With Laurent's segle end from London and Gerard read from Berlin.
This is redefining energy today.
On redefining energy, what are we going to do, Lauren, Oh, it's a fascinating subject. We're going to talk about balancing on settlement code. But first of all, from my partner.
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Back to the show, and for those who have a clue what that is, we're talking about the power markets.
Yeah, exactly, and people talk about the all the time, but at some point and where not, at some point every day there is a central organization organize the payments exactly.
Yeah, somebody has to settle everything and make sure that you get the money that you do and that you pay the money that you're meant to pay.
And so that function is centralized. In most of the big system operator, it is done by the system operator. But as usual Great Britain has a bit of a very special system where a lot of those functions have been split into different companies. So you're going to hear a lot of acronyms. You're gonna hear a lot of different organizations. So let's try to list them for you. And this is relatively new because there's been a big
reform two years ago. So we used to have something called National Grid, and National Grid, which had been privatized a long time ago, used to be the operator of the system, owning the wires, organizing the settlement of trades, and it has been split into different organizations. You still have National Grid that owns the infrastructure. But then now you're going to hear about nisso so jero, what's nisso.
Well, that's what's called an independent system operator. Yeah, And an independent system operator is there really to have an overview of the whole system and also also to be separate from the ownership of the assets. And what that means is, you know, if you can imagine if you're running a grid, it could well be that you sort
of say, you're incentivized oftentimes just to build grid. So the idea with having an independent system operator is you are independent and can make recommendations and decisions for the good of the whole system.
Which itself is supervised by your body call of GENA. That's the government and then there is the police. There is a policy you're going to hear a lot about in the UK. It's called CP thirty and chard. CP thirty stands for.
Stands for Clean Power by twenty thirty.
Which is the UK strategic plan to decarbonize and of course gets a great ambition, but it's pretty difficult. You
need investment, wires and so on. And one of the means is to develop more vulnerable and you're going to hear also AR seven and AR seven is the auction round number seven, which gives a CFD contract for difference, so the investors and mostly off Shot Wind will get a fixed price and the government will set up with the market price through Alexon, which is the company we are interviewing now.
And I suppose really just to give you a little bit more in depth on what we've done, is we've invited Peter Stanley who is the CEO of Alexan to come on the show to give us really more background and to help us really understand power market.
Alexon has been independent from National Grid for I would say two years. It's a non for profit and it is owned by the thirteen largest power company in GB. So it's really a very special type of organization. It's not owned by the government, it's owned by the main market actors.
Well, let's bring them on the show.
Peter, welcome the show.
Well, thank you for having me so.
Peter, you're the CEO of alexan independent company that is the accountant and the referee of the power market in GB. Can you give us an overview of exactly who intervened in the power market and what's your role in it?
As you say, we're an independent manager of wholesale market arrangements in the GB market, and in practice, what that means is that we set the rules for how participants in that market trade and how we deal with either short trade or long trading in relation to either long term power purchase agreements or in today trading. So take the situation where a supplier purchases enough energy for their retail customers but on the day if they are short and the NISSO in the UK has then to balance
in real time. There's a cost to that, and what Alexon does is it keeps track of those contracted positions, It takes account of the cost of the NISSO balancing in real time, and then it redistributes those costs according to who was short who was long, in order to provide an incentive for the partitionant in the market to self balance, which of course never happens closer than others.
But we keep track of all those transactions and then handle all the payments on a daily basis to generators as suppliers.
Peter, can I maybe just jump in and just ask could you expand there on this balancing market and how it works on why it's really critical in every power market.
As you've made reference to, the balancing mechanism is the means by which need say both trades in terms of its needs for energy in real time. But there are also many other services that it needs to provide in order to keep the system stable. So there are a number of products that it's trading beyond just balancing. Typically we would call those ancillary services. So it's looking at things like inertia. It's looking at dealing with constraints on
the network. So it looks at how it deals with constraints and certainment and makes the appropriate payments and then brings on power elsewhere within the system in order to make sure that the system is not only balanced, but the power is coming across the network taking account of those constraints. So the sort of cost of that within that balancing mechanism is what Alexon then redistributes in order that supplies and generator is true up against demand and supply.
