How does the UK PPA market need to innovate?

Omolola Coker: Hi and welcome to another Inspiratia podcast. My name is Omolola Coker, head of research here at Inspiratia. On this episode I speak with a diverse group of energy practitioners from multinational law firm Gowling WLG; energy and procurement experts at The Energy Consortium; UK independent power producer Conrad Energy; and Squeaky, a next generation marketplace for buying clean power from generators. The discussion goes into the current geopolitics of energy the industry finds itself in, tackling whether the prices we see today are transitionary and if so how can PPAs become more innovative to make such prices sustainable and meet the ever-changing needs of both offtakers and sellers.

So why don't we start off with you James?

James Stanier: Great. Good morning Omolola, and it's great to be here. By way of a quick intro, I'm an energy lawyer at Gowling WLG. I've worked on a wide range of renewables projects over the last decade with my practice spanning amongst other things PPAs, both utility and corporate, wholesale trading, regulatory advice in energy tech - I lead the firm's energy tech practice. I've advised on a significant proportion of GB's largest renewables PPAs including in recent times a huge 1,075 megawatt seagreen offshore windfarm.

Chris Bowden: Hi, good morning, I'm Chris Bowden, the founder and managing director of Squeaky. I've been in the energy markets for over 30 years now, both as an energy trader, a project finance banker and I used to run a company called Utilyx which became the largest buyer of electricity and gas in the UK where we also pioneered corporate PPAs back in 2008. And Squeaky is essentially a business allowing generators to sell electricity directly to end users and consumers, business consumers.

Omolola: Adam?

Adam Clarke: Morning Omolola; morning guys. Adam Clarke, recently joined TEC as managing director, joined at the beginning of March. Prior to that I have a background in energy risk management and energy trading; most latterly I built the large offtake portfolio of renewable generation in the UK at EDF before joining TEC as I say at the beginning of March. Nice to see you all.

Omolola: And last but not least but we have Tim.

Tim Foster: Good morning everybody, I'm Tim Foster, I head up Conrad Energy's energy services. Conrad Energy are an independent power producer and energy supplier. My background has really activities been right the way through from energy supply through power purchase agreements and general route to market and at Conrad I head up those activities, so power purchase agreements, route to markets for generators and also the wider energy supply.

Omolola: OK, great. So in recording this podcast with you guys we are now experiencing the other end of the extreme from what was really low prices in the early days of COVID-19 to now, because of the Ukraine and Russia war, extremely high prices. So it's kind… it's a very interesting time but it's telling us one thing which is interesting that it's not isolated events. It's spilling over into different markets affecting energy security. I was wondering if you could start off by what this means for the sustainability of the UK's energy market. Why don't we start with Chris?

Chris: I think sustainability in terms of, you know, is the, is the UK energy market broken? And I think, you know, I think you've got to remember that, you know, we live in an interconnected world. Fortunately for the UK actually very little of our gas comes from Russia, only about three per cent as opposed to Europe where it's over I think 35 per cent, something like that. But because our gas comes from Norway – we have quite a lot of indigenous but a lot of our swing gas comes in the form of LNG, we are exposed like all markets to the international price and we are competing for that gas on international markets. So that's why we're seeing these significant… well, we've seen the significant uptick in pricing and incredible volatility. I think if you go back to 2011 to 2020 the average price over that ten-year period was 45, a low of 22 and a high of 46. If you look at the average of the Enter Ex, you know, we're now seeing an average in the last three months of a whopping £200, it's four and a half times higher. So, you know, we are exposed to international prices. We can't really get away from that any time soon. We have a lot of renewables on the system but that isn't what sets the price and I think that's what a lot of people think about, you know, can we shift to more renewables? Until we've weaned ourselves off fossil fuel, you know, the marginal price of energy in the UK and the rest of the world will be set by fossil fuels and so as a market, you know, we are, we are linked to the rest of the world.

Omolola: Thank you Chris. Do you guys share the same thoughts?

Adam: Yeah, I was going to say Chris, I'd agree with what you said there and I think, I don't know if you'd agree, that what… I think what's remarkable is had the Ukrainian war not taken place I think we'd still be having this podcast talking about exceptionally high prices. I think it would be remiss of us to say that this is all created by, you know, Putin's invasion. If we look at charts prior to the invasion and even the period before anybody really knew what was going on there. You know, we've seen prices slowly escalate over the last 18 months. You know, I've head of talk, is this… are these the new transitionary prices? Is a hundred pound base load the new… is that the new nor… the new normal? You know, we know we had an exception with low wind year last year. We know that we had to use gas that had been intended for this winter etc., but you know, is that the market we're now facing or is that the market we're now operating in, particularly as we now to transition as Chris says to a greener and more renewable future.

James: I completely agree with what you've both said, Chris and Adam, and particularly Adam, the point that you've made that this is a much broader issue than what's happening right now. Last summer we saw wholesale gas prices spike, didn't we, which led to a great number of suppliers folding and a great number of consumers therefore including me going through the solar process to a new home. And that is in recognition, as we exited the pandemic, the global demand for fossil fuels soared and as you mention we import I think at the last count about 30 per cent of our energy from overseas in the form of fossil fuels and therefore we are, you know, we are subject to volatile, playable markets and that isn't going to change in the immediate term as you say Chris. The… interestingly the, you know, the late '90s, early 2000s, we were an exporter of energy but now, you know, increasing reliance on fossil fuels. The government has recently launched the Energy Strategy to go some way to addressing that in the medium and longer term. It's seeking to accelerate deployment of nuclear, offshore including floating, wind, and hydrogen and solar, to help insulate us to some degree from reliance on those global markets. But those impacts will be as I say not immediate, it will be a few years down the line before we get these projects with the, you know, associated storage capacity required, the intermittent generation online.

