WEBVTT - With Great Power Markets Comes Great Responsibility 0:00:00.080 --> 0:00:02.960 This is Dana Perkins and you're listening to Switched on 0:00:03.279 --> 0:00:06.160 the podcast where we feature different B and F analysts 0:00:06.240 --> 0:00:10.200 each week and they share their research on the energy transition. Now, 0:00:10.200 --> 0:00:12.320 if you're a regular listener, you'll have noticed that we've 0:00:12.360 --> 0:00:14.720 featured a co host on a few episodes of the 0:00:14.800 --> 0:00:18.000 last couple of months, and today he is the host 0:00:18.000 --> 0:00:20.239 of the show. I've worked with Tom Rowlands Reese for 0:00:20.320 --> 0:00:23.280 nearly the entire fifteen years I have been at BNF, 0:00:23.400 --> 0:00:26.040 and not only does he match my exuberance for the 0:00:26.040 --> 0:00:28.720 intricacies of the energy transition, but he is also a 0:00:28.840 --> 0:00:31.800 self proclaimed energy nerd. I've also always found him to 0:00:31.880 --> 0:00:35.400 be a great storyteller, and today's show was no exception. 0:00:35.600 --> 0:00:38.560 On the topic of what is a power market? Tom 0:00:38.640 --> 0:00:41.479 and his guests have managed to explain this question by 0:00:41.520 --> 0:00:45.040 relying on tandem bicycles as their metaphor of all things. 0:00:45.320 --> 0:00:47.400 Tom is the perfect host for a show on power 0:00:47.440 --> 0:00:50.959 markets because he actually leads our power research teams globally. 0:00:51.240 --> 0:00:53.960 He's joined today by Helen Coe, who manages our US 0:00:54.000 --> 0:00:56.480 power team, and Ian Berryman, who is our head of 0:00:56.560 --> 0:01:00.240 Energy Systems Modeling at BNF. I think this show might 0:01:00.320 --> 0:01:02.560 be their love Letter to Power Markets, where at the 0:01:02.600 --> 0:01:05.800 beginning they share why power markets are an incredible innovation 0:01:06.000 --> 0:01:09.360 on power systems, before they then get into just how 0:01:09.400 --> 0:01:12.080 these markets work and the things one needs to consider 0:01:12.200 --> 0:01:14.840 if they want to know what a power market actually 0:01:15.080 --> 0:01:18.320 is and to be conversant with the terminology. If you're 0:01:18.360 --> 0:01:20.800 a BNF client, we have a wealth of information on 0:01:20.880 --> 0:01:24.120 power markets around the world and this can be found 0:01:24.200 --> 0:01:26.760 at BNF go on the Bloomberg terminal or at BNF 0:01:26.800 --> 0:01:29.760 dot com by going then to the dropdown menu titled 0:01:29.800 --> 0:01:33.360 Sectors and then selecting power markets, and I would recommend 0:01:33.400 --> 0:01:36.840 starting with some research notes such as US merit Order Primer, 0:01:37.000 --> 0:01:40.080 a supply side power Study. We also have an accompanying 0:01:40.200 --> 0:01:42.759 live sheet that goes with this. We have a European 0:01:42.800 --> 0:01:46.040 Power Markets Monitor live sheet and a European Power Monthly, 0:01:46.240 --> 0:01:49.160 a US Power Weekly and the twenty twenty four CAISO 0:01:49.240 --> 0:01:53.200 Market Outlook Dynamics in transition. So here we go Tom 0:01:53.240 --> 0:01:55.720 on his maiden voyage as solo host, joined by Helen 0:01:55.760 --> 0:01:58.080 and Ian, where they share why everyone should be as 0:01:58.240 --> 0:02:00.400 enthralled by power markets as they are. 0:02:10.080 --> 0:02:13.320 Helen co Welcome to the show, Thank you, and Ian 0:02:13.320 --> 0:02:16.200 Berryman welcome to the show. Thank you. I am really 0:02:16.240 --> 0:02:19.960 excited to talk to two fellow nerds on this topic. 0:02:20.160 --> 0:02:22.160 We've got the head of Energy Systems Modeling here and 0:02:22.200 --> 0:02:24.480 the head of US Power to talk about power markets, 0:02:24.480 --> 0:02:26.640 to explain how they work, why we think they're cool. 0:02:26.800 --> 0:02:30.000 So let's start with that last question, Helen, what's your 0:02:30.080 --> 0:02:31.800 view on why power markets are so cool? 0:02:32.400 --> 0:02:34.960 I mean, I think power markets are cool because it's 0:02:35.040 --> 0:02:39.160 often like the interplay between supply and demand and economics. 