Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the podcast where we feature different B and F analysts
Speaker 1: each week and they share their research on the energy transition. Now,
Speaker 1: if you're a regular listener, you'll have noticed that we've
Speaker 1: featured a co host on a few episodes of the
Speaker 1: last couple of months, and today he is the host
Speaker 1: of the show. I've worked with Tom Rowlands Reese for
Speaker 1: nearly the entire fifteen years I have been at BNF,
Speaker 1: and not only does he match my exuberance for the
Speaker 1: intricacies of the energy transition, but he is also a
Speaker 1: self proclaimed energy nerd. I've also always found him to
Speaker 1: be a great storyteller, and today's show was no exception.
Speaker 1: On the topic of what is a power market? Tom
Speaker 1: and his guests have managed to explain this question by
Speaker 1: relying on tandem bicycles as their metaphor of all things.
Speaker 1: Tom is the perfect host for a show on power
Speaker 1: markets because he actually leads our power research teams globally.
Speaker 1: He's joined today by Helen Coe, who manages our US
Speaker 1: power team, and Ian Berryman, who is our head of
Speaker 1: Energy Systems Modeling at BNF. I think this show might
Speaker 1: be their love Letter to Power Markets, where at the
Speaker 1: beginning they share why power markets are an incredible innovation
Speaker 1: on power systems, before they then get into just how
Speaker 1: these markets work and the things one needs to consider
Speaker 1: if they want to know what a power market actually
Speaker 1: is and to be conversant with the terminology. If you're
Speaker 1: a BNF client, we have a wealth of information on
Speaker 1: power markets around the world and this can be found
Speaker 1: at BNF go on the Bloomberg terminal or at BNF
Speaker 1: dot com by going then to the dropdown menu titled
Speaker 1: Sectors and then selecting power markets, and I would recommend
Speaker 1: starting with some research notes such as US merit Order Primer,
Speaker 1: a supply side power Study. We also have an accompanying
Speaker 1: live sheet that goes with this. We have a European
Speaker 1: Power Markets Monitor live sheet and a European Power Monthly,
Speaker 1: a US Power Weekly and the twenty twenty four CAISO
Speaker 1: Market Outlook Dynamics in transition. So here we go Tom
Speaker 1: on his maiden voyage as solo host, joined by Helen
Speaker 1: and Ian, where they share why everyone should be as
Speaker 1: enthralled by power markets as they are.
Speaker 2: Helen co Welcome to the show, Thank you, and Ian
Speaker 2: Berryman welcome to the show. Thank you. I am really
Speaker 2: excited to talk to two fellow nerds on this topic.
Speaker 2: We've got the head of Energy Systems Modeling here and
Speaker 2: the head of US Power to talk about power markets,
Speaker 2: to explain how they work, why we think they're cool.
Speaker 2: So let's start with that last question, Helen, what's your
Speaker 2: view on why power markets are so cool?
Speaker 3: I mean, I think power markets are cool because it's
Speaker 3: often like the interplay between supply and demand and economics.
Speaker 3: When I think about why I wanted to cover power
Speaker 3: markets and understand US power markets in particular, I think
Speaker 3: to the fact that I really like strategy games. I
Speaker 3: like chess, and I like Majong, and I think power
Speaker 3: markets is a little bit like the ultimate strategy game.
Speaker 3: I think, like, you have power plant owners and their
Speaker 3: goal is to maximize profits by trying to figure out
Speaker 3: when to generate, when to hit demand. You have system
Speaker 3: operators and they're trying to figure out how to win
Speaker 3: the game by trying to figure out how to balance
Speaker 3: the power market in real time five minutes, fifteen minutes,
Speaker 3: depending on that market. And so it's this big strategy
Speaker 3: game that everyone's playing all together. The other thing is
Speaker 3: that it's regional, so every game is very much unique
Speaker 3: to that specific area. It's often shaped by the physical
Speaker 3: infrastructure of that region, the geography, or the local politics.
Speaker 3: The way I think about this is like asking maybe
Speaker 3: you or Ian to draw a cat. Right, everyone knows
Speaker 3: what a cat looks like. You have an idea of
Speaker 3: what the cat is. But when I ask you to
Speaker 3: draw a cat, it's going to look very very different.
Speaker 3: Depending on just the ears or the whiskers, you're going
Speaker 3: to have a different cat. And it's the same between
Speaker 3: URKOT or KAISO or PJM. Various power markets are regionally
Speaker 3: very different. You have like urcot's price oidders or kaiso's
Speaker 3: resource adequacy rules, all really really unique, and as an analyst,
Speaker 3: it's really interesting to basically figure out large trends across
Speaker 3: multiple power markets and figure out what that strategy is
Speaker 3: from a fundamental perspective, but then also get to deep
Speaker 3: dive into kind of the intricacies of each region.
