206. Renewables Repriced: Hedge Funds and Algo power trading - dec25

With Laurent Segaland from London and Gerard Reed from Berlin. This is Redefining Energy. Today on Redefining Energy. Well, we're going to talk about power trading, aren't we Laurent? Yes, but under the specific angles of hedge funds and algos inside power trading. But first a word from our partner. Abloco Energy is Europe's Premier Leaser of 10 Foot Container Mobile batteries. Built in Europe with CATL Best LFP cells. Abloco Energy serves 14 European countries including France, Germany and the UK. Abloco's batteries can be leased for any duration between six weeks and six years. And they are monitored by the Dutch award winning platform school, Abloco Energy. Make your life easier, make your business more flexible. Back to the show, which of course. Are radically changing the way we actually buy and sell power on the wholesale markets, right? Yeah, exactly. For the past two decades renewable energy investment was viewed as an infrastructure play. So it means you had pension funds, long term capital seeking predictable most of the time government backed cash flows. And now that the subsidies are phasing out, investors in honorable get an increased exposure to wholesale prices, the volatility, they are freaking out about the stability of the cash flow. And here there's a solution which is emerging. Exactly. And a large part of axidata is actually also optimization of what I would call flexibility. So we brought Amani Joas who's managing director of a startup in Germany called Flex Power. And the very interesting thing is that they were purchased by none other than Citadel with the global hedge fund. So you see how by operating at the intersection of short term power trading and battery optimization, you start building some long term position. It's absolutely fascinating. Well, let's bring him on the show. Amani, it's really great to have you on the show. Thanks for having me. Well Amani, knowing you're coming, Leo Biombo called me and said I'm so sad that Amani left our company four years ago, but I'm so proud of what he has achieved. Your story is remarkable. Probably it starts even before your days at E on it starts at Nex Kraftwerk Hamani, explain what was going on there. I started trading with Next Graftwerke at around 2015 and that was still at a time where renewables played a role, but they didn't significantly move the market. And at NextGraftwerke we had an amazing story and it was a great company. And we became Germany's largest trader of commercial PV and also had the largest biogas portfolio. So we learned a lot about short term Power trading and the growth of renewables and what it does to prices and what it does to volatility and build out. I think one of Europe's best trading desks, obviously with a focus on Germany with our assets. But we also moved prop trading all across Europe and with the biogas plants. We also had a lot of experience in AFR which is nowadays becoming more and more important when you think about battery optimization. And then I left the company a little before COVID happened. I started up a trading desk at a company called Priogen for short term trading in Germany. And then I went to E On, became commercial lead of power and gas and was trading at E On during the energy crisis. I doubt that Leo Bielbaum knows my name, but in that time obviously the market was very exciting and I learned about, well, how corporate structures work, which are very different than what I saw at next, which is a more entrepreneurial company. And in the meantime NEXT got bought up by Shell and some of my former colleagues. You know, we're now super happy with the compliance that came in. And also Next Grafberg is a green energy transition company and I think it was difficult for the culture that you were suddenly making money for an oil major. So they also decided to jump ship. And I got a call from these guys asking hey, should we start doing this on our own? And I was very excited about this. So we had a great start with our investors from CFP Energy. They are a London based commodity trader and risk manager and they gave us a helping hand in terms of starting capital to just run the business, but probably more importantly for collateral. Then in the middle of the energy crisis, we went out and said we can do this on our own. It was very difficult to get a portfolio because people were worried about different things than giving four guys a renewable portfolio. And yeah, and then we grew this business from 90 megawatts to 2 gigawatts of wind, solar and batteries and started it up from there. You go out, you're a bunch of friends and your friend sponsor. We know the SIF Partners guide. They've been around for quite some time. They have an excellent also trading background. But you need to build systems because it's all about systems and data. So how fast can you ramp up your systems? Systems is one part. The second part is really getting a portfolio, which is difficult when nobody knows you in the market. And when we were starting, I always refused to call us a startup because we had a very clear idea of what we wanted to build. We are engaging in renewable physical power Trading. So you need a portfolio, you need a virtual power plant which we contracted out. We didn't build this ourselves. You need tech people that understand the renewable energy market and the data flows that come with this. You need to be able to communicate with DSOs and with TSOs because this is physical trading. So you send new schedules every 15 minutes. And when I look back at the business plan that we presented originally is actually quite remarkable because we really just checked off these lists and we got operational within six months. So you need to register balancing groups, you need to register with the exchange, you need to get a portfolio. So we were super fast on this because we had a good idea of where we wanted to go and what we needed to do. And within six months we were trading. Obviously the systems were glued together and not very sophisticated yet. And over the last three