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Speaker 1: Hey, everyone, you might be will hear in my voice,

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Speaker 1: but I've got a bit of a cold right now.

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Speaker 1: I guess that was bound to happen when we all

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Speaker 1: went back out into the world. I guess. I don't know.

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Speaker 1: I hope everybody's feeling fine and doesn't have a cold anyway.

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Speaker 1: So I got a text the other day from a

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Speaker 1: friend that just said, quote, tell me what's what and

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Speaker 1: had a link to an op ed about the current

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Speaker 1: energy crisis here in Europe. Yes, there are cues at

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Speaker 1: the pump, Yes there are higher gas prices, and yes

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Speaker 1: gas storage levels are low compared to years prior. But

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Speaker 1: is it a crisis? And the op ed claims it's

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Speaker 1: all caused by renewables? Is that true? So I texted

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Speaker 1: him back and I said, well, I actually didn't know

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Speaker 1: the full answer, but as luck would have it, I'm

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Speaker 1: recording a pot on the topic and we'll find out then.

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Speaker 1: So to help us figure out what's what, we've got

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Speaker 1: David Hoster, being his head of research for AMIA the

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Speaker 1: Europe Middle Eastern Africa region. He'll walk us through the

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Speaker 1: big picture why the energy crunch, why now? And walk

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Speaker 1: us through all the contributing factors. Gas coal, carbon and renewables.

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Speaker 1: This interview is based on an ongoing coverage of European gas,

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Speaker 1: power and carbon markets being a Fuss. You can find

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Speaker 1: this analysis on BFC and the Bloomberg Terminal, BNF dot

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Speaker 1: com and BENF Mobile. As a reminder, BENIF does not

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Speaker 1: provide investment of strategy advice and you can do the

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Speaker 1: full disclaimer at the end of the show. I'm Mark

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Speaker 1: Taylor and you're listening to switch on to BENF podcast. David. Welcome, Hi, Mark,

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Speaker 1: it's good to be here. Thanks for joining. Okay, so,

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Speaker 1: just reading the news here in the UK, you know

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Speaker 1: there's all this news about long queues at the petrol

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Speaker 1: stations or the British Army today was announced that they

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Speaker 1: were coming to to deliver the patrol to the stations.

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Speaker 1: You hear about electricity distributors going out of business. I'm

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Speaker 1: hearing about high natural gas prices. But honestly I don't

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Speaker 1: really know what's going on. And I get text messages

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Speaker 1: from friends saying like, hey, you're an energy can you

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Speaker 1: explain what's going on? And I say no, I can't

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Speaker 1: actually told one. I'm doing a podcast today where we'll

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Speaker 1: get an explanation and just to listen to the show.

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Speaker 1: So can you help me and my friends understand what's

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Speaker 1: going on a bit better? Yeah, it's funny how these

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Speaker 1: kind of quote unquote boring topics that you and I

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Speaker 1: care so much about have suddenly made headline news in

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Speaker 1: the right So so suddenly where in this energy crunch

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Speaker 1: and all these inner working tubes and flows that are

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Speaker 1: really boring where it come to the front, right, So

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Speaker 1: you used to go into the petrol station, of course

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Speaker 1: there's petrol, and used to kind of turning on the lights,

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Speaker 1: and of course there's lights, and suddenly suppliers switching high prices,

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Speaker 1: high gas make you question all of that And the

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Speaker 1: answer is that probably probably it's not that bad. And

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Speaker 1: there's the stage in trading is like the cure for

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Speaker 1: high prices as high prices, so you know, if prices

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Speaker 1: are high, that will kick off the necessary investments and

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Speaker 1: trades and flows too to bring them down again. But

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Speaker 1: it just feels a little bit like we're and and

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Speaker 1: that doesn't just feel we are in in in a

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Speaker 1: crunch at the moment where a lot of factors come together.

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Speaker 1: And I think what what is surprising too many people

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Speaker 1: is how connected today's markets are if you think about gas,

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Speaker 1: if you think about power, these are you know, kind

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Speaker 1: of commodities that are often generated and sourced locally. But

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Speaker 1: in the case of gas, we are now suddenly in

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Speaker 1: this global market where something that happens in Korea, something

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Speaker 1: that happens in Japan affects us directly. And that's new, right,

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Speaker 1: where gas prices are really really high, and then power

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Speaker 1: prices are high as a result of thought, and then

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Speaker 1: we have these other kind of crisis or perceived crisis

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Speaker 1: in other commodities as well. So I think it's really

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Speaker 1: come to the forefront. There is an element of hype

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Speaker 1: as well. People go crazy, and then you know, the

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Speaker 1: papers write about people going crazy, and that makes people

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Speaker 1: go more crazy. But there is a real interesting story here,

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Speaker 1: and it touches on all the major commodities, and it

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Speaker 1: touches on all the major markets, and it's frankly like

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Speaker 1: a very interesting time to be in energy and then

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Speaker 1: especially as we're looking transition to a net zero world,

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Speaker 1: but not necessarily an interesting time to pay my electricity

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Speaker 1: bill or go to the petrol station. Okay, so what

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Speaker 1: we want to do in this episode, everybody is just

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Speaker 1: kind of lay this out so we understand, you know,

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Speaker 1: tick tick tick, what's going on with each of these

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Speaker 1: types of commodities and markets. To help understand what's going on.

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Speaker 1: But let's just put this to bed, Like, is this

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Speaker 1: a crisis, a crunch somewhere in between? Is it real?

