Managing BESS market risks in the EU's hottest market with Martin Daronnat (Engie)

Hello and welcome to Transmission.

Today, Q is joined by Martin Darrinna, head of flexibility and structured origination in Germany for Engie, the French multinational electric utility company. In this episode, they discuss the booming German battery market with five hundred gigawatts in connection Qs, how batteries generate revenue through wholesale markets and ancillary services without subsidies and the emergence of fixed price flexibility purchase agreements as a new risk management tool. As always, if you're enjoying transmission, feel free to like and subscribe wherever you get your podcasts. Now, let's jump in.

Hello, Martin.

Hi, Kortin.

Lovely to see you twice in twenty four hours.

Our pleasure.

Pretty dehydrated after baking in the sun at the oval yesterday. We should probably do a shout to Fritz for inviting us along to, the the t twenty.

We had a good night.

How was it was your experience of, British cricket then?

Not understanding everything, to be honest, but still a good time. Yeah.

It was a good game. People. Yeah. It was a good game. Alright. Martin, we're gonna talk about the German market in great detail.

I actually think we could do knowing you, we could do this podcast as just contrarian views.

So it's gonna be a lot of fun. Maybe we'll give you a bit more space at the end to do more than one. But for our listeners, let's who who are you, Martin? What do you do at ENGIE? And let's go from there.

Perfect. So my name is Martin. I work at ENGIE since two years. I'm responsible for flexibility and structured origination in Germany for the trading part of ENGIE.

Engie as a company, I mean, I guess, you everybody knows, but we are basically a vertically integrated utility. We are investing into assets, into into grids. We have, of course, a lot of customers that we supply, and NG, trading is effectively at the core of that optimize optimizing all the assets of the group, supplying all the customers, and then, providing risk management tools to clients that have, for instance, batteries. That's what I do all day long.

And in in another life, we could have ended up working on the same floor. My, previous gig at Kiwi Power got bought by I think you're part of Engie. Right? NG Correct. Gem or Gems? Gems.

So yeah. Which is now called SEM. It's a it's a new name, but it it still is trading origination asset optimization and supply of of clients.

So what's the s?

Because it used to be global.

Okay. Alright. Okay.

It's now international, supply and energy management. Yes.

Excellent. Excellent. So we're gonna talk about the German battery market. There's tons of interest in this space. We've got assets being built. Investors are finally getting comfortable with this market. Could you give us a lay of the land of the battery world in Germany before we go down the rabbit holes?

Sure. Absolutely. So first thing to say is that the German market is very hot, at the moment. I mean, you have numbers of connection queues that are adding up to up to five hundred gigawatts.

It was mentioned in a few podcasts here already. It's a hot market because the needs are huge. I mean, Germany in twenty thirty will have something like three hundred gigawatts of renewables, targets at least, for consumption at peak of seventy to eighty gigs. So the need for flexibility to match demand and production is just huge.

That is calling up for short term flexibility. That's where batteries are coming in for also mid to long term flexibility, not necessarily for batteries. But the huge needs of batteries are also represented into the numbers that we see at the moment in terms of grid connection requests and also in terms of, like, the number of client that we see are building, batteries. At the moment, a lot of two hour batteries are being built.

More and more four hours are coming the way. I would say that by twenty thirty, we will have something between ten to twenty gigs, of batteries in in Germany, something around that.

Wow.

So a market that's three or four times the size of the UK right now, would you Probably, but Germany is also very, very big.

It's it's something that is also sometimes difficult to explain to, internal stakeholders.

I mean, Germany is, is a huge market. Three hundred gigawatts of renewables is a huge number. So, like, if you if you look at it compared to other countries, then you basically need to have, like, an approach that's relative to to the scale of the renewable penetration effectively. So twenty gigs of PES versus three hundred gigs of, you know, renewables is actually quite normal.

And peak load of eighty gigs.

So Something like this.

Yeah.

Roughly double the UK. Yeah.

Alright. And so you're you're a Frenchman, of course. Yes. Covering the German market. So how long you've been looking in the German world?

So I'm in Germany since nine years. I came first at EON, EON markets, developing the flexibility business there. EON was quite advanced, back in the days on that topic. Then moved to to Watanfel trading, was heading up the the biz dev team of trading, like Key, and, actually, a few days ago was in this podcast.

Exactly the same job. So there, we built the FlexDesk, actually. That was my last part of my job there. So offering risk management solutions for for for customers of that and file and then moving now to, to ENGIE. So nine years in Germany.

Nine years.

I'm still liking it, actually.

Okay. Can we talk about those targets for a second? That's at least twenty, thirty. You mentioned there are targets, and whether we get there, I don't know, but they're pretty lofty. Can you just discuss what Germany is aiming for?

I mean, Germany is aiming for renewables plus flex, basically. That's that's the future of the country. That's something which is, I would say, kind of standard and understood now in the German landscape. The renewables target are in the low.

That's also a difference. Nuclear is kind of gone, so there will be no probably no coming back. And even if there would be a comeback, that would be very, very little in any case. The coal, is in the process of being exited, so gas is still a bit there.

There will be new gas power plants to take care of the mid to long term flex, topic that I was mentioning a bit before.

