feet against a lot of sectors which are getting very direct support. I think the sector reaches a bit of a crossroads, and it's a really interesting sort of way in which it could develop. And we see different markets going down different routes. So in the GB market, I'm gonna borrow from mister Pringle and say, once you pop, you can't stop on on sort of government, intervention in markets.

And then what I mean by that is that the as you say, the hustle market just gets smaller and smaller, and you then end up needing to kind of do more and more things to type to to fix it. And if that does carry on, there is a question as to like, where do you go? So for example, in New York ISO, they look to create, an index for batteries and they say, you know, this is the amount of money that a battery can make similar to a CFD and, that comes with some benefits. So if you have fifteen year certainty, great, then it's much easier to get lower cost of capital and all of a sudden it's easier for finance to flow into the space.

That is definitely one way that markets could go. I I personally would strongly dislike that as a market designer. I think it doesn't encourage the right type of, efficiencies within a market. I'm I'm sort of pro markets and and anti intervention, but but it is quite hard to row back on the sort of the the amount of change that's happening within the space.

And so I think one of the really key questions for government is over the next five, ten years is, like, what is the role of the wholesale market? And so when we look at wholesale prices in two thousand and forty, like one of the really interesting things for us is you see like lots of periods of, say, zero pound pricing. And that's quite odd because, consumers are still paying for, say, a contract for difference because that's being sort of resolved outside of the wholesale market, but the power price is coming through at zero. So let's say you have country a, country b, and an interconnector that sits in the middle, you know, you might see wholesale price at zero in one region, wholesale price at zero in another region.

The interconnector doesn't really know what it's supposed to be doing. Right?

And so you get these kind of funky dynamics playing through where the more you resolve off wholesale markets, the harder it becomes to make decisions around what to do operationally with these assets.

And I for me, if I was designing a market, I would be pushing as hard as possible to have market driven signals. Because one of the really big things is that I think some really good people designing markets from a central planning perspective, or choosing, you know, what goes where and and kind of what tech they're gonna select for various regions. But the the honest answer is that they don't know what's gonna happen in the future. And if you ask them, they all say the same thing.

It's because in a year's time, somebody might come through and say, oh, by the way, solid state batteries. Yeah. We we've got it. It's gonna come through and actually that battery is not gonna be x cost a hundred pounds, it's gonna be twenty five pounds. And at that point, all of your sort of system design or subsidy schemes are all then effectively optimized for the wrong mix because because the game changed on you. And so if you go in a markets road, I think you have the flexibility to then try and optimize again.

Whereas if you sort of bake things, into the system at an early stage, I think you set yourself up to find it hard to, reoptimize, when when the game changes.

Yeah. It's a good and it's it's this inherent it's this deep tension which will always be there in sort of market design. And I think one of the challenges is wanting, obviously, to have an optimized energy system, but also having to move quite quickly and knowing that there are some kinds of projects that we will need substantial amounts about. And I think you kind of there's a trade off where you could say, okay.

We're gonna let everything be driven by the market. We're gonna need a slap on a big carbon price potentially, which which again is, you know, politically, no one's been able to to do a carbon price, which is high enough in order to send the investment signals that we might need. And, again, you know, this is a slight aside. I don't think carbon pricing itself is enough.

I think you need that that demand side. I think, you know, when you look at innovate innovation systems and energy, you also do need something on the supply side for newer technologies. But, yeah, you you could take the this approach where we're gonna be very market led, and you probably do get a better balance between different generation technologies and flexibility demand side technologies.

But you also get a lot of people just kind of waiting and holding on because there is so much uncertainty about the future. And and as government, there is this trade off that has to be made where it's like, yes. Yes. We want the perfect system, but we can't let the perfect be the enemy of the good. And, you know, we have carbon budgets that we need to make. Climate change is really urgent.

We know that we're gonna need a certain amount of generation.

Let's get some stuff built.

But I definitely recognize that in that, you end up with probably a less efficient overall mix. Yes. There there isn't a a perfect answer in the end, but I think it's this delicate balance where you do need market signals. But at the same time, if government takes too much of a step back, I just don't think that we get anywhere near where we need to be for our climate objective.