Speaker 2: You've touched on so many things that we're going to
Speaker 2: explore in a little bit more detail for those listeners
Speaker 2: who are not familiar with US power markets. By the way,
Speaker 2: Urkot is the power market that covers most of Texas,
Speaker 2: KAISO is most of California, and PGM is multiple states
Speaker 2: in the US Mid Atlantic Ian you've heard Heirlin's perspective,
Speaker 2: Why do you think power markets are so cool?
Speaker 3: Yeah?
Speaker 4: Thanks so so I think power markets are really cool
Speaker 4: because I think they are an amazing, even shining example
Speaker 4: of real world free markets. And yeah, when I started
Speaker 4: working at BNF and I got exposed to power markets,
Speaker 4: my experience was really like, Wow, these things they just
Speaker 4: really work and they're sort of just beautiful in their simplicity.
Speaker 4: And I think that's for me, that's what it is.
Speaker 4: An electron is an electro on. Electricity is electricity. It
Speaker 4: doesn't really matter where you get it from. It's all
Speaker 4: the same. And it's sort of like that where theoretical
Speaker 4: the sort of beauty of capitalism can actually be applied
Speaker 4: in the real world and really work and deliver, for
Speaker 4: the most part, incredibly reliable power that very infrequently we
Speaker 4: do without. And it's often very cheap considering the amount
Speaker 4: of value that it brings to our lives.
Speaker 2: I mean, I think that is a really true statement
Speaker 2: that I would agree with that power is very cheap
Speaker 2: compared to the value that it brings to our lives
Speaker 2: and maybe we can probe that a little bit more later,
Speaker 2: and I am sure we are also going to join
Speaker 2: this podcast talk about some of the shortcomings of power markets.
Speaker 4: After further learning, I realized that also the power system
Speaker 4: is not always as amazing as I make it out
Speaker 4: to be.
Speaker 2: But for the most part, it's pretty good. No, But
Speaker 2: I think it's a fair point that before we talk
Speaker 2: about where the glass might be a little bit empty,
Speaker 2: there is a lot of water in the glass. Power
Speaker 2: markets are by and large, they serve an important purpose
Speaker 2: and actually kind of leads to my next question because
Speaker 2: we're not here talking about power systems but talking about
Speaker 2: power markets specifically, which is a component of the power system,
Speaker 2: and not all power systems have a power market. So
Speaker 2: just to put power markets in context, can we talk
Speaker 2: a little bit about what the alternatives to having a
Speaker 2: power market are before we go into the details of
Speaker 2: how the power market works. What are the other options?
Speaker 3: You're right, Tom, not everywhere has wholesale power markets in general.
Speaker 3: I mean even in the US, you have various different
Speaker 3: types of power systems. In the southeast or the Southwest,
Speaker 3: you have a lot of vertically integrated utilities, and those
Speaker 3: are single entities that own both generation, transmission and distribution.
Speaker 2: You're referring to the southeast and southwest of the US, right, yes, okay.
Speaker 3: Yes, correct, And I mean the price of generation is
Speaker 3: then based on the capital cost of building those power
Speaker 3: plants and plus a rate of return, which is rate based,
Speaker 3: and it's typically the dominant model that we see across
Speaker 3: various other power markets, like across Asia and China or Korea.
Speaker 3: They're kind of it's been our version of like vertically
Speaker 3: integrated utilities is just state owned utilities, and that's just
Speaker 3: when the government owns and operates the entire electricity supply
Speaker 3: chain of generation, transmission, and distribution. Some examples of that
Speaker 3: are like New York Power Authority or Tennessee Value Authority
Speaker 3: in the US.
Speaker 2: I mean going back, if we go way way back,
Speaker 2: you know, because I think a lot of our thinking
Speaker 2: is that the natural state for power systems you have
Speaker 2: either state owned or regulated monopolies, and then eventually they
Speaker 2: decide to introduce the liberalized power market. And you see,
Speaker 2: that's what's happening in various parts of the world like
Speaker 2: South East Asia. But if you go back before then
Speaker 2: power was a completely unregulated market. You know, you had
Speaker 2: people like Thomas Edison just building generators, building their own
Speaker 2: wires going everywhere. Then their competitors would be building their
Speaker 2: own generators and their own wires getting everywhere. So how
Speaker 2: did we move from that to the sort of the
Speaker 2: regulated picture, which then then maybe tease up then going
Speaker 2: into the liberalized pictures. Seems like there's been a bit
Speaker 2: of a journey in how we've structured the business of
Speaker 2: delivering power.
Speaker 4: I mean, some particular examples would be cases where you
Speaker 4: have the sort of centralized dispatch model, which can often
Speaker 4: fly in the face of better economic outcomes. So an
Speaker 4: example of that where it would be where a state
Speaker 4: of utility is signed a contract with a coal plant
Speaker 4: to provide a certain amount of power. Meanwhile, you've got
Speaker 4: end consumers who want to put solar panels on their
Speaker 4: roof and reduce their daytime consumption, and if you don't
Speaker 4: have everything in place to allow that, you might get
Speaker 4: stuck with a system where you're sort of forced to
Speaker 4: burn this coal and you don't have those price signals
Speaker 4: in the market which would get you a cheaper system overall.