So Is it like new CCGTs or Correct.

Yes. If you can get hold of turbines.

Yes. Exactly. Yeah. It's it's not without, any issues, clearly. It's also not without any issues with parcel and with other countries that need to be okay with that because the the whole story is decarbonization.

We should not forget that. So batteries are a nice piece of of of technology and equipment that are matching both the needs of the grids, of the markets, and are carb carbon free to some extent.

And you talk about three hundred gigs of renewables. That that is a a very difficult number to get your head around. You know, it's almost too big.

You know, it's you can you can make what you want with those numbers. Will we end up at two hundred, three hundred, two hundred fifty? It's a huge number. That's the point.

And that's a huge commitment for the German society to actually get there, not only from the people, from the politicians. We see that still today. I mean, with the new coalition, it's still, you know, pushing for for more effectively. The consequences of that are more volatility in the market, more needs to rebalance your portfolios because it's not allowed in Germany to be imbalanced effectively.

That is going up for nice spreads on the intraday market, for instance, which is all the problems that batteries short term flexibility batteries are coming therefore, basically. So it's it's, at the moment, a good, I would say, very, very good ecosystem, which is very favorable for batteries, not only in the market, but also in terms of regulation.

Okay. Let's talk about how batteries are actually operating in the market at the moment because we're we're approaching a a big change. The similar saturation problem that happened in GB and is happening in Texas right now is coming to Germany and pretty much any ancillary services driven market. Right?

And then I think because of the huge investor appetite and the macro making sense for Germany, Alongside that, there's also a lot of noise in the market. So we have a number of optimizers serving Germany. You've got utilities all fighting it out for what this future model looks like. You know, do do asset owners wanna be vertically integrated?

Do they wanna do they wanna hand the keys to an optimizer? Do they wanna get, you know, a toll with the utility?

And I don't know. You might disagree with me, but it hasn't really become obvious what is the what's gonna happen in that market. In GB, it was very optimizer led, but that hasn't become obvious, I don't think, in Germany. Although there are some incredible optimizers there by the looks of things with, you know, large teams, great technology, and if they can do what they say they can do, could be incredibly disruptive.

But on on the the back of that, of course, west well, Central Europe and Western Europe is very utility led in a way that we don't have in GB, so there's some big differences there. So that's me having a go at setting the scene. You will do much better.

What's the state of play with route to market in Germany?

Yep. So, I mean, the first thing to say is that, I mean, batteries, where do they make revenues? They make bat revenues on wholesale market, they had intraday, and on an ancillary services. Maybe in the future on some other markets, capacity market, maybe all of that. But to make it super simple, it's NCI services. They had an intraday.

And so so just to be clear there, so there's no subsidies, no capacity market?

There's no need for subsidies in Germany, which is great. I'm a firm believer in markets, to be honest, and I think that it's one of the good things in Germany. There's no need for subsidies whatsoever at the moment, at least, for batteries. Full merchant assets get financed.

Full toll, asset also get financed still. So it is it is quite nice, actually. Those batteries are indeed making money. So on FCR, AFR mainly for for for primary and secondary reserve on anti life services and on the head intra day.

In Germany, you have the biggest and more liquids by far market in Europe for day ahead and intra day. You have a lot of needs to rebalance your portfolios because of the renewables, that have to be balanced. So intra day liquidity is quite high, in quite intra day volatility is also quite high, which is the dream of any of any battery owner, effectively. I think what's something which is something which is quite important to keep in mind at the moment, though, is that, I mean, NCI services, as you say, are still quite high.

Two thirds of revenues of a two hour battery, in twenty twenty four, If you listen to some people, so two thirds depending on ancillary services is quite a lot.

Two thirds of the revenues from batteries in that sense.

That, you know, all of that will be gone if ancillary services is saturated because it's, you know, communicating basis, of course. But still, you know, a fifty percent drop is absolutely not excluded in terms of NCI services or revenues only.

By the way, it was exactly the same in Great Britain in two thousand twenty, twenty one. It was, like, eighty, ninety percent revenues came from FFR. And you know what? The market the market moved on.

Yeah. And it's not surprising. The good thing is that in Germany, you still have the day ahead and intraday.

Liquidity is there. The the the the volatility is also there and probably going to increase for a few years before batteries actually solve the topic. That's, you know, that's what markets are here for. It's like giving the signals to then find your solutions to then solve the situation that was not super easy to to solve without batteries.

The the good thing about Germany and the key difference, I would say, to GB JB, sorry, is how far you can trade. Basically, in Germany, you can trade to up to cal plus nine. Of course, it's not super liquid, so that means nine years out, you can find a price in the market. Of course, liquidity is very little, but still that provides traders, people like us, with the ability to hedge long term. And when you can hedge long term, you can then take position long term, which is absolutely not the case everywhere. And, of course, traders, when they take positions, they have very, very, very clear risk frameworks that they have to abide, by, so to say.

And if you don't have, like, hedging positions hedging possibilities, apologies, then you cannot really take those positions. That's the first key difference. And I would say that, at the moment, what's also calling for more tolls is just the tolling levels. You know? The the tolling levels you can get on Germany are still twenty to thirty percent higher than in JB.

What do you mean by level?

