Speaker 1: Hey, everyone, you might be will hear in my voice,
Speaker 1: but I've got a bit of a cold right now.
Speaker 1: I guess that was bound to happen when we all
Speaker 1: went back out into the world. I guess. I don't know.
Speaker 1: I hope everybody's feeling fine and doesn't have a cold anyway.
Speaker 1: So I got a text the other day from a
Speaker 1: friend that just said, quote, tell me what's what and
Speaker 1: had a link to an op ed about the current
Speaker 1: energy crisis here in Europe. Yes, there are cues at
Speaker 1: the pump, Yes there are higher gas prices, and yes
Speaker 1: gas storage levels are low compared to years prior. But
Speaker 1: is it a crisis? And the op ed claims it's
Speaker 1: all caused by renewables? Is that true? So I texted
Speaker 1: him back and I said, well, I actually didn't know
Speaker 1: the full answer, but as luck would have it, I'm
Speaker 1: recording a pot on the topic and we'll find out then.
Speaker 1: So to help us figure out what's what, we've got
Speaker 1: David Hoster, being his head of research for AMIA the
Speaker 1: Europe Middle Eastern Africa region. He'll walk us through the
Speaker 1: big picture why the energy crunch, why now? And walk
Speaker 1: us through all the contributing factors. Gas coal, carbon and renewables.
Speaker 1: This interview is based on an ongoing coverage of European gas,
Speaker 1: power and carbon markets being a Fuss. You can find
Speaker 1: this analysis on BFC and the Bloomberg Terminal, BNF dot
Speaker 1: com and BENF Mobile. As a reminder, BENIF does not
Speaker 1: provide investment of strategy advice and you can do the
Speaker 1: full disclaimer at the end of the show. I'm Mark
Speaker 1: Taylor and you're listening to switch on to BENF podcast. David. Welcome, Hi, Mark,
Speaker 1: it's good to be here. Thanks for joining. Okay, so,
Speaker 1: just reading the news here in the UK, you know
Speaker 1: there's all this news about long queues at the petrol
Speaker 1: stations or the British Army today was announced that they
Speaker 1: were coming to to deliver the patrol to the stations.
Speaker 1: You hear about electricity distributors going out of business. I'm
Speaker 1: hearing about high natural gas prices. But honestly I don't
Speaker 1: really know what's going on. And I get text messages
Speaker 1: from friends saying like, hey, you're an energy can you
Speaker 1: explain what's going on? And I say no, I can't
Speaker 1: actually told one. I'm doing a podcast today where we'll
Speaker 1: get an explanation and just to listen to the show.
Speaker 1: So can you help me and my friends understand what's
Speaker 1: going on a bit better? Yeah, it's funny how these
Speaker 1: kind of quote unquote boring topics that you and I
Speaker 1: care so much about have suddenly made headline news in
Speaker 1: the right So so suddenly where in this energy crunch
Speaker 1: and all these inner working tubes and flows that are
Speaker 1: really boring where it come to the front, right, So
Speaker 1: you used to go into the petrol station, of course
Speaker 1: there's petrol, and used to kind of turning on the lights,
Speaker 1: and of course there's lights, and suddenly suppliers switching high prices,
Speaker 1: high gas make you question all of that And the
Speaker 1: answer is that probably probably it's not that bad. And
Speaker 1: there's the stage in trading is like the cure for
Speaker 1: high prices as high prices, so you know, if prices
Speaker 1: are high, that will kick off the necessary investments and
Speaker 1: trades and flows too to bring them down again. But
Speaker 1: it just feels a little bit like we're and and
Speaker 1: that doesn't just feel we are in in in a
Speaker 1: crunch at the moment where a lot of factors come together.