So every twenty four hours, you close the book and you say this guy or that guy our much And it's a bit of a clearing function. Is it just the accounting or you move the cash as well.
We do the accounting and we move the cash. So we deal with all the cash imbalances across the day, but on a thirty minute basis, So we're dealing with the calculation of that position on a forty eight settlement periods within the day. We move the money on a daily basis based on forty eight positions.
How many companies are in your system right now, and maybe compared to a few years.
Ago, companies have remained pretty stable. As you know, back in twenty twenty two when we had the energy crisis as a result of the invasion of Ukraine, where we saw gas prices significantly spike. We did see about twenty suppliers exit the market back at that point, but it's pro remained pretty stable at about six hundred. What we have seen over the last few years is an increase
in cost of balancing the network. And those imbalanced charges that we were distributing were totally about one point seven billion pound perannum. We now see that rise to about eight billion pounds perannum, and because of catailment costs, that's forecast to increase significantly over the next five to ten years unless there is a significant amount of infrastructure investment to overcome those network constraints.
So Peter, maybe you could talk a little bit about that. How do you incentivize those infrastructure investments.
The business case is driven by the fact that investment in infrastructure will reduce balancing costs. All of those costs balancing costs, but also increasingly network build and also renewal subsidies are being placed back onto wholesale price of electricity and therefore is becoming a more dominant factor in the total cost of energy compared with the past, where that would probably driven much more largely by the commodity cost itself.
So if you take the situation of large scale wind generation in gbmarket, now they're under being by the contract for different scheme where the you're effectively getting a stripe price. Interesting Alexon also manages that scheme on behalf of the Low Carbon Contract Company, which is a government organization looking at levees and subsidies for both CFD market and also the capacity market. So we handle those schemes and do all the calculations for the transactions that are required there
as well. So in a situation with wind generation or as the zero cost of fuel, but the dominant cost there is which is placed back into the wholesale price, is coming from the strike price agreed through the various RAMS auctions and the CFD schemes themselves. So increasingly sort of a complicated picture if you like, in terms of
what's driving wholesale prices. Still marginal cost of gas for many of the settlement periods is the dominant factor, but so over time this is now switching to be driven by significant investment in infrastructure and other levee schemes.
You're really tracking all those balancing issues, which, as you said, is going to I fold in the past years. But there's been a lot of investment into batteries, and we hear also that the battery manager complained that the system does not really know what's going on, so they are not called where they should be. I mean, there's a lot of debate going on as of today. Have you seen the impact of those batteries on balancing coos are not really.
As you rightly point out, the number of assets now including battery storage, being attached to often times the local distribution networks creates challenges around visibility and number one, but also many many more smaller assets now are part of the options for balancing, and that creates challenges around the ability to dispatch them in order to get the most economic outcome. So ANISSO has been implementing something called the Open Balancing Platform, which is automating the way it stacks
assets in order to create balancing. There has been some criticism I think in the past that oftentimes batteries are being overlooked for more conventional generation options, and I think NISSO always has to balance security supply and risk of
the actions that it takes. There's also in some part of cultural change that's happening in the TB market at the moment, which is getting used to the idea that big levers such as interconnectors or large scale generators attached to the transition network may not necessarily always be the
optimal solution for how the system's balanced. So I think that's a very life transition that we're going through at the moment in terms of understanding how you can achieve the same outcomes but with much more granular, small scale assets. So increasingly we're seeing aggregated electric vehicles participating now in the capacity market compared with in the past it would
have been dominated by gas fire Dean. That's true of increasingly granular and more small scale assets participating now connected into the tribution networks creates a much more complex challenge I think for system operators to dispatch that in an optimal way.
One of the things I do like about the UK market is the fact that you've got a huge amount of innovation there. So it was from the European perspective, it was really the first to go and put large scale batteries in and now I thought was very interesting what you said is that we're now looking at virtual power plants in and around EV charging. So maybe expand on that and talk a little bit about how you see that developing then in the next few years.