The the price, approximately the price. So for the same, you know, batteries, same CapEx, same, you know, approximately same cost, you can get to secured completely secured or partially secured revenues, which is twenty to thirty percent higher than elsewhere, which is where the big money guys come in. They're not the person that want to have the biz biggest, you know, revenues effectively, but have a safe semi semi safe invest, they are very, very happy. I mean, you can secure still double digit IRRs without any risks effectively, at least not market risks.

That's why there's so much money being pulled down in Germany at the moment. And, effectively, back to your question, what will be the winning, scheme of of avenues? Nobody effectively knows. I think we will see more contracted because all the news will probably go down, as we've seen in any markets.

The the markets will solve their problem on their own, basically. That's the beauty of markets. Right? So whole venues will probably go down, and this will be calling up for more hedging.

We have seen that already. I mean, in twenty twenty three, there was I mean, twenty twenty two, don't don't need to speak about it with the corona years. In twenty twenty three, nobody wanted to hedge. You know, it was smaller project, so fully merchant, fully equity, or balance sheet, sorry, financed effectively, so no need for hedging.

In twenty twenty four, I I still remember my mailbox after Christmas twenty twenty four, we saw a lot of demand for for flows, for hedges, or partial hedges at least because market dropped by forty percent. The base load prices dropped quite significantly because, I mean, it it it it they are coming back a bit to normal after corona. Right? So, and after the Ukrainian war as well.

Sorry. So point being, like, people become more and more aware of the risk that they are getting into by seeing the prices of the market changes. When they get as well reports from, like, I know, all the big consultancy in q one versus the q four report that they got the year before, which is dropping by twenty or thirty percent, they also realized that the need that market risk is a real topic and that hedging might be a good idea. So depending on where market prices are moving, effectively, we see more and more appetite for hedging or less appetite for hedging.

So this will be a moving thing, I think. But the bigger assets that that we see coming these days, I mean, one hundred megawatts is probably the average size of an asset these days. What we talk to in terms of clients, probably one fifty, in terms of average size, to be honest. All those things are typically not fully balance sheet finance, so that's where the lenders come in and lenders are very, very, very strict effectively.

You know, they don't want to take any risk of very, very little. So that's where the the the fixed price flexibility purchase agreement, as I call them, FPAs, are basically, like, matching their needs.

FPAs, which is, excuse me, but similar to a p it's a PPA, but for flexibility. Correct. Okay. And I I could the reason why that makes sense then is because if you can fund an asset with debt, then your cost of capital comes down, and you're willing to accept lower revenues because your project's overall cheaper, and you're happy to pass those onto a big balance sheet partner who can hedge it for you.

Absolutely. And you can still get nice revenues, nice nice returns. That's the good thing at the moment, at least. Right?

The toll levels will probably go down over years. That's clear. So at the moment, you can secure with no risk, like, high level of tolls, which, you know, make you very happy. No risk and high returns.

So it's not it's not necessarily like a compromise effectively that you do. Right? So you can still get, like, very high returns effectively, with with no risk, which is exactly what some, like, you know, pension funds, for instance, would would would love to have. So they are striking a much higher return than they would expect still with no risk, no market risk.

So it's I would not say it's a dream come true. It's probably a bit extreme, but kind of effectively for them. And that's what we see. Those are the clients we also talk to, not only asset developers, but also all these investors that have, like, a lot of capital to to put on the table or, like, lending banks that want to really lend a lot of money and then are happy to see people like us then providing them risk management solutions.

So say I come to you, Angie, and I've got a couple hundred megawatt sites, and I wanna do a tolling agreement with you or I wanna pass that risk on to you, that market risk. What duration of a contract are you open to at NGE? What does that what does that look like? And then my second part of this question is, there is a limit to how much of this risk NGE could take on its balance sheet. Right? So, how many hundred megawatts or gigawatts could you guys handle of this flexibility?

It all depends how you risk manage them. And that's the big difference, I would say, from ENGIE compared to other, players. ENGIE has the ability to risk manage their positions. We don't only sit on risk like some utilities, unfortunately, still do these days.

And that means that, conceptually speaking, there is no limit to to what we can swallow as long as we can really manage those risk. Right? We could build a huge portfolio that's also how utilities, in the past have built, like, huge portfolios of conventional assets and huge portfolios of clients. It's just because they hedge effectively.

That's the only possibility not to die. We've seen that in in corona times once more, like like utilities, especially in the UK, not hedging.

It can end up pretty, pretty bad. So, batteries, to your point, for us, we don't have necessarily at least for Germany, I can speak for Germany, we don't have necessarily a limit. We think that we will need between two to three gigawatts for portfolios of renewables and downstream clients by twenty thirty. It's a broad range, plus, minus, not not necessarily super precise.

And we think we can get there, not only because we are quite good, I would say, at structuring and origination or trading as well, algo trading, which we have in house, but also because we can risk manage. Because at some point, adding batteries to batteries to batteries, it's adding the same risk all all the way, and that cannot work. It's similar to renewables. You need to hedge your positions.

Otherwise, building, like, a long position in renewables or a long flex position at some point can really kick back effectively.

So say I'm gonna build this asset, right, and it's a twenty year asset, twenty year design life or twenty five year design life, how much of that would I wrap up with you guys in a agreement?