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Speaker 1: You mentioned hype a second ago, Like, what's the real deal?

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Speaker 1: It is a crunch, and it is real because high

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Speaker 1: prices are hitting consumers, high prices are hitting suppliers, high

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Speaker 1: prices are hitting companies. So you know, you and I

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Speaker 1: were in the UK, we have this observed situation a

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Speaker 1: few weeks back where a fertilizer planned was coming offline

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Speaker 1: because the gas prices are very high. So why should

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Speaker 1: we care about this? Well, we do care because as

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Speaker 1: a side product of the fertilizing process as c O

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Speaker 1: two and c O two is one of the inputs

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Speaker 1: for dry eyes, that's one of the inputs for meat

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Speaker 1: and poultry industry. And suddenly we're in the situation where

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Speaker 1: you know, we can't get deliveries from our supermarkets because

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Speaker 1: they don't have frozen goods because they don't have dry eyes.

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Speaker 1: And suddenly becomes very real. Right, there is a a

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Speaker 1: real element in terms of like where we're going long

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Speaker 1: term with this, and we said this had been here

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Speaker 1: for a long time. Long term prices will go down

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Speaker 1: in the power sector, and that's because renewables coming in.

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Speaker 1: The renewables are you know, near zero marginal cost, So

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Speaker 1: we expect prices to go in the long term. And

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Speaker 1: and too many people it's been almost a surprise that

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Speaker 1: in the meantime prices can go up again. There isn't

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Speaker 1: just this one way street where prices go down. There

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Speaker 1: is an element of hype, asn't any trade, but there

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Speaker 1: is also kind of real shortage and part of this

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Speaker 1: supply and demand, and part of it goes back to COVID, right,

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Speaker 1: like all these disruptions in the supply chain that we

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Speaker 1: had the last year are coming back to bite us.

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Speaker 1: A ripple effect, Yeah, there's there's a ripple effect. There's

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Speaker 1: this experiment that I really like about phantom traffic jam.

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Speaker 1: I don't know if you know this experiment. It's basically

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Speaker 1: a bunch of cars going around in a circle and

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Speaker 1: there's no obstacle, but they're just going around in the

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Speaker 1: circle and then after a while you get these ripple effect. Well,

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Speaker 1: one driver goes a little bit slower, and the next

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Speaker 1: one goes a bit slower, and suddenly you have a

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Speaker 1: traffic jam and what is a perfect circle, Like there

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Speaker 1: shouldn't be any obstacle, but there's still this traffic jum

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Speaker 1: And I think it's a really nice image for the

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Speaker 1: global supply chains and how they're connected. And in this case,

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Speaker 1: there was a real obstacle, which was COVID, and we're

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Speaker 1: still seeing these these ripple effects were odd pieces of

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Speaker 1: the supply chain don't work. That's fascinating. I'm sure everybody

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Speaker 1: in in Washington, d C. Was thinking just now Root

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Speaker 1: sixty six when you said that that infamous traffic on

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Speaker 1: that road happened just because of that. When somebody taps

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Speaker 1: the brakes, you know, everything else stops. I didn't even

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Speaker 1: think about the you know, the fertilizer plant not be

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Speaker 1: able to pay their their gas bill shutting down, that

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Speaker 1: leading to disruptions in the in the cold chain, in supermarkets.

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Speaker 1: I mean, come on, it's all it's all interconnected. It's fascinating.

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Speaker 1: Can we start with gas actually just going to tick

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Speaker 1: through these things of what's going on with each of

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Speaker 1: these these commodity markets. Yeah, let's do that, all right?

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Speaker 1: So just give it to a straight What's what's going

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Speaker 1: on with gas? So the gas market in many sents,

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Speaker 1: it is one of the biggest drivers for this crisis,

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Speaker 1: and it's really to do in Europe with concerns around

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Speaker 1: Europe's ability to refill gas storage before the winter. Right,

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Speaker 1: So Europe has gas storage, and during the summer, when

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Speaker 1: demand in Europe is low because we're not heating there

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Speaker 1: isn't so much demand from domestic users, we fill up

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Speaker 1: the storage before the winter, and then over the winter

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Speaker 1: we deplete that and we still import. So the storage

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Speaker 1: level is a really important indicator of where we are

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Speaker 1: going in terms of the winter, whether the market would

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Speaker 1: be tight meaning there's kind of not enough supply for

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Speaker 1: the demand, or whether we lose where there's oversupply, and

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Speaker 1: that's you know, prices are all around tightness. Source stores

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Speaker 1: filled up right now. So part of the driver of

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Speaker 1: these high prices is concerns around storage. Right. We import

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Speaker 1: gas over the summer stored and then we use it

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Speaker 1: over the winter and we keep importing all the while.

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Speaker 1: And this year storage levels are really low historically, so

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Speaker 1: we're only at compared to where we would be on

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Speaker 1: a five year average, and that's creates tightness in the

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Speaker 1: market and really some concerns around the winterhead because if

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Speaker 1: we have a cold winter mark we could be ending

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Speaker 1: up with zero or next to no storage left at

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Speaker 1: the end, and that then creates a ripple effect kind

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Speaker 1: of coming back to this traffic journal we talked about earlier.