You've you've you've won me over. Okay. So I'm definitely pro markets. I also recognize that, in the spirit of kind of low cost of capital and decisions being made and dealing with the actual problem we have, which is, with climate change, that we need to make decisions and we need to move fast, and that I'd be definitely willing to accept inefficiency in the system in order to be able to move faster to to to get stuff done. So, yeah, definitely not sitting here trying to be a perfectionist, recognize that we need to get stuff done.

Yeah. And, again, it's not one of the other extremes. Like, in in practice, it will always be a balance and a mix of the two. Like, there will be and and again, we often talk about market versus non market.

I often like to conceptualize it as where is government best able to make decisions and risks versus where are markets best able to make decisions and manage risks. Mhmm. Yeah. Government should have no business, you know, making small scale changes to how individual assets are operating based on, you know, their charge levels, how they're kinda managing their individual asset, what the local grid is doing, etcetera.

Obviously, government has an indirect effect on that by the way that it's setting the market design, and we shouldn't pretend that it doesn't. But there are some things which everyone would agree. Okay. Government should not be doing this.

Market should not be should be doing this. There are also some things I think most people agree government definitely should be doing, like, you know, maintaining security of supply, for example. There are some places, you know, Texas is probably the example of the most Wild West, electricity market that we've got. And in some ways, it works really effectively.

But then when stuff goes wrong, it goes spectacularly wrong. Mhmm. And and I don't think that the UK citizenship or the the citizens of the UK and consumers in the UK would be willing to accept that kind of spectacular failure even if it's, you know, a once in a generation type event. We saw this even during the twenty twenty two energy crisis.

Actually, what you see is government has to end up stepping in because people, you know, they are you know, if if a if a large company goes bust, effectively, government is the last person to bail out consumers. And so, yeah, on that side, you've got most people to say, okay. We think government does broadly need to make sure that we've got security of supply.

Everything in between is up for grabs. And it might be there are some things such as, you know, a few large technologies that we think, okay. Actually, this need needs more significant government intervention because of the scale, the the length of the operation of this asset. And there are some things where we think, actually, this is better if government is is less involved, and it can be a bit more bottom up market, driven because, you know, either the the CapEx isn't as high or they need to be exposed to more operational signals.

I'm quite excited to be outside of government and to be able to think really long term about, you know, so much of the the air in the review of electricity market arrangements has been sucked up by the locational market question.

But there are these all other fundamental questions which in, you know, in the mid twenty thirties, twenty forties, what does it look like when the majority of generation has really, really low or zero operational costs but high, you know, upfront costs? And you've got lots of new demand and flexible loads that are happening. What is the role of the market in this world? And, you know, when I'm designing CFDs round to round, I've not got the time to think about that. So, hopefully, if you ask me these kinds of again in a year, I'll have a really articulate answer as to exactly what market design should look like.

Well, not not for this podcast, but, I was just talking with our team outside around a particular dynamic that comes through, which is when you get sort of zero negative pricing and how how do CFD backed wind farms bid, into wholesale markets? And then secondly, into the balancing mechanism. If if not all assets clear in the in the wholesale market, how do they then bid into the balancing mechanism? And how does that split by location?

One that is not for this podcast. Absolutely. Funky stuff. Yeah.

You start to see some very funky stuff coming through.

And I I the reason why I say all of that is because, I really want people to get a a sense of just there are lots of markets. So the energy market is just not sort of someone sells something, someone buys something. There are so many different dynamics over so many different time periods covering, the sort of oversupply in certain half hours through to how do we meet seasonal generation, how do we solve a sort of north south generation split, do we have a locational market, or do we sort of build out very, very large transmission lines at x cost?

The there's a sort of fascination with how all of this works. It's incredibly interesting to spend time thinking about, but we shouldn't go into that because it will take far too long. We generally ask two questions when we wrap up podcast. I would like to ask you the first one, which is around, is there anything you'd like to plug?