0:02:39.320 --> 0:02:42.560 When I think about why I wanted to cover power 0:02:42.600 --> 0:02:46.040 markets and understand US power markets in particular, I think 0:02:46.360 --> 0:02:49.400 to the fact that I really like strategy games. I 0:02:49.520 --> 0:02:52.840 like chess, and I like Majong, and I think power 0:02:52.840 --> 0:02:56.320 markets is a little bit like the ultimate strategy game. 0:02:56.960 --> 0:02:59.440 I think, like, you have power plant owners and their 0:02:59.440 --> 0:03:03.160 goal is to maximize profits by trying to figure out 0:03:03.160 --> 0:03:06.480 when to generate, when to hit demand. You have system 0:03:06.520 --> 0:03:08.560 operators and they're trying to figure out how to win 0:03:08.600 --> 0:03:10.520 the game by trying to figure out how to balance 0:03:10.600 --> 0:03:13.760 the power market in real time five minutes, fifteen minutes, 0:03:13.800 --> 0:03:16.880 depending on that market. And so it's this big strategy 0:03:16.919 --> 0:03:19.640 game that everyone's playing all together. The other thing is 0:03:19.680 --> 0:03:24.320 that it's regional, so every game is very much unique 0:03:24.360 --> 0:03:27.360 to that specific area. It's often shaped by the physical 0:03:27.400 --> 0:03:30.799 infrastructure of that region, the geography, or the local politics. 0:03:31.000 --> 0:03:34.680 The way I think about this is like asking maybe 0:03:34.720 --> 0:03:38.240 you or Ian to draw a cat. Right, everyone knows 0:03:38.240 --> 0:03:40.080 what a cat looks like. You have an idea of 0:03:40.120 --> 0:03:42.600 what the cat is. But when I ask you to 0:03:42.720 --> 0:03:45.040 draw a cat, it's going to look very very different. 0:03:45.120 --> 0:03:48.120 Depending on just the ears or the whiskers, you're going 0:03:48.200 --> 0:03:50.640 to have a different cat. And it's the same between 0:03:50.800 --> 0:03:54.840 URKOT or KAISO or PJM. Various power markets are regionally 0:03:54.960 --> 0:03:58.120 very different. You have like urcot's price oidders or kaiso's 0:03:58.160 --> 0:04:02.360 resource adequacy rules, all really really unique, and as an analyst, 0:04:02.440 --> 0:04:06.120 it's really interesting to basically figure out large trends across 0:04:06.200 --> 0:04:09.000 multiple power markets and figure out what that strategy is 0:04:09.040 --> 0:04:12.240 from a fundamental perspective, but then also get to deep 0:04:12.320 --> 0:04:15.000 dive into kind of the intricacies of each region. 0:04:15.480 --> 0:04:17.000 You've touched on so many things that we're going to 0:04:17.040 --> 0:04:19.839 explore in a little bit more detail for those listeners 0:04:19.839 --> 0:04:22.280 who are not familiar with US power markets. By the way, 0:04:22.600 --> 0:04:25.600 Urkot is the power market that covers most of Texas, 0:04:25.920 --> 0:04:30.120 KAISO is most of California, and PGM is multiple states 0:04:30.880 --> 0:04:34.320 in the US Mid Atlantic Ian you've heard Heirlin's perspective, 0:04:34.360 --> 0:04:36.440 Why do you think power markets are so cool? 0:04:36.640 --> 0:04:36.839 Yeah? 0:04:36.880 --> 0:04:38.960 Thanks so so I think power markets are really cool 0:04:38.960 --> 0:04:43.080 because I think they are an amazing, even shining example 0:04:43.360 --> 0:04:46.359 of real world free markets. And yeah, when I started 0:04:46.360 --> 0:04:49.200 working at BNF and I got exposed to power markets, 0:04:49.480 --> 0:04:52.560 my experience was really like, Wow, these things they just 0:04:52.880 --> 0:04:56.240 really work and they're sort of just beautiful in their simplicity. 0:04:56.279 --> 0:04:58.440 And I think that's for me, that's what it is. 0:04:58.600 --> 0:05:01.359 An electron is an electro on. Electricity is electricity. It 0:05:01.360 --> 0:05:03.520 doesn't really matter where you get it from. It's all 0:05:03.560 --> 0:05:06.200 the same. And it's sort of like that where theoretical 0:05:06.320 --> 0:05:08.760 the sort of beauty of capitalism can actually be applied 0:05:08.760 --> 0:05:11.400 in the real world and really work and deliver, for 0:05:11.440 --> 0:05:15.280 the most part, incredibly reliable power that very infrequently we 0:05:15.960 --> 0:05:19.440 do without. And it's often very cheap considering the amount 0:05:19.440 --> 0:05:21.000 of value that it brings to our lives. 