Speaker 2: So we describe power markets as being this very pure
Speaker 2: form of free market capitalism, but it exists as a
Speaker 2: unit within a sort of a regulated box, and there
Speaker 2: are parts of the system outside of that market for
Speaker 2: supply and demand that are heavily regulated.
Speaker 3: I think, just to add on Tom, when you threw
Speaker 3: the question around the history of power markets, like I
Speaker 3: often think utilities are like these naturally regulated monopolies. When
Speaker 3: I studied power markets, very much like I assumed that
Speaker 3: when we think about utilities, they were natural monopolies that
Speaker 3: roughly around, Like, at least in the US in nineteen
Speaker 3: ninety two, we started liberalizing markets right so with the
Speaker 3: Energy Policy Act, and it basically enabled independent power producers
Speaker 3: to basically produce generation. And that really came at the
Speaker 3: same time as you had all this grid enhancements in
Speaker 3: advanced metering and also new policy announcements like for quarter
Speaker 3: A eight which allowed for independent system operators, which happened
Speaker 3: roughly in nineteen ninety six. I think, like the point
Speaker 3: I'm trying to make is that at least in the US,
Speaker 3: we went from kind of very decentralized markets to centralized markets,
Speaker 3: and we're kind of returning into decentralized markets again. When
Speaker 3: we think about power markets in general. What's interesting to
Speaker 3: me is the fact that their constructs that we pretend
Speaker 3: are like really solid, but they actually ebb and flow
Speaker 3: and change over time quite a bit.
Speaker 2: I think that's a really great point. And actually I
Speaker 2: wish I could remember the dates. It's a similar story
Speaker 2: in Europe, and I know that there was a European
Speaker 2: Union piece of legislation which the date of which and
Speaker 2: name of which I don't remember, which create did the
Speaker 2: equivalent thing in Europe, except maybe much more consistently than
Speaker 2: in the US, because all EU companies have something resembling
Speaker 2: a liberalized power market. But aside from that, I think
Speaker 2: you make a really important point, and because we're going
Speaker 2: to talk a little bit about power markets and the
Speaker 2: energy transition in a moment, and I think it's really
Speaker 2: important to understand because a lot of there are maybe
Speaker 2: a lot of challenges that need to be resolved, adaptations
Speaker 2: that need to be made. These power markets, in their
Speaker 2: current form, they're not an inherent truth. They are a construct,
Speaker 2: a relatively recent construct of something that has been continually evolving,
Speaker 2: and so there is no reason why they can't continue
Speaker 2: to evolve. So to t that up, why do power
Speaker 2: markets matter? For the energy transition, very very high level.
Speaker 2: They matter because they determine who gets paid what, and
Speaker 2: so you can there's no fixed design. There's a lot
Speaker 2: of standardization around the world, but there's no central global
Speaker 2: government that tells you how to design a power system.
Speaker 2: And that choice there of who gets enumerated what for
Speaker 2: providing which service dictates who are the winners and the
Speaker 2: losers in those markets, and we try to do that
Speaker 2: in a fair way.
Speaker 4: They matter for the energy transition because things like wind
Speaker 4: and solar very famously don't have a fuel cost, and
Speaker 4: so if you get enough of them on the system,
Speaker 4: you can get power prices falling, going towards zero or
Speaker 4: sometimes even going negative. And that becomes a challenge because
Speaker 4: if you want more of these things on the system,
Speaker 4: if you know that they lower overall costs in the system,
Speaker 4: but they're not getting paid, then the power market is
Speaker 4: really crucial to determining how we eve enumerate those assets.
Speaker 2: It's a really great point, and Ian just to follow.
Speaker 2: We said Ian is the head of energy systems modeling.
Speaker 2: For a lot of listeners, that might not mean anything
Speaker 2: in particular, but Ian is the brains behind a lot
Speaker 2: of our neo reports, and in particular the Nephan model
Speaker 2: that models what gets built in the power system. And
Speaker 2: I note that you know your model is based on
Speaker 2: what is the least cost system to keep the lights on?
Speaker 2: And it's really interesting because that doesn't produce necessarily the
Speaker 2: same outcomes as a model that was built around what
Speaker 2: would you build based on remuneration in the market. So
Speaker 2: there's a discrepancy there between the value it measured one
Speaker 2: way and the value measured the other way exactly. So
Speaker 2: we've kind of talked around the topic a little bit.
Speaker 2: We've talked about power markets in abstract terms, and I
Speaker 2: know that Helen and Ian you are both chomping at
Speaker 2: the bit here to explain how power markets work. I'm
Speaker 2: going to start with Ian because Ian has this analogy
Speaker 2: that he's been absolutely dying to share with us. So, Ian,
Speaker 2: how do power markets work?