You're right.
I mean, if you look at the Clean Power twenty thirty targets in GB market, which is intended to largely decarbonize the system in the next five years, flexibility and flexible assets are going to key heart in that. The first move is there are, as you say, aggregated EV to grid as part of a solution for that, but we're also seeing separate side of battery combinations that are available to provide the sort of flexibility you need to
manage stability on the grid. As a result, a lot of high renewable penetration in GB market that's set to grow up the figures of the moments that makes up about EV's about two point three percent at the moment. That's set to grow significantly, and of course one of the keys to that growth is to ensure the consumers feel the benefit of providing those flexible services in their pocket.
And at the moment, a lot of that is driven by a flexible time of use tariffs, but increasingly that will need to reflect the total system cost or the system value of having access to those evs or that flexibility. Yes, it's set to grow, and one of the key enables for that has to be smart metering and the ability to be able to sort of meter and take account of those transactions at the half hour level. Only now we introducing through a half hourly settlement the ability to
see meters domestic meters at the half hourly level. So getting visibility of that and being able to understand and trup those transactions is going to be key to ensuring that the money flows are correct. So it's quite a complex picture. But going back to CP twenty thirty, that set to increase some flexibility is by about fivefold. So I think at the moment we've got about seven gigawats
of battery storage on the system. That needs to increase to twenty five to twenty seven gigawats by twenty thirty.
Earlier this year there was the conclusion of a huge work which was called REMA. Now for the non British listener, it's the Review of Electricity Market Arrangement, which came out with a certain decisions, decisions to implement some things and decisions not to implement others. Proposed reform like nodle pricing. What's your assessment of the result, and especially if we compare with other countries.
REAMA has been ongoing now for many years across quite an ambitious scope of that review, looking at all aspects of the whole, whole set electricity market. The course of the review, it's looked at the fundamental reforms in relation to each aspect of that the last of which, as you say, was looking at whether the GB market should go down nodal or even zonal markets as opposed to sticking with its historic national pricing.
Last year ruled.
Out nodal pricing, and I think a lot of that was driven by the need for stability. So looking at the CP twenty thirty targets, it requires significant investment in both infrastructure and also renewable generation, I think there was some real concern that a fundamental shift in those markets could create sufficient uncertainty that that investment wouldn't follow. The timeline also for implementing that would be well in excess of twenty thirty, So all ways round, it was going
to be a very difficult decision to take. Having said that retaining a national market doesn't necessarily mean that that
won't incur further reform. Government now is working with industry around what they call the review of National Pricing, with the intent that it can bring about many of the benefits that zono markets would have brought without the uncertainty and disruption to investment, including looking at tinuous charging, So that's looking at network use of system charging and how to take account of the constraints I talked about earlier, how to properly incentivize generation to be connecting at the
right place in the network where there's sufficient capacity already, which was one of the key building blocks of zono markets. So that, coupled with nisso's own spatial planning role, now means that through national pricing you can still get some
of those benefits. In other words, sit the renewables where they need to be on the network in order to optimize network investment, and also looking at things like shorter settlement periods to sharpen wholesale market prices, and particularly to give much greater visibility into flexibility actions so that they can be settled. Because clearly, even though forty eight to
thirty minute blocks is reasonably granular. The actions we're talking about on the network are very in sub thirty minutes, and therefore if you're providing freakany response services from your EV then you need to be rewarded for the actions within that thirty minute period. So there's a lot still to go on under the banner of what was now reform of national pricing. So over the next few years we should see continued reform, but without necessarily the disruption
to the investment required. Over the next few years.
The first of October continued to past fifteen minutes settlement compared to an hour, so everything has been multiplied by four. Have you started to see impact of that reform?
