With Laurent segel And from London and Gerard Reed from Berlin. This is redefining Energy.
Today.
On Redefining Energy, we're going to talk about the state of the PPA market power purchase agreements, which are an incredibly important part of the electricity world around.
Yeah, and new concept or so coming on FPAs flexibility Purchase Agreement. And for that we have our returning guest, Luc Aperti, co founder of Pixa Park, this.
Time live from Texas. I think he last year he was in Texas as well, isn't he right?
Okay, let's bringing on the show. But first of the world from our partner.
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happy New year, chief. I know we're in February, but still I'm gonna saying Happy New Year to people till the.
End of June.
Happy New Year. Thanks, great to be here.
And Lucia, it's your thirurth time here. Now we bring you back because you download a lot. That's the only reason.
Yeah, you told me, thanks.
And Luca, I bring you back because I like you.
You're speaking from Houston, Texas, so probably explain first why you're there.
Yeah, Texa Park, as you know, provides price intelligence for clean energy. Europe is big, the US is as big. So we have expanded our coverage last year and I wanted to be front up here in the US to accompany our expansion.
Excellent. Now you say fair value pricing, and of course I've read in a lot of your papers there is this acronym who comes on a regular basis, and that's if S thirteen. So can you elaborate a bit what it is.
Yes, I'm not an auditor, but these are new rules which are impacting the market. So what is high fors thirteen. Well, it's basically a standard describing how you need to value contracts. The way it used to be in the past is that PPAs were seen as level three type of contracts, so there is no observable price points. This has changed. There are observable price points, so you need to value them. Now the type of exemptions that are applied that you
need to value them as fair value. They have changed. So if you're in a financial contract, to make it very simple, you need to apply fair value accounting. That means the value of your PPA might shift much more dramatically as when you don't need to update those prices so often.
Okay, so it means if I sign right now, say ten yere PPA, I need to value it every year, and it's going to go up and down because beforehand they used to keep it in a drawer and you know whenever.
The correct and that means, of course, if you're a CFO, you will have bigger swings and earnings volatility. This is something which is not liked, but irrespective of the regulatory aspect, it is good practice. We call this mark to market. Now, you want to know what is the actual market value of your assets, of your contracts. This is a basic principle for risk management and it helps you to learn
to act to react. And there were a lot of bad surprises in the PPA space because this practice wasn't done. So there's the regulatory aspect, which means certain contrasts need to be valued like this now. And there's the practical aspect that this is good practice anyway, whether you're regulated and you need to apply it or not.
This is a nightmare because I can tell you what the accountant's love is what they call mak to model. So you know they do an excel sheet wonderful and that's how they mark their book and a lot of people have avoided a lot of losses or managed to push them forward by doing this mack to model.
It's okay, look one thing and this is IFS, which is at the end of the day, this is non US, right,
this is Europe. But when I hear this, what I think of is the big data center companies and hyperscalers because at the end of the day, what they're doing is they're going to have to sign long term PPAs to go and you know in and around the power, which means they have a liability on the balance sheet, and that liability if it was a UK or a European based business, what would actually happen is you would have volatility in its earnings because you're changing the value
of this. Just dig into what impact you think this has. Does it mean that these companies are going to do less PPAs or more PPAs, or what does it mean for people?
It means that financial PPAs need to be definitely marked at fair value where you have this earning volatility. This is something which typically companies that are not trading companies' utilities companies don't want to do. But if you have a physical PPA, if the power is for own use,
then these rules do not apply. Also, there's more precise language on nature dependent electricity contracts because we know that it is not clear exactly how much volume will come and this volume maybe need to be sold back, which would automatically have caused fair value treatment. This is now exempted,
so there is an approach trying to accommodate this. Definitely, what we can say crossboarded PPAs of financial nature will fall under these rules, and this is some sort of disincentive for those types of contracts.
Excellent, before we go to the new report that just went out, maybe rolling back a few months, because you've got a huge analysis on IPPs. They were like no eight podcasts to came up all of a sudden in December, which and I can tell you I've listened to none of them, but I'm sure they were great. Can you summarize in two minutes what you're finding on IPPs, because that's very interesting.
Yes, IPPs are becoming revenue managers. Have we seen consolidation in the space. There's more value being accrude down the value trend, There's more value post the contract, that is in the optimization of the revenue. There's more value on portfolio level if you aggregate the assets and manage them, and that's a key driver in the IPP field. So what we're seeing is IPPs becoming bigger and piece becoming
a bit like utilities. So they're adding structuring, trading, physical optimization desks because this is where the value is now accrude. And we're expecting a further consolidation in this space. But these are the principal actors next to utilities and developers and the off takers of course in the energy transitions.