0:05:21.160 --> 0:05:23.120 I mean, I think that is a really true statement 0:05:23.279 --> 0:05:25.560 that I would agree with that power is very cheap 0:05:25.640 --> 0:05:27.800 compared to the value that it brings to our lives 0:05:27.839 --> 0:05:29.800 and maybe we can probe that a little bit more later, 0:05:29.880 --> 0:05:31.640 and I am sure we are also going to join 0:05:31.680 --> 0:05:36.200 this podcast talk about some of the shortcomings of power markets. 0:05:36.760 --> 0:05:39.960 After further learning, I realized that also the power system 0:05:40.000 --> 0:05:42.400 is not always as amazing as I make it out 0:05:42.440 --> 0:05:42.640 to be. 0:05:42.760 --> 0:05:44.680 But for the most part, it's pretty good. No, But 0:05:44.720 --> 0:05:46.560 I think it's a fair point that before we talk 0:05:46.600 --> 0:05:49.320 about where the glass might be a little bit empty, 0:05:49.520 --> 0:05:51.880 there is a lot of water in the glass. Power 0:05:51.920 --> 0:05:55.040 markets are by and large, they serve an important purpose 0:05:55.320 --> 0:05:57.640 and actually kind of leads to my next question because 0:05:58.040 --> 0:06:00.400 we're not here talking about power systems but talking about 0:06:00.400 --> 0:06:03.040 power markets specifically, which is a component of the power system, 0:06:03.200 --> 0:06:06.640 and not all power systems have a power market. So 0:06:07.040 --> 0:06:10.000 just to put power markets in context, can we talk 0:06:10.000 --> 0:06:12.920 a little bit about what the alternatives to having a 0:06:12.960 --> 0:06:15.359 power market are before we go into the details of 0:06:15.440 --> 0:06:18.720 how the power market works. What are the other options? 0:06:19.279 --> 0:06:23.599 You're right, Tom, not everywhere has wholesale power markets in general. 0:06:23.640 --> 0:06:25.840 I mean even in the US, you have various different 0:06:25.880 --> 0:06:29.760 types of power systems. In the southeast or the Southwest, 0:06:29.920 --> 0:06:32.360 you have a lot of vertically integrated utilities, and those 0:06:32.400 --> 0:06:37.039 are single entities that own both generation, transmission and distribution. 0:06:37.440 --> 0:06:41.280 You're referring to the southeast and southwest of the US, right, yes, okay. 0:06:41.160 --> 0:06:45.240 Yes, correct, And I mean the price of generation is 0:06:45.320 --> 0:06:48.640 then based on the capital cost of building those power 0:06:48.680 --> 0:06:51.520 plants and plus a rate of return, which is rate based, 0:06:51.560 --> 0:06:54.480 and it's typically the dominant model that we see across 0:06:54.600 --> 0:06:58.880 various other power markets, like across Asia and China or Korea. 0:06:59.000 --> 0:07:01.520 They're kind of it's been our version of like vertically 0:07:01.520 --> 0:07:04.599 integrated utilities is just state owned utilities, and that's just 0:07:04.600 --> 0:07:07.800 when the government owns and operates the entire electricity supply 0:07:07.920 --> 0:07:11.320 chain of generation, transmission, and distribution. Some examples of that 0:07:11.400 --> 0:07:14.560 are like New York Power Authority or Tennessee Value Authority 0:07:14.600 --> 0:07:15.160 in the US. 0:07:15.720 --> 0:07:18.280 I mean going back, if we go way way back, 0:07:18.520 --> 0:07:20.960 you know, because I think a lot of our thinking 0:07:21.120 --> 0:07:23.840 is that the natural state for power systems you have 0:07:23.960 --> 0:07:27.080 either state owned or regulated monopolies, and then eventually they 0:07:27.080 --> 0:07:29.600 decide to introduce the liberalized power market. And you see, 0:07:29.600 --> 0:07:31.720 that's what's happening in various parts of the world like 0:07:31.760 --> 0:07:34.240 South East Asia. But if you go back before then 0:07:34.640 --> 0:07:39.080 power was a completely unregulated market. You know, you had 0:07:39.080 --> 0:07:43.720 people like Thomas Edison just building generators, building their own 0:07:43.720 --> 0:07:46.840 wires going everywhere. Then their competitors would be building their 0:07:46.880 --> 0:07:49.360 own generators and their own wires getting everywhere. So how 0:07:49.360 --> 0:07:51.720 did we move from that to the sort of the 0:07:51.760 --> 0:07:55.040 regulated picture, which then then maybe tease up then going 0:07:55.080 --> 0:07:57.640 into the liberalized pictures. Seems like there's been a bit 0:07:57.680 --> 0:08:00.600 of a journey in how we've structured the business of 0:08:00.800 --> 0:08:01.640 delivering power. 0:08:01.840 --> 0:08:04.560 I mean, some particular examples would be cases where you 0:08:04.640 --> 0:08:09.120 have the sort of centralized dispatch model, which can often 0:08:09.240 --> 0:08:11.880 fly in the face of better economic outcomes. So an 0:08:11.880 --> 0:08:14.080 example of that where it would be where a state 0:08:14.160 --> 0:08:16.880 of utility is signed a contract with a coal plant 0:08:17.000 --> 0:08:20.040 to provide a certain amount of power. Meanwhile, you've got 0:08:20.200 --> 0:08:22.480 end consumers who want to put solar panels on their 0:08:22.560 --> 0:08:25.040 roof and reduce their daytime consumption, and if you don't 0:08:25.160 --> 0:08:27.360 have everything in place to allow that, you might get 0:08:27.400 --> 0:08:29.240 stuck with a system where you're sort of forced to 0:08:29.280 --> 0:08:32.040 burn this coal and you don't have those price signals 0:08:32.040 --> 0:08:34.360 in the market which would get you a cheaper system overall. 0:08:34.840 --> 0:08:39.120 So we describe power markets as being this very pure 0:08:39.240 --> 0:08:42.720 form of free market capitalism, but it exists as a 0:08:43.200 --> 0:08:46.280 unit within a sort of a regulated box, and there 0:08:46.280 --> 0:08:48.559 are parts of the system outside of that market for 0:08:48.600 --> 0:08:51.080 supply and demand that are heavily regulated. 0:08:51.360 --> 0:08:53.480 I think, just to add on Tom, when you threw 0:08:53.520 --> 0:08:56.000 the question around the history of power markets, like I 0:08:56.040 --> 0:09:00.400 often think utilities are like these naturally regulated monopolies. When 0:09:00.440 --> 0:09:03.319 I studied power markets, very much like I assumed that 0:09:03.440 --> 0:09:07.080 when we think about utilities, they were natural monopolies that 0:09:07.280 --> 0:09:09.680 roughly around, Like, at least in the US in nineteen 0:09:09.720 --> 0:09:13.040 ninety two, we started liberalizing markets right so with the 0:09:13.120 --> 0:09:17.120 Energy Policy Act, and it basically enabled independent power producers 0:09:17.120 --> 0:09:20.640 to basically produce generation. And that really came at the 0:09:20.640 --> 0:09:23.440 same time as you had all this grid enhancements in 0:09:23.480 --> 0:09:27.440 advanced metering and also new policy announcements like for quarter 0:09:27.800 --> 0:09:30.880 A eight which allowed for independent system operators, which happened 0:09:30.920 --> 0:09:33.160 roughly in nineteen ninety six. I think, like the point 0:09:33.200 --> 0:09:35.600 I'm trying to make is that at least in the US, 0:09:35.640 --> 0:09:39.600 we went from kind of very decentralized markets to centralized markets, 0:09:39.720 --> 0:09:42.760 and we're kind of returning into decentralized markets again. When 0:09:42.760 --> 0:09:45.840 we think about power markets in general. What's interesting to 0:09:45.920 --> 0:09:49.720 me is the fact that their constructs that we pretend 0:09:50.000 --> 0:09:52.960 are like really solid, but they actually ebb and flow 0:09:53.000 --> 0:09:54.480 and change over time quite a bit. 0:09:54.920 --> 0:09:57.240 I think that's a really great point. And actually I 0:09:57.320 --> 0:09:59.560 wish I could remember the dates. It's a similar story 0:09:59.559 --> 0:10:01.760 in Europe, and I know that there was a European 0:10:01.920 --> 0:10:04.800 Union piece of legislation which the date of which and 0:10:04.880 --> 0:10:06.680 name of which I don't remember, which create did the 0:10:06.679 --> 0:10:10.280 equivalent thing in Europe, except maybe much more consistently than 0:10:10.280 --> 0:10:13.320 in the US, because all EU companies have something resembling 0:10:13.400 --> 0:10:15.559 a liberalized power market. But aside from that, I think 0:10:15.559 --> 0:10:17.600 you make a really important point, and because we're going 0:10:17.640 --> 0:10:19.120 to talk a little bit about power markets and the 0:10:19.200 --> 0:10:21.120 energy transition in a moment, and I think it's really 0:10:21.160 --> 0:10:23.840 important to understand because a lot of there are maybe 0:10:23.880 --> 0:10:26.599 a lot of challenges that need to be resolved, adaptations 0:10:26.640 --> 0:10:28.800 that need to be made. These power markets, in their 0:10:28.880 --> 0:10:32.559 current form, they're not an inherent truth. They are a construct, 0:10:32.600 --> 0:10:36.160 a relatively recent construct of something that has been continually evolving, 0:10:36.200 --> 0:10:38.560 and so there is no reason why they can't continue 0:10:38.600 --> 0:10:41.839 to evolve. So to t that up, why do power 0:10:41.840 --> 0:10:47.000 markets matter? For the energy transition, very very high level. 0:10:47.280 --> 0:10:50.320 They matter because they determine who gets paid what, and 0:10:50.480 --> 0:10:53.400 so you can there's no fixed design. There's a lot 0:10:53.440 --> 0:10:56.520 of standardization around the world, but there's no central global 0:10:56.520 --> 0:10:58.560 government that tells you how to design a power system. 0:10:58.559 --> 0:11:01.600 And that choice there of who gets enumerated what for 0:11:01.679 --> 0:11:05.000 providing which service dictates who are the winners and the 0:11:05.040 --> 0:11:06.840 losers in those markets, and we try to do that 0:11:06.880 --> 0:11:07.600 in a fair way. 0:11:07.840 --> 0:11:10.760 They matter for the energy transition because things like wind 0:11:10.800 --> 0:11:14.000 and solar very famously don't have a fuel cost, and 0:11:14.120 --> 0:11:16.040 so if you get enough of them on the system, 0:11:16.280 --> 0:11:19.360 you can get power prices falling, going towards zero or 0:11:19.360 --> 0:11:21.960 sometimes even going negative. And that becomes a challenge because 0:11:21.960 --> 0:11:23.960 if you want more of these things on the system, 0:11:23.960 --> 0:11:27.280 if you know that they lower overall costs in the system, 0:11:27.360 --> 0:11:29.840 but they're not getting paid, then the power market is 0:11:29.880 --> 0:11:32.880 really crucial to determining how we eve enumerate those assets. 0:11:33.120 --> 0:11:36.080 It's a really great point, and Ian just to follow. 0:11:36.640 --> 0:11:39.160 We said Ian is the head of energy systems modeling. 0:11:39.240 --> 0:11:41.480 For a lot of listeners, that might not mean anything 0:11:41.520 --> 0:11:45.000 in particular, but Ian is the brains behind a lot 0:11:45.040 --> 0:11:48.040 of our neo reports, and in particular the Nephan model 0:11:48.120 --> 0:11:51.000 that models what gets built in the power system. And 0:11:51.320 --> 0:11:53.800 I note that you know your model is based on 0:11:54.040 --> 0:11:56.760 what is the least cost system to keep the lights on? 0:11:57.080 --> 0:12:00.079 And it's really interesting because that doesn't produce necessarily the 0:12:00.120 --> 0:12:03.520 same outcomes as a model that was built around what 0:12:03.559 --> 0:12:06.440 would you build based on remuneration in the market. So 0:12:06.480 --> 0:12:09.800 there's a discrepancy there between the value it measured one 0:12:09.800 --> 0:12:12.800 way and the value measured the other way exactly. So 0:12:13.240 --> 0:12:15.120 we've kind of talked around the topic a little bit. 0:12:15.480 --> 0:12:18.960 We've talked about power markets in abstract terms, and I 0:12:19.120 --> 0:12:22.120 know that Helen and Ian you are both chomping at 0:12:22.120 --> 0:12:25.640 the bit