So I don't think we've seen that impact in gb markets as a result of the European reform. Going back to pre Brexit, we were always set to be on that same trajectory, so under what was called European harmonization. I think back in twenty twenty we were looking at harmonizing to fifteen minute settlement as well. As you know, the Australians have already moved to fifteen and five minute settlement, and we're keeping a very close eye on how that's
worked for them. We've built the systems within Alexon to cope with much shorter settlement period so that we can scale for that when it comes in, and we would assess that we are going down a very similar trajectory. But there's still the business case to look at across the industry to understand exactly where the benefits of that will fall.
Peter, So, surely the benefits are pretty simple. What you've got is you've just got the market now that basically the market working as best as can down to that gate closure of fifteen minutes, which means lots of competition to how would I say, you know, removing efficiencies.
The benefits are clear. I think what's not clear at the moment is the cost of the transition to that within the GB market. And so my mi ndstanding is that the business case that was done was some time ago and so there will need to be a refresh
of that. But yeah, from a system perspective, we clearly see the benefit of sharpening those wholesale market signals and also our ability then to understand what's happening at a sub thirty minute level in order to trie up those transactions, particularly from flexibility from balancing in that shorter time frame.
Peter, maybe you talk a little bit about how do we incentivize in particularly renewable build out, but also other forms of generation inclusive batteries going forward.
That in the GB market has been substantially underpinned for many years now through contracts of different scheme and also the capacity market, so both doing slightly different things. Capacity market providing confidence that capacity will be there for generation that the NISSO can be can rely on in particular areas of or times of system stress. But in terms of long term investment signals in renewables, the contract for
different scheme is really critical in that. So that's providing guaranteed strike price the energy price volatility that we might see in order that that decisions can be taken around return on capital over the duration of those assets. And what we're seeing is an extension of the CFD now out to twenty year contracts, which is really sort of underpinning the capital investment needed to build an undercertainty required
to build those renewables. We're also seeing very similar games now with nuclear, so size we'll see is being underpinned by what we call the regulatory asset base, which is another lowy scheme which elects on runs on behalf of the local contracts company. So again that's guaranteeing that in undertaking sizeable investment in nuclear, that the return on capital is going to be achieved, so reducing the cost of capital for those investments.
Basically, what you're saying is that the market per se does not provide signals for investment, and that whether it's offshore wind so it's going to be CfDS, nuclear is going to be what I call a blank check, let's face it. And then for a lot of long duration here as you storage or interconnectors who are into cap and floor regimes. So in fact, the government intervenes indirectly in the investment in any new type of capacity. Is it the correct understanding.
Yeah, in conjunction with with a NISO, Yeah, sending the right signals to ensure that the right investments are made in the right sorts of renewable technology. You rightly, it's not just wind generation, so that's offshore wind generation, onshore wind generation, nascent technologies like a floating offshore wind and long term storage. So whether that be investment in longer
term battery technology or whether that's in from hydro. Yeah, the mix of that is now being determined through the auction processes, the next one of which is AR seven and right, prices will be agreed across those different technologies in order to give certainty on return and investment and reduce the cost of capital.
I love pumpeirol and I'm sure you know a few can be done in Scotland. But let's face it, with the pace of development of batteries and the cost going down like bananas bananas, Because I started investing in batteries two years ago. Now I see prices divided by four in two years, and I can tell you when I started looking into batteries, it's okay, one hour battery, then two, then four and eight, And it means for me, the longertion energy starage is like an ice bag on the
tropical sea. It's just gonna melt away because cleture my own battery can take up to twelve hours, you know, without any problem. So the question is I understand the long term policy of governments, but the arrival of batteries is gonna put us certain number of supposedly future of technology to be obsolete. How do you give sufficient flexibility in those long term plans to accommodate technological innovation, which is really difficult question.
Now it is a very different question, and we see the same with solar. So you know, solar is also becoming way more efficient. Prices are plummeting for installation of large scale solar and the combination of that with batches and the ability to, as you say, increasingly use batches for longer term storage. That innovation in the technology will disrupt and it does raise questions around long term commitment to underpinning subsidy schemes which will effectively set the price
of that for many years to come. At the same time, you're say much greater innovation and reduction in.