Speaker 1: And I think what what is surprising too many people
Speaker 1: is how connected today's markets are if you think about gas,
Speaker 1: if you think about power, these are you know, kind
Speaker 1: of commodities that are often generated and sourced locally. But
Speaker 1: in the case of gas, we are now suddenly in
Speaker 1: this global market where something that happens in Korea, something
Speaker 1: that happens in Japan affects us directly. And that's new, right,
Speaker 1: where gas prices are really really high, and then power
Speaker 1: prices are high as a result of thought, and then
Speaker 1: we have these other kind of crisis or perceived crisis
Speaker 1: in other commodities as well. So I think it's really
Speaker 1: come to the forefront. There is an element of hype
Speaker 1: as well. People go crazy, and then you know, the
Speaker 1: papers write about people going crazy, and that makes people
Speaker 1: go more crazy. But there is a real interesting story here,
Speaker 1: and it touches on all the major commodities, and it
Speaker 1: touches on all the major markets, and it's frankly like
Speaker 1: a very interesting time to be in energy and then
Speaker 1: especially as we're looking transition to a net zero world,
Speaker 1: but not necessarily an interesting time to pay my electricity
Speaker 1: bill or go to the petrol station. Okay, so what
Speaker 1: we want to do in this episode, everybody is just
Speaker 1: kind of lay this out so we understand, you know,
Speaker 1: tick tick tick, what's going on with each of these
Speaker 1: types of commodities and markets. To help understand what's going on.
Speaker 1: But let's just put this to bed, Like, is this
Speaker 1: a crisis, a crunch somewhere in between? Is it real?
Speaker 1: You mentioned hype a second ago, Like, what's the real deal?
Speaker 1: It is a crunch, and it is real because high
Speaker 1: prices are hitting consumers, high prices are hitting suppliers, high
Speaker 1: prices are hitting companies. So you know, you and I
Speaker 1: were in the UK, we have this observed situation a
Speaker 1: few weeks back where a fertilizer planned was coming offline
Speaker 1: because the gas prices are very high. So why should
Speaker 1: we care about this? Well, we do care because as
Speaker 1: a side product of the fertilizing process as c O
Speaker 1: two and c O two is one of the inputs
Speaker 1: for dry eyes, that's one of the inputs for meat
Speaker 1: and poultry industry. And suddenly we're in the situation where
Speaker 1: you know, we can't get deliveries from our supermarkets because
Speaker 1: they don't have frozen goods because they don't have dry eyes.
Speaker 1: And suddenly becomes very real. Right, there is a a
Speaker 1: real element in terms of like where we're going long
Speaker 1: term with this, and we said this had been here
Speaker 1: for a long time. Long term prices will go down
Speaker 1: in the power sector, and that's because renewables coming in.
Speaker 1: The renewables are you know, near zero marginal cost, So
Speaker 1: we expect prices to go in the long term. And
Speaker 1: and too many people it's been almost a surprise that
Speaker 1: in the meantime prices can go up again. There isn't
Speaker 1: just this one way street where prices go down. There
Speaker 1: is an element of hype, asn't any trade, but there
Speaker 1: is also kind of real shortage and part of this
Speaker 1: supply and demand, and part of it goes back to COVID, right,
Speaker 1: like all these disruptions in the supply chain that we
Speaker 1: had the last year are coming back to bite us.
Speaker 1: A ripple effect, Yeah, there's there's a ripple effect. There's
Speaker 1: this experiment that I really like about phantom traffic jam.
Speaker 1: I don't know if you know this experiment. It's basically
Speaker 1: a bunch of cars going around in a circle and
Speaker 1: there's no obstacle, but they're just going around in the
Speaker 1: circle and then after a while you get these ripple effect. Well,
Speaker 1: one driver goes a little bit slower, and the next
Speaker 1: one goes a bit slower, and suddenly you have a
Speaker 1: traffic jam and what is a perfect circle, Like there
Speaker 1: shouldn't be any obstacle, but there's still this traffic jum
Speaker 1: And I think it's a really nice image for the
Speaker 1: global supply chains and how they're connected. And in this case,
Speaker 1: there was a real obstacle, which was COVID, and we're
Speaker 1: still seeing these these ripple effects were odd pieces of
Speaker 1: the supply chain don't work. That's fascinating. I'm sure everybody
Speaker 1: in in Washington, d C. Was thinking just now Root
Speaker 1: sixty six when you said that that infamous traffic on
Speaker 1: that road happened just because of that. When somebody taps
Speaker 1: the brakes, you know, everything else stops. I didn't even
Speaker 1: think about the you know, the fertilizer plant not be
Speaker 1: able to pay their their gas bill shutting down, that
Speaker 1: leading to disruptions in the in the cold chain, in supermarkets.
Speaker 1: I mean, come on, it's all it's all interconnected. It's fascinating.