years we built operations that are partially fully running, automated with algorithms. We have a trading desk or we have a company of 55 people, 247 operations, around 50 people in Hamburg, 5 people in New Zealand to cover the night shifts. So it's really about having a plan and knowing where you want to go and finding the right people and recruiting the right people to do this. That's part number one. That's just building a short term power business. But I think where vision came in is during the crisis we saw the front year trading at €800. And Nextcraft vehicle actually had a large portfolio of biogas and solar. And the biogas plants, you could hedge them forward very, very easily with baseload shapes. But the renewables, so the pv, it would take you three, four months to do a PPA with them. And when you concluded the PPA price levels were down again. So we said we need to be in a market where we can hedge renewables just like a baseload within two minutes. And that's what we built very early on with our power match platform where we're now able to do a PPA from a renewable portfolio, wind, solar and even a battery within two minutes. And that's what I mean when I talk about the commoditization of renewables. Mani, can you sort of expand a little bit on that in the sense that what I'm really interested in when you talk about PPAs, you're talking really about short term PPAs. Yes. Where I'm coming from is I'd be interested to hear your views on that and how you see that in terms of being able to go into long term PPAs. Now the reason I'm saying that is If I'm a finance person, I want to finance a solar park. It's all great to have a short term ppa, but actually I want to have a longer term PPA so that I can actually I can get debt on my project, et cetera, et cetera. Right, so how do you see that going forward? That market, the short term PPAs have a different purpose than long term PPAs. So the short term PPAs have a purpose of, let's say you own a bunch of renewable plants and a ship in the Baltic accidentally hits the pipeline to Norway. You can imagine what happens to gas prices, you can imagine what happens to power prices. And then we need some forward liquidity in the market. And if you have a renewable plant and the price goes up to €500, you can hedge with that and cash in quite nicely. And you also dampening effect on the price level because there are people selling, whereas in the energy crisis nobody was selling anymore because that liquidity wasn't there because we just didn't have that commoditization. And on the other hand, what we're doing with the short term ppas is we can deliver hedges from renewables which in the future will be a lot cheaper to industrials who just want to hedge their power positions. But here we're talking about risk and hedging for three years. So a trading desk like ours, we're not infrastructure fund, we don't look 15 years into the future. And when it comes to financing a PPA for 15 years, which is what an investor in a new asset essentially needs, we're in a different market. But I think the standardization can help you to have a pricing benchmark just like you have on oil and gas. In oil and gas you would also use hub benchmarks to finance long term projects. So it's more about finding a pricing standards that you say this is how much solar is worth as like one number and not as an aggregate of 1000 PPAs that you might know or might not know. Imani, I think it's very important to explain to the listener how that power market works and why if I have a solar asset, why I'm actually using your services at all. So maybe just explain a little bit about the background of how that power market works so that can understand really why you're important and what you do. Then stepping away from the PPAs for one second, if you own a solar farm or a wind farm, you usually do not know a lot about energy markets. You're a project developer, you know about engineering, you know about financing, but you don't know about schedules to the tso. You don't know how to connect your plant, you don't know how to trade it. So you need a service provider that gives you route to market access. That's number one. So that's a service where we say hey, we connect you with the dso. We tell them this is your plant. If you want to redispatch, this is how you connect to it. We connect to the plant ourselves through a so called VPP so that we can forecast each renewable plant. So we do this every 15 minute. Each renewable asset gets a new forecast so we can tell the TSO how much power they can expect to be coming into the grid. And then we sell this power usually largest part on the so called day ahead markets and then the forecast errors that you inevitably have on the so called intraday market. And for this we take what they call balancing risk. So we pay out to the renewable assets usually the day ahead hourly price, but sometimes there's more or less solar, you might over underproduce, you're hit by crazy intraday prices or even more so crazy imbalance prices. And we are taking this risk away from the asset holder and that's a service and we charge a small fee for this. And this is the physical business. So this is what we call balancing services. And then the second step, and this is where the PPAS comes in, is if you see a price that you like in the next year, do you want to hedge your forward price expectation with an instrument such as this? So if you say hey, I think renewable prices are even going to be lower next year, I saw a lot of negative prices last year. I'm scared of those. I think my value is dropping. I want to lock in my value right now. And this is where the PPA side comes in. That is fundamental. The secret of your company is harnessing the balancing risk. And that's how you can somehow structure a product which is, I'm not going to say synthetic but relatively replicable and then have portfolio effect. You need a lot of computer because you are managing the balancing risk. And if we look at the UK market, which is well, very dissimilar from the German market, but the balancing cost used to be like 2 billion