Speaker 4: So at its core, a power market is generation, transmission,
Speaker 4: and distribution. We're just going to focus on generation first,
Speaker 4: so this is where we create power. We do this
Speaker 4: in power plants. And the way I want to think
Speaker 4: about this is the analogy of a tandem bicycle. Think
Speaker 4: of each cyclist as a power plant. The pedals is
Speaker 4: how they contribute power to the grid. The grid is
Speaker 4: the chain connecting the bicycle, and so the first thing
Speaker 4: you notice is that for the tandem bicycle to work,
Speaker 4: each cyclist or each power plant has to be pedaling
Speaker 4: at the same speed. The same is the same is
Speaker 4: true for the power system. And so let's just assume
Speaker 4: that demand is constant. That's broadly the equivalent of the
Speaker 4: bicycle pedaling across the flat and so obviously you still
Speaker 4: have to add power if demand is constant, So those cyclists,
Speaker 4: those power plants are still contributing power.
Speaker 2: Now.
Speaker 4: Interestingly, what happens is if demand increases. We can think
Speaker 4: of this as the bicycle reaching a gradual incline, so
Speaker 4: it's going uphill now, and so for the system to work,
Speaker 4: the cyclists have to keep pedaling at the same speed
Speaker 4: they were before. And I think intuitively, anyone who's cycled
Speaker 4: before will know to keep pedaling at the same speed.
Speaker 4: If they're going uphill now, we need to pedal with
Speaker 4: more effort, and that's what that's what happens in the
Speaker 4: power system. So if demand goes up in the system,
Speaker 4: the power plant connected to that system have to generate
Speaker 4: more power to meet that demand. The opposite is true
Speaker 4: as well. So if demand falls, you think of that
Speaker 4: as going downhill on this bicycle. Each of those cycles
Speaker 4: or power plants now has to contribute a little less power,
Speaker 4: but as always, they have to keep pedaling at the
Speaker 4: same speed. That speed is in Europe fifty hurts, so
Speaker 4: fifty times a second they're peddling, and in the US
Speaker 4: that's sixty hurts or sixty times a second. But that's
Speaker 4: the sort of very basics of how power system strings together.
Speaker 4: And obviously the case of two people on a bicycle
Speaker 4: is very simple. There's many, many, many many power plants
Speaker 4: in some of the larger systems, and things start to
Speaker 4: get a bit more complicated. But that's the basics of
Speaker 4: how we balance supply and demand in the power system
Speaker 4: and coordinate synchronization of power plants of generators.
Speaker 2: So, actually, let's dive into this because I feel like
Speaker 2: you've framed the criteria that has to be met. You know,
Speaker 2: let's say this isn't a tandem bicycle. It's a bicycle
Speaker 2: that has thousands all pedaling on it all at once.
Speaker 2: And although this isn't true in real life, we've decided
Speaker 2: that they have to maintain the same speed of pedaling.
Speaker 2: So that's that makes sense. That's the challenge that we
Speaker 2: have to meet. And as you say, you go up
Speaker 2: a hill, in order to maintain that seats top of pedaling,
Speaker 2: collectively they need to put more effort in, and when
Speaker 2: they're going downhill they need to put less effort in.
Speaker 2: In a way, I feel like the bicycle analogy states
Speaker 2: the problem that the system has to keep spinning, and
Speaker 2: there's lots of different contributors, all of whom are putting
Speaker 2: in effort, and they might be putting in different amounts
Speaker 2: of effort. So maybe you don't have to carry on
Speaker 2: using Ian's analogy. But what I suppose we still need
Speaker 2: to understand is how we telling all of those cyclists individually,
Speaker 2: or how those power plants individually, how much effort they
Speaker 2: need to be putting in, and what is the role
Speaker 2: of the power market in that. How does it do that?
Speaker 3: So let's take Ian's analogy and say that they're every
Speaker 3: cyclist or bicycle is a power plant, and all of
Speaker 3: these cyclists are basically cycling at various different class like
Speaker 3: they're paid at different costs. In a power market, we
Speaker 3: often think about basically like the entire fleet of power
Speaker 3: plants or the entire fleet of cyclist, and every different
Speaker 3: cyclist is kind of being paid to cycle at a
Speaker 3: different costs, which we call short run marginal cost for
Speaker 3: power plants, and they're kind of stacked from the cyclists
Speaker 3: that can cycle at the cheapest amount to the cyclist
Speaker 3: that can cycle at the most expensive amount. So like
Speaker 3: an all star superstar cyclist.
Speaker 2: Stepping out of the analogy for a moment, because I
Speaker 2: think you've talked about a really important concept, short run
Speaker 2: marginal cost. Can you just define that in literal terms.
Speaker 3: It's just the cost to basically generate electricity.
Speaker 2: Of an individual plant.
Speaker 3: Of an individual plant, and it's often determined based off
Speaker 3: of the fuel costs the operating expenditure of any given
Speaker 3: power plant. In general, for renewables, that fuel cost is
Speaker 3: zero or minimal, and for other types of thermal generators
Speaker 3: it's based off of the thermal recas source like coll
Speaker 3: or gas.