Speaker 1: Can we start with gas actually just going to tick
Speaker 1: through these things of what's going on with each of
Speaker 1: these these commodity markets. Yeah, let's do that, all right?
Speaker 1: So just give it to a straight What's what's going
Speaker 1: on with gas? So the gas market in many sents,
Speaker 1: it is one of the biggest drivers for this crisis,
Speaker 1: and it's really to do in Europe with concerns around
Speaker 1: Europe's ability to refill gas storage before the winter. Right,
Speaker 1: So Europe has gas storage, and during the summer, when
Speaker 1: demand in Europe is low because we're not heating there
Speaker 1: isn't so much demand from domestic users, we fill up
Speaker 1: the storage before the winter, and then over the winter
Speaker 1: we deplete that and we still import. So the storage
Speaker 1: level is a really important indicator of where we are
Speaker 1: going in terms of the winter, whether the market would
Speaker 1: be tight meaning there's kind of not enough supply for
Speaker 1: the demand, or whether we lose where there's oversupply, and
Speaker 1: that's you know, prices are all around tightness. Source stores
Speaker 1: filled up right now. So part of the driver of
Speaker 1: these high prices is concerns around storage. Right. We import
Speaker 1: gas over the summer stored and then we use it
Speaker 1: over the winter and we keep importing all the while.
Speaker 1: And this year storage levels are really low historically, so
Speaker 1: we're only at compared to where we would be on
Speaker 1: a five year average, and that's creates tightness in the
Speaker 1: market and really some concerns around the winterhead because if
Speaker 1: we have a cold winter mark we could be ending
Speaker 1: up with zero or next to no storage left at
Speaker 1: the end, and that then creates a ripple effect kind
Speaker 1: of coming back to this traffic journal we talked about earlier.
Speaker 1: That could then last into the summer when we're competing
Speaker 1: with Japan and Korea, and then into next winter. So
Speaker 1: what happens now could like you know, trickle down, ripple
Speaker 1: through the system and lead to a tight situation next
Speaker 1: winter as well. In the UK, we always like to
Speaker 1: kind of see some sunshine. Would we really get to
Speaker 1: see some sunshine this winter because if we if we
Speaker 1: if we end up with a colder than you know,
Speaker 1: just really the colder, much colder than average winter, then um,
Speaker 1: that could be could your problem? There's a I was
Speaker 1: just sitting here at my desk freezing, wearing a jacket.
Speaker 1: My kids come up from school and like, Dad, can
Speaker 1: we can we turn on the heat And I'm like,
Speaker 1: come on, it's still September. I kid, turn on the heat.
Speaker 1: They please, We're freezing And I was like, Hi, fine,
Speaker 1: so September here we are September and I'm turning on
Speaker 1: the heat. Yeah, and you were coming off a cold winter,
Speaker 1: if you if you cast your mind back to a
Speaker 1: couple of months earlier, we had a really cold winter
Speaker 1: this year, you know, there was kind of we were
Speaker 1: heating well into March May. So that's the issue, right
Speaker 1: where low one supply and low on storage, and then
Speaker 1: supply just hasn't come in the way it usually does.
Speaker 1: So imports from Russia, which are a big factor and
Speaker 1: this have been low. And there's a bunch of reasons
Speaker 1: for that. And then llen G, which is liquid natural gas,
Speaker 1: which has been increasingly playing a role in European supplies,
Speaker 1: has also gone down. And that's due to global competition,
Speaker 1: and it's due to kind of long term contracts from
Speaker 1: Japan and Korea in particular, where they import gas, and
Speaker 1: they just called on these contracts to be fulfilled and
Speaker 1: there just wasn't enough to go around to fill up
Speaker 1: European supplies. And I think I read the other day
Speaker 1: that China has a what does it fill at all
Speaker 1: costs contract for LERG, you know, so that they'll pay
Speaker 1: just basically whatever to make sure they have their supplies. Yeah, right,
Speaker 1: that sounds a really strong signal. And on top of that,
Speaker 1: they also announced this week that they're going to restrict
Speaker 1: some of the health and safety protocol in coal mines,
Speaker 1: so if there's an accident in a coal mine, they'll
Speaker 1: just run production back up quicker. And that's a really
Speaker 1: strong signal. And if one of your biggest buyers says, hey, guys,
Speaker 1: I'm going to buy at all costs, and then you know,
Speaker 1: hearts are fluttering in Europe when that goes ahead, and
Speaker 1: that means that, in a way, of the European energy
Speaker 1: transition an our kind of gas picture. At b NIEF
Speaker 1: we like to call about this kind of one gas world.
