With Laurent's segal end from London and Gerard read from Berlin.
This is redefining energy Today. On redefining energy, we're going to talk about power trading, aren't we go on?
Yes, but under the specific angles of hedge funds and algos inside power trading. But first of well, from our partner, A.
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Back to the show, which of course are radically changing the way we actually buy and sell power on a wholesale markets.
Right, yeah, exactly. For the past two decades, renewable energy investment was viewed as an infrastructure play, so it means you add pension funds, long term capital seeking, predictable most of the time, government back cash flows and now that the subsidies are phasing out investors in honorable get an increased exposure to wholesale prices the volatility. They are freaking out about the stability of the cash flow, and here there's a solution which.
Is emerging exactly and a large part of accidata is actually also optimization of what I would call flexibility.
So we brought amani Jas who's managing director of a startup in Germany called flex Power. And the very interesting thing is that they were purchased by none other than Citadel with the Global Hedge Fund. So you see how by operating at the intersection of short term power reading and butt optimization, you start building some long term position. It's absolutely fascinating.
Well, let's bring him on the show, Amnie. It's really great to have you on the show. Thanks for having me.
When I'm an annoying your coming, Lio Bimbo called me and say, I'm so sad that how Many left our company for you to go, but I'm so proud of what he has achieved. Your story is remarkable. Probably it starts even before your days at Eon. It starts at Next half work. How Many explained what was going on there.
I started trading with Next Craftbacker at around twenty and fifteen, and that was still at a time where renewables played a role, but they didn't significantly move the market. And at next Calfbacker, we had an amazing story and it was a great company, and we became Germany's largest trader of commercial PV and also had the largest biogas pot. So we learned a lot about short term power trading and the growth of renewables and what it does to prices and what it does to volatility and build out.
I think one of Europe's best trading desks, obviously with a focus on Germany with our assets, but we also moved prop trading all across Europe and with the biogas plans. We also had a lot of experience in AFARR, which is nowadays becoming more and more important when when you think about battery optimization. And then I left the company
a little before COVID happened. I started up a trading desk at a company called prior Gen for short term trading in Germany, and then I went to Eon, became commercial lead of power and gas and was trading at Eon during the energy crisis. I doubt that Leo Bilmbaum knows my name. But in that time, obviously the market was very exciting and I learned about well how corporate structures work, which are very different than what I saw
at next Claffwaku, which is a more entrepreneurial company. And in the meantime, Next Craftwaki got bought up by Shell and some of my former colleagues, you know, when I was super happy with the compliance that came in. And also next Craftwerk is green energy transition company, and I think it was difficult for the culture that you were suddenly making money for an oil major. So they also decided to jump ship. And I got a call from these guys asking, hey, should we start doing this on
our own? And I was very excited about this. So we had a great start with our investors from CFP Energy. They are a London based commodity trader and risk manager, and they gave us a helping hand in terms of starting capital to just you know, run the business, but probably more importantly for collateral. Then in the middle of the energy crisis, we went out and said we can do this on our own. It was very difficult to get a portfolio because people were worried about different things
than giving four guys a renewable portfolio. And yeah, and then we grew this business from ninety megawats to two gigawards of WIM solar and batteries and started it up from there.
You go out, you're a bunch of friends and your find sponsor. We know the SIVE Partner's Guide. They've been around for quite some time. They have an excellent res trading background. But you need to build systems because it's all about systems and data. So how fast can you ramp up your systems?
Systems is one part. The second part is really getting a portfolio, which is difficult when nobody knows you're in the market. And when we were starting, I always refuse to call us a startup because we had a very clear idea of what we wanted to build. We are engaging in renewable physical power trading. So you need a portfolio. You need a virtual power plant, which we contracted out.
We didn't build us ourselves. You need tech people that understand the renewable energy market and the data flows that come with it. You need to be able to communicate with DSOs and with tsos because this is physical trading so you send new schedules every fifteen minutes. And when I look back at the business plan that we presented originally, is actually quite remarkable because we really just checked off
these lists and we got operational within six months. So you need to register balancing groups, you need to register with the exchange, you need to get a portfolio. So we were super fast on this because we had a good idea of where we wanted to go and what we needed to do, and within six months we were trading. Obviously, the systems were glued together and not very sophisticated yet, and over the last three years we build operations that
are partially fully running automated with algorithms. We have a trading desk, or we have a company of fifty five people, twenty four to seven operations around fifty people and Hamburg five people in New Zealand to cover the night shifts. So it's really about having a plan and knowing where you want to go and finding the right people and recruiting the right people to do this. That's part number one.