Speaker 2: So, to make it really clear for people not familiar
Speaker 2: with this concept, this short run marginal cost doesn't include
Speaker 2: the cost of building the plant. It's the instantaneous cost.
Speaker 2: It's the difference between deciding not to generate a megaa
Speaker 2: hour of electricity and generating it. How much does it
Speaker 2: cost you to decide to make that decision precisely?
Speaker 3: Yes, And so I mean if we're going to get
Speaker 3: out of the bicycle analogy. The stack of like short
Speaker 3: marginal cost of every single power plant based on the
Speaker 3: least cost to the highest cost is known as a
Speaker 3: merit order. And what determines power prices is where that
Speaker 3: supply of resources hits demand. So demand might be changing
Speaker 3: various amounts throughout the day, and wherever demand hits the
Speaker 3: cost produce electricity. That is then the power price at
Speaker 3: a power market, and all the generators that are less
Speaker 3: than that power price ends up generating electricity and get
Speaker 3: paid that power price, and everything that is more expensive
Speaker 3: to actually generate don't.
Speaker 2: So just to really, I only want to spell this
Speaker 2: out for people who are not familiar with this. And
Speaker 2: by the way, we have a great note on merit
Speaker 2: orders that we published recently if you want to see more.
Speaker 2: This is like, if we're thinking in economics terms, this
Speaker 2: is a supply curve for power. You stack it up
Speaker 2: with who would be willing to deliver power at the
Speaker 2: cheapest price, all the way to the ones that would
Speaker 2: deliver it at the most expensive and collectively, when you
Speaker 2: sort of add it up, that gives you a curve
Speaker 2: that says how much the price of power should be
Speaker 2: at different degrees of demand. Correct, And then the idea
Speaker 2: is is then that if everyone is acting logically for
Speaker 2: a certain level of demand, we should get a price
Speaker 2: should be formed because of all the different players basically
Speaker 2: playing in their bid. And everyone who generate is everyone
Speaker 2: who is generating at or at a cheaper cost than
Speaker 2: the power price, and everyone who sits idly not generating
Speaker 2: for them it would have been not profitable to generate.
Speaker 2: Is that what we're saying? Yeah? Got it? So the
Speaker 2: price is maybe a byproduct of balancing supply and demand
Speaker 2: rather than a measure of the inherent value of the power.
Speaker 2: Is that a fair statement, I'd say so.
Speaker 3: Yeah, it's it's definitely a way to figure out the
Speaker 3: balance between supply and demand.
Speaker 2: Got it? Ian? Yeah, do you have anything to add
Speaker 2: to this description? Can you relate it back to your cyclists?
Speaker 2: I can, Tom, okay, because Helen Helen broke it down
Speaker 2: into literally how it works. Yeah, let's related back because
Speaker 2: I do think your cyclist analogy is kind of is
Speaker 2: very evocative and cool. So let's see if we can
Speaker 2: map it. But what Helen just said onto your analogy.
Speaker 2: So what Helen just said was great, that's exactly how
Speaker 2: it works. The one thing to add is that the
Speaker 2: largest markets, and when we talk about power markets, what
Speaker 2: we're generally describing the wholesale power market is traded in
Speaker 2: hourly blocks. And so we do that analysis. We list
Speaker 2: all the cyclist or power plants from cheapest and more expensive.
Speaker 2: We go our power supply curve to where our demand is,
Speaker 2: and then that's the price that's set. But we tend
Speaker 2: to set that price for an hour at a time.
Speaker 2: And I think it's.
Speaker 4: Quite obvious to see that the actual power system, we
Speaker 4: don't all coordinate our actions as consumers to keep demand
Speaker 4: constant for an hour. So we'll sort of peg the
Speaker 4: average amount for an hour where we think it will be.
Speaker 4: But then within that every second, every fraction of a second,
Speaker 4: people are turning on kettles, TVs, computers, etc. So the
Speaker 4: actual instantaneous demand varies quite a lot. And so this
Speaker 4: is where we get to the next layer of complexity
Speaker 4: is ancillary surfaces. And this is sort of an umbrella
Speaker 4: term to describe that everything has to go on under
Speaker 4: the hood to keep those finer adjustments going, to keep
Speaker 4: the system ticking along. And so one of the ancillary
Speaker 4: services to mention is inertia. So to go back to
Speaker 4: our bicycle, the way to think about inertia, So inertia
Speaker 4: is if everyone's pedal was really, really, really heavy, and
Speaker 4: so it takes a lot of effort to change this
Speaker 4: speed at which those pedals are moving. So this is inherently.
Speaker 2: Really badly designed bike.
Speaker 4: Well, technically everyone has three pedals, so it starts getting confusing.