Speaker 1: That's increasingly the case, and that's new, that's a new phenomenon.
Speaker 1: And I think I read in your analysis that the
Speaker 1: UK has not kept up with their storage right, so
Speaker 1: they're replying more on L and G because they haven't
Speaker 1: invested as much in storage, so there's not as much
Speaker 1: to draw fround. Is that right? Yeah? This problem is
Speaker 1: structural and goes back a long time. The UK actually
Speaker 1: used to have a huge amount of storage and was
Speaker 1: called the North Sea. So we would in the UK
Speaker 1: ease the North Sea as a storage and then also
Speaker 1: have it as it you could ramp up and down
Speaker 1: domestic supply. That's not the case anymore, and some storage
Speaker 1: sites we even shut down. So there's a structural need
Speaker 1: to build more storage going forward. But it's also not
Speaker 1: a quick fix, right, so we can build new storage
Speaker 1: now to take pressure of this winter or possibly even
Speaker 1: the next winter. But what the UK can do though
Speaker 1: is to really think more about their the lergy contracts,
Speaker 1: you know, improving the energy infrastructure and thinking about how
Speaker 1: they're going to contract an increasingly global market. I think
Speaker 1: there was a perception in Europe that llen G from
Speaker 1: the US in particular, would take the pressure of reliance
Speaker 1: on Russian imports on domestic production. But you know, allen
Speaker 1: G has a global commodity goes where prices are high,
Speaker 1: and even the high prices in Europe because you know,
Speaker 1: the tightness in the market was visible from the summer
Speaker 1: or European gas team has said the market will be tight,
Speaker 1: and prices started to rise accordingly, but there was still
Speaker 1: not enough to attract fuel and ships from the US.
Speaker 1: And then you know, frankly, there's just a a time
Speaker 1: element like if if if a tanker leaves the US
Speaker 1: and goes to Asia. It takes so too many days
Speaker 1: to go there and then suns when it's come back
Speaker 1: and fill up and go the other way. So it's
Speaker 1: not like you can turn a switch and allen G
Speaker 1: just flows like these these chips around their way. And
Speaker 1: there's some excellent analysis that the allergy has team has
Speaker 1: done about um, you know, twelve small reasons that all
Speaker 1: upset the supply chain. And you know you talked about
Speaker 1: fuel earlier. Shipping supply chains also in disarray for a
Speaker 1: number of reasons. So you can see all these elements
Speaker 1: coming together to form this perfect storm. Is that the
Speaker 1: title of the report, twelve small reasons LERG supply gets
Speaker 1: mest up. I don't know. Well, we'll look it up
Speaker 1: and we'll put in the notes. It's the lesser like
Speaker 1: some of the lesser lesser talked about reasons. But there's
Speaker 1: this whole litany of things and and some local factors
Speaker 1: as well. Right, if the UK had a fire in
Speaker 1: one of its major substations, there's some unplanned outages and
Speaker 1: some plant maintenance work on the power plants because those
Speaker 1: measures were deferred during COVID times. So all the maintenance
Speaker 1: schedule us a little bit upset. And in a way,
Speaker 1: it used to be that the winter season was what
Speaker 1: the focus was on, right because say, well, during the winter,
Speaker 1: everything needs to be ready and we think about supply margin.
Speaker 1: But now that was already the k last year that
Speaker 1: the shoulder seasons are actually more dangerous. The shoulder seasons
Speaker 1: is gonna bring and autumn when suddenly the system is
Speaker 1: getting ready for winter. But winter might come early, or
Speaker 1: we might have a lull in wind power. So the
Speaker 1: shoulder seasons in many ways have become more dangerous than
Speaker 1: the winter seasons now for a very short break. Stay
Speaker 1: with us. So globally connected gas market, lower than average storage,
Speaker 1: higher dependence on L and G, which is becoming more
Speaker 1: competitive to to get contracts, Difficulty getting gas from Russia.