here to explain how power markets work. I'm 0:12:25.640 --> 0:12:28.920 going to start with Ian because Ian has this analogy 0:12:29.400 --> 0:12:33.480 that he's been absolutely dying to share with us. So, Ian, 0:12:33.800 --> 0:12:35.240 how do power markets work? 0:12:35.720 --> 0:12:40.120 So at its core, a power market is generation, transmission, 0:12:40.120 --> 0:12:42.800 and distribution. We're just going to focus on generation first, 0:12:42.880 --> 0:12:45.360 so this is where we create power. We do this 0:12:45.440 --> 0:12:47.720 in power plants. And the way I want to think 0:12:47.760 --> 0:12:51.920 about this is the analogy of a tandem bicycle. Think 0:12:51.960 --> 0:12:55.679 of each cyclist as a power plant. The pedals is 0:12:55.720 --> 0:12:59.480 how they contribute power to the grid. The grid is 0:12:59.520 --> 0:13:02.679 the chain connecting the bicycle, and so the first thing 0:13:02.720 --> 0:13:05.960 you notice is that for the tandem bicycle to work, 0:13:06.240 --> 0:13:08.680 each cyclist or each power plant has to be pedaling 0:13:08.720 --> 0:13:11.320 at the same speed. The same is the same is 0:13:11.320 --> 0:13:14.199 true for the power system. And so let's just assume 0:13:14.400 --> 0:13:18.520 that demand is constant. That's broadly the equivalent of the 0:13:18.559 --> 0:13:22.880 bicycle pedaling across the flat and so obviously you still 0:13:22.920 --> 0:13:27.400 have to add power if demand is constant, So those cyclists, 0:13:27.440 --> 0:13:29.480 those power plants are still contributing power. 0:13:29.760 --> 0:13:29.960 Now. 0:13:30.000 --> 0:13:33.079 Interestingly, what happens is if demand increases. We can think 0:13:33.120 --> 0:13:37.080 of this as the bicycle reaching a gradual incline, so 0:13:37.120 --> 0:13:40.360 it's going uphill now, and so for the system to work, 0:13:40.760 --> 0:13:44.400 the cyclists have to keep pedaling at the same speed 0:13:44.840 --> 0:13:48.280 they were before. And I think intuitively, anyone who's cycled 0:13:48.280 --> 0:13:50.760 before will know to keep pedaling at the same speed. 0:13:50.840 --> 0:13:53.160 If they're going uphill now, we need to pedal with 0:13:53.200 --> 0:13:55.600 more effort, and that's what that's what happens in the 0:13:55.640 --> 0:13:59.160 power system. So if demand goes up in the system, 0:13:59.320 --> 0:14:01.920 the power plant connected to that system have to generate 0:14:02.000 --> 0:14:04.600 more power to meet that demand. The opposite is true 0:14:04.600 --> 0:14:07.120 as well. So if demand falls, you think of that 0:14:07.160 --> 0:14:10.040 as going downhill on this bicycle. Each of those cycles 0:14:10.120 --> 0:14:13.200 or power plants now has to contribute a little less power, 0:14:13.280 --> 0:14:15.560 but as always, they have to keep pedaling at the 0:14:15.679 --> 0:14:20.120 same speed. That speed is in Europe fifty hurts, so 0:14:20.240 --> 0:14:22.720 fifty times a second they're peddling, and in the US 0:14:22.720 --> 0:14:25.200 that's sixty hurts or sixty times a second. But that's 0:14:25.200 --> 0:14:28.760 the sort of very basics of how power system strings together. 0:14:28.800 --> 0:14:30.720 And obviously the case of two people on a bicycle 0:14:30.800 --> 0:14:33.560 is very simple. There's many, many, many many power plants 0:14:33.560 --> 0:14:35.520 in some of the larger systems, and things start to 0:14:35.520 --> 0:14:38.360 get a bit more complicated. But that's the basics of 0:14:38.520 --> 0:14:41.920 how we balance supply and demand in the power system 0:14:42.000 --> 0:14:45.640 and coordinate synchronization of power plants of generators. 0:14:46.040 --> 0:14:48.240 So, actually, let's dive into this because I feel like 0:14:48.360 --> 0:14:52.080 you've framed the criteria that has to be met. You know, 0:14:52.360 --> 0:14:55.200 let's say this isn't a tandem bicycle. It's a bicycle 0:14:55.200 --> 0:14:57.640 that has thousands all pedaling on it all at once. 0:14:57.800 --> 0:15:00.000 And although this isn't true in real life, we've decided 0:15:00.320 --> 0:15:03.480 that they have to maintain the same speed of pedaling. 