Speaker 4: But so imagine these three pedals are really really really heavy,
Speaker 4: and if you want to go up a hill, this
Speaker 4: is a good thing because it means there's a lot
Speaker 4: of energy in those pedals. So for a brief moment
Speaker 4: after we start going uphill, energy can be lost from
Speaker 4: that spinning mass of the pedals and given to the
Speaker 4: system and we don't really notice. So inert is a
Speaker 4: good thing because it makes the system a lot more stable.
Speaker 4: One of the great things about the traditional form of
Speaker 4: power generation coal and gas, et cetera, is they have
Speaker 4: these great, big, hulking steam turbines, and I mean there's
Speaker 4: huge power output goes through these things. So they are
Speaker 4: just like monumental masses of spinning metal which add a
Speaker 4: lot of inert to the system and keep everything very,
Speaker 4: very stable. And so I mentioned the speeds we were
Speaker 4: spinning out before, So take the US as an example. Again,
Speaker 4: sixty times a second, we can actually measure inertia, and
Speaker 4: when we see the pedals slowing down slightly, that's the
Speaker 4: signal to the rest of the system to either or
Speaker 4: subtract energy to make things more stable. And this is
Speaker 4: second category of nilary service markets we start talking about
Speaker 4: frequency regulation and other things, and these are just I mean,
Speaker 4: various markets have will have five minute trades for these
Speaker 4: and et cetera. But they're just basically you're on call
Speaker 4: to provide slight adjustments in power output to balance that
Speaker 4: divergence from what we said the power level was going
Speaker 4: to be for the whole hour versus what it is
Speaker 4: in this five minute interval or this one second interval,
Speaker 4: et cetera.
Speaker 2: So does that mean there's cyclists maybe who are on
Speaker 2: this bike whose pedals are spinning, because everyone's pedals are
Speaker 2: spinning and they're not actually pushing at all necessarily, but
Speaker 2: they're they're sort of moving their legs without really pushing,
Speaker 2: but if there is a slight adjustment up or down,
Speaker 2: then they're spinning pedals and maybe a little bit of
Speaker 2: input from their legs will be making those corrections.
Speaker 4: Yeah, So they can either be completely idle and waiting
Speaker 4: and raring to go, or they could be just at
Speaker 4: say eighty percent of their capacity and they've got room
Speaker 4: to move either up or down. And how much power
Speaker 4: they contribute got it?
Speaker 2: And so who's paying them? Is there just a separate
Speaker 2: market that they're involved in to get paid for doing that.
Speaker 3: Basically that's known as ancillary service markets. It's a secondary
Speaker 3: market where like resources are just paid instead of in
Speaker 3: terms of dollar per mego hot hours, so dollar of
Speaker 3: energy into dollar per mega loat of available capacity. So
Speaker 3: it's just a payment of being available aus some type
Speaker 3: of performance adder.
Speaker 2: So then there's another market structure that gets talked about
Speaker 2: a lot that can be overlaid onto all of this,
Speaker 2: which is capacity markets. So, Helen, do you want to
Speaker 2: explain the role of the capacity market.
Speaker 3: They're actually quite similar to ancillary service markets and that
Speaker 3: it's payment of availability, but instead of it being payment
Speaker 3: of availability for like instantaneously ramping up or ramping down
Speaker 3: at like a five second interval. It's kind of payment
Speaker 3: of availability for given long term time period. Capacity markets
Speaker 3: think of it as like long term planning, So it's
Speaker 3: having resources available or being able to have resources available
Speaker 3: at like summer peak demands or winter peak demands, and resources,
Speaker 3: particularly thermal generation resources are paid to basically be available
Speaker 3: at these peak demand periods.
Speaker 2: So, to take it back to Ian's analogy of the bike,
Speaker 2: there are some cyclists who most of the time aren't
Speaker 2: really pushing and therefore are not really making any money
Speaker 2: because everyone's getting paid for pushing. But they've been paid
Speaker 2: to come along for the ride, to be on the
Speaker 2: bike because we know that at some point there's a
Speaker 2: really steep hill and they're going to be needed for
Speaker 2: that steep hill. So they weren't otherwise going to come
Speaker 2: along on this ride. They were going to go home
Speaker 2: and have a cup of tea rather than be on
Speaker 2: the bike. But there's this market that says, we know
Speaker 2: how many people were going to need for this entire journey,
Speaker 2: and so even if instantaneously you're not doing much, we
Speaker 2: are going to pay you to just come along so
Speaker 2: that when you're needed, you're there. Is that a correct
Speaker 2: mapping of what you've said onto the bike analogy.
Speaker 4: I think that's that's perfectly right. But there's also another
Speaker 4: reason why you'll have spare cyclists too, and that can
Speaker 4: you continue ther bike analogy. Sometimes people fall off the bicycle.
Speaker 4: So this happens, very terrible bike people fall off it. Yeah,
Speaker 4: but I mean basically, all power systems, to ensure stability
Speaker 4: and reliability, should be keeping around enough spare capacity. So
Speaker 4: if the largest generator, like the strongest cyclist, happens to
Speaker 4: fall off, there's enough spare capacity elsewhere in the system
Speaker 4: to come online and fill that gap.