Speaker 1: They're filling up their own stores before sending it over
Speaker 1: to Europe. The list goes on with gas. Let's let's
Speaker 1: keep going with with Cole. So Cole is kind of
Speaker 1: a weird one. I think I remember back in Geez.
Speaker 1: I don't remember what year it was. I think it
Speaker 1: was around Fukushima, around when Germany said, you know what,
Speaker 1: we're going to shut down our nuclear as well, and
Speaker 1: they did, and they kept on the coal, but now
Speaker 1: it's going out of being run of the market by economics, right,
Speaker 1: Can you explain kind of what's going on with coal,
Speaker 1: how some is surviving, how some is contributing, you know,
Speaker 1: more to the grid right now? Basically what's going on
Speaker 1: with coal? So Europe has embarked on this journey where
Speaker 1: us say we're gonna shut down COLE, right and we're
Speaker 1: gonna phase out COLE and as you mentioned, some market
Speaker 1: stuff put in strict timelines. Others are probably working on them,
Speaker 1: and even markets like Poland, which is very reliant on coal,
Speaker 1: have said they want to phase out COLE eventually. So
Speaker 1: that's good. The challenge at this point is that while
Speaker 1: coal was really out of the market last year when
Speaker 1: when we had all these COVID upsets in the market,
Speaker 1: this year it is back, and it's back because of
Speaker 1: high gas prices. And in Europe there are two types
Speaker 1: of coal. So there's hard call, which is kind of
Speaker 1: more energy dense and that's kind of traded globally to
Speaker 1: to degree, and then there's lignite, which is the kind
Speaker 1: of brown call, is less energy dense. It's mind locally
Speaker 1: it is very polluting and the irony of this year
Speaker 1: is that lignite is the only call that's in the money.
Speaker 1: So if your own a lignant cold station at the moment,
Speaker 1: you're you're just printing money because gas is high, hard
Speaker 1: core is high. Carbon pyramids are high as well, but
Speaker 1: you're still cheaper than the competition. So it's been a
Speaker 1: real reversal from from last year. Last year we were
Speaker 1: at the point where every gas plant that could possibly
Speaker 1: run to displace coal was running and cole was kind
Speaker 1: of at its absolute minimum. We still we still think
Speaker 1: that in the long run economic coal fiz art will continue,
Speaker 1: but this year has been kind of a bit of
Speaker 1: a reversal of fortunes in that sense. And it's going
Speaker 1: to be bad for emissions, right, It's not great for emissions,
Speaker 1: And we're actually forecasting that will be up on emissions,
Speaker 1: up on last year, up in probably north and then
Speaker 1: even up on you, which is the reference here of
Speaker 1: the of the before times. So it's it's not a
Speaker 1: great picture when you look at emissions at the moment. Jeez, Okay,
Speaker 1: we'll get to renewables, but can we touch on carbon
Speaker 1: first since we're kind of on that with CEO two.
Speaker 1: Emissions and the impact on cold etcetera. I mean, so
Speaker 1: Europe has a carbon price, right something that is more
Speaker 1: or less unique to to a whole you know, continent.
Speaker 1: I guess you could say, but can you explain kind
Speaker 1: of what's going on with carbon and where it's at
Speaker 1: right now? The European carbon market is one of kind
Speaker 1: of the main instruments for the European Union to decarbon
Speaker 1: as the power market, and it's effectively putting a regulated
Speaker 1: price on, putting a cap on carbon emissions and then
Speaker 1: let the market define with the prices. And that price
Speaker 1: was very low of blong time, and then maybe eighteen
Speaker 1: months ago so we really started picking up and going up.
Speaker 1: And right now the carbon price is at around sixty
Speaker 1: five euro per ton, which is double what it was
Speaker 1: last year or less. And that's been driven partly by
Speaker 1: expected tightness in the market, you know, as in Europe
Speaker 1: we have a whole package called Fit for fifty five
Speaker 1: or we call it, where Europe tries to reduce its
Speaker 1: missions to and then the carbon market is part of that.