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Speaker 1: That could then last into the summer when we're competing

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Speaker 1: with Japan and Korea, and then into next winter. So

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Speaker 1: what happens now could like you know, trickle down, ripple

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Speaker 1: through the system and lead to a tight situation next

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Speaker 1: winter as well. In the UK, we always like to

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Speaker 1: kind of see some sunshine. Would we really get to

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Speaker 1: see some sunshine this winter because if we if we

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Speaker 1: if we end up with a colder than you know,

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Speaker 1: just really the colder, much colder than average winter, then um,

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Speaker 1: that could be could your problem? There's a I was

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Speaker 1: just sitting here at my desk freezing, wearing a jacket.

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Speaker 1: My kids come up from school and like, Dad, can

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Speaker 1: we can we turn on the heat And I'm like,

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Speaker 1: come on, it's still September. I kid, turn on the heat.

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Speaker 1: They please, We're freezing And I was like, Hi, fine,

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Speaker 1: so September here we are September and I'm turning on

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Speaker 1: the heat. Yeah, and you were coming off a cold winter,

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Speaker 1: if you if you cast your mind back to a

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Speaker 1: couple of months earlier, we had a really cold winter

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Speaker 1: this year, you know, there was kind of we were

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Speaker 1: heating well into March May. So that's the issue, right

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Speaker 1: where low one supply and low on storage, and then

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Speaker 1: supply just hasn't come in the way it usually does.

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Speaker 1: So imports from Russia, which are a big factor and

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Speaker 1: this have been low. And there's a bunch of reasons

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Speaker 1: for that. And then llen G, which is liquid natural gas,

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Speaker 1: which has been increasingly playing a role in European supplies,

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Speaker 1: has also gone down. And that's due to global competition,

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Speaker 1: and it's due to kind of long term contracts from

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Speaker 1: Japan and Korea in particular, where they import gas, and

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Speaker 1: they just called on these contracts to be fulfilled and

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Speaker 1: there just wasn't enough to go around to fill up

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Speaker 1: European supplies. And I think I read the other day

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Speaker 1: that China has a what does it fill at all

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Speaker 1: costs contract for LERG, you know, so that they'll pay

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Speaker 1: just basically whatever to make sure they have their supplies. Yeah, right,

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Speaker 1: that sounds a really strong signal. And on top of that,

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Speaker 1: they also announced this week that they're going to restrict

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Speaker 1: some of the health and safety protocol in coal mines,

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Speaker 1: so if there's an accident in a coal mine, they'll

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Speaker 1: just run production back up quicker. And that's a really

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Speaker 1: strong signal. And if one of your biggest buyers says, hey, guys,

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Speaker 1: I'm going to buy at all costs, and then you know,

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Speaker 1: hearts are fluttering in Europe when that goes ahead, and

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Speaker 1: that means that, in a way, of the European energy

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Speaker 1: transition an our kind of gas picture. At b NIEF

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Speaker 1: we like to call about this kind of one gas world.

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Speaker 1: That's increasingly the case, and that's new, that's a new phenomenon.

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Speaker 1: And I think I read in your analysis that the

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Speaker 1: UK has not kept up with their storage right, so

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Speaker 1: they're replying more on L and G because they haven't

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Speaker 1: invested as much in storage, so there's not as much

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Speaker 1: to draw fround. Is that right? Yeah? This problem is

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Speaker 1: structural and goes back a long time. The UK actually

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Speaker 1: used to have a huge amount of storage and was

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Speaker 1: called the North Sea. So we would in the UK

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Speaker 1: ease the North Sea as a storage and then also

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Speaker 1: have it as it you could ramp up and down

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Speaker 1: domestic supply. That's not the case anymore, and some storage

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Speaker 1: sites we even shut down. So there's a structural need

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Speaker 1: to build more storage going forward. But it's also not

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Speaker 1: a quick fix, right, so we can build new storage

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Speaker 1: now to take pressure of this winter or possibly even

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Speaker 1: the next winter. But what the UK can do though

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Speaker 1: is to really think more about their the lergy contracts,

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Speaker 1: you know, improving the energy infrastructure and thinking about how

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Speaker 1: they're going to contract an increasingly global market. I think

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Speaker 1: there was a perception in Europe that llen G from

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Speaker 1: the US in particular, would take the pressure of reliance

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Speaker 1: on Russian imports on domestic production. But you know, allen

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Speaker 1: G has a global commodity goes where prices are high,

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Speaker 1: and even the high prices in Europe because you know,

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Speaker 1: the tightness in the market was visible from the summer

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Speaker 1: or European gas team has said the market will be tight,

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Speaker 1: and prices started to rise accordingly, but there was still

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Speaker 1: not enough to attract fuel and ships from the US.

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Speaker 1: And then you know, frankly, there's just a a time

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Speaker 1: element like if if if a tanker leaves the US

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Speaker 1: and goes to Asia. It takes so too many days

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Speaker 1: to go there and then suns when it's come back

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Speaker 1: and fill up and go the other way. So it's

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Speaker 1: not like you can turn a switch and allen G

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Speaker 1: just flows like these these chips around their way. And

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Speaker 1: there's some excellent analysis that the allergy has team has

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Speaker 1: done about um, you know, twelve small reasons that all

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Speaker 1: upset the supply chain. And you know you talked about

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Speaker 1: fuel earlier. Shipping supply chains also in disarray for a

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Speaker 1: number of reasons. So you can see all these elements

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Speaker 1: coming together to form this perfect storm. Is that the

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Speaker 1: title of the report, twelve small reasons LERG supply gets

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Speaker 1: mest up. I don't know. Well, we'll look it up

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Speaker 1: and we'll put in the notes. It's the lesser like

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Speaker 1: some of the lesser lesser talked about reasons. But there's

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Speaker 1: this whole litany of things and and some local factors

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Speaker 1: as well. Right, if the UK had a fire in

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Speaker 1: one of its major substations, there's some unplanned outages and

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Speaker 1: some plant maintenance work on the power plants because those

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Speaker 1: measures were deferred during COVID times. So all the maintenance

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Speaker 1: schedule us a little bit upset. And in a way,

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Speaker 1: it used to be that the winter season was what

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Speaker 1: the focus was on, right because say, well, during the winter,

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Speaker 1: everything needs to be ready and we think about supply margin.