And Luke difference between North America and Europe or do you see them the same?
A very good question. Very similar. The big difference is what we see is definitely in the US the ipp is making more use of third parties for portfolio management versus in Europe companies trying to build everything in house. But otherwise it is a consolidation which is also across the continent. It makes sense to spread and have assets in multiple jurisdictions.
Can I just I give you my thesis for the year and you can just tell me you think this
is mad or not. My thesis is that what you've got in Europe is the majority of renewables is owned by financial institutions in the form of funds, and then you have a fund manager and basically ninety percent of these guys have not the capabilities that you're talking about, which means that there's going to be massive amount of stress first and foremost and eventually needs to M and A. Do you see something similar or how do you look at it?
I see the opportunity aspect of it, because more value is moving downstream those IPPs, those players that have these competencies are very well placed to grow. And yes M and A can be part of that story. But Jared, I think to mention stress this is the right word. The key thing is we are now in renewable dominated markets in ever more markets and this is causing stress. It's causing stress on capture rates, negative prices, price volatility,
technical curtailments, balancing cost. But this is all temporary and this is driving the players to add more intelligence. You need more intelligence, you need commercial management to deal with those effects of the energy transition. And this is a massive value game. The value is just occurring at a different area in the value chain, and this is driving this IPP consolidation. This is driving this next generation of players.
And do you think, because again just taking a step beyond what you're saying there, do we move back to virtual integration in other words, that you also not just have that mondetization and risk management part, but you sort of go, well, if I'm really going to be in this game, I need to actually have customers.
We don't see yet. On the IPP side, there is a good argument to make in less liquid market, especially to sell to smaller clients as an IPP. But this is not something which we're seeing it. We're seeing smart place in the aggregation space. So you're seeing new intermediation companies, so to say, stepping up aggregating demands smartly and connecting it with producers. There is real value there because they are from a renewable perspective underserved.
Okay, maybe it's time to dive into your findings because you published this incredible amount. I mean, there's more and more slides every year. I mean the other first year was like five slides and now we're like sixty or something. You've become more intelligent, the market has become more complex. What are the big big findings? Because you start talking about them, so let's dive into it.
The key finding of the report is just a matter of fact that we are living in ever more markets, in renewable dominated environments, and this is changing how markets work and where value is accrude and we call it the big repricing. We can show where value is going and it's definitely moving downstreams. There's more value in the optimization, there is more value in structuring, there's more value in the arbitrot and this is shaping and impacting the players
we just talked about the ippiece. These are some of the key structural trends which we're observing.
Can I ask your relation to that, because ultimately part of the issue is the fact that what we've got is huge volatility in the pricings and you could say this is largely caused by the fact that we've just got too much, in particular too much solar or at certain parts of the day and obviously when it's sunny.
Surely what's going to happen going forward is that's just going to be armed out because we're just going to be lots and lots of batteries in there right correct, And do you have any sense of that in terms of unity extent of it.
We do expect no easing of the pressure in terms of negative prices and price volatility in twenty twenty six. When you just look at fundamentals, how many more gigabots of a flexible capacity we can build to have an effect. This will at least for the next two three years keep us or the industry busy to end this flexible capacity. But you see already the early science you see in markets where we add quickly best how it is impacting price setting. It was very nice to see here in Urcot.
Approximately ten gigabots were added off flexible capacity in twenty twenty five and it had an immediate impact on price volatility, reducing those breads. And that's exactly the purpose of this and this is what we're seeing in every market. It's just a question of time how fast this will go.
Well, look, because you're Swiss, you're very moderating your statement. But if I look at the numbers the batteries in twenty five in RCOT, they made ten times less money than three years ago. So everybody went merchant like, yeah, yeah, yeah, it's a bit of a disaster, or or it only works if there is a cold snap or a heat wave, which was not really the case in two twenty five. You know, we can talk about the price of gas.
Yeah, but that's the nature of a free market. And this is how it also works on renewables. At some point you have cannibalization, and you have the same effect on storage. You build more at the same location, it will have an impact on the revenue. Where we see stability is when you aggregate it on portfolio. So yes, we have cannibalization on single asset perspective, but if you are a smart large ipp or utility, you can construct a portfolio which is stable and can serve the grid
and the customer. And this is where we see the value going. Yes, it's cannibalizing, but overall it can be stable.
Okay. So here I'm going to show the audience that have done a lot of research because there is this new thing called RTC plus B in Acott launch in December. Is complaining about that?