pounds a year five, six years ago and they went to 8 billion. So the system is more imbalanced. A do you see the same thing in Germany? And B, are you comfortable that if there is like five standard deviation your system is not going to blow up? So I always Think of ourselves in the power markets as the first responders. We are responsible for the dispatch on the last meters, right? A few minutes before delivery, we can still react, we can still trade out power. And I would like to dissect the question a little bit because we have one thing in Germany that we call the renewable balancing paradox or the renewable energy paradox, which is when you look at the system physically, you would expect that more renewables mean more volatility, means more need for ancillary services. So backup power plants that balance this out in the last seconds, just for the physics, right? Because if you have 50 gigawatt of solar and the cloud comes, you easily have deviations 4 gigawatts up and down. So you would expect the cost of these ancillary markets to grow. And in Germany, actually they haven't, they haven't grown, they have shrunk. And the question on this is why? And the reason for this is that we've become a lot better on weather. So our forecasting capabilities are becoming increasingly great. And then in Germany we have a balancing price system that heavily punishes you if you have an imbalance on the wrong side. So traders like ourselves, we don't only forecast and trade, but we also actively manage the assets. And we often hear, oh, it's such a bad thing that renewable plants are getting curtailed. In a renewable system, curtailment is going to be one of the most important things that you do to balance the system in the short term in terms of overproduction and then when the market is short, so think about the evening peak, you have an outage, all power plants are ramping up. You need traders in the market and also you need prop traders in the market that have a view on risk and prices to get that short term flexibility into the market very quickly and give them a price incentive to come on live and manage the system. And this has been working immensely well. So everything that is market based, everything that is short term price based is the greatest innovation of the energy transition that we've actually done in Germany, beyond the physics, is really building this amazing market that is balancing everything to the last second. The problem where the costs are coming in is redispatch. So redispatch costs are going to explode. But that is more of a system problem and problem for lack of price signals that we have to shut down more and more wind in the north and ramp up power plants in the south. And this is really where in Germany system costs are getting higher and higher and are probably going to explode if we don't do something about it. Okay, which is basically grid cost. That's what we're sort of saying. It's a lack of grid. You just can't move the wind or the solar where it's needed and the. Lack of price signals. So let me give you an example. So the German government is very resistant on splitting Germany into several price zones, which in my view is the only thing that would help this. But on a day like today, it's a holiday in Germany right now, or at least in northern Germany. And so we don't have a lot of demand. If we have a lot of wind in the north, we can't transport it down. So what do they do? They shut down wind in the north and probably ramp up a gas peak in the south. And this needs to be paid for. Now, if we have a lot of renewables, we might be at a price level that is at zero or at negative prices. And because as a trader, I'm not seeing the grid, I'm only seeing Germany as a whole, I might actually curtail or shut down renewable plants in the south. So I'm curtailing a solar plant in the south while we're lacking energy in the south. And that is a systematic problem that you can only solve if you have different price signals in different regions. And if you had different zones, what you would also do it also incentivize putting in storage and stuff like that, which at present you don't have that incentive. Yes, especially putting storage into the right place and having storage react to the right price signals. So storage might do exactly the same as I just told you. So in a situation where you have low prices and a lot of readers batch and you can't transport power to the south, you might actually have a storage asset taking a lot of energy from the grid in the south, which you really don't want it to do. So it's about giving the right price signals to the right assets so that they can react in the right way. This is on the dispatch side and what nobody ever talks about is, well, what about the investment side? You also want to give an investment incentive to build the assets in the right place. And currently we just have none of this in Germany. We have this in Texas and Erica, they figured it out, but in Europe we're kind of running blind here. Mani, can I ask you a little bit about just two things really that I've seen in the market that I think are quite impactful in terms of changes. One is we've moved from so called gate closure of one hour to 15 minutes across Europe. So maybe you could explain that. And the second thing I'd love to ask you to talk about is the role of storage and what this, how you see this and what this means going forward. We have moved the standard trading product from one hour to 15 minutes. That happened a couple months ago. So right now we're trading in 15 minute blocks and not in one hour blocks anymore. Which is a good evolvement because renewables have pretty steep ramps and those ramps need to be covered. And so it is good if we have a Europe wide price signal on these 15 minutes. So we had 15 minute products before an intraday, but we didn't have a cross European market on it. And across European market on this just fosters competition and better allocation of resources. So this is good in terms of gate closure times. This really depends on every market and also on the exchanges. So we can trade