Chris: I think one of the things that I worry about and think about is that energy security always trumps, you know, the carbon or green agenda, so it's going to be more important for us to think about energy security in the future and that worries me slightly in terms of our transition because the real transition fuel for renewables is gas. You know, a lot of people talk about storage but it's, it's just way too expensive and it will continue to be too expensive into the futures. You know, the conflict in Ukraine is causing problems with the ability to source lithium for example and other rare minerals that you get from Russia, you know, battery storage costs are going to go up as a function of that. But as we transition to a renewables future we will need more gas and now we're uncertain or concerned about where that gas comes from – remember most of the world's gas is in places where you don't have a democratic system. You know, the North Africa, the Middle East, Russia, you know, these are big gas-producing nations and so, you know, this geopolitics of energy is just going to get greater and greater and it's, you know, it's a concern for me in terms of the transition. You know, what it has done is made energy prices more expensive which means renewables are more competitive but they take a long time to roll out and deploy.

Omolola: Okay, Tim…

Chris: Maybe not as long as nuclear.

Omolola: So, Tim, you look like you wanted to jump in.

Tim: Yeah, I was going to say I think, I think Chris has probably absolutely hit the nail on the head there. You know, gas is the transitional fuel. If you look at where the gas producers are, both currently and also going forward, and check, cross-reference that to the Foreign Office travel advisory search, you'll notice that most of those actually are on that list and I think that just gives us genuine concerns about supply going forward and, you know, that is reflected perhaps in the risk premium in the prices we all see. I think the other thing really to note is that, you know, very high wholesale prices are, you know, good for a generation but on the other side somebody needs to buy that power, somebody needs to consume it, and I think that is the other issue we really do need to think about is that, you know, an energy market where, you know, this current winter is £225 a megawatt hour power at the moment and perhaps a long-term £100-plus a megawatt hour power price benchmark is not good for UK Plc and UK energy consumers in general. And whether or not that's the new norm or a transitional phase as we get more and more renewables online and perhaps costs come down is going to be interesting to see how that plays out in the next while. But as Chris mentioned this is not, you know, an immediate solution. Renewables, battery storage projects, energy projects in general take a long time to come online. New nuclear that was announced in the last week is, you know, ten, 12 years-plus of time and I think, you know, we do need to think both short and longer term about how we transition and whether or not these prices are going to be here for the foreseeable future.

Adam: A really good point Tim. You know, Omolola, you asked, you know, how sustainable, or is it sustainable? For energy-intensive industries it probably isn't or it almost certainly isn't because the ability for energy-intensive industries to pass these costs through are very limited as we know, you know. As we all know, from April's price rise, you know, energy prices are already a burden on households, more to come on that in October, and I don't think we've fully seen the full impact of this increase in wholesale energy prices on consumer prices more generally. So, you know, we said right at the beginning it's a global market but we do know there are discrepancies between pricing in those markets and the reservation I'd have is that, you know, the UK, it's a considerable market. It's open and, you know, we price at almost at the margin… Those that have the opportunity or option to diversify where they make their goods might look to other markets, so in terms of sustainability for the UK, I'd suggest that these very high prices are quite a threat to UK's competitive capability.

Omolola: OK, thanks for that Adam, and actually you asked an interesting question earlier saying are these prices transitionary? So just to put everything that we've just discussed into context in terms of how extreme the prices we're looking at, how does this compare to past trends you've seen?

Adam: I confess, I mean, it's… we've never seen it. I mean, prior to this, I think all of us on the call will remember 2008, that use to be our benchmark. We used to talk about 2000, 2008 and warn new recruits this is how bad things can go. But, you know, we, we flew past 2008 pricing levels. Omolola, you explained at the top of the call, you know, 2020 we saw record lows, prices that we haven't seen for a long time due to COVID-19, but this is unprecedented. I don't think, you know, we… second of March was it 800 pence gas, you know, that, that, that we haven't seen, so this, this truly is exceptional trading conditions.

Chris: I might just come in there because I've got slight advantage in that we've been doing quite a lot of research on what the impact might be on the I&C market. In my previous company Utilyx we spent a lot of time developing the hedging strategies for large corporates and I've written a blog about this. You know, if you go back to 2020 the average Enter Ex prices was £35, in '21 it was £118 and in '22 it was £268, and the way that I&C customers typically buy energy is on a rolling forward hedge basis. So most of the big FTSE 100 companies that we worked would look to hedge out 18 to 24 months ahead so they never went into a financial year with any exposure to power prices or to gas prices because that can hit your, you know, your financials, one of the biggest controllable costs that you have, it can really hurt you. I think what's been happening, and I'm sure what's been happening actually, is a number of those corporates have not been following that. So, you know, so they've been running back their hedging from 24 months out to 18 months out to 12 months out, to even less than that, because as the power price goes up it becomes more difficult to buy in to a rising market. You know, human nature is, oh, it must come back down, it must come back down, and I think we've yet to see the full impact. You've seen it on the domestic market because that's a rolling six-month hedge, that's how the price cap works. But in the commercial markets, it's usually a rolling 18-month hedge. So you what you're going to… what we've seen in the domestic market is going to start hitting this year and next year and it's going to be pretty incredible. I mean, if you use the £35 2020 that's something like £3billion worth of wholesale electricity, for example. If you use £268 that's £23 billion worth of wholesale electricity. So think about that flowing through into the P&L or the L of several, you know, large companies out there or medium sized companies, it's, it's scary.