That's just building a short term power business. But I think where vision came in is during the crisis, we saw the front gear trading at eight hundred euros and next GAFAC actually had a large portfolio of biogas and solar, and the biogas plans you could hatch them forward very very easily with baseload shapes, but the renewables, so the PV, it would take you three four months to do a PPA with them, and when you concluded, the ppa's price
levels were down again. So we said, we need to be in a market where we can hedge renewables just like a baseload within two minutes. And that's what we built very early on with our power match platform, where we're now able to do a PPA from a renewable portfolio wind, solar, and even a battery within two minutes. And that's what I mean when I talk about the commoditization of renewables, Manie.
Can you sort of exp and a little bit on that in the sense that what I'm really interested in when you talk about PPAs, you're talking really about short term PPAs. Yes, where I'm coming from is I'd be interested to hear your views on that and how you see that in terms of being able to go into long term PPAs. And the reason I'm saying that is, if I'm a finance person, I want to finance a
solar park. It's all great to have a short term PPA, but actually I want to have a longer term PPA so that I can actually I can get that on my project, etcetera, etcetera. Right, So, how do you see that going forward? That market?
The short term PPAs have a different purpose than long term PPAs. So the short term PPAs have a purpose of Let's say you own a bunch of renewable plants and shipping the Baltic accidentally hits the pipeline to Norway. You can imagine what happens to gas prices, you can imagine what happens to power prices. And then we need some forward liquidity in the market. And if you have a renewable plant and the price goes up to five hundred euros, you can hedge with that and cash in
quite nicely. And you're also dampening effect on the price level because there are people selling, whereas in the energy crisis, nobody was selling anymore because that liquidity wasn't there because we just didn't have that commoditization. And on the other hand, what we're doing with the short term PPAs is we can deliver hedges from renewables, which in the future will be a lot cheaper to industrials who just want to
hedge their power positions. But here we're talking about risk and hedging for three years, so a trading disk like hours, we're not infrastructure fun. We don't look fifteen years into the future. And when it comes to financing a PPA for fifteen years, which is what an't invest in a new asset essentially needs, we're in a different market. But I think the standardization can help you to have a pricing benchmark, just like you have on oil and gas.
In oiling gas, you would also use hot benchmarks to finance long term projects. So it's more about finding a p I think standards that you say this is how much solar is worth as like one number and not as an aggregate of one thousand PPAs that you might know or might not know.
And Mannie, I think it's very important to explain to the listener how that power market works. Why if I have a solar asset, why I'm actually using your services at all? Right, So maybe just explain a little bit a bit of the background of how that power market works. So that people can understand readly why you're important and what you do.
Then, stepping away from the PPAs for one second, if you own a solar farm or a wind farm, you usually do not know a lot about energy markets. Your project developer, you know about engineering, you know about financing, but you don't know about schedules to the tso you don't know how to connect your plan. You don't know how to trade it. So you need a service provider that gives you route to market access. That's number one.
So that's that's a service where we say, hey, we connect you with the Dso we tell them this is your plant. If you want to read us batch, this is how you connect to it. We connect to the plant ourselves through a so called VPP so that we can forecast each renewable plant. So we do this every fifteen minute, each renewable asset gets a new forecast, so we can tell the TSO how much power they can
expect to be coming into the grid. And then we sell this power usually largest part on the so called data head markets, and then the forecast errors that you inevitably have on the so called interday market. And for this we take what they call balancing risk. So we pay out to the renewable assets usually the day I had hourly price, but sometimes there's more or less solar. You might over underproduce, you hit by crazy interday prices or even more so crazy imbalance prices. And we are
taking this risk away from the asset holder. And that's a service, and we charge us small fee for this. And this is the physical business. So this is what we call balancing services. And then the second step, and this is where the PPAs comes in, is if you see a price that you like in the next year, do you want to hedge your forward price expectation with an instrument such as this. So if you say, hey, I think renewable prices are even going to be lower
next year. I saw a lot of negative prices last year. I'm scared of those. I think my value is dropping. I want to lock in my value right now. And this is where the PPA side comes in.