Pricing, Peter, I just I'm going to follow on from Luran's comment. Just if I grow on being in batteries for quite a while, and if I just went back eight nine years ago, we were talking about batteries for ten minutes. Well, the latest I've heard now and I'm just back from a battery conference the six hour batteries, right, So it's it's like the use case is just explode.
It's not long just even the pricing. It's the use case as exposed as well, right, because of those price reductions as well, which and I go along with Ron, it's a really game changer.
No, agreed, because you say, quite right, the use case is changing, and there was a big gap I think when you're looking at batteries providing a short term only there was a big gap, particularly around the intermittency for with such a dominant generation on the GB network, such as wind, where you get a low wind cold spell and you've got a big problem because you've got a
big gap to fill largely historically through intercollectors. Now, as you say that, that is a game change, and there's a long term storage coming well, longer term storage coming from batteries, and as you really say that, the rate of innovation at battery technology is also a game changer.
Peter.
Really, just in terms of wrapping up, I think one thing we didn't talk about was AI and digitalizations. Really, you know, just give us a review on how AI and particular AI has got to change the whole power markets and trading environment. In the future.
Data and digitalization is going to be key. We're talking about an energy system that's going to have millions of assets connected undertaking hundreds of thousands of transactions, which is beyond the way that historically the system operators both distribution level and national level have been able to manage balancing
on the grid maintaining stability of supply. The only way to do that in reality is to have much more highly automated systems that are managing those transactions, and clearly the role of AI is going to need to play a part. I guess the challenge culturally is how you effectively see control to AI when historically that's been done with people at control centers working twenty four to seven to ensure that that system is balanced. But it's going to become highly complex in terms of how the system
is balanced. It's much more Grindal the Peter.
We're kind of glad that competent teams like yours are in charge of the system, because not only we need reliable, affordable, but we need to work the fact that ALEXN is doing such a crucial role, which is not really perceived. You know, when everything works, everything is normal, and it's when there's a glitch that all of a sudden people realize, you know, something missing, So you're kind of the subbaress of the energy system. If I may say so, thank
you very much for coming on the show. Thank you, Thanks Peter, great having you well job. People like when I sing, people like when I bentter. But unfortunately you've got some episode which are a bit technical. And what did you use? Say it?
Because I use the word boring, but I don't know if that's appropriate.
I know, I mean it's a complex topic.
Ron and I listen. I think you and me have a good understanding of this, but each country is slightly different, and it really ends up with a whole part of technical words and acronyms that when you do listen to it you sort of go, what are they actually talking about?
Right? Yeah, But at the end of the day, it's the old pipe of that, the old pipe of money every day between six hundred parties, retailers and so on. I can understand some who used to be very vertically integrated. You know, it was all one and fine, there was one bio, one cellar and so on. But in very
few examples monopoly have proven efficient for the consumer. And where you see monopoly is where you have an asset base which is extremely capexivy, so you tend to seemilarpoli where you have large hydro fleets or large nuclear fleets. But if not, the market is better organized with a multitude of actors, biags more and so on.
And yeah, and in the market like UK which has massive amounts of sort of wind and a huge band of actors that own assets in the system, right and don't forget massive amounts of batteries and this, that and the other thing, the market approach really works well.
To our listeners. Sometimes we do technical episodes which are interesting in the sense that it's easy to talk about the future two fifty you know, YadA, YadA, YadA. But at some point you've got guys like Peter who are in the weeds every day, every day, every day to make sure that the hundreds of millions or billions are being exchanged so that somehow the system lives.
Yeah, and actually we take it totally for granted around because at the end of the day, we assume that the money that we're old hits my bank account and vice versa. Somebody has to go and do that. At the background conclusion, look, power markets are critical for actually ensuring that capital is deployed in the right areas. Number
one and number two. It's also critical for ensuring in this world of intermittent renewables that you actually can ensure that they are as efficiently and cost effectively as possible integrated into the energy system, the wider energy system.
Chig, you're so wise. It's a pleasure to do the podcast with you. Okay, I took to you next week. Let's see you next week.
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