Tim: Just to back up Chris's point, you know, we've seen that in action. No… nobody in energy procurement wants to go and speak to the financial director about locking in an energy price rise and I think we've seen exactly that where hedges have rolled, you know, 12, 18, 24, 36 months out. Now… they've now gone down to literally, you know, within year and a number of large consumers are write… you know, having to write very large energy costs into their business which is not good. I think the other thing as well, even stepping down a level, the amount of small and medium size enterprises and smaller industrial and commercial consumers who try to wait this out just to see if something gets resolved and they've ended up having to renew or potentially going to default tariffs at the first of April. They are working their way through the system as well, so where they've seen energy bills at sort of delivered cost of 15 pence a kilowatt hour previously and they're now looking at 40, 45 pence a kilowatt hour which I don't think any of them can wear in the longer term and I think that's really, we are going to see this play out in the next, you know, three, six, nine months. And either, as Chris said, that's either going to be passed through to us as consumers, ultimate consumers of goods and services, or we're going to see a spate of failures of wider companies, especially those who… traditionally energy has been quite a small element of their cost base. It's now become, you know, one of the biggest costs, if not the biggest.

Omolola: I had a question, I'm going to ask can the UK survive these prices, but I think it's particular, it's not sustainable as Adam shared earlier.

Chris: It does depend, doesn't it? If everybody in the world is paying much higher energy prices then for many companies, that's okay because if I'm a big manufacturer, if I'm a cement or a, you know, steel manufacturer and all of my competitors are paying really high prices, then it's okay. It does mean that everybody else has to pay higher prices for everything but it's a competitive thing here, so it's really about how does our energy price compare to the rest of the world, to the rest of Europe, to our near neighbours where we're competing?

Adam: I'd agree, I'd agree with that, Chris. It's where, where there's parity in price across, across global markets and I think that plays out. I think just… just to build on your point I guess what we might agree is that if, if this truly is the new normal then as consumers we might expect to consume less, so the threat might not be against competition, it might just be, you know, global demand will shift down because simply, you know, we will not be able to afford things we could at 40 pence a base… 40 pound base load, you know, if cement is maybe produced at 260 base load, cement is going to go up by quite an amount, so I wonder we'll build quite so much.

Omolola: With my next question then, what is the liquidity of the trading markets and what does that mean for PPA or revenue contracts going forward? I have put Tim to jump on this.

Tim: Yeah, liquidity – liquidity has always been a problem and I think over the years Ofgem particularly has had a number of attempts to try to address liquidity and forward liquidity. Back in the old days Enron was around and, you know, you could get a price out for ten years if you really wanted to from energy prices from them. But I think the reality now is that liquidity and the number of players in that market have decreased, so we've seen the failure of a number of small energy suppliers who quite often use PPAs to hedge their own supply position. We've seen larger energy suppliers, energy traders look seriously at the credit requirements that allow them to trade. So we have seen general liquidity price, liquidity dry up, particularly in seasons, you know, that are beyond the current year, and also I think just general market volatility has made people very concerned. I mean, we've seen prices move £20 a megawatt per trade. You come in the morning and energy prices are at one level, an hour later they're at £50 higher or £50 lower, and I think that, from a, from a credit, from a volatility point of view, just makes it difficult to see price discovery along the way out. What this does of course open up is the opportunity for consumers to replace that liquidity. So if a, if a large energy consumer is, as Chris has already mentioned, is looking to hedge power out for multiple years then the traditional route of going through a, you know, getting a price discovery through a, through their energy supplier or energy trader could in theory be replaced by, that price discovery, by talking to, directly to a generator or a portfolio of generators in order to get that delinking from the wholesale traded market. And I think we're starting to see a lot more engagement in that sort of sector rather than just your over-the-desk trading type activities, you know, that, that is perhaps an interesting by-product of the current volatility and high prices,

Chris: Yeah, I just… before I go on to add to that because I totally agree Tim there's a real opportunity here to, to create a liquid market between corporates and generators. But before that I think it's really important to understand what's really going on in the traded markets. So as an ex electricity trader, you know, right now I'd be very, you know, very worried about my credits lines and my capital base because, you know, if you go back to this sort of benign period of 20… you know, 2020, before that, you entered into a £100 million one-year electricity contract and you'd need probably £10 million collateral upfront, ten per cent. You know, in the current market, that £100 million trade is now £400 million, it's at least 4x, so now we've four times the amount of value for the same number of megawatts. And also you've got a much higher volatility, so now I'm looking at 30% initial collateral, so I now have to put up £120 million worth of capital whereas I was putting up ten.

So that makes trading energy, and you've seen this through the Uniper, you know, Uniper had to borrow another ten billion on top of the ten billion they'd already borrowed. This is a company that has a market cap of seven billion. So you can see how expensive it's become to trade and that's why, you know, the liquidity is… isn't there because, you know, traders and utilities talk about 'I will warehouse that risk.' I hear that a lot, you know, 'Sell the power to me, I'll warehouse that risk.' Uh-uh, not any more. You're going to… you just can't afford to warehouse the risks that you used to warehouse and so, you know, buying 50 megawatts of summer '24 is dangerous these days, the capital requirements, the market move afterwards. And so no wonder the bid side of the curve is 20 quid less than the mid and offer side is 20 quid more. There's a spread sometimes of 30 or 40 quid in the market for base products, never mind complex products like Peak.