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Speaker 1: But now that was already the k last year that

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Speaker 1: the shoulder seasons are actually more dangerous. The shoulder seasons

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Speaker 1: is gonna bring and autumn when suddenly the system is

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Speaker 1: getting ready for winter. But winter might come early, or

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Speaker 1: we might have a lull in wind power. So the

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Speaker 1: shoulder seasons in many ways have become more dangerous than

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Speaker 1: the winter seasons now for a very short break. Stay

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Speaker 1: with us. So globally connected gas market, lower than average storage,

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Speaker 1: higher dependence on L and G, which is becoming more

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Speaker 1: competitive to to get contracts, Difficulty getting gas from Russia.

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Speaker 1: They're filling up their own stores before sending it over

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Speaker 1: to Europe. The list goes on with gas. Let's let's

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Speaker 1: keep going with with Cole. So Cole is kind of

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Speaker 1: a weird one. I think I remember back in Geez.

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Speaker 1: I don't remember what year it was. I think it

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Speaker 1: was around Fukushima, around when Germany said, you know what,

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Speaker 1: we're going to shut down our nuclear as well, and

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Speaker 1: they did, and they kept on the coal, but now

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Speaker 1: it's going out of being run of the market by economics, right,

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Speaker 1: Can you explain kind of what's going on with coal,

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Speaker 1: how some is surviving, how some is contributing, you know,

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Speaker 1: more to the grid right now? Basically what's going on

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Speaker 1: with coal? So Europe has embarked on this journey where

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Speaker 1: us say we're gonna shut down COLE, right and we're

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Speaker 1: gonna phase out COLE and as you mentioned, some market

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Speaker 1: stuff put in strict timelines. Others are probably working on them,

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Speaker 1: and even markets like Poland, which is very reliant on coal,

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Speaker 1: have said they want to phase out COLE eventually. So

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Speaker 1: that's good. The challenge at this point is that while

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Speaker 1: coal was really out of the market last year when

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Speaker 1: when we had all these COVID upsets in the market,

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Speaker 1: this year it is back, and it's back because of

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Speaker 1: high gas prices. And in Europe there are two types

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Speaker 1: of coal. So there's hard call, which is kind of

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Speaker 1: more energy dense and that's kind of traded globally to

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Speaker 1: to degree, and then there's lignite, which is the kind

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Speaker 1: of brown call, is less energy dense. It's mind locally

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Speaker 1: it is very polluting and the irony of this year

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Speaker 1: is that lignite is the only call that's in the money.

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Speaker 1: So if your own a lignant cold station at the moment,

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Speaker 1: you're you're just printing money because gas is high, hard

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Speaker 1: core is high. Carbon pyramids are high as well, but

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Speaker 1: you're still cheaper than the competition. So it's been a

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Speaker 1: real reversal from from last year. Last year we were

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Speaker 1: at the point where every gas plant that could possibly

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Speaker 1: run to displace coal was running and cole was kind

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Speaker 1: of at its absolute minimum. We still we still think

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Speaker 1: that in the long run economic coal fiz art will continue,

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Speaker 1: but this year has been kind of a bit of

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Speaker 1: a reversal of fortunes in that sense. And it's going

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Speaker 1: to be bad for emissions, right, It's not great for emissions,

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Speaker 1: And we're actually forecasting that will be up on emissions,

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Speaker 1: up on last year, up in probably north and then

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Speaker 1: even up on you, which is the reference here of

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Speaker 1: the of the before times. So it's it's not a

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Speaker 1: great picture when you look at emissions at the moment. Jeez, Okay,

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Speaker 1: we'll get to renewables, but can we touch on carbon

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Speaker 1: first since we're kind of on that with CEO two.

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Speaker 1: Emissions and the impact on cold etcetera. I mean, so

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Speaker 1: Europe has a carbon price, right something that is more

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Speaker 1: or less unique to to a whole you know, continent.

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Speaker 1: I guess you could say, but can you explain kind

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Speaker 1: of what's going on with carbon and where it's at

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Speaker 1: right now? The European carbon market is one of kind

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Speaker 1: of the main instruments for the European Union to decarbon

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Speaker 1: as the power market, and it's effectively putting a regulated

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Speaker 1: price on, putting a cap on carbon emissions and then

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Speaker 1: let the market define with the prices. And that price

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Speaker 1: was very low of blong time, and then maybe eighteen

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Speaker 1: months ago so we really started picking up and going up.

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Speaker 1: And right now the carbon price is at around sixty

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Speaker 1: five euro per ton, which is double what it was

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Speaker 1: last year or less. And that's been driven partly by

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Speaker 1: expected tightness in the market, you know, as in Europe

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Speaker 1: we have a whole package called Fit for fifty five

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Speaker 1: or we call it, where Europe tries to reduce its

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Speaker 1: missions to and then the carbon market is part of that.