Yeah. It it it all depends when the battery starts. If the battery was to start today, I would say we could do up to ten years. That's not necessarily a problem for us, to be honest, because we have the portfolio behind that supports those needs effectively.

We can also do three to five years contract. That's really not a problem, and it all depends when the asset starts, I would say. The later the asset starts, the less years we can do, obviously, because at some point, it it comes to years which we don't know. We we have really no view on or no position or on sorry.

Or no liquidity in the market to hedge. So that's basically the defining factors of, like, how many years we would do effectively.

And I guess the decision that asset owners are gonna make is the optimizers would argue because they don't have the balance sheet that Engie has, but they would argue that their merchant capture would be higher because they have better technology. That's the pitch for an optimizer. Right?

That's the pitch because they have to, to be honest. I mean, we have very good optimizers. I I don't necessarily want to to say negative things because we are we are lucky in Germany. We are very capable optimizers. We work with these optimizers, help them on some contract as well.

How how do you how do you work with an optimizer? Don't you don't you come up against each other?

Not necessarily. I mean, it's not only the balance sheet that differentiates ourselves. It's the risk management tools, capabilities, and know how, basically. Those things they don't have.

Optimizers are good at optimizing. They are not good, and they cannot take risks because they cannot manage them, and they cannot onboard them because of their balance sheet. It's not only a balance sheet thing and to to manage risk. It's also like a risk management capabilities.

It's tooling and people. And that is much, much, much harder effectively than just optimizing in in a way. At the end of the day, you know, comparing performances from optimizers to utilities, we have been doing quite a lot of backtest here in my job and in my previous job as well. I hate to say it, but the whole it's not rocket science to optimize a battery at the end of the day.

Right? That's the real truth, and everybody will come to the Apphooks next week.

Concierge view.

Probably. Probably. Yes. But that that's actually the truth. I mean, there's one thing that you need to keep in mind is that, of course, as an optimizer, if you're not convincing enough that you can get the best revenues whatsoever in the market or that your margin is also the lowest, then you don't get any clients.

Right? So you need to be convincing, sometimes pretending for some, not for all, that's a good thing effectively, that you have the best revenues and that you can bring the best margins to to the clients. Effectively, if you were to come to someone like us, which are also, I mean, optimizing asset, we have an Algo desk, actually quite advanced in some years, we can bring the same revenues and probably even more. The reason behind is that we take risks.

That means that if I cannot do at least what the optimizers are doing, I might be bleeding money on my tolling effectively on my FPAs. Right? So that's the the the reason why we are equally good is not only because it's, you know, something that we do since years, but it's also because we effectively take risk. And the the only way I mean, one of the best ways to get better at something is effectively to have a risk somewhere.

If you have a c if you have, like, one hundred megawatts, of a fixed price agreement with someone in your portfolio, then you better be good at optimizing it behind because otherwise, you really, really make a loss. A loss, not only, like, less revenues, but a loss, like a really popular red number in your p and l. So that that's, I think, a key difference with the the optimized sensor. It's not only balance sheet, it's also risk management capabilities around them.

So when we work with them, it's to support them, like offering maybe sometimes flows, which they cannot because they don't have the balance sheets, and all the structuring capabilities to do a flow effectively. So we bring them, like, sometimes financial products that they can combine with the optimization. And I think, to be honest, there is a future for those for for those products because, I mean, optimizers are far better than, than, utilities when it comes to transparency, when it comes to be flexible with the clients, when it comes to having conversations sometimes with the clients in a much more frequent manner than what we would do.

We are not necessarily the best at this. Let's be very honest. Right? Risk management, they, however, cannot do.

So combining bay basically the two, capabilities, one's on the transparency side, the other one on risk management side is maybe a good, future proof solution for some clients at least.

Let's change lanes for a second and talk about the two big risks in most markets around the world, which is cannibalization risk. So there needs to be build out of renewables and solar to match the batteries in some sort of exchange rate, not one for one. But if you look at what's happening in Australia, for example, solar build out has pretty much stalled because it was over build out. And so if there's too much batteries built in Australia without the addition of some more solar, there is a number out there.

It's in double digits, but there's a number out there of gigawatts where you where batteries start to cannibalize each other, although they also cannibalize, you know, peaking plant and other things as well along the way. So we let's talk about cannibalization first. How do you think about that in Germany? And then I'm gonna ask you about saturation.

So cannibalization, what's the risk? The set the scene. It's the year two thousand twenty eight.

Mhmm. I'd say we in twenty twenty eight, we are still good to to to be honest. That's my personal view, that I that I'm sharing here. I would say cannibalization might happen, especially, I mean, you know, on some markets like intraday that that are still, you know, liquid and and and deep in Germany.

But at some point, if you start to have, like, a lot of batteries in there that are fighting effectively, like, for the same prices, especially intraday was the liquidity is lower than they had, of course, then those especially those extreme prices that we see often on LinkedIn effect effectively, they will disappear. LinkedIn prices? LinkedIn prices. No.