And I and I would like to steer you in this. So you've just launched the Energy Revolution podcast. Why did you do that? What's it all about?

Yeah. So thank you for plugging the Energy Revolution. Obviously, if you're listening to this through the Energy Revolution kind of show, then wonderful. You're already here. Hopefully, you're already convinced that we're great.

I launched the energy revolution because I think that the energy transition is not happening in a vacuum.

The energy is something which is deeply political.

It's something where decisions on the energy transition and the way that the energy transition plays out. It's not just about kind of electricity and energy. It's also about larger industrial policy. It's impacted by, you know, global trade wars that we're having, which are as political as they are economic.

It's impacted by the higher interest rates that we have in the UK versus other places. And that sounds really boring, but then it relates to things like, you know, Brexit as an example of one of the reasons that we've had more persistent inflation in the UK. That's led to higher interest rates. We're still feeling that in the cost of our offshore wind compared to other technologies.

It's something which is culturally very significant as well, where pea people are starting to relate to the energy transition in a in a different way as it comes into their homes a little bit more. You know, the the car that you drive, maybe some people have solar panels in the roofs.

Heat pumps are, you know, heat pumps and just generally home upgrades for insulation are going to be massive social as well as kind of economic projects. And so my my hope is that if, you know, if people listen to the energy revolution week by week, they'll develop a a richer sense of, you know, how the energy transition is playing out, and understand how their bit of work, because we are often very focused on our particular, you know, what are what what did the grid code say on this? Or, you know, what's the business case for this specific project? How does that work fit into this much wider story of of the energy transition?

I think it's a it's a fascinating space. Already seen two episodes go live. Today is the seventh of August. So, we are very much, a privilege to have your two guests so far and excited to hear hear further from from from the team.

Now we have a we have a we have an interesting, point we've reached where we need a final question. So we would always ask, is there a contrarian view you hold? So something you believe that the majority of the market doesn't. I feel like we've had a lot of those views already in the episode so far.

So maybe I'll I'll leave it open. Is there is there anything that that's left unsaid?

Good question. What what would be my final reflections?

I think one is that people often assume that the electricity market exists as a market like everything else. But I think that that's not the right assumption. I think that energy and electricity are so fundamental to a functioning society, what is seen as an effective state, that, you know, there is always going to be a level of political economy that links into energy as much as it does, you know, the the the kind of so called market fundamentals.

And often we try to separate the kind of quote unquote market fundamentals from what is happening in the wider world and I just don't think you can do that with energy. I think everything from the production, you know, we we've talked about batteries being cheap. Sometimes we talk about solar being cheap. A lot of that has been because, you know, the Chinese government has made a really concerted effort over the last twenty or thirty years to have an industrial policy which builds manufacturing, and kind of focuses on the the industries of the future.

We talk about things like the capacity market and the CFD. They are economic tools. They are also very political. The capacity market is partly there because if you have a blackout, that looks really bad for you as a government.

It's kind of like a, you know, a flagship of a failed state as if if you have regular blackouts.

And so being able to keep the lights on is really crucially important.

I remember even Khwazi Khwatang had a great quote once when he when he was an energy minister, where he basically said something along the lines of nothing will turn you away from sort of free market evangelism towards kind of seeing the benefits of state intervention than being an energy minister. It's just something which is so important from everything from, you know, how we live our lives daily to our industrial policy to, like, our national security that it's always going to be deeply tied up with sort of general politics and government ambitions.

And so I think there will always be this conversation and this dialogue that needs to happen between those that are thinking in a more government political economy space and those that are thinking in a more market purist space. And hopefully, we pull each other a little bit closer to something which works for both.

It's it's a it's a fantastic place to to to leave it, that kind of intersection of of how all of these various elements give you that thing which comes through the post or on email, that that energy bill that comes out of the far end. So I hope you've all really enjoyed listening to this crossover between, Modo Energy's transmission and the Energy Revolutions podcast. We hope you dial into both in the future, and yeah, thank you for your time.

Yeah. Thank you very much for having me, and thank you everyone at home for listening.