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Speaker 1: So the carbon market has been rising anticipations of regulations

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Speaker 1: and policy that will constrain supply of carbon permits in

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Speaker 1: the future, and At the same time, there's been a

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Speaker 1: whole influx of trader is of a kind of new

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Speaker 1: participants in the market that has driven the price. And

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Speaker 1: because the carbon price and the gas price are linked

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Speaker 1: to a degree, it has kind of risen with the

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Speaker 1: gas price. But the carbon market has decoupled from the

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Speaker 1: gas market over the summer, and that's partly because it

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Speaker 1: is now so ridiculously high that kind of both markets

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Speaker 1: are almost like free floating. You know. It's like when

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Speaker 1: you're in a plane, you're the one of these space planes.

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Speaker 1: You're in the apex of the curve, and everybody is

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Speaker 1: just floating and unconnected to like the fundamentals. So we

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Speaker 1: would expect the market to be high, and we actually

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Speaker 1: we're still bullish on the market in October, but it

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Speaker 1: just won't catch up with a stampede in the European

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Speaker 1: gas market. So still be high, but gas is going

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Speaker 1: to be still higher kind of going forward. Yeah, at

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Speaker 1: this point, it's hard to see how gas prices can

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Speaker 1: come down quickly because of real tightness and because there's

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Speaker 1: there's no quick solution that could elevate the shortness. For

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Speaker 1: for this winter, it seems like the carbon market is

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Speaker 1: kind of doing its job right. It's it's it's putting

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Speaker 1: a price on emissions. But my question, maybe you don't

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Speaker 1: know the answer to this. I don't know, But is

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Speaker 1: support for the market still strong? Are people saying it awesome,

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Speaker 1: this is great, it's do a good job. But in

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Speaker 1: the face of an energy crunch, are people saying, like,

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Speaker 1: I wish we didn't have this, this carbon market, Like

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Speaker 1: what's the general feel? Yeah, that's a good question. Maybe

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Speaker 1: just take a step backward. The carbon market is not

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Speaker 1: just looking at the carbonizing the power market, but it's

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Speaker 1: also looking at the carbonizing industry. It will do the

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Speaker 1: combonizing transport. So because gas is so high in the

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Speaker 1: power market, the carbon price is not the factor at

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Speaker 1: the moment. It is one factor that drives high prices,

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Speaker 1: but you know, gas is by far the most important one.

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Speaker 1: What's interesting those as we're extending the carbon market to

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Speaker 1: more sectors, as we're tightening some of the kind of

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Speaker 1: availability for for certificates for industry, the carbon market just

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Speaker 1: background and gives some free allocation to two sectors, which

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Speaker 1: means that you know, industrial sectors at the moment are

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Speaker 1: not really tight on permits. But if the price is

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Speaker 1: really high and remains really high. That should worry steel producers,

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Speaker 1: That should worry aluminium smelters, that should worry a whole

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Speaker 1: bunch of industries that are further down the line. So

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Speaker 1: in a sense, you would expect opposition not necessarily come

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Speaker 1: from the power sector, which is like busy elsewhere, but

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Speaker 1: from industry, and a lot of the reforms that are

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Speaker 1: underway for the for the European car markets and for

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Speaker 1: this package are still in discussion right so as these

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Speaker 1: discussions rumble on, we're looking for signs whether participants and

401
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Speaker 1: saying Okay, sure, we'd love to join your market and

402
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Speaker 1: really start contributing, but you know, this price is really

403
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Speaker 1: really high, and if we're on the hook for that

404
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Speaker 1: very soon, then we don't even have a chance to

405
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Speaker 1: develop the technologies that we need to address that. Because

406
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Speaker 1: in in the power market, there's a bunch of things

407
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Speaker 1: you can do. You can switch off coal and turn

408
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Speaker 1: on more gas and that reduces your carbon emissions and

409
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Speaker 1: your kind of helps with the price. But in an

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Speaker 1: industry we're looking for like really substantial changes to two processes.

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Speaker 1: We're looking for a more use of hydrogen, you know,

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Speaker 1: which we've talked about a lot in the past podcast

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Speaker 1: as well and our research. We're looking for kind of electrification,

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Speaker 1: which is meaning like using power and replacing some some

415
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Speaker 1: other processes to have a very high price. Now already

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Speaker 1: it's really tricky for industrial users. So that's that's maybe

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Speaker 1: where more pushback will come from. Finally, let's let's touch

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Speaker 1: on renewables. So all these high prices seem to make

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Speaker 1: it a good time to be an owner or developer

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Speaker 1: of renewable energy, is that right? Yeah, It depends what

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00:21:36,400 --> 00:21:40,639
Speaker 1: kind of contract you're in, right, Okay, Okay, let's put

422
00:21:40,680 --> 00:21:42,360
Speaker 1: it this way. If if you're an owner of emergent

423
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Speaker 1: power plant, this is a good time to be in

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Speaker 1: the market. Merchant power means. So previously we supported renewables

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Speaker 1: by giving them fixed off take contracts in the form

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Speaker 1: of feeding tarriffs or feeding premiums or contracts for difference.