Yeah, a rule chain, how very specific question. A rule change how batteries are operated in aircut the major change. It's now five minute coptimization and previously ancillary services were locked in during the day ahead market and now aircut the operator will optimize every five minutes. And if you had awarded a battery in a regulation service, but energy prices suddenly spike, the system swaps for the energy production instantly.
So from a system perspective, this is all about higher efficiency, better management. The short term impact is of course a lower arbitrage what is being expected. But from a system perspective it it does sound very sensible.
And of course if we compare to Europe, you have the mechanismod A Provigianamento Decapacita di stoccagio Electrico bravo bet are known as MAXI in Italy, and that's the dream point Fossil to invest are because basically it's a giganteque tooling contract at national level.
Yes, and we have different schemes in Europe. So definitely we see in Spain and Italy more regulated capacity mechanisms versus other markets like in GB in Germany which are very successful with flexibility purchase agreement which are tools and floors, as well as optimization agreement. So more the private route. I think it will be like in the renewable space, you will have multiple route to markets which serve different purposes. You have auctions and you have private contracts and they
are complementary. But overall, actually Italy has been a great market. It has been not just on the storage side, on the ppa side that was real progress. It was one of the hottest market in Europe twenty twenty five.
OK.
What I see with bascheries is we talked about the cannibalization. That's just like the batteries are just becoming a mature asset class now. Is that the way you look it, right? Because if I look the way it was at the beginning, you go into a battery, you run into the UK market, you get your three year payback, then you run somewhere else. This is the way it's gone. But now it's really becoming a serious as a class. Is that the way you see it or I'm missing it.
Absolutely, it just went much faster than in the renewable space, where this took six seven eight years. In the battery space, it took just two three years.
Okay, great, that sort of gives me a little bit of sense of where we'll go.
Now, you just introduced the new term FPA flexibility purchase agreement, and now you put that at the same level as PPA. So now we're gonna talk. So first of all, maybe a broad definition of FPA.
It's basically industry consultation. What shall we use? What is the battery off take? In broad lines, we have flexibility purchase agreement, which means an off taker is taking on price risk, that's a floor, that's a toll years, seven years. And then we have optimization agreements which give a root to the market, which provide the intelligence and algorithm which
helped to optimize the battery on various markets. So these two broad categories of battery off takes, optimization agreement and flexibility purchase agreements.
So ppafpas, can you explain a bit who signed what and how did it change to a twenty five versus to twenty four.
On the star side, we have utilities and optimizers. On the optimizer side, we have a lot of new companies which didn't exist a few years ago, so these are new players on the market. On the PPA side, we have two differentiate between the US and Europe, but in both markets we saw lower figures than twenty twenty four for different reasons. During Europe we see definitely saturation of PPA demand, mainly also due to set for solar profiles.
It's not generally just lower demand. Data center's a huge factor of thirty five percent of the demand in corporate PPAs from data centers. The other big notable change in Europe is utilities are back. So it used to be over the last five six years that the role of utilities in PPAs became smaller, smaller, smaller in absolute and relative terms, and now they're back. So they just doubled the volume, going from one point seven to three point
eight gigawatt. And it's a sign of the times that it takes more work, it takes more optimization to do good deals, and this speaks to the strength of utilities. A big thing on the off take side is of course not just PPA, but the big demand pulled data centers they want to go direct. So a big trend is bring your own capacity, co locate directly, get exemptions. We could probably cover PGM, which is the largest market in the world where we have all those data centers,
and it's dramatic there. Just imagine we have a market with one hundred gigawatt of peak demand and we just had a capacity auction where the margin which was left was one hundred and thirty nine megawatts and prices of course shot up, and this has huge political implications. Affordability is a big topic here. What does it cost five hundred bucks more a year on a household level, so very big stress.
And what to do.
And basically there was just a ruling from the regulator co location ruling and what they allow is, among others, some very sensible things like enabling fostering non firm demand. Data center is not baseload. They can ramp. They don't want to do it, but they can and this has tremendous value if you can reduce by fifty hours or seventy hours or whatever the figure is. And then another which is called interim service, which we just give you an exemption to build gas or whatever in an island
at your site. So there are all desperate means to make capacity available as fast as possible, and unfortunately in PGM it is not renewables. The market is maybe at ten percent. There would be fantastic values on the PPA side for those PPAs, but the queue is so long and you don't get it permitted. So that's a bit what we see on the mid demand side, and definitely most interesting on can we make firm demand interruptible? And this island strategy that they bring their own capacity directly.
Luca, what's it like in the Texas market.
Well, it's just a fascinating market because huge demand growth, huge everything, So building lots of renewables, still building lots of storage. I just mentioned ten gigabotes, data centers being built and served, everything done, everything fast, everything big. And then Europe, Europe complicated. I think we don't have demand growth as a first, we see the energy transition progressing.