So, you know, what Tim's talking about, if you can cross that spread and get a generator to sell to a buyer, you disintermediate this, you know, this warehousing issue that utilities and traders have and you also disintermediate the collateral requirements because after generators and buyers can do transactions without the requirement for collateral. So massively improves the efficiency of the market if you can get buyers and generators to meet in the middle.

Omolola: Thank you for that Chris. Adam, you're shaking your head as Tim and Chris were talking.

Adam: Right, well, nodding more than shaking, yeah!

Omolola: [Laughs]

Adam: Yeah, vehemently agree and, you know, I am now a buyer and, you know, not unlike a lot of I&C buyers, you know, as Chris outlined earlier, let alone often, is generally the best risk approach. You know, liquidity is a real issue. Chris mentioned a sort of £20/£30 spread and that, that's only in some markets. You now, quite often, it's all implied price, so you try and build a strategy around implied price. You then speak to your trading outfit and you realise that it's £40 higher. You know, that, that's significant, that massively changes your strategy and risk appetite, so you know, I've never quite known times quite as tough as this to buy and sell energy for the reasons Chris and Tim have outlined, you know, from a buyer's perspective it's, it's really difficult because not only have you got to work out what's happening to L&G cargoes in the South Pacific, we now need to work… you know, have an appreciation for capital requirements and all kinds of other things. You know, this is something that UK buyers are not used to. Typically you ring and ask for a price and within a one or two per cent… or the price on the screen, you'll be offered something, you know, within one or two per cent. That is no longer the case. It's changed significantly in the last six weeks, if not, if not the last six months.

Omolola: Before I move on to my more specific PPA related questions, I just wanted to see whether there is a case then for the market pushing itself towards a merchant future. Do you, do you see this as being one of those pivotal moments or it's not likely yet?

Chris: There's a big discussion going on amongst financiers, project financiers, banks and investors, whether, you know, they need to fix the power price on projects any more so they can build them and take the merchant risk because they're taking exposure to an unknown price in the future. That's definitely a trend because I think, you know, the cost of generation, two years ago a seller project needed low forties as generated to get the returns investors needed. Today that's low fifties to high fifties depending on the quality of the project, that's a £10-£15 uplift versus a £150 uplift in the wholesale market. So that means that the appetite for merchant projects has gone up as investors are thinking 'Maybe I can get £100 into the future'. So definitely, yeah, more projects will get done on a merchant basis but of course, you know, the risk there is that the prices come back down at some time in the future. So as with everything, you know, if you go merchant you are taking a bet on the future power price.

Omolola: So then is this where floor prices come into place?

Chris: I'll leave that to you, Tim or Adam, you'll know more about the classic floor PPAs.

Tim: No, the floor is always a difficult area. The floor is… I mean, the question is always whether or not a floor is actually worth anything and that's been the fundamental point from, you know, over the last ten or 15 years and I expect, you know, back in the day it was just a requirement of the funders and the financiers that, did it have a floor price – yes, tick. And the assumption was that energy prices may or may not get down to that level sporadically during the 15, 20-year PPA term and it was a necessary safety net. I think the issue now is, I mean, are floor prices necessary? I think, you know, certainly investors would probably still like to see a floor, they like to see some guarantee of income, but it's quite difficult at the moment to trade off that sort of guaranteed income at quite a low level versus that front end uplift, you know, for being either merchant or even just having a couple of years to merchant at the front of a project and then refinancing it. I suppose the other question is, where is a floor price going to be pitched? Is it going to be at the long term value of electricity and how long is that long term or do you take the new now as the indication going forward? I cannot imagine anybody writing a floor price of £100 a megawatt hour, certainly not, and whether or not you then move, well, perhaps away from a floor price to a fixed price as that sort of structure. Personally I think the need for floor prices or the recurrent floor prices may be is not as strong as it used to be and I think what we will see is that, you know, the element of fixed pricing or locking in revenue is probably more important than ever for a generator in order to, you know, satisfy the funders and their own returns.

James: I'd second that, Tim. I mean, we obviously wrote probably over a hundred PPAs before price over the years but very much now, particularly as we're moving to, you know, we've moved passed the phase where subsidies were readily available for renewables projects and there was a, you know, real emphasis then on having that floor, I think that as the markets evolved, lenders have become more comfortable with taking the risk of not having a floor because it was the lenders that were requiring the floor, wasn't it, back in the day rather than equity because it would be equity that took the hit on the discount to facilitate that floor and what we're seeing certainly now is more forward hedging in the PPA fixed prices and, you know, fairly rarely in fact floor prices because you actually say, what do you use to set the price at the moment in such a volatile market? The levels that we historically have seen will be, you know, completely pointless where we are today.

Omolola: Tim, did you want to say something? I saw your hand…

Tim: No, I was going to say that… I mean, the other thing that's really important is, you know, the additional revenue that comes into the project from not having a floor. I mean, typically discount levels, you may have got an extra five per cent on your revenue just for not having a floor and I think, you know, the early days, you know, ten years ago where, you know, it was a must, you had to have a floor, it was a simple structure, floor price and then some sharing of… percentage sharing against a revenue stream and index or similar have changed and I think, you know, as buyers become more sophisticated and there is more information around in the marketplace you are seeing that level of sophistication come through into PPA contracts. You are seeing, you know, the ability to fix or unfix in certain cases and roll and roll on index and then step back in again and I think, you know, this is where, you know, volatility and uncertainty of energy prices sorts of drives that behaviour and people come up with, you know, innovative solutions and Chris, you know, mentioned the early days of corporate PPAs, you know, that was very much the solution to the problem at the time and I would say we're going to see increasingly sophisticated solutions to what's going on at the moment.