Speaker 1: So the carbon market has been rising anticipations of regulations
Speaker 1: and policy that will constrain supply of carbon permits in
Speaker 1: the future, and At the same time, there's been a
Speaker 1: whole influx of trader is of a kind of new
Speaker 1: participants in the market that has driven the price. And
Speaker 1: because the carbon price and the gas price are linked
Speaker 1: to a degree, it has kind of risen with the
Speaker 1: gas price. But the carbon market has decoupled from the
Speaker 1: gas market over the summer, and that's partly because it
Speaker 1: is now so ridiculously high that kind of both markets
Speaker 1: are almost like free floating. You know. It's like when
Speaker 1: you're in a plane, you're the one of these space planes.
Speaker 1: You're in the apex of the curve, and everybody is
Speaker 1: just floating and unconnected to like the fundamentals. So we
Speaker 1: would expect the market to be high, and we actually
Speaker 1: we're still bullish on the market in October, but it
Speaker 1: just won't catch up with a stampede in the European
Speaker 1: gas market. So still be high, but gas is going
Speaker 1: to be still higher kind of going forward. Yeah, at
Speaker 1: this point, it's hard to see how gas prices can
Speaker 1: come down quickly because of real tightness and because there's
Speaker 1: there's no quick solution that could elevate the shortness. For
Speaker 1: for this winter, it seems like the carbon market is
Speaker 1: kind of doing its job right. It's it's it's putting
Speaker 1: a price on emissions. But my question, maybe you don't
Speaker 1: know the answer to this. I don't know, But is
Speaker 1: support for the market still strong? Are people saying it awesome,
Speaker 1: this is great, it's do a good job. But in
Speaker 1: the face of an energy crunch, are people saying, like,
Speaker 1: I wish we didn't have this, this carbon market, Like
Speaker 1: what's the general feel? Yeah, that's a good question. Maybe
Speaker 1: just take a step backward. The carbon market is not
Speaker 1: just looking at the carbonizing the power market, but it's
Speaker 1: also looking at the carbonizing industry. It will do the
Speaker 1: combonizing transport. So because gas is so high in the
Speaker 1: power market, the carbon price is not the factor at
Speaker 1: the moment. It is one factor that drives high prices,
Speaker 1: but you know, gas is by far the most important one.
Speaker 1: What's interesting those as we're extending the carbon market to
Speaker 1: more sectors, as we're tightening some of the kind of
Speaker 1: availability for for certificates for industry, the carbon market just
Speaker 1: background and gives some free allocation to two sectors, which
Speaker 1: means that you know, industrial sectors at the moment are
Speaker 1: not really tight on permits. But if the price is
Speaker 1: really high and remains really high. That should worry steel producers,
Speaker 1: That should worry aluminium smelters, that should worry a whole
Speaker 1: bunch of industries that are further down the line. So
Speaker 1: in a sense, you would expect opposition not necessarily come
Speaker 1: from the power sector, which is like busy elsewhere, but
Speaker 1: from industry, and a lot of the reforms that are
Speaker 1: underway for the for the European car markets and for
Speaker 1: this package are still in discussion right so as these
Speaker 1: discussions rumble on, we're looking for signs whether participants and
Speaker 1: saying Okay, sure, we'd love to join your market and
Speaker 1: really start contributing, but you know, this price is really
Speaker 1: really high, and if we're on the hook for that
Speaker 1: very soon, then we don't even have a chance to
Speaker 1: develop the technologies that we need to address that. Because
Speaker 1: in in the power market, there's a bunch of things
Speaker 1: you can do. You can switch off coal and turn
Speaker 1: on more gas and that reduces your carbon emissions and
Speaker 1: your kind of helps with the price. But in an
Speaker 1: industry we're looking for like really substantial changes to two processes.
Speaker 1: We're looking for a more use of hydrogen, you know,
Speaker 1: which we've talked about a lot in the past podcast
Speaker 1: as well and our research. We're looking for kind of electrification,
Speaker 1: which is meaning like using power and replacing some some
Speaker 1: other processes to have a very high price. Now already
Speaker 1: it's really tricky for industrial users. So that's that's maybe
Speaker 1: where more pushback will come from. Finally, let's let's touch
Speaker 1: on renewables. So all these high prices seem to make
Speaker 1: it a good time to be an owner or developer
Speaker 1: of renewable energy, is that right? Yeah, It depends what
Speaker 1: kind of contract you're in, right, Okay, Okay, let's put
Speaker 1: it this way. If if you're an owner of emergent
Speaker 1: power plant, this is a good time to be in
Speaker 1: the market. Merchant power means. So previously we supported renewables
Speaker 1: by giving them fixed off take contracts in the form
Speaker 1: of feeding tarriffs or feeding premiums or contracts for difference.