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Speaker 1: These are all like fixed price mechanisms that allow you

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Speaker 1: to go to the bank and say, hey, here's my

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Speaker 1: price for the next the years and kind of please

430
00:22:01,240 --> 00:22:04,520
Speaker 1: borrow some money from you. Increasingly, we're seeing more merchant

431
00:22:04,680 --> 00:22:09,560
Speaker 1: renewable plans where you maybe only hedge a part of

432
00:22:09,560 --> 00:22:12,439
Speaker 1: your output and then you go to the wholesale market

433
00:22:12,600 --> 00:22:15,560
Speaker 1: for your revenues, and if the whole snak is really up,

434
00:22:15,600 --> 00:22:17,399
Speaker 1: I mean good, good for you. Right, So, so e

435
00:22:17,440 --> 00:22:21,360
Speaker 1: merchant renewables are in the money, a lot of plans

436
00:22:21,359 --> 00:22:24,760
Speaker 1: will be on off take agreements where you might have

437
00:22:24,800 --> 00:22:27,280
Speaker 1: a kind of ceiling where we're kind of the upside

438
00:22:27,320 --> 00:22:30,800
Speaker 1: is capped. But on first evidence, this is good for renewables,

439
00:22:30,840 --> 00:22:34,440
Speaker 1: but it's it's it depends on what what governments will

440
00:22:34,480 --> 00:22:38,720
Speaker 1: do next. Right, So, in order to get to get

441
00:22:38,880 --> 00:22:41,760
Speaker 1: us to a position where we can truly decarbonize the

442
00:22:41,840 --> 00:22:43,960
Speaker 1: energy system, we need investment, and we need quite a

443
00:22:44,000 --> 00:22:49,320
Speaker 1: lot of investment. So having renewables going into the marketing

444
00:22:49,320 --> 00:22:51,480
Speaker 1: situation where prices are high, it's good because it means

445
00:22:51,520 --> 00:22:54,920
Speaker 1: that you can negotiate better terms, you can negotiate better

446
00:22:54,960 --> 00:22:57,240
Speaker 1: off take contract So it is it is good. But

447
00:22:57,320 --> 00:23:00,440
Speaker 1: at the same time, some governments are also quite dittery

448
00:23:00,440 --> 00:23:03,280
Speaker 1: about high prices. You know, one one of the examples

449
00:23:03,920 --> 00:23:06,720
Speaker 1: we've seen in Spain where they're proposing a clawback mechanism

450
00:23:06,760 --> 00:23:09,560
Speaker 1: to kind of reign in some of the excesses quote

451
00:23:09,600 --> 00:23:13,000
Speaker 1: unquote clawback. Does that mean like if I've received, you know,

452
00:23:13,080 --> 00:23:15,360
Speaker 1: money for the power I've sold, they're going to ask

453
00:23:15,400 --> 00:23:17,840
Speaker 1: for that money back pretty much, or they just give

454
00:23:17,840 --> 00:23:21,480
Speaker 1: me less going forward. Well, this Spanish government is proposing

455
00:23:21,520 --> 00:23:24,440
Speaker 1: a temporary claw back where they will take some of

456
00:23:24,480 --> 00:23:28,159
Speaker 1: the windfall profits that merchant renewables are making and also

457
00:23:28,320 --> 00:23:31,600
Speaker 1: that utilities are making with their own assets, and then

458
00:23:32,400 --> 00:23:36,320
Speaker 1: subsidizing consumer bills with that. So that kind of taking

459
00:23:36,320 --> 00:23:38,879
Speaker 1: from the generation side and putting it into the retail side,

460
00:23:39,320 --> 00:23:43,080
Speaker 1: and that is a well, is probably a well intended measure,

461
00:23:43,160 --> 00:23:45,280
Speaker 1: but it was brought in in such a chaotic and

462
00:23:45,600 --> 00:23:50,159
Speaker 1: kind of quick way that it might have led to

463
00:23:50,280 --> 00:23:54,680
Speaker 1: some real collateral damage. Vedroller announced last week that they

464
00:23:54,720 --> 00:23:58,600
Speaker 1: would hold renewables development until they get further qualification. So

465
00:23:58,640 --> 00:24:01,240
Speaker 1: it really kind of puts tears up the market. Let's

466
00:24:01,280 --> 00:24:04,000
Speaker 1: kind of put a bow on this. Let's let's say

467
00:24:04,119 --> 00:24:06,760
Speaker 1: let's say you're in the public sector, right, you're the

468
00:24:06,760 --> 00:24:09,199
Speaker 1: Spanish government or you're the UK government. What are some

469
00:24:09,280 --> 00:24:12,399
Speaker 1: of the levers that you have to pull to adjust

470
00:24:12,440 --> 00:24:15,159
Speaker 1: some of these things in renewable energy and gas, in

471
00:24:15,320 --> 00:24:19,119
Speaker 1: carbon call, what have you? Coming back to what I

472
00:24:19,160 --> 00:24:23,800
Speaker 1: mentioned earlier, there's no like real quick fix for for

473
00:24:23,920 --> 00:24:27,439
Speaker 1: high gas and that's that's just really a reality. So

474
00:24:27,520 --> 00:24:29,800
Speaker 1: you can there's there are important things that need to

475
00:24:30,359 --> 00:24:33,440
Speaker 1: be done to avoid this in the future, right, So

476
00:24:33,680 --> 00:24:37,480
Speaker 1: investing in storage will be important, investing in energy infrastructure

477
00:24:37,520 --> 00:24:41,000
Speaker 1: will be important also to build in a bit like