0:15:03.640 --> 0:15:06.800 So that's that makes sense. That's the challenge that we 0:15:06.920 --> 0:15:08.960 have to meet. And as you say, you go up 0:15:08.960 --> 0:15:10.840 a hill, in order to maintain that seats top of pedaling, 0:15:11.040 --> 0:15:13.600 collectively they need to put more effort in, and when 0:15:13.600 --> 0:15:16.359 they're going downhill they need to put less effort in. 0:15:16.360 --> 0:15:18.920 In a way, I feel like the bicycle analogy states 0:15:18.920 --> 0:15:21.960 the problem that the system has to keep spinning, and 0:15:22.000 --> 0:15:25.160 there's lots of different contributors, all of whom are putting 0:15:25.240 --> 0:15:27.520 in effort, and they might be putting in different amounts 0:15:27.520 --> 0:15:30.320 of effort. So maybe you don't have to carry on 0:15:30.480 --> 0:15:35.600 using Ian's analogy. But what I suppose we still need 0:15:35.640 --> 0:15:39.520 to understand is how we telling all of those cyclists individually, 0:15:39.600 --> 0:15:42.720 or how those power plants individually, how much effort they 0:15:42.760 --> 0:15:44.160 need to be putting in, and what is the role 0:15:44.160 --> 0:15:46.040 of the power market in that. How does it do that? 0:15:46.440 --> 0:15:50.080 So let's take Ian's analogy and say that they're every 0:15:50.120 --> 0:15:53.960 cyclist or bicycle is a power plant, and all of 0:15:54.000 --> 0:15:58.760 these cyclists are basically cycling at various different class like 0:15:58.800 --> 0:16:02.640 they're paid at different costs. In a power market, we 0:16:02.720 --> 0:16:07.880 often think about basically like the entire fleet of power 0:16:07.920 --> 0:16:10.800 plants or the entire fleet of cyclist, and every different 0:16:10.840 --> 0:16:14.280 cyclist is kind of being paid to cycle at a 0:16:14.320 --> 0:16:17.120 different costs, which we call short run marginal cost for 0:16:17.280 --> 0:16:21.320 power plants, and they're kind of stacked from the cyclists 0:16:21.360 --> 0:16:25.240 that can cycle at the cheapest amount to the cyclist 0:16:25.320 --> 0:16:27.680 that can cycle at the most expensive amount. So like 0:16:27.760 --> 0:16:29.440 an all star superstar cyclist. 0:16:29.640 --> 0:16:31.680 Stepping out of the analogy for a moment, because I 0:16:31.680 --> 0:16:34.680 think you've talked about a really important concept, short run 0:16:34.760 --> 0:16:38.480 marginal cost. Can you just define that in literal terms. 0:16:39.040 --> 0:16:43.920 It's just the cost to basically generate electricity. 0:16:43.600 --> 0:16:45.000 Of an individual plant. 0:16:44.760 --> 0:16:47.800 Of an individual plant, and it's often determined based off 0:16:47.840 --> 0:16:51.240 of the fuel costs the operating expenditure of any given 0:16:51.280 --> 0:16:54.360 power plant. In general, for renewables, that fuel cost is 0:16:54.520 --> 0:16:58.440 zero or minimal, and for other types of thermal generators 0:16:58.440 --> 0:17:00.680 it's based off of the thermal recas source like coll 0:17:00.760 --> 0:17:01.240 or gas. 0:17:01.720 --> 0:17:03.760 So, to make it really clear for people not familiar 0:17:03.800 --> 0:17:07.440 with this concept, this short run marginal cost doesn't include 0:17:07.480 --> 0:17:10.560 the cost of building the plant. It's the instantaneous cost. 0:17:10.760 --> 0:17:14.120 It's the difference between deciding not to generate a megaa 0:17:14.200 --> 0:17:17.480 hour of electricity and generating it. How much does it 0:17:17.520 --> 0:17:21.160 cost you to decide to make that decision precisely? 