Speaker 1: These are all like fixed price mechanisms that allow you
Speaker 1: to go to the bank and say, hey, here's my
Speaker 1: price for the next the years and kind of please
Speaker 1: borrow some money from you. Increasingly, we're seeing more merchant
Speaker 1: renewable plans where you maybe only hedge a part of
Speaker 1: your output and then you go to the wholesale market
Speaker 1: for your revenues, and if the whole snak is really up,
Speaker 1: I mean good, good for you. Right, So, so e
Speaker 1: merchant renewables are in the money, a lot of plans
Speaker 1: will be on off take agreements where you might have
Speaker 1: a kind of ceiling where we're kind of the upside
Speaker 1: is capped. But on first evidence, this is good for renewables,
Speaker 1: but it's it's it depends on what what governments will
Speaker 1: do next. Right, So, in order to get to get
Speaker 1: us to a position where we can truly decarbonize the
Speaker 1: energy system, we need investment, and we need quite a
Speaker 1: lot of investment. So having renewables going into the marketing
Speaker 1: situation where prices are high, it's good because it means
Speaker 1: that you can negotiate better terms, you can negotiate better
Speaker 1: off take contract So it is it is good. But
Speaker 1: at the same time, some governments are also quite dittery
Speaker 1: about high prices. You know, one one of the examples
Speaker 1: we've seen in Spain where they're proposing a clawback mechanism
Speaker 1: to kind of reign in some of the excesses quote
Speaker 1: unquote clawback. Does that mean like if I've received, you know,
Speaker 1: money for the power I've sold, they're going to ask
Speaker 1: for that money back pretty much, or they just give
Speaker 1: me less going forward. Well, this Spanish government is proposing
Speaker 1: a temporary claw back where they will take some of
Speaker 1: the windfall profits that merchant renewables are making and also
Speaker 1: that utilities are making with their own assets, and then
Speaker 1: subsidizing consumer bills with that. So that kind of taking
Speaker 1: from the generation side and putting it into the retail side,
Speaker 1: and that is a well, is probably a well intended measure,
Speaker 1: but it was brought in in such a chaotic and
Speaker 1: kind of quick way that it might have led to
Speaker 1: some real collateral damage. Vedroller announced last week that they
Speaker 1: would hold renewables development until they get further qualification. So
Speaker 1: it really kind of puts tears up the market. Let's
Speaker 1: kind of put a bow on this. Let's let's say
Speaker 1: let's say you're in the public sector, right, you're the
Speaker 1: Spanish government or you're the UK government. What are some
Speaker 1: of the levers that you have to pull to adjust
Speaker 1: some of these things in renewable energy and gas, in
Speaker 1: carbon call, what have you? Coming back to what I
Speaker 1: mentioned earlier, there's no like real quick fix for for
Speaker 1: high gas and that's that's just really a reality. So
Speaker 1: you can there's there are important things that need to
Speaker 1: be done to avoid this in the future, right, So
Speaker 1: investing in storage will be important, investing in energy infrastructure
Speaker 1: will be important also to build in a bit like
Speaker 1: more flexibility in the grid. And we've we've been saying
Speaker 1: this for a while, right, some of the high prices
Speaker 1: spice we've seen in the market where due to limit
Speaker 1: a limited amount of flexibility or not the right kind
Speaker 1: of flexibility. And in in terms in terms of the
Speaker 1: other long term fixes, we still believe doubling down on
Speaker 1: renewables and other attornative tone technologies to cut reliance on
Speaker 1: gas is a good idea, all right. So this is
Speaker 1: not a time to take the foot of the accelerator.
Speaker 1: It's a time to push through and make sure that
Speaker 1: you deliver on those goals that you've said. Okay, So
Speaker 1: the shortest version is that there's no quick fix for
Speaker 1: any of this, but there are solutions for longer term
Speaker 1: stability as long as the GASP power project connected the
Speaker 1: way they are. Any an upset from the gas market
Speaker 1: will also always translate into the power market. So if
Speaker 1: you want to break that gas length then renewables and
Speaker 1: potentially nuclear is one of the main solutions you want
Speaker 1: to be looking at. Okay, I got one more for you.