478
00:24:41,080 --> 00:24:43,360
Speaker 1: more flexibility in the grid. And we've we've been saying

479
00:24:43,400 --> 00:24:45,160
Speaker 1: this for a while, right, some of the high prices

480
00:24:45,240 --> 00:24:47,160
Speaker 1: spice we've seen in the market where due to limit

481
00:24:47,440 --> 00:24:49,639
Speaker 1: a limited amount of flexibility or not the right kind

482
00:24:49,680 --> 00:24:52,720
Speaker 1: of flexibility. And in in terms in terms of the

483
00:24:52,720 --> 00:24:55,320
Speaker 1: other long term fixes, we still believe doubling down on

484
00:24:55,400 --> 00:24:59,040
Speaker 1: renewables and other attornative tone technologies to cut reliance on

485
00:24:59,119 --> 00:25:01,080
Speaker 1: gas is a good idea, all right. So this is

486
00:25:01,119 --> 00:25:04,000
Speaker 1: not a time to take the foot of the accelerator.

487
00:25:04,480 --> 00:25:07,840
Speaker 1: It's a time to push through and make sure that

488
00:25:07,880 --> 00:25:10,480
Speaker 1: you deliver on those goals that you've said. Okay, So

489
00:25:11,240 --> 00:25:13,480
Speaker 1: the shortest version is that there's no quick fix for

490
00:25:13,520 --> 00:25:18,320
Speaker 1: any of this, but there are solutions for longer term

491
00:25:18,359 --> 00:25:23,000
Speaker 1: stability as long as the GASP power project connected the

492
00:25:23,000 --> 00:25:25,680
Speaker 1: way they are. Any an upset from the gas market

493
00:25:25,680 --> 00:25:28,480
Speaker 1: will also always translate into the power market. So if

494
00:25:28,480 --> 00:25:32,240
Speaker 1: you want to break that gas length then renewables and

495
00:25:32,520 --> 00:25:35,280
Speaker 1: potentially nuclear is one of the main solutions you want

496
00:25:35,280 --> 00:25:38,399
Speaker 1: to be looking at. Okay, I got one more for you.

497
00:25:39,000 --> 00:25:42,360
Speaker 1: So as I was sitting here Thursday, you know, freezing

498
00:25:42,359 --> 00:25:45,760
Speaker 1: with my my winter code on in in my room,

499
00:25:45,960 --> 00:25:47,960
Speaker 1: I was thinking I should get one of those one

500
00:25:47,960 --> 00:25:51,880
Speaker 1: of those Dison you know, space heater fan things. Then

501
00:25:51,880 --> 00:25:53,320
Speaker 1: I looked it up and I was like, that's six

502
00:25:53,560 --> 00:25:57,400
Speaker 1: d pounds geez. And then I thought, well, okay, well

503
00:25:57,440 --> 00:26:00,919
Speaker 1: my gas bill for this winter be higher than that

504
00:26:00,960 --> 00:26:03,679
Speaker 1: six hundred pounds right. So I don't know if you

505
00:26:03,680 --> 00:26:05,280
Speaker 1: can answer this, but like, do you think it'd be

506
00:26:05,440 --> 00:26:09,199
Speaker 1: you know, worthwhile? Is that the consumers should be thinking of.

507
00:26:09,480 --> 00:26:13,719
Speaker 1: So your your gaspel in the UK won't be rising

508
00:26:13,760 --> 00:26:16,600
Speaker 1: in the same way that the wholesale market rises. And

509
00:26:16,680 --> 00:26:20,280
Speaker 1: the reason for that is what's called the well it's

510
00:26:20,320 --> 00:26:23,800
Speaker 1: it's a cap on consumer prices. So consumer prices will

511
00:26:23,920 --> 00:26:27,320
Speaker 1: rise very shortly and they probably rise around twelve which

512
00:26:27,359 --> 00:26:29,239
Speaker 1: is the maximum that the government can put up at

513
00:26:29,280 --> 00:26:32,720
Speaker 1: any one point. But that's not enough to to help

514
00:26:32,840 --> 00:26:35,119
Speaker 1: your your retailer. And I don't know which retailer you in,

515
00:26:35,160 --> 00:26:37,639
Speaker 1: but you know, in the UK we've seen this market

516
00:26:37,640 --> 00:26:40,200
Speaker 1: liberalization where a lot of retailers come in and we

517
00:26:40,280 --> 00:26:42,440
Speaker 1: had at the peak of the market that where around

518
00:26:42,440 --> 00:26:46,880
Speaker 1: seventy retailers to choose from, and the UK government really

519
00:26:46,960 --> 00:26:49,280
Speaker 1: encouraged you to switch as well and look for better deals.

520
00:26:50,160 --> 00:26:54,000
Speaker 1: So the issue is that runaway prices in the wholesale market.