It's those are real prices, by the way. But still, like, those very extreme prices, which are a huge portion of the revenues of batteries, especially intraday revenues, but that that's where cannibalization will start to appear. I think cannibalization of batteries will not be as bad as saturation, which we will discuss in a minute maybe. And it will not be as bad as cannibalization of solar, for instance, because solar is really like one defined pattern, which is, you know, defined by the sun, and there's nothing you can do about it.

So that's that's where cannibalization really kicks in. For batteries, you can still steer the asset. That's an asset that makes money based on how much you steer it effectively. So you're still a bit less exposed to cannibalization, I would say.

So when does cannibalization start to be a problem then?

I think when when we have a lot of batteries and when the intraday prices that are, like, super high are being, like, you know, cannibalized by batteries. So if your if your neighbor has a battery, if they have a battery, if you want to get, like, those extreme five thousand euro per megawatt of price, maybe they get it before you do. And then you cannot catch these prices anymore. And And then effectively, that's that's where your revenues, especially intraday, might go a bit down.

I think the real cannibalization or saturation for me is really coming from the NC Life Services, to be honest. Just that the the it's obvious that the markets will go down on that one. FCR is a very, very small market, so primary, reserve. Six hundred megawatts, it's it's it's it's basically nothing, compared to day ahead and intraday.

And then AFR, I mean, I still believe that in the future, you will be able to make money on AFR energy, but all the products that are more capacity driven, so FCR and FR capacity, they have a history, first of all, of saturation. I mean, anyone that has been doing flex like we did, in the years two thousand eighteen in Germany remembers what, you know, what happened then, effectively.

And this might be, again, coming up, basically. So energy driven products like AFR Energy, Intraday, I think will be the future, to be honest, which is also something that is important when you design your battery. So one hour batteries, I think, anyway, in the past that everybody understood. But even two hours batteries might be becoming a bit more and more challenged effectively by by this, by this transition.

Alright. I'm gonna pull you up on something you talked about earlier, which is a FPA. Alright? Yeah.

Which I think is a is a power purchase agreement with a different name, but you can tell me I'm wrong. You're right. I'm wrong. Yeah.

Okay. Let's do that. What's an FPA? Why and why is it different to a PPA?

And why introduce this new acronym?

Because what you buy is flexibility. You don't buy power. You don't buy, renewable production. You buy flexibility.

You're buying the ability to get access to a flexible capacity and, effectively, the underlying product is not power or not only power, it's a spread, basically. So I I I think that this word FPA is actually quite good because it really insists on what you're buying. Some people buy or, like, do tolls without really knowing what they buy these days. That that's unfortunately the the case.

So, you know, you have clients and we see competitors are also coming up with term sheet that are PPAs, you know, term sheets. When you bring that to a battery, it doesn't work. It simply doesn't work. A PPA is something where you buy power and renewables certificates, of course, with some clauses.

It's still complex, nonstandard most of the time, the term sheet and long forms.

FPAs are even more complex because you have all the optimization rules and all the the physical aspects of the batteries that need to be properly represented into the the the term sheet and into the contract at some point. So that's why FPAs are for me like a term that's you know, might work. In the end, PPAs were there for power purchase agreement. FPAs are just there for flexibility purchase agreement.

So let's say you you sign, you sign a couple hundred megawatts for the battery, the one I mentioned earlier, in in Germany. What does that agreement look like? What's in there?

What are these what tools do you have legally or or contractually Yeah.

To wrap this thing up and make sure that that risk is represented and then transferred?

Yeah. So the and that's the job of a structure, basically. Originators and structure are are paid to effectively represent all those risks. So it could be market risk, of course. That's the key and the king of all risks, effectively.

Then you have all the regulatory risks that need to be represented. So when the tax system is changing, when the, know, the regulation for grid fees is is changing potentially one day. You have all the technical parameter risk, all the the, you know, the warranty terms that need to be represented properly into the the term sheet and into the contract. So what can you do with the batteries?

How much resting time do you have to do between two cycles? What's the upper limit? What's the under limit? What are the round trip efficiencies?

What are the degradation curve? And how do you measure that effectively over time? Because when you offer a fixed price, the fixed price is typically priced on some assumptions. So if the assumptions become true, on year one but not true anymore on year two or year five, then, of course, you have paid for something as a trader that is not there.

So you need to settle the difference. At the same time, it can also be a bonus, to be honest. Right? Some clients will perform better than than planned.

Round trip efficiency might be higher. Degradation might be lower than planned, which is great. And then that also need to be represented because the clients have been doing a better job at the end. So they need to be represented.

Those things are quite normal and quite common. Right? Because the for a quality project, what you have written in your supply of the equipment and the warranty, usually, there's some margins of there's margins of safety in there from the, you know, the commercial negotiations. Both sides, they they they there's bits of safety on top. And then when you run the asset, often it does a bit better than it says on paper. Right?

Correct. But you still don't want to pay the damages. And especially if you have a bank behind or if you have a trader that is offering you a toll, you would always prefer, at least that's what I see in the market currently, to be on the conservative side to avoid paying damages. You would much rather see, like, a realistic picture being sold to someone instead of, like, selling them dreams. So to say that will end up being penalties.

And that's So there's marginal safety on your side in the contracting as well.

Right? So you're you're doing it both both sides here.

But we we we give that back to the clients.