We are in the wobbles of the energy transition, so we see the stresses and we're reacting now to those stresses, which means new business models, new pools of value. So some of the innovation, the way of doing this is actually happening here. We are more advanced along the energy transition, and you see this especially markets like gb and Germany.
This is where actually the future is being built. But there are very big structural barriers I mentioned already in the next two three years, we can't build as fast as possible the storage to improve capture and reduce negative prices. Gas remains the marginal price center in many markets, so system costs are up. We need so much more intelligence we need to incorporate and you covered it the distribution grid, which is something different than the transmission. It's under utilized
with just twenty percent. So there's so much more to do. But there are some structural questions in the markets which need to be answered. And Laura, was you saying the energy transition is made deal by deal. I stick to this for ten years, this is where it happens. But maybe twenty twenty five was for the first time for me where I needed to step back and say, Okay, there is politics to it. There is structural constraints which cannot be solved deal by deal.
Luca. Two twenty six is the year of the revision of the green as gas POTOCOLO. We need to count those electrons on an hourly basis, and do you see this going through or do you feel this too much resistance?
First, we need modern market infrastructure, which is we need to assign hourly green value in markets dominated by renewables. We need this as a paradigm shift. I have no prediction of whether it is going through, but it's just essential transparency for the modern functioning. What we're worried a bit is just we're making deal making more complicated. We have IFS thirteen, we have greenhouse gas protocol, we're having
SABAM rules for non European companies. From a corporate perspective, we can just risk to delay and reduce deals where they say this is just too complicated, We're not doing it. So it's a fine balance. But for me it is unavoidable that we need a modern infrastructure to assign value to firm green hourly production.
Luca, maybe just you know, to end, can.
You talk about the trends you see in twenty twenty six and twenty seven And actually, really what I like is I want to hear what really excites What do you say?
Jesus, I can't wait for that.
Oh man, we could do another podcast. I'm most excited about how the players change. So the rise of next generation IPPs. This is for me something which I love. There's more intelligence, there's new actors, so the solutions are there, and this is what always has excitingly focused on the players that shape the energy transition, and this keeps me always optimistic. Whatever struggles we have, whatever roadblocks they are, we're basically creating problems to solve them. Again, this is progress.
I agree told you with you actually, and it's also it's such an exciting time that we're living in.
Well, Luca to us a treat to our view, so much great information. So we're going to put the link of your report indu show notes, and I wish I can see you soon if you come back to Europe from time to time.
Thank you, Laura, thank you, shut up, and.
I wish you a great year.
Well job.
So much information and so much understanding of what's going on.
Yeah, and actually he's the data. I just have a feeling, and he's come from my feeling, which is we're going into a period of consolidation in and among owners of renewable assets, whether that be in North America Europe.
What is very clear is that there's a lot of PPAs signed a few years ago which are totally in the red, and I think a lot of people are busy trying to renegotiate them. But that's a tough one now. So there's a lot of embedded risk inside portfolios and I guess if the manager are not very sophisticated, they're carrying a lot of loss.
Yeah, And it's back to it's an interesting thing because a lot of these companies or the owners of renewables, particularly in Europe, back to that change in ifrs. They're probably lucky that their private companies because they'd otherwise be you know, a lot of them could be in significant
issues in around the revaluation of their PPAs. You know, there's one thing that he didn't sort of talk about, which is, let's talk about extreme stress in the market, because if you look in Europe, what you've got is in an Ordics, you've got a whole pile of wind assets that are really underwater. And actually you're seeing the same thing in Spain as well, because the Spanish grid operator has been curtailing and not paying renewable owners and you could see this spreading into other markets.
As long as the demand does not grow in your rope. Everybody's going to fight for a slice of pizza. And if you put more people around the table for pizza the same size, there's going to be a lot of suffering. And the thing is the incumbents, they always find a way to look at the government to get a kind of support mechanism for cold plant or gas plant. But the renoble's owner, they're on their own.
Oh, if you're telling me that they're going to play the system relevant cards, I know that. I We've heard that perform in the banking industry. So you tell me it's coming into the energy space as well. By the way, I think you're right. I think you're absolutely right.
Yeah, Okay, great conversation. So we put the link in the show notes, the link on the ipp and the link on their VPA review.
And by the way, it's always great to have a look on. And it's just brilliant, really yes, really pleasure. Yeah, And what is done with SPECSA park over the years, It's remarkable, absolutely, Okay, John, Always a pleasure to do you next week.
Looking forward to what us one.
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