521
00:26:54,320 --> 00:26:56,480
Speaker 1: Retailer is a cut between a rocket and a hard

522
00:26:56,600 --> 00:26:59,520
Speaker 1: place because their prices are going up, but they can't

523
00:26:59,600 --> 00:27:05,240
Speaker 1: charge their markups. So that means consumers remain protected. But

524
00:27:05,600 --> 00:27:08,840
Speaker 1: retailers are really in a tough situation if if they

525
00:27:08,880 --> 00:27:11,879
Speaker 1: hadn't hedged for this properly, and hedging means you know,

526
00:27:12,040 --> 00:27:14,600
Speaker 1: signing long term contracts. You look in the summer and

527
00:27:14,920 --> 00:27:16,760
Speaker 1: then you kind of see, okay, how much do you

528
00:27:16,760 --> 00:27:19,240
Speaker 1: wanted to forward contract for the winter. If they haven't

529
00:27:19,240 --> 00:27:21,000
Speaker 1: done this, or if they weren't able to because they

530
00:27:21,000 --> 00:27:23,000
Speaker 1: didn't have the balance sheet to do that, then kind

531
00:27:23,000 --> 00:27:25,960
Speaker 1: of that's kind of a business critical problem and that

532
00:27:26,000 --> 00:27:29,439
Speaker 1: will lead to retailers going bust and we've seen you know,

533
00:27:29,760 --> 00:27:32,720
Speaker 1: a bunch of retailers going bust in the past weeks

534
00:27:32,720 --> 00:27:36,040
Speaker 1: in the UK. As a consumer, you're you're you're protected

535
00:27:36,080 --> 00:27:40,439
Speaker 1: from that, so it doesn't filter food to to you.

536
00:27:40,440 --> 00:27:44,359
Speaker 1: You might be some somebody else will either kind of

537
00:27:44,400 --> 00:27:47,600
Speaker 1: take you over, or the government can step in as

538
00:27:47,600 --> 00:27:49,600
Speaker 1: a supplier of last resort. So so one thing we

539
00:27:49,640 --> 00:27:53,439
Speaker 1: can be very certain on is that consumers won't be

540
00:27:53,560 --> 00:27:55,760
Speaker 1: left without gases winter. They won't be left without power

541
00:27:55,800 --> 00:27:59,320
Speaker 1: this winter. If there's a real gas shortage then and

542
00:27:59,440 --> 00:28:03,240
Speaker 1: more likely snarios that a industrial users will shut down

543
00:28:03,359 --> 00:28:07,080
Speaker 1: because of very high prices, or they can be made

544
00:28:07,080 --> 00:28:10,000
Speaker 1: to shut down if they have flexible contracts. Either way,

545
00:28:10,160 --> 00:28:12,280
Speaker 1: we will ask consumers pay for this one way or

546
00:28:12,280 --> 00:28:14,119
Speaker 1: the other, right not maybe not for your bill, but

547
00:28:14,200 --> 00:28:18,960
Speaker 1: maybe through reduced output or taxation. If the government steps

548
00:28:18,960 --> 00:28:21,199
Speaker 1: in as a supply of last resort, that will, you know,

549
00:28:21,280 --> 00:28:24,440
Speaker 1: inflate government spending. So so one way or the other,

550
00:28:24,520 --> 00:28:27,639
Speaker 1: this will come back to haunt us. So what you're

551
00:28:27,680 --> 00:28:29,520
Speaker 1: saying is I don't need to buy the Dyson fan,

552
00:28:30,080 --> 00:28:32,760
Speaker 1: the Dyson heater. I I think I think at this

553
00:28:32,840 --> 00:28:35,840
Speaker 1: point you may be better off checking whether you haven't

554
00:28:35,880 --> 00:28:38,200
Speaker 1: done everything you can do to insulate your house and

555
00:28:38,960 --> 00:28:41,440
Speaker 1: kind of reduce heat loss. And I think that's that's

556
00:28:41,560 --> 00:28:44,520
Speaker 1: you know, an energy efficiency is a good good thing

557
00:28:44,560 --> 00:28:46,960
Speaker 1: to invest in. An adult. It will probably last longer

558
00:28:47,000 --> 00:28:49,440
Speaker 1: than that and fun. There you go, Hey, and you

559
00:28:49,520 --> 00:28:52,000
Speaker 1: had one more line in your report that I really

560
00:28:52,040 --> 00:28:55,120
Speaker 1: like that. The the ultimate thing that Europe should probably

561
00:28:55,120 --> 00:28:58,240
Speaker 1: do this winter is pray for sunshine. That would that

562
00:28:58,280 --> 00:29:01,800
Speaker 1: would be helpful if if we have a Warren Winters

563
00:29:02,960 --> 00:29:14,800
Speaker 1: off the system, David, Thanks for joining. Thanks Mark. Today's

564
00:29:14,800 --> 00:29:17,160
Speaker 1: episode of Switched On was edited by Rex Warner of

565
00:29:17,240 --> 00:29:19,640
Speaker 1: gray Stoke Media. Bloomberg an e app is a service

566
00:29:19,640 --> 00:29:22,640
Speaker 1: provided by Bloomberg Finance LP and its affiliates. This recording

567
00:29:22,680 --> 00:29:25,920
Speaker 1: does not constitute, nor should it be construed as investment advice,

568
00:29:26,040 --> 00:29:29,560
Speaker 1: investment recommendations, or a recommendation as to an investment or

569
00:29:29,600 --> 00:29:32,160
Speaker 1: other strategy. Bloombergin e F should not be considered as

570
00:29:32,200 --> 00:29:35,400
Speaker 1: information sufficient upon which to base an investment decision. Neither

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00:29:35,480 --> 00:29:38,880
Speaker 1: Bloomberg Finance LP nor any of its affiliates makes any

572
00:29:38,880 --> 00:29:41,960
Speaker 1: representation or warranty as to the accuracy or completeness of

573
00:29:42,000 --> 00:29:45,040
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00:29:45,040 --> 00:29:47,000
Speaker 1: a result of this recording is expressly disqui