That is fundamental. The secret of your company is honesting the balancing risk. And that's how you can somehow structure a product which is I'm not going to say synthetic, but relatively replicable. And then a portfolio effect. You need a lot of computer because you are managing the balancing risk. And if we look at the UK market, which is very dissimilar from the German market, but the balancing cos used to be like two billion pounds a year five six years ago and they went to eight billion, so
the system is more imbalanced. A do you see the same thing in Germany and the are you confort able that if there is like both five standard deviation your old system is not going to blow.
So I always think of ourselves in the power markets as the first responders. We are responsible for the dispatch on the last meters right a few minutes before delivery. We can still react, we can still trade out power.
And I would like to dissect the question a little bit because we have one thing in Germany that we call the renewable balancing paradox or the renewable energy paradox, which is when you look at the system physically, you would expect that more renewables mean more volatility, means more in need for ancillary services. So back up power plants
that balance this out. In the last second, just for the physics, right, because if you have fifty gigawad of solar in the cloud comes you easily have deviations four gigawa's up and down. So you would expect the cost of these ancillary markets to grow, and in Germany, actually they haven't. They haven't grown, they have shrunk. And the question on this is why. And the reason for this is that we've become a lot better on weather, so
our forecasting capabilities are becoming increasingly great. And then in Germany we have a balancing price system that heavily punishes you if you have an imbalance on the wrong side. So traders like ourselves, we don't only forecast and trade, but we also actively manage the assets. And we often hear, oh, it's such a bad thing that renewable plants are getting curtailed.
In a renewable system, curtainment is going to be one of the most important things that you do to balance the system in the short term in terms of overproduction. And then when the market is short so think about the evening peak you have an outage, all power plans
are ramping up. You need traders in the market also, you need prop traders in the market that have a view on risk and prices to get that short term flexibility into the market very quickly and give them a price incentive to come on live and manage the system. And this has been working immensely well. So everything that is market based, everything that is short term price based, is the greatest innovation of the energy transition that we've
actually done in Germany. Beyond the physics is really building this this amazing market that is balancing everything. To the last second, the problem where the costs are coming in is redispatch. So redispatch costs are going to explode, but that is more of a system problem and problem for lack of price signals that we have to shut down more and more wind in the north and ramp up
power plants in the south. And this is really where in Germany, system costs are getting higher and higher and are probably going to explode if fre don't do.
Something about it, okay, which is basically grid costs, that's what we're saying. So a lack of great you just can't move the wind or the soul or where it's needed, and a lack of price signals.
So let me give you an example. So the German government is very resistant on splitting Germany into several price zones, which in my view is the only thing that would help this, but on a day like today is a holiday in Germany right now, or at least in northern Germany, and so we don't have a lot of demand. If we have a lot of wind in the north, we can't transport it down. So what do they do. They shut down wind in the north and probably ramp up a gas picker in the south. And this needs to
be paid for now. If we have a lot of renewables, we might be at a price level that is at zero or at negative prices. And because as a trader, I'm not seeing the grid, I'm only seeing Germany as a whole, I might actually curtail or shut down renewable plants in the south. So I'm curtailing a solar plant in the south while we're lacking energy in the south. And that is a systematic problem that you can only solve if you have different price signals in different regions, and if.
You had different zones. What you would also do would also incentivize putting in storage and stuff like that, which are present. You don't have that incentive.
Yes, especially putting storage into the right place and having storage react to the right price signals. So storage might do exactly the same as I just told you. So in a situation where you have low prices and a lot of redispatch and you can transport power to the south, you might actually have a storage asset taking a lot of energy from the grid in the south, which you really don't want it to do. So it's about giving the right price signals to the right assets so that
they can react in the right way. This is on the dispatch side, and what nobody ever talks about is, well, what about the investment side. You also want to give an investment incentive to build the assets in the right place, and currently have none of this in Germany. We have this in Texas and Aircot they figured it out, but in Europe we're kind of running blind here.
Minie, can I ask you a little bit about the two things really that I've seen in the market that I think are quite impactful in terms of changes. One is we've moved from so called gate closure of one hour to fifteen minutes across Europe, so maybe you could explain that. And the second thing I'd love to ask you to talk about is the role is storage and what this how you see this and what this means going forward?
We have moved the standard trading product from one hour to fifteen minutes. That happened a couple of months ago. So right now we're trading in fifteen minute blocks and not in one hour blocks anymore, which is a good evolvement because renewables have pretty steep ramps and those ramps need to be covered, and so it is good if we have a your wide price signal on these fifteen minutes.