0:17:21.520 --> 0:17:23.480 Yes, And so I mean if we're going to get 0:17:23.560 --> 0:17:26.880 out of the bicycle analogy. The stack of like short 0:17:27.080 --> 0:17:29.639 marginal cost of every single power plant based on the 0:17:29.760 --> 0:17:31.879 least cost to the highest cost is known as a 0:17:31.920 --> 0:17:36.320 merit order. And what determines power prices is where that 0:17:36.840 --> 0:17:41.160 supply of resources hits demand. So demand might be changing 0:17:41.280 --> 0:17:45.640 various amounts throughout the day, and wherever demand hits the 0:17:45.680 --> 0:17:49.640 cost produce electricity. That is then the power price at 0:17:49.680 --> 0:17:53.280 a power market, and all the generators that are less 0:17:53.320 --> 0:17:56.400 than that power price ends up generating electricity and get 0:17:56.440 --> 0:17:59.919 paid that power price, and everything that is more expensive 0:18:00.080 --> 0:18:01.720 to actually generate don't. 0:18:02.160 --> 0:18:04.359 So just to really, I only want to spell this 0:18:04.400 --> 0:18:06.359 out for people who are not familiar with this. And 0:18:06.359 --> 0:18:08.359 by the way, we have a great note on merit 0:18:08.480 --> 0:18:11.520 orders that we published recently if you want to see more. 0:18:11.600 --> 0:18:14.280 This is like, if we're thinking in economics terms, this 0:18:14.359 --> 0:18:16.840 is a supply curve for power. You stack it up 0:18:16.880 --> 0:18:19.919 with who would be willing to deliver power at the 0:18:20.000 --> 0:18:22.359 cheapest price, all the way to the ones that would 0:18:22.440 --> 0:18:25.199 deliver it at the most expensive and collectively, when you 0:18:25.280 --> 0:18:27.960 sort of add it up, that gives you a curve 0:18:28.119 --> 0:18:31.040 that says how much the price of power should be 0:18:31.359 --> 0:18:34.760 at different degrees of demand. Correct, And then the idea 0:18:34.880 --> 0:18:38.199 is is then that if everyone is acting logically for 0:18:38.280 --> 0:18:41.520 a certain level of demand, we should get a price 0:18:41.560 --> 0:18:44.680 should be formed because of all the different players basically 0:18:44.720 --> 0:18:47.320 playing in their bid. And everyone who generate is everyone 0:18:47.320 --> 0:18:51.439 who is generating at or at a cheaper cost than 0:18:51.480 --> 0:18:54.880 the power price, and everyone who sits idly not generating 0:18:55.240 --> 0:18:58.000 for them it would have been not profitable to generate. 0:18:58.080 --> 0:19:01.199 Is that what we're saying? Yeah? Got it? So the 0:19:01.359 --> 0:19:06.679 price is maybe a byproduct of balancing supply and demand 0:19:06.760 --> 0:19:09.560 rather than a measure of the inherent value of the power. 0:19:09.600 --> 0:19:11.840 Is that a fair statement, I'd say so. 0:19:12.000 --> 0:19:15.280 Yeah, it's it's definitely a way to figure out the 0:19:15.320 --> 0:19:16.800 balance between supply and demand. 0:19:17.119 --> 0:19:20.520 Got it? Ian? Yeah, do you have anything to add 0:19:20.520 --> 0:19:24.120 to this description? Can you relate it back to your cyclists? 0:19:25.119 --> 0:19:28.680 I can, Tom, okay, because Helen Helen broke it down 0:19:28.720 --> 0:19:32.359 into literally how it works. Yeah, let's related back because 0:19:32.359 --> 0:19:35.480 I do think your cyclist analogy is kind of is 0:19:36.000 --> 0:19:38.239 very evocative and cool. So let's see if we can 0:19:38.240 --> 0:19:40.800 map it. But what Helen just said onto your analogy. 0:19:40.920 --> 0:19:43.640 So what Helen just said was great, that's exactly how 0:19:43.640 --> 0:19:46.439 it works. The one thing to add is that the 0:19:46.520 --> 0:19:48.720 largest markets, and when we talk about power markets, what 0:19:48.760 --> 0:19:52.439 we're generally describing the wholesale power market is traded in 0:19:52.600 --> 0:19:57.000 hourly blocks. And so we do that analysis. We list 0:19:57.040 --> 0:19:59.920 all the cyclist or power plants from cheapest and more expensive. 0:20:00.240 --> 0:20:02.840 We go our power supply curve to where our demand is, 0:20:02.840 --> 0:20:05.200 and then that's the price that's set. But we tend 0:20:05.200 --> 0:20:07.080 to set that price for an hour at a time. 0:20:07.119 --> 0:20:07.840 And I think it's. 0:20:07.760 --> 0:20:10.439 Quite obvious to see that the actual power system, we 0:20:10.480 --> 0:20:13.600 don't all coordinate our actions as consumers to keep demand 0:20:13.640 --> 0:20:16.159 constant for an hour. So we'll sort of peg the 0:20:16.240 --> 0:20:19.240