Adam: I'd agree with that Tim. It used to be the preserve, didn't it, in the… in 2010… 2010 area. It was, you know, six, maybe ten large offtakers and fairly standard contract that we can't pretend to ourselves this is now a mass market area but corporate PPAs have certainly increased the range of buyers and the shape of this market and perhaps that's something we explore a little later. But, you know, it's moved away from a simple offtake model for often, you know, government-backed, subsidised assets where, you know, a little bit extra through the wholesale never hurts anybody but let's be honest with each other, you know, the funding model is broadly based on [AUDIO UNAVAILABLE]. You know, as we move into an unsubsidised world we're now facing into a different buying brief perhaps. You know, perhaps sometimes as Chris alluded to, you know, with the suppliers as the intermediary, that you know, the range and sophistication, ironically given that we're bringing this base to the masses, is increasing. So the range of structures I dare say will increase and number of times particularly as the number of buyers and their requirements change.

Omolola: Thanks Adam. You guys have actually naturally touched on my next question which was going to be on the evolution of PPA structures, the need for more sophistication. So actually I thinking is there a challenge then of these PPA structures and different products may be coming out, is it a matter of them keeping up to pace with the changing market?

Chris: So we purchased our first… I pitched a PPA, a corporate PPA in 2005 to a supermarket and we did our first deal with Sainsbury's in 2008, so this is not a new product. I have to say though that it has not moved on very much and when we launched Squeaky 2017 with a focus on selling a platform for generators to sell power directly to consumers, one of the reasons we did that is the market had not moved on and we wanted to, you know, try and innovate and I think unfortunately the utilities sector is not very innovative, you know, it's very inward looking. And so they don't think about customer needs, whether it be generators or consumers, as much as they should do and create products that deal with those risks. So had it not been for COVID-19 I think we would have done a lot more of the consortia deal we did with The Energy Consortium. You know, the first I think European first on a real consortia deal where a group of buyers, some of them very small, came together to sign up to a single corporate PPA, all on standard terms, all signing the same document. I remember a lawyer, there was 22 lawyers involved in the transaction, and one of them I met at a Gowling WLG event and he said 'One of the refreshing things about this transaction is when we said we want to change the paperwork, we want to change the documentation, we said no. No, we've been through this a thousand times, we've done a thousand corporate PPAs, it's a fair document, you have to sign it as is.' And actually that's refreshing to get people to say no and actually people go, okay fine.

But there really does need to be a lot more innovation and certainly Squeaky I think is at the forefront of that, you know, we're doing more consortium deals at the moment where we're doing our first five year deal, we're working on our first five-year deal. I can see corporate PPAs effectively becoming an alternative trading mechanism for generators, one year, two year, three year, cutting out the middle man of the utilities and then restructuring of the arrangement so that every PPA, whether it's a utility or corporate PPA, has to deal with the same set of risks, right? So if we look at the market risks it's balancing risk, its capture risk and its price risk, and the easy one, the one that all everybody understands is price risk, you know, is it a good value against the market? So as generated it's 55, it's 50, and people will argue a lot about that pricing but I think we'll see a lot more innovation around managing and dealing with these other risks which are really significant now. So balancing risk, you know, I think Tim will probably know better than me some of the best corporate… sorry, best utility PPAs were struck at something like 85% of the Enter Ex. You know, that was, you know, amazing days and the best months from a generator perspective are probably in at 98% and Adam will probably attest to that as well. I think those are around the sort of ranges of prices you see and that's where somebody is taking the balancing risk. Now that's gone back down now. I think you're more likely at 93 and so a balancing risk is seven per cent but it's seven per cent of £100 now or seven per cent of £200 in this current market, so that's a big value. We need to think about how that's addressed in a PPA, a corporate PPA.

And then this other thing capture risk, well, very… not many people really, really, really understand capture risk, yeah? It's a complicated thing but it's huge. It's a very significant risk that needs also to be managed in this construct of a PPA. And so I think we're going to see product development around that because capture risk is now forecast to be for wind and solar at around 20% of the price. So if your baseline price is forecast to be a hundred, then you're going to, you know, capture 80% of that, so you're going to get 80 quid a megawatt as a wind or solar project. This… these are just rough numbers and so, you know, arguing about one or two pounds on the as generated price and not thinking about these other risks and how you deal with them in an effective and efficient way, I think that's where a lot of the innovations, certainly where we're working on in, you know, products to innovate around managing those risks, that's where we see a lot of opportunity.

Omolola: Thanks Chris. I just wanted to go to you James since Chris name-dropped Gowling and your event but also from a contract perspective, is this something where you're seeing managing the expectations from I guess clients who could be either corporates or generators, is this something where it's a constant… not constant back and forth but it is this push to get a wider understanding of the needs and he risks of the projects but also to get to a point where it's balanced between both players?

James: I think that there are, there are a variety of forms of PPA out there, some more established than others, for example the utilities all have fairly set forms which generators, investors, lenders are all relatively comfortable with. What we have seen in recent times is the increasing prevalence of corporate PPAs with a wide array of corporate purchasers from various sectors that have their own form of documentation which is perhaps not driven by GB energy, you know, track records on PPA, they're based on, for example, US energy supply PPA contracts they will use globally and that reflects that, you know, that we have a large range of corporate buyers from outside the, you know, the mainstay to date and that has led, you know… Tim and I were chatting before, this has led to, many to ask, well, can we have some form of standardisation in the corporate PPA and indeed the utility PPA space and I guess very much like we have with electricity trading, we have the well-established GTMA for gas, we have the MBP, and we don't really have anything for PPA. EFET has produced a document which isn't widely used. We've got… I guess the closest thing we've got in GB is the backstop PPA which is a fairly good PPA but again isn't widely used and it needs the industry really to come together if that's going to happen and to, you know, via some trade association or central body which corporate buyers collectively tap into, contribute to and commit to use because we are seeing at the moment a, you know, an increasing array of forms of PPA so I think that would actually be very beneficial for both generators, corporate purchasers, lenders, investors or stakeholders in the market.