Let's be clear. Not everybody does. I find it fair to give that back to clients. Basically, when when you do an FPA, a fixed price FPA at least, we are taking the market risk for you against your performance on the technical side. So if you perform better than plan on the technical side, you should be attributed for this. If I'm performing better than the tolls, that's also, you know, that's also where I'm attributed.

So I think it's a good and sense like, if my availability is higher or my usable capacity is higher in the period or whatever, then we can share some more of that.

Correct.

I think I find it fair.

Yeah. Sounds fair to me.

But all those contracts, just to be clear, are also nonstandard.

That's something we have to do in we are really in a world of nonstandard contracts, so it's difficult to say that it should be the norm.

All the clients have different risk appetite. So some clients will not say, look, I I I don't want to have this bonus, but I want to have something else instead. And that's all the balance of the agreements that you need to be by finding one to the other effectively. And that's why standardization of those contracts, I think, is a bit of a myth, to be honest. A good portion can be standardized for sure, but not everything. We've seen this standardization dream for PPAs since, I think, ten years, you know.

In in wind, but you still got this.

It's still not there. Still pay a fortune to lawyers because it's complicated stuff. Yeah. Yeah. Alright. Let me ask you about a word that I've heard you mentioned before. So bubble.

Mhmm. Thoughts? The question is, are we in a bubble or not?

I I don't I don't have You have to interview yourself now and I just I just throw a word out.

That's how this podcast works now.

Yeah. Perfect. I've given up. Oh, perfect. So bubble, yes or no? I think that that's the key question.

I mean, when you look at five hundred gigawatts of gate connection requests, one could say yes. It's huge bubble, of course. At the same time, those numbers are not I mean, are to be get taken with a huge piece of salt.

There's not much skin in the game for many of those gigawatts in Germany. Right?

Exactly that. So it's a lot of ghost projects. In the past, it wasn't taking so much money to develop projects effectively, almost none. Now the rules are are going to change a bit like we've seen in the UK before. So it's not necessarily a big surprise. Germany is just following up basically, like, all the mature markets.

We are not yet in a bubble. I don't think so, but the question is, like, in twenty seven, twenty eight, when we start to have, like, a few gigawatts of battery, real numbers of gigawatts on the batteries, what happens to the revenues of NC line services? What happens to the revenues of intra day, especially the continuous intra day market, which is where we make most money at the moment currently with a battery? And that might be then the moment where we might be talking more about the bubble and decreasing revenues.

I don't think that we are yet in the in the bubble. I mean, the revenues that we still make on batteries are huge, and it's because there are not enough batteries. But the question is, like, when there will be a lot of batteries, if all the pipeline that all the the developers are materializing? I mean, if you don't have a gigawatt in your pipeline, you're not a good developer these days.

Then we will see if if we were or not in the bubble. I think future will tell, to be honest.

You'd think that there were lessons learned from other markets. Right? And, I don't know. That's that's literally me saying this time it's different, which I know is a bit stupid. No.

But no. No. It's it's actually very fair what you say because we see I mean, we have a lot of clients. Right? We have a lot of clients on the asset development side and investment side. What we definitely observe is a difference between the German only, so to say, clients and the one that are coming from the UK. The one that are coming from the UK have made their experiences, you know.

That's so cool.

And they are much more in in terms of risk management, not not necessarily on the risk, but on the risk management side, they are aware. Right? It doesn't mean that they will fully hedge, but at least they are aware of this risk. They are aware that it needs to be looked at.

And then they can take conscious, non biased decision whether or not to hedge or to hedge partially, maybe to hedge a few asset or at portfolio levels. But at least they know, and we see that very, very clearly in the conversations that they have. Right? That we have story with them.

So that's I think lessons learned have been taken, have been taken. I think for some, I think the people that probably will suffer the most, if I'm right, saying that the revenue will go down, are the ones that have started in Germany and that have not necessarily been looking at the risk management topics.

Alright. So I know that one of the things that's close to your heart is this word bankable.

Mhmm.

Right?

We talked about it over a beer last night. And so what's your thesis on battery assets and whether they are bankable now or whether they what they need to do or the market needs to do to make them bankable assets? And I know you come from a risk management perspective.

Yeah. I mean, at the end of the day, risk management is something which is very tailor made to the to the profile of investors. So bankable assets might be a different definition if you ask, like, a lending bank or if you ask, like, a pure equity investor or if you ask a utility or an asset developer, basically. So I think there's all shades of grays in terms of what bankability means.

Where I struggle a bit with the term bankable, it's that for me, something which is bankable should be something which is robust. At least that's what we've seen in renewables, space, so to say, and in the past as well with conventional asset, effectively. So bankable would, for me, in my definition, means something can really rely on, something which is there and will stay the same. So that means at least a portion of fixed price.

Anything which is not a fixed price and just a forecast effectively is worth a forecast effectively. We know that forecasters are having a tough job. To be honest, it's a very it's almost an impossible job, so it's it's a bit easy to be tough on them. But at the same time, I think you need to realize that the forecast is changing, basically.

Right? Every quarter, you get your new curve from all the typical consultants, and then you will realize each every quarter whether or not the curve was really bankable. That's a bit the definition that's, that that's where a bit where I struggle, sorry, on the word bankability.