So we had fifteen minute products before and intra day, but we didn't have across European market on it, and across European market on this just faster competition and better allocation of resources. So this is good in terms of gate closure times. This really depends on every market and also in the exchanges. So we can trade across Europe
one hour before delivery. In Germany we can trade nationwide until half an hour before delivery, and then we can trade within the tears over until five minutes before the delivery. And the further you come to delivery, the smaller the volumes that you can trade, but the higher the volatility.
So you're smart, you're growing, and all of a sudden, a gigantique US edge fund arrives and knock at your door and say what you do is very interesting, we like to acquire you. So explain the process and how you came now to be a company owned by Citadel.
Yeah, you explained it very well. We were not at all in the market to sell this business. We wanted to build a renewable energy trading company for the long term and we still do. But last year we got an email and a call from Citadel Commodities. And when the most sophisticated, in my view, best commodity trader in the world, knocks on your door, you have that conversation and they had a very clear idea of what they wanted and what they were looking for, and this process
moved extremely fast. And on our side, we thought about if this makes strategic sense for what we want to build, and it does make a lot of strategic sense, and now I'm really convinced that it's an ideal partner for
a bunch of reasons. One is with them we can access trading sophistication in terms of weather models, modeling the market, and just having great talent that understands commodities and especially power in Europe very very deeply, which will also help us in our short term operations, and two is with our power Match Liquid Ppa platform, we were coming on limits because our balance sheet was just too small to do deals for a large volume and also for longer tenors.
And now with Citadel, we're looking to push the tenors beyond the three years and come into a place where we can hopefully offer tolling agreements to batteries. And that space right now is owned by a bunch of utilities and we would like to break that place open. And if you want to do that, you need to have the kind of balance sheet that Citadel does, So in
that way, they're really really an I deal partner. And I've just been impressed with the people I got to know over the last weeks and months and the intelligence and working with them is going to be very exciting for us.
A Manni back to the German power market, I'd love to hear your view on the need for gas, and in particular new gas in the system.
When you look at our own portfolio, it's kind of a microcosm of what we think the future of the German energy system is. So we have a couple hundred megawad of industrial offtake that flexibly responds to prices. We have two gigawatts of wind and solar, and we have a bit of a battery capacity to fill the gaps when the wind doesn't blow and the sun isn't there.
If you want it to power the system with that, you would have a hard time because obviously there are times where there is no wind and no sun, so you need something to fill these longer term gaps, and long term storage probably isn't there fully to do it right now. So am I one of the people that
says we don't need any gas at all. No, we'll need some gas speakers, or if we see it more strategically and not from a climate perspective, there probably will also be a political discussion to let call run a bit longer. However, the point where we're at right now is that the German government, which which I think is still pushed by the fossil fuel lobby, is advertising twenty gigawards of gas build out and that should be fully subsidized.
That is quite a ridiculous statement that a company is too scared to build a gas peaker based on market prices. We have in the US. We have companies, private companies shooting rockets into space with private money, and RWE is saying it is too much risk to build a gas peaker based on short term power prices and they can't hedge this, so they need a capacity market or a subsidy to get these things built. And I think that's
a little bit ridiculous. And everything is there in the market for gaspeakers to just be built out of the market if government made a commitment not to have a capacity market, and then it would come at a size
where the market decides and not political bureaucrats decide. That obviously have their models and they're trying to do their best, but forecasting the drop and battery costs and what new technologies might be coming and to what extent demand might be able to respond to two peak prices that they're definitely going to make errors on this, And if you're a government official, you're probably always going to error on
the side of security. So this is the recipe to get overcapacity and to the market, which might crowd out technologies that are just a lot cheaper. So I don't like the way this discussion is going at out.
Wow, Okay, let's jump into another topic that certainly make headlines, which is algo trading. What you want to say about how good training.
On short term markets, If you look at the orders being executed, we're already in Germany at around eighty five percent of orders being executed through algoes, or it might even be more, but the volume on those is quite small. And when we're talk in terms of volumes, it's something like two thirds of volumes are executed by algos. And when you think about a battery that is optimized on inter day, we have single assets that have over a
thousand trades allocated to them. So this is not a job for a human to sit there and click for trading a battery. That's physically impossible. But I think a mistake that many people make is that they think, Okay, this is now AI revolution done, or the algos have figured out everything, you don't need human traders anymore. In our experience, that's not at all the case. Most of the risk decisions and most of the real intelligence is often still coming by humans. We have algos and humans
trading also, both in risk taking positions. And while the algos are doing great and I do see some future there, humans are still outperforming algos because especially in short term markets, Lots of things happen that are very difficult to predict, that are very difficult to back test, and you run into situations where you don't want an algo life that has trained on data that looks completely differ than this.