Omolola: Adam?

Adam: Yeah James really well said and yes please. I have so far been on the, I have written a good few PPAs and the only thing that is probably consistent with all of them was at the end we promised to make the next one that bit easier. I'm not sure we always learnt our lessons. I think there has to be, there has to be an opportunity for all of us to come together and just share our thinking on this. You know we do about net zero. We need to work more collaboratively together and for me this is one area because they are complicated structures, huge sums of money is involved etc. etc. I know that but there has to be scope for simplifying and increasing the ability for those who perhaps don't have the resources to participate in this market. Now this is a market that probably needs to grow. There is certainly a demand from consuming customers to participate but one huge barrier at the moment is the level of sophistication, the time and resource required in order to undertake a corporate PPA typically on the core, what nine months, enough for a new to earth asset faster that is a significant investment for somebody whose energy is a relatively small part of their overall spend. It is an incredibly important part of their spend because they are decarbonised their scope ones and twos for example so any opportunity to get together as an industry to simplify this area I think I would be certainly very much in favour of.

Tim: Yeah if I can just come in there with a point I suppose thinking back over the years of doing sort of long term PPAs there is probably 90% of a PPA contract is generally untouched transaction. It is probably if you looked at them they are word for word verbatim probably the same and I think that has always been a problem of whether or not there is just time spent just negotiating PPAs for negotiating the same and I think that is always my point as somebody who generally fits some of the bills in that process you always question that from the lawyers notes there but interesting with corporate PPAs and the wider sector you are dealing with a section of the energy industry that is not energy savvy and there is a fair bit of education involved in that process and there is also then going back through and having to explain maybe the fundamentals of PPA contracting which at its heart is just a sell and a buy of energy in its sort of DNA. I think the issues generally come around and I can see the argument for standardisation for a fair bit but then you move into how do you cover off perhaps a risk that is changing the capture in price? How do you change impact and cover off in balance risk which changes, how do you cover off the non-delivery or the non-consumer risk and this is where you are involved in the sort of quite difficult discussions with generators or consumers. You know a generator is always optimistic, the site will start on 1 April. You know but build out during the winter the solar site or the consumer says well I am going to be consuming power for the next 20 years but then production is then moved to a different country and I think this is where when we talk about PPA this is the sort of risks where you do end up in the bespoke territory so I think there is a scope for getting a lot of it correct and standardised. There is always going to be especially for big consumers for multi-national consumers. There is always going to be this element of a bespoke negotiation around their own particular requirements. I think that standardisation could be applied if you start thinking a bit about buying grids or wider smaller consumers where perhaps bundling together whether there is some aggregation of risk and potentially of aggregation of generation on the other side as well so you can see an argument whereby mitigating some of the risk by aggregation you could reduce those legal costs down and you can start to look at proper standardisation across the whole PPA contract.

Chris: Yeah I think one of a vision of maybe how it could be standardised is to rethink the whole construct and to say a number of things have to happen here, a number of risks have to be taken and from my sort of standardisation days many years ago, we used to think about this and say right where should be put these risks, who is best able to take these risks, who wants these risks and who does not want this risk and so to think about we constructing the corporate PPA framework, we look at it as a framework and so OK where can we place these risks in the most efficient way and that is why you will get standardisation by breaking it up and standardising its component parts. I think that is where we see the future but the only issue with that is that we are trying to standardise something that is complex, there are a lot of advisors and lawyers who do not honestly understand some of the risks that we are having to deconstruct and place in the market and so very recently on a transaction we had a bank that sad I only want to do it, I only want to do the lending if the deal looks like this and we said well actually it does look like this. It is just constructed differently but you end up with the same set of the same revenue profile but actually because it was square in a round hole they do not want to do it and so you can innovate but if the advisors and the lawyers and the banks don't want to use anything different on you which is our industry frankly that is where I heard about innovating this industry. It takes so much time because the powers that be you are trying to innovate from inside the utilities don't want to change that fast and so but we need to, we need this innovation, we need these new products to increase the number of buyers in the market so the tech deal had 22 universities coming together to do a deal right. That's incredible like people say where is all the liquidity coming from? It is not going to come from the big tech companies anymore because they are full they are getting full of power. We have got to get it into smaller buyers, we have got to get, we talk about standardisations simplifying shortening and shrinking these arrangements so that we can get more buyers that is what has got to happen but if the banks and the investors and the utilities go oh no it is not the same as we have seen before they will struggle.

Tim: I just wanted to pick up on that as well obviously tech and the energy consortium into your point there are certainly advantages to a generator in dealing with a consortium of buyers OK at the negotiation stage perhaps there are a few more lawyers involved but I think over the term of the contract that socialisation of risk, that socialisation of benefit I think does bring significant benefit to the generator party in as much as you rightfully say you know at the very simplest level the portfolio benefit different consumption patterns for example not all universities are the same I'm sure you guys know that already but by mixing the consortium up, particularly with typically there are all very well credit rated anyway it does provide for an attractive proposition for generators I would say and certainly as a buy in group my belief is that it does offer something quite unique to a generator who may diversify their risk or at least limit their risk on such a long term frame.