Well, I would challenge that.

So I guess the first thing to say is that I I am naturally biased because we do forecasting and are launching our general forecast very soon. And it's been and as with all markets that we enter, for I mean, for us, as Modo, we come up against, you know, the the incumbents, right, who we have to work ten times harder than the incumbents because we are naturally a much smaller company. And so for us to become bankable in in Europe and the UK and be approved for debt raises and, hundreds of millions of assets, in in asset CapEx and whatnot. That's taken us probably about three years to get there.

And that process, what we would define bankability, would be hundreds of hours with credit committees in banks and and transparency and talking through our fundamentals model. So I think that is a real thing because you really have to to to get approved and get assets financed using your curves, having done it and having gone through it, is one hell of a process. And so I take my hat off to the companies that went before us as well-to-do that too. But what I would challenge about what you're saying is for the job of a forecaster what what is our job as a forecaster?

Our our job is to build a picture of the future with some judgment from our view of the market in an intellectually honest way and in our view at Modo to do it in a transparent and demonstrate governance in the way that we produce and release these forecasts. So if we can do all those things, we're happy. However, when you're building a fundamentals model, which is essentially a you know, it's a long time horizon, twenty, thirty years, then I don't think you can I'm aware that this sounds like forecaster explaining forecast a forecast or excuse. Right?

But if you can look past that, I don't think you can judge a for fundamentals model on which is trying to predict a couple of things. It's trying to predict power prices and also volatility in a kind of twenty, thirty year horizon. I don't think you can judge that on a quarterly basis for for now because if actually, if you were trying to see what happened next quarter, you would take a different modeling approach to a fundamentals model.

Yeah. Yeah. Probably. So I think for me, the keyword is actually in what you say is bias, effectively.

I think there's good and bad in consulting. Right? And I I I I said, I think their job is impossible in terms of forecasting. Right?

They are first for sure selling something wrong, and they know that, their clients know that. Everybody knows that, but that's that's normal. They cannot be right. Of course, for twenty to thirty years, it's impossible.

Right? I think that the challenge that we observe with these, fundamental providers is that they are not, for some, not all, looking enough at the market. So what's the real truth that is stayed by the market, which is the best picture that you have today in terms of revenues. Right?

If you look at that, then you end up with different forecasts effectively, and you should be in a position to update your view, change it according to what the real truth is. The difficulty is that if you start with a forecast which is, like, based on a view, which is yours and or or, like, in the one of someone else, and you come to to trading or to to to people like this that really have skin in the game and suddenly want to take a position in the market, they will not be able to tell you, look, that's my belief in the future. That is basically, you know, what I see in the market. So the

fair value of a battery is often different than the fundamental view of the battery. Alright.

I wanna give plenty of time for your contrarian view. So tell me, is there anything you want to plug from ENGIE or you and your team?

What I'm quite proud of is the the team that we have effectively and the fact that we were, like, frontrunners in signing the first zoning agreement in Germany and in continental Europe last year, effectively, for more than one hundred megawatts of battery for seven years, which we are super proud of. Thank you. It shows how the how much the commitment of ENGIE is effectively to to make this piece of, like, a battery and short term flexibility advance to to benefit for the energy transition. It's really what drives us, at the end.

I think, globally speaking, we are super happy to talk to any clients that are in need of risk management capabilities, be it a toll, a partial toll, you know, like, swaps that, we also offer. We are also very innovative and, you know, each and every month thinking of new ideas on how to match the client's need versus what we can offer. And we have the freedom to design what we what we want in terms of product and these nonstandard origination business effectively that we do. So, yeah, we have a huge appetite as well.

And, if you if your clients have needs, we're happy to to to accommodate.

Okay. Well, if you're listening to this and you wanna get in touch with Martin, we're gonna put some links, to the team at NG and to you personally in the show notes. Alright. Now let's do your contrarian view or views. So what do you believe that not a lot of other people believe?

I think what what I personally believe is that there's a lot of bias of information in the market, at the moment for various players. One of them could be optimizers that basically need to paint a nice story for for the future. The other one might be consulting firms or forecast providers. I think there's lots of what do you want to see or what do you want to hear, and I will paint it for you at the moment a bit in the market.

We've seen that as well in the past, and that's something which I think needs, to to be solved. So maybe by people like you that would, you know, dare to say sometimes the painful truth to the clients or the painful risks that are coming potentially their way. I think that's something that not a lot of people believe in too. At least, you know, we are often accused as traders who said to steal, money from from from clients.

I would completely disagree with that. I think we have a view on the market, which is the fair value of what the market themselves thinks based on the future prices, based on also on our curves, to be honest. And we are willing to put money on the table, skinning the game based on our beliefs, and that's where it stops. So the price that we typically give, and that's maybe the second contrary view, is a fair price.

That's the price that includes taking away all the risks. So traders are not people that steal anyone. If it's they are the ones that take risks away. And either the risks are managed and then, yes, of course, it's priced in, or you as an owner carry the risk fully.

And then the risk might be coming your way. The worst part being that you probably don't have any means to to to manage data. We have seen that in the UK with some investors that's suffered maybe not losses, but, like, huge disappointments that had then to turn to traders to hedge, which is probably a worse moment in time to to to to hedge effectively. You would rather want to hedge when prices are high, which is maybe I I can understand that.