So to my surprise, humans are still alive in Kicking, and I think they will be for the next five years because risk taking is still something that's that's very difficult for algorithms to do.
So speaking of five years, let's go to twenty thirty. I want to talk about how you see the German energy transition, because for me, it's paradoxical. The paradox is that Germany can't even put smart meters in so one level, they can't digitalize at all. And then at the area that you're working is, which is the power market. It's the most digital power market in the world, it's the
most liquid power market, the most innovative. Give me a view of twenty and thirty and how you see the energy transition in Germany and what it looks like.
As an entrepreneur, I'm a natural optimist and I actually think the things that we need to fix in Germany are not that big. We need to get some regulations out of the way to get the smart media rollout done. If we do this well, it should be possible to get this done in two three years. The situation is ridiculous. I absolutely agree with you. We need some better regulation
in place. When it comes to redispatch, I think we need price zone split, and then we need to push for the build out and not slow down, and be strategic and make sure that we have energy prices that
allows industry to stay in Europe. All of these things can happen, so I hope that we'll be in an energy system where we have around eighty eighty five percent renewables and the biggest export that I think the German energy transition has for the rest of the world is how to build this system and how to make the
system work. And we are relatively still a rich economy, so when you think about it in terms of climate, I think it is on us to make some of these mistakes and pay some of these prices to then hopefully arrive at a system where others say this is actually working. We're copying this, And to use one of one of the words that I've been hearing on your podcast, I really hope will be in electro state by the time of twenty thirty.
And Annie, thank you very much, absolutely great having you on the show and I wish you all the best in the future.
Thank you so much for having me so job.
What do you think what is in an area of Roman.
I've been doing a lot of work in the last few years, you know, so I'm very very clear that what we're seeing in the whole renewable and infrastructure space is a change and power and value ad from used to be the developers with a high value adds sort of profitable guys, and then you had at the other roend you had the acid infrastructure players, which were you know, had to have huge scale because the margins and if you'd like to say the years were very very low.
But now I look and I say, well, all the values in the middle, and that's where somebody like this is.
There's a moment during the conversation where I say, oh my god, this guy is so good when he told I have five guys in New Zealand, so they work at night and there's somebody on the phone twenty four hours a day, and that tells you what it takes to monitor twenty four to seven. You need to have five guys in New Zealand. So when it's night in Germany, that's their day and they continue to monitor the market. It's absolutely crazy. Yeah, and you listen.
If you don't do it, you're not compared to overall.
Yeah, but I don't know when we or EON's going to open an office in New Zealand or in Australia. Now there are fifty guys, Okay, their structure as of course, Okay, let's say five million a year and the amount of capital they were allocated is below twenty million. And so with twenty million terms of colleto and everything, they are to make more than five million a year just to pay for the structure and certainly make money if they were quite bive Citadel. So do you imagine the profitability
of that capital? The investment must have returned thirty to forty percent a year. And that's what trading is all about. I would say, at least because I think all the values.
Again, I say all the values now in the middle, Yeah, you can see this developer prices are falling and as I said, then you've got yields on the asset ownership side going down and risks going up. So there you go. You got the guy in the middle, and he's really needed going forward. Can't get away with this, you can't be If you really want to have value as a developer, you need to be able to understand how that paler
market element, because it's not just about selling. I've got the rights to build five megawatts of solar or in East Germany, that's not enough anymore. And then on the other side, the guy who owns the asset, he looks and goes, oh my god.
I've got negative prices.
What am I going to do? So I either you outsource it to these guys, you partner with them, or you try to do it yourself. So it's a very very interesting moment in the whole renewable space, and this whole area of power trading and optimization is critical.
And when the which fund guys are really going to invest, you're going to see a level of optimization that we have no idea right now because they are used to liquidity, which is something that is relatively new in our energy system. Okay, job, We thank Amani for coming on the show. Those guys and all the one who came from Next Craft K. They only came from Next Craft that was a seminal company. It sure was. Yeah, I wish them the best, but
they really know what they're doing. Yeah, the shadow Okay, Joab was an interesting conversation and I talk to you next week looking forwards.
Thank you for listening to Redefining Energy.
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