Speaker 1: So as I was sitting here Thursday, you know, freezing
Speaker 1: with my my winter code on in in my room,
Speaker 1: I was thinking I should get one of those one
Speaker 1: of those Dison you know, space heater fan things. Then
Speaker 1: I looked it up and I was like, that's six
Speaker 1: d pounds geez. And then I thought, well, okay, well
Speaker 1: my gas bill for this winter be higher than that
Speaker 1: six hundred pounds right. So I don't know if you
Speaker 1: can answer this, but like, do you think it'd be
Speaker 1: you know, worthwhile? Is that the consumers should be thinking of.
Speaker 1: So your your gaspel in the UK won't be rising
Speaker 1: in the same way that the wholesale market rises. And
Speaker 1: the reason for that is what's called the well it's
Speaker 1: it's a cap on consumer prices. So consumer prices will
Speaker 1: rise very shortly and they probably rise around twelve which
Speaker 1: is the maximum that the government can put up at
Speaker 1: any one point. But that's not enough to to help
Speaker 1: your your retailer. And I don't know which retailer you in,
Speaker 1: but you know, in the UK we've seen this market
Speaker 1: liberalization where a lot of retailers come in and we
Speaker 1: had at the peak of the market that where around
Speaker 1: seventy retailers to choose from, and the UK government really
Speaker 1: encouraged you to switch as well and look for better deals.
Speaker 1: So the issue is that runaway prices in the wholesale market.
Speaker 1: Retailer is a cut between a rocket and a hard
Speaker 1: place because their prices are going up, but they can't
Speaker 1: charge their markups. So that means consumers remain protected. But
Speaker 1: retailers are really in a tough situation if if they
Speaker 1: hadn't hedged for this properly, and hedging means you know,
Speaker 1: signing long term contracts. You look in the summer and
Speaker 1: then you kind of see, okay, how much do you
Speaker 1: wanted to forward contract for the winter. If they haven't
Speaker 1: done this, or if they weren't able to because they
Speaker 1: didn't have the balance sheet to do that, then kind
Speaker 1: of that's kind of a business critical problem and that
Speaker 1: will lead to retailers going bust and we've seen you know,
Speaker 1: a bunch of retailers going bust in the past weeks
Speaker 1: in the UK. As a consumer, you're you're you're protected
Speaker 1: from that, so it doesn't filter food to to you.
Speaker 1: You might be some somebody else will either kind of
Speaker 1: take you over, or the government can step in as
Speaker 1: a supplier of last resort. So so one thing we
Speaker 1: can be very certain on is that consumers won't be
Speaker 1: left without gases winter. They won't be left without power
Speaker 1: this winter. If there's a real gas shortage then and
Speaker 1: more likely snarios that a industrial users will shut down
Speaker 1: because of very high prices, or they can be made
Speaker 1: to shut down if they have flexible contracts. Either way,
Speaker 1: we will ask consumers pay for this one way or
Speaker 1: the other, right not maybe not for your bill, but
Speaker 1: maybe through reduced output or taxation. If the government steps
Speaker 1: in as a supply of last resort, that will, you know,
Speaker 1: inflate government spending. So so one way or the other,
Speaker 1: this will come back to haunt us. So what you're
Speaker 1: saying is I don't need to buy the Dyson fan,
Speaker 1: the Dyson heater. I I think I think at this
Speaker 1: point you may be better off checking whether you haven't
Speaker 1: done everything you can do to insulate your house and
Speaker 1: kind of reduce heat loss. And I think that's that's
Speaker 1: you know, an energy efficiency is a good good thing
Speaker 1: to invest in. An adult. It will probably last longer
Speaker 1: than that and fun. There you go, Hey, and you
Speaker 1: had one more line in your report that I really
Speaker 1: like that. The the ultimate thing that Europe should probably
Speaker 1: do this winter is pray for sunshine. That would that
Speaker 1: would be helpful if if we have a Warren Winters
Speaker 1: off the system, David, Thanks for joining. Thanks Mark. Today's
Speaker 1: episode of Switched On was edited by Rex Warner of
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