It's maybe counterintuitive for some investment committees, but you definitely don't want to come to traders when the market has gone down. That's the worst moment ever to lock prices effectively.

I'm gonna use this opportunity to do a bit of a plug for Modo, actually, which is that one of the things I talk to the team about a lot and it's in our DNA is that we one of the businesses we really aspire to and respect is S and P. And one of the things we say a lot within the company is that we want to be trusted even when the the answers aren't easy. And so if the market's down twenty percent, if the Nasdaq's down twenty percent or the S and P five hundred's down, for example, twenty percent, then you know you can S and P will tell you it's down twenty percent. It is the ground truth.

And I agree with you. I think that, it's just part of the cycle of these investment cycles that there is there is some bias introduced. I don't think anyone's a bad actor in this. It's just part of a load of cash going somewhere into a market and and a great deal of opinion.

And what we what we specialize in is on top of doing the fundamentals modeling, which is a it's an economical view of the future. There's a lot of judgment that we think is value add that we we put on top, and then we that judgment is seeded in how assets are really making money, which is why we spend so much time doing benchmarking.

That in our view, that's that's that's something that we can stand behind and we think is an intellectually honest way to approach these problems.

But, yeah, there are there are there are moral hazards, of course, with someone who takes market positions also being the the adviser to the market. And you you you don't have to be a genius to figure that one out, even though I don't think anything is there's nothing underhand happening here. It is just a part a part of life. So what do you think happens next then?

Now we we will see, what happens next. I think we will see more and more batteries, coming up in Germany.

What people also sometimes need to to take into account in Germany is that, I mean, to make money, a battery doesn't only need spreads. That that's often what I hear. Right? That's maybe the last controversial view that I have. It's like, you know, there will always be volatility.

Maybe, maybe not, by the way. But to make money, basically, batteries need a few thing. They need volatility, but volatility around a certain price level. Right?

So if prices go down at equal volatility, you make less money. The shape of the price is extremely important. Everybody knows about this duck curve. Right?

So if the duck curve flattens and becomes, I don't know which animal, then in the future, we'll see. Yeah. Maybe.

Then, I mean, the day ahead part, especially, of the batteries will suffer huge times. Ancillary services, of course, we've talked we've we've talked a lot about it. That that's clear. That's a huge component. And the missing child, which is often forgotten in all the discussions, for good or bad reasons, I don't know, is liquidity.

And liquidity is the ability to find buyers and sellers in front of your position. So if you desire to sell or buy as an algo trader, basically, if you find no one in front of you, then you might not be able to close your position or not at the price that you wanted. And that is, of course, where, saturation or cannibalization of intraday prices might come in. And this is something which is to be monitored because, effectively, batteries being super, super fast, they can catch or the algos behind them can catch good prices, but up to the amount of liquidity which is into the market.

So if liquidity goes down, effectively, then prices or avenues, so to say, of intraday and maybe other markets will go down. So that's maybe the last controversial view. Batteries do not only need volatility to make money. Absolutely not.

All those other factors, which are all surrounded and impacted by market risk, so things moving in the market, are important factors effectively.

But I guess the reason why if I'm gonna counter that, the reason why and this isn't my position, just trying to think you know, play steel man this argument. I think the reason why volatility is is mentioned so much is because so the other element that that you're talking about, so liquidity and a and a baseload price to to have spreads around, are sort of baked into the market if you have a yeah. I think that's assumed that those things are gonna be there. So tell me another way. Right? So what what's the future where liquidity dries up at the intraday market in Germany, for example?

It could be very simple. If the if the scaling of of batteries go super, super fast, then you will have a lot of people competing for the same price for a very small product. After all, like, you know, the intraday continuous market is made of ninety six quarter of an hours, which are not a huge products like the day ahead, which are, like, more you know, huge volumes are coming into into the into the market at the same time on production and consumption side. So for for those smaller products, I would say that the liquidity will be smaller.

That's it. So the ability to really close your position when you see a good price is gonna be much more complex going forward. And if you combine this effectively to NCI services going down or saturating, let's see where it all ends up, plus then intraday being more challenging, I would say, not necessarily impossible, but more challenging, then that leads you to being very good at day ahead effectively. And that's where the utilities will be, that's also my view, much, much, much better than others because that's what they do since decades.

So knowing the market and, like, how to really bid into this market is today not necessarily like a must have, I would say, to to make money on on batteries As long as you can do a decent forecast on on satellite services and a decent algo, speed of trade and execution in twin today whilst, of course, respecting the technical parameters of the batteries, which is super important to be able to be back to back versus your market positions, then you will be good. But in the future, wholesale market will take a bigger role and especially the day ahead part. That's at least what I think.

Alright, Martin. We could have gone on much, much longer. I wanna say a huge thank you for coming and joining us in London. It's been a pleasure to have you and, of course, to see you at the cricket last night. And, next time we'll have you on, we'll just do all Contrera interviews.

Perfect. Sounds like a great plan. Thanks so much for the invitation for cricket last night as well. That was great. And looking forward to the next one!

Alright, thank you!

Thank you!