Speaker 2: Got it. So we're planning for a certain amount of
Speaker 2: carnage in the journey. I want to move on to
Speaker 2: a really important part of this discussion, which is how
Speaker 2: power markets need to change during the energy transition. And
Speaker 2: we kind of touched on some of this already. We
Speaker 2: talked about maybe the price goes really low when there's
Speaker 2: a lot of wind blowing, which is kind of like
Speaker 2: some of the cyclists on your bike are inconsistent. Sometimes
Speaker 2: the wind blows and they react to that by pedaling
Speaker 2: really hard, or when the sun shines they pedal really hard,
Speaker 2: and everyone else has to adjust to that. But using
Speaker 2: Helen's idea of the merit order, you can see that
Speaker 2: you end up in the really sort of low price
Speaker 2: parts of that curve. And I mentioned that the price
Speaker 2: that is set in a wholesale power market isn't necessarily
Speaker 2: a measure of the inherent value of the power. It's
Speaker 2: just a byproduct of this system of balancing supply and demand.
Speaker 2: The analogy I always use is is, in that system
Speaker 2: of balancing supply and demand, if the wind was blowing
Speaker 2: really hard one day, and wind in a particular market
Speaker 2: was generating enough power to satisfy all of the needs
Speaker 2: of the market, and it has zero dollars per mego
Speaker 2: on our short run marginal cost, then the power in
Speaker 2: that market would be free. The price that the market
Speaker 2: would form would be free or there or thereabouts. But
Speaker 2: the value of that power is not zero to society.
Speaker 2: It's still powering factories, putting people's lights on, running it infrastructure,
Speaker 2: so it's not truly valuing the power. So it kind
Speaker 2: of leads me to my last question is we can
Speaker 2: see how renewables create a new dynamic in this power
Speaker 2: market system, So how do power markets need to change
Speaker 2: to enable the energy transition and how could or should
Speaker 2: they change.
Speaker 4: So I think the wind example is a really good one, Tom,
Speaker 4: And to bring it back to the bicycle, wind is
Speaker 4: like having a sail on this bicycle because for the
Speaker 4: most part, wind is there's no pedals, they're not connected.
Speaker 2: Sorry, my cyclist that suddenly signed pedaling was wrong. It's
Speaker 2: a sale on the bike. It's a sale on the bike.
Speaker 4: And just like a real world sail, if we get
Speaker 4: a big gust of wind all of a sudden and
Speaker 4: we haven't planned for that, we might be pedaling too hard. Similarly,
Speaker 4: if the wind drops all of a sudden, we need
Speaker 4: to make sure we've got enough cyclists on hand to
Speaker 4: pick up the slack. And importantly, that sale is not
Speaker 4: connected to the chain, so they don't contribute power in
Speaker 4: the same way necessarily as these thermal generators, so there's
Speaker 4: there's less inertia on the system from having wind. Taking
Speaker 4: it back to your question about how things are changing
Speaker 4: with renewables, I think, well, firstly, this discussion about renuneration
Speaker 4: is really important. Might even throw it to you, Helen,
Speaker 4: the pp What are they?
Speaker 2: What is it? What is a PPA? And how does that?
Speaker 2: Why does that matter?
Speaker 4: For renewables.
Speaker 3: A PPA is a power purchase agreement. And what a
Speaker 3: PPA is is where basically an off taker, usually some
Speaker 3: type of utility or maybe a large corporate is paying
Speaker 3: directly to a generator for energy and it's it's a
Speaker 3: payment of a dollar per megoat hour. It's usually an
Speaker 3: additional revenue stream outside of energy markets for that type
Speaker 3: of generation.
Speaker 2: Well, I would assert that does the PPA really solve
Speaker 2: this fundamental challenge or is it just a band aid
Speaker 2: plastering over it? Because you're you're a generator and you
Speaker 2: sell it to a customer, and so then you get
Speaker 2: a guaranteed revenue stream and a customer basically owns the
Speaker 2: off take that they've they've paid for. But then the
Speaker 2: value of that off take is still then getting determined
Speaker 2: by this wholesale market. Surely, and ultimately, if we still
Speaker 2: see that value getting crushed in wholesale power markets, over time,
Speaker 2: people are going to be less and less willing to
Speaker 2: pay a decent amount for a PPA. So it just
Speaker 2: doesn't it just defer the problem for a.