Omolola: Chris, Tim you guys touched on I guess the wider markets opportunities of consumers together and I imagine that means there is going to be greater role for aggregators in the market. How do you see this coming about to transition us?

Chris: So we are working on three consortium deals at the moment and it is interesting they are all different. One of them is an industry group so they represent a specific industry in the UK and they want to buy together because they collectively want to reduce their carbon emissions and so that buy in group wants to come together to do corporate PPAs but they are all supplied by different suppliers so there is a set of challenges that we have to deal with, but it is interesting that these groups are coming together around the common sector and wanting to work together. Another group is a group that is represented by a single buy in collaborative and so they are different companies that are coming together and they are wanting to do a deal and individually they are too small and so they are coming together for the aggregation size and benefit and the one I am most excited above is a supply chain so very large company wants to push clean energy into their supply chain. The companies themselves are too small do a corporate PPA and so what the company that they supply is saying OK we will organise this transaction with Squeaky. We will all pull it together and you can call off a certain amount of megawatts and it can be like .1 megawatt it does not have to be 5 megawatt deal or 1 megawatt it can be a very small amount and we will build up until we get to a certain amount and we will anchor that deal and so they can anchor the deal, they can do all the negotiation they have the skills and the knowledge to do that and then they can bring their supply chain into that corporate PPA and I think those are the sorts of things we are seeing in the market which will hopefully increase the number of participants and the amount of energy that can be brought though corporate PPAs.

Tim: And you like that Chris the notion of those that can help and perhaps those that can't just now because as we said a moment ago, this is a complicated area and there is a level of sophistication so where there's common interest decarbonisation, energy procurement an appropriate price then it makes good sense doesn't it for those who can support those at the moment can't. There is probably a role for us to play at the larger end of the market to support those who have as much energy and desire to decarbonise the rest of us but unfortunate don't have the resources.

James: It is interesting that you are saying that with oversight and behind the metre scheme it is similar to your analogy there Chris you have got a consumer who is anchoring the project behind the metre so maybe a large solar or a de-plant feeding into a site but then oversizing that project to allow export out to either the wider group of the consumer if it is a site within a group but also again there is a lot of interest within the supply chain particularly where they are being forced by who they are selling to, to actually green their whole process up and decarbonise and by themselves they are individually incapable of doing that. It is just that they can't afford it or just are not the size where equivalent suppliers or energy engaged to actually offer those services to them so it is interesting to see that even with physical assets behind the metre and maybe making 20%/30% bigger than the site consumes. It is interesting from an energy company as well it helps mitigate the risk. I think Chris mentioned and Adam has mentioned we have got different shapes of offtake, different types of consumption, different types and shapes of generation, different locations as well. There is a lot of natural mitigation that comes to help reduce some of these risks if you are putting different types of consumer, different types of generator together and it helps manage the residual shape risk from an energy supply point of view as well.

Omolola: Just to kind of continue from what you were saying Tim is there a role then for storage in this age of mitigating the risk in this transition we are seeing with the prices.

Tim: Yes there is a simple one word answer to that yes. The UK is just so short of storage or any energy storage be it long or short term and we are seeing growth in that but it has already been highlighted on the core you know you just simply cannot press a button and everything magically turns up and I think we really are seeing the need for both short and longer term energy storage requirements. National Grid managing the system at the moment if it is a windy day or wind drops off you suddenly see big requirements of storage, we will see yet more of it during the summer if we have either very sunny days or forecast sunny days and the sun doesn't turn up but you will see that sort of natural within day use of storage to consume or re-export energy but also to manage the frequency of the grid and there is a fundamental problem as well which is how do you get to the point where you actually have longer term storage. If you are talking about solar over production you know drawing them at high summer, high production in terms of the summer you are talking about six to eight hours of large amounts of generation. We have seen a huge amount of sites with big DNO curtailment requirements on at the moment why they are waiting for either reinforcement or just simply as part of their dynamic group connection and it always frustrates me that we should be producing as much energy as we can, it is just a use of natural resources. We really do need to look at how we utilise or store that energy in batteries longer term storage systems, change in behaviour, and change in customer behaviour. Do we go back to economy 7 type electrical heating for the domestic market which took advantage of overnight lower energy costs 30 years ago? Do we move back to that sort of stage maybe with a bit more clever solutions to that but yes is the easy answer to that?

Adam: I guess one of the upsides if there are any of these incredibly high power prices Tim is that one of these things are back on the table. I don't think they have ever left the table but there was never really that financial imperative to look at these things. Perhaps this will challenge us as you mentioned innovation across utility but more broadly does this encourage the innovators out there to come up with the technology because we have always said as part of the net zero journey haven't we, we don't know what technology is going to deliver it. We only know what we can see in front of us, what we also know is that that will not deliver net zero so perhaps if we are looking for a silver lining perhaps these inflated prices encourages innovation and will bring new technologies to market that will help us to achieve true decarbonisation.

James: I agree with what Tim and Adam said and as we move to an ever increasing low carbon generation makes an intermittency forming a large part of that due to the fact that we are an island and we can harness the wind resource very effectively. We are going to need to put even greater focus on storage both short and long term I guess by long duration into storage we typically mean over four hours don't we but weeks and months even and technology is not just battery chemistries but you know liquid air, compressed air, thermal gravity based systems, all that kind of stuff which is in its infancy in deployment but is a great hope for enabling low carbon net zero future and I think that I saw a report by McKinzie perhaps at the tail end of last year saying the most cost effective route to net zero is going to be harnessing long duration energy storage so not only is it a cost effective part of net zero but it seems essential given the generation mix that we are aspiring to in light of the Government strategy announced just a short while ago.

Adam: We have learned something as humans, we waste a lot less during periods of crisis so if this is a crisis are we learning now not to waste energy and that we learn to harness the energy available to us even my next door neighbour has put a washing line up. They have always used the tumble dryer but these energy prices after five years they have finally succumbed to a washing line so if it is hitting middle Britain then perhaps it is starting to have an effect.

Omolola: Thanks guys. We have to come to the end of this. There is so much to talk about and am sure that much more could be said but I would just like to get your closing comments regarding what we all just discussed but also I will cheeky and squeeze in a question: Do you think the current market's conditions are negative or positive for the energy transition?

Adam: Shall I go first so in the immediate term clearly it's a threat. If this is a blip we need to be able to ride it so we need to be able to make sure that businesses can survive these current energy prices. On a more positive note it is getting a lot of attention. This now is not the preserve of sustainability and energy buyers or estate managers only. FDs, CEOs etc. are now very bought into this so perhaps there is a unique opportunity and I don't know how long it will last where actually decarbonising is a cheaper option. Hitherto it has always been how much of a premium we need to pay to decarbonise against a backdrop of a very liquid market we have talked about that but it gets a backdrop of a hyper inflated market, opportunities to look at are alternative sources of energy from alternative markets I would argue is positive and so there is a mood swing amongst energy buyers to look more favourably at low carbon sources of energy not least because economically it makes sense.

Omolola: Thanks Adam. Anyone else want to jump in? James?

James: I think that I'd agree with Adam. It is in the moment, it is not comfortable for consumers and purchasers of electricity nobody wants to pay high prices but what it has done is put a sharp razor like focus on to this issue which was already picking up steam gradually and then we had COP26 last year. We feel we got a real momentum behind and if we can take a positive from this acute spike in wholesale prices, it is that we are going to be powering through the energy transition at a greater speed than we otherwise would have been. Would we have seen the Government's energy strategy published last week had we not been in such a volatile market or would it have included the steps that it did, I don't know. So the hope of course is that for the short term pain economically there will be long term gain on that energy transition to net zero but also in the hope that whilst gas will be a transitional fuel, the reliance upon overseas imports will go down from the current high levels and offer greater insulation on prices in addition to the low carbon nature of the power that we are generating and consuming.

Chris: I am probably just add exactly the same message again I don't think a three to four increase in energy prices is good for anybody and certainly the speed at which that has come given where prices have perhaps been on the longer term has obviously come as a big shock. What it does do is really does incentivise that innovation in technology in data and data management which we need to drive that transition so it should increase the focus and increase the drive towards transition towards low carbon economy. I think what it also brings up is where in the past a lot of this has been sort of one to one type transactions where you have a generator who writes a PPA is written between that and the utility or a large single corporate consumer. What it is going to bring is how to you address the multitude of smaller consumers and smaller generators potentially not just your megawatt of offshore wind but maybe a couple of tens of 5 megawatts or indigenous solar and really bring those the solutions to those so how do you get everybody comfortable with the risks of the management of that power and how do you give businesses and domestic consumers alike the ability to actually know what energy prices are going to be like going forward because with consistency we can actually plan longer term.

Adam: Can I just add as well I think what this is doing is accelerating behavioural change because the bit that we have always struggled with isn't it either a t domestic level or I'd say especially at a domestic level. These last six months have had a greater impact on energy efficiency I would argue but nothing to back this up than the rolling out of smart metres because all of a sudden it was a little bit of an inconvenience that wastage costs you a little bit more but it inconsequential. It is consequential now. We are driving our cars less because we can't afford to fill the tank up, perhaps as I said my next door neighbours are now using the washing line as opposed to, you know people are genuinely considering do they need all of their outdoor garden lighting. It was a waste of energy, it is a waste of energy people are switching those types of things off so perhaps one positive to come out of this is that it is encouraging all of us as end consumers to consider that wastage again because we can't afford to waste it currently hopefully some of this will stick so if we do see a return to normal, new normal we do learn to behave slightly differently and waste the energy we have a little less.

Omolola: Thanks for that Adam and I guess Chris to help close us out.

Chris: We live in an interconnected world. One of my first economic principles I learnt was comparative advantage and that has driven globalisation and we import our energy like many countries and so we are interconnected but what I think this situation in the Ukraine has done it has really woken people up to the cost of energy security and I think it is going to be there now for a while people are, it is not going away. People will want to wean themselves off fossil fuels but right now it is going to hamper efforts towards this net zero target that we have got because unfortunately energy security will always trump carbon neutrality so we have got to take action to mitigate risk posed by importing fossil fuels posed by the climate effect of fossil fuels so from a security perspective need more indigenous energy hopefully that is going to be more renewables consume less energy efficiency that was a big miss from the Government I think in the paper. We need a lot more grid connectivity so it is quite a monumental shift and it is going to be very expensive but I think this might be a trigger for us to do more to speed up that process to speed the energy transition.

Omolola: Thank you for tuning into this episode. We will be back soon with another episode but until then please feel free to like and share this one. You are also welcome to listen to our passed episodes on the Inspiratia or any other podcast platform of your choice including Spotify, Apple Podcasts and more. If you are interested in joining us as a guest then please email podcasts@Inspiratia.com. Until next time, bye.