Speaker 3: Little bit, I would say, So with increasing amount of renewables,
Speaker 3: you're basically to go back to the cyclist's analogy like
Speaker 3: you're going to have a lot of bicycles that are
Speaker 3: either going to only be cycling when the wind is
Speaker 3: blowing or only be cycling when they're sunshine, right, and
Speaker 3: so you end up needing more cyclists that are able
Speaker 3: to actually start and stop or cycle harder or cycle slower,
Speaker 3: depending on the specific cyclists that only cycle when the
Speaker 3: sun is shining or the wind is blowing. And so
Speaker 3: power markets need to change in a way to like
Speaker 3: incentivize cyclists that can start and stop really quickly. So
Speaker 3: maybe having more nuanced capacity markets, or like additional ancillary services,
Speaker 3: or even rethinking the entire structure of how we think
Speaker 3: about resource planning. Those are all different things that probably
Speaker 3: as we have more renewables, will need to actually consider.
Speaker 4: And that there may not be a perfect way of
Speaker 4: doing this already. You can sort of see slightly different approaches.
Speaker 4: I think probably fair to say that the out that
Speaker 4: Australia in Texas are taking slightly less emphasis on capacity
Speaker 4: markets and guaranteed payments and more emphasis on having very
Speaker 4: high emergency pricing, if that's a sort of stretch that definition.
Speaker 4: So if you're one of the few cyclists that can
Speaker 4: still pedal. When the grid really really needs you, you're
Speaker 4: going to get paid ten times, fifty times, one hundred
Speaker 4: times what you might normally get paid, and so you
Speaker 4: can make a huge fraction of your annual revenue just
Speaker 4: in a handful of hours. And then other markets they
Speaker 4: want to manage that volatility and in slightly different ways,
Speaker 4: so they'll de emphasize how much you might get paid
Speaker 4: in a single hour, but then the capacity payments, the
Speaker 4: guaranteed revenues just for sort of sticking around, will be
Speaker 4: a bit higher.
Speaker 2: I feel like there's two problems here. One is, when
Speaker 2: you have more renewables, you need to have a way
Speaker 2: to guarantee that dispatchable generation, whether it's thermal generation or batteries,
Speaker 2: can stay online. And I think what you've both just
Speaker 2: described to me deals with that problem. The second problem
Speaker 2: is that the market is not correctly valuing the power
Speaker 2: that wind and solar is bringing to the market. How
Speaker 2: do we solve that. Do we have to go back
Speaker 2: to a regulated system or is there some hybrid.
Speaker 4: I think there's definitely a hybrid, And I think that
Speaker 4: you want to use the beauty of the power system
Speaker 4: to correctly value renewables, and so that you've got a
Speaker 4: system which already has a lot of renewables. Since there's energy,
Speaker 4: we're not using this too much solar, you probably don't
Speaker 4: want to incentivize more solar in that system.
Speaker 3: To answer your question, do we go back to like
Speaker 3: a regulated system, I think we need probably more regulation
Speaker 3: of some sort. I use to cover en inergy storage.
Speaker 3: And a key trend that we saw in one of
Speaker 3: our market outlooks was that a lot of different regulators
Speaker 3: were basically creating carve outs in their capacity markets. We're
Speaker 3: creating top down regulation to like basically incentivize energy storage
Speaker 3: in a very top down policy way, in a kind
Speaker 3: of like integrated resource plans or utility planning process. Current
Speaker 3: market structure clearly doesn't do a good job valuing clean
Speaker 3: dispatchable resources. And oftentimes when we think about renewables, it
Speaker 3: needs to be paired with some type of clean dispatchable
Speaker 3: resource to actually be able to meet demand. And so
Speaker 3: the current market structure doesn't work necessarily that well, and
Speaker 3: so new frameworks need to be made, whether that's fully
Speaker 3: regulated or other types of different constructs.
Speaker 2: I'll just wrap with a thought about both of your responses.
Speaker 2: You're both power market experts and this question of valuing
Speaker 2: renewables and the correct way to value renewables. I think
Speaker 2: you both have different ideas of how that could happen,
Speaker 2: but it's not obvious. I think this is a thing.
Speaker 2: It's a really tough question, even for you guys. Helen
Speaker 2: made the point earlier that power markets and power systems
Speaker 2: and the way their structure have always evolved, and so
Speaker 2: maybe we're looking at the next step of evolution, and
Speaker 2: there are all sorts of different factors that could determine
Speaker 2: what the right answer is. So, for example, the way
Speaker 2: power markets are currently set up, demand is almost completely
Speaker 2: inelastic relative to price. Now some of these problems go
Speaker 2: away with more elastic demand, and we're seeing potentially all
Speaker 2: sorts of new sources of demand that would be more flexible,
Speaker 2: would be able to bring that We don't have the
Speaker 2: answered this question. It's an entire research topic for us.
Speaker 2: So you know, maybe it's unfair me putting Helen and
Speaker 2: Ian on the spot, but this is why I think
Speaker 2: this is such an interesting and you know, for the
Speaker 2: power nerds of for everyone else, it's such an important question.
Speaker 2: So let me just wrap by saying thank you to Helen.
Speaker 2: Thank you to Ian. It's been a really fascinating discussion. Helen,
Speaker 2: thank you for joining. Thank you, and Ian, thank you
Speaker 2: for joining. Thank you.
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