across Europe one hour before delivery in Germany, we can trade nationwide until half an hour before delivery and then we can trade within the TSO until five minutes before delivery. And the further you come to delivery, the smaller the volume. Still you can trade, but the higher the volatility. So you're smart, you're growing and all of a sudden a gigantic US hedge fund arrives and knock at your door and say what you do is very interesting, we'd like to acquire you. So explain the process and how you came now to be a company owned by Citadel. Yeah, you explained it very well. We were not at all in the market to sell this business. We wanted to build a renewable energy trading company for the long term and we still do. But last year we got an email and a call from Citadel Commodities. And when the most sophisticated and in my view best commodity trader in the world knocks on your door, you have that conversation. And they had a very clear idea of what they wanted and what they were looking for. And this process moved extremely fast. And on our side we thought about if this makes strategic sense for what we want to build. And it does make a lot of strategic sense. And now I'm really convinced that it's an ideal partner for a bunch of reasons. One is with them we can access trading sophistication in terms of weather, models, modeling the market and just having great talent that understands commodities and especially power in Europe very deeply, which will also help us in our short term operations. And two is with our Power Match Liquid PPA platform, we were coming on limits because our balance sheet was just too small to do deals for large volume and Also for longer tenors. And now with Citadel, we're looking to push the tenors beyond the three years and come into a place where we can hopefully offer tolling agreements to batteries. And that space right now is owned by a bunch of utilities and we would like to break that place open. And if you want to do that, you need to have the kind of balance sheet that Citadel does. So in that way they're really, really an ideal partner. And I've just been impressed with the people I got to know over the last weeks and months and their intelligence and working with them is going to be very exciting for us. Amani, back to the German power markets. I'd love to hear your view on the need for gas and in particular new gas in the system. When you look at our own portfolio, it's kind of a microcosm of what we think the future of the German energy system is. So we have a couple hundred megawatt of industrial offtake that flexibly responds to prices. We have 2 gigawatts of wind and solar and we have a bit of a battery capacity to fill the gaps when the wind doesn't blow and the sun isn't there. If you wanted to power the system with that, you would have a hard time because obviously there are times where there is no wind and no sun. So you need something to fill these longer term gaps and long term storage probably isn't there fully to do it right now. So am I one of the people that says we don't need any gas at all? No, we'll need some gas peakers. Or if we see it more strategically and not from a climate perspective, there probably will also be a political discussion to let coal run a bit longer. However, the point where we're at right now is that the German government, which I think is still pushed by the fossil fuel lobby, is advertising 20 gigawatts of gas build out and that should be fully subsidized. That is quite a ridiculous statement that a company is too scared to build a gas peaker based on market prices. In the US we have companies, private companies, shooting rockets into space with private money. And RWE is saying it is too much risk to build a gas peaker based on short term power prices and they can't hedge this, so they need a capacity market or a subsidy to get these things built. And I think that's a little bit ridiculous. And everything is there in the market for gas peakers to just be built out of the market. If government made a commitment not to have a Capacity market. And then it would come at a size where the market decides and not political bureaucrats decide that obviously have their models and they're trying to do their best. But forecasting the drop in battery costs and what new technologies might be coming and to what extent demand might be able to respond to peak prices, that they're definitely going to make errors on this. And if you're a government official, you're probably always going to err on the side of security. So this is a recipe to get overcapacity into the market, which might crowd out technologies that are just a lot che. So I don't like the way this discussion is going at all. Wow. Okay, let's jump into another topic that certainly make headlines, which is algo trading. What do you want to say about. Algo trading on short term markets? If you look at the orders being executed, we're already in Germany at around 85% of orders being executed through Algos or might even be more. But the volume on those is quite small. And when we talk in terms of volumes, it's something like 2/3 of volumes are executed by Algos. And when you think about a battery that is optimized on intraday, we have single assets that have over a thousand trades allocated to them. So this is not a job for a human to sit there and click for trading a battery. That's physically impossible. But I think a mistake that many people make is that they think, okay, this is now AI revolution done. The Algos have figured out everything. You don't need human traders anymore. In our experience, that's not at all the case. Most of the risk decisions and most of the real intelligence is often still coming by humans. We have Algos and humans trading also, both in risk taking positions. And while the Algos are doing great, and I do see some future there, humans are still outperforming Algos because especially in short term markets, lots of things happen that are very difficult to predict, that are very difficult to back test. And you run into situations where you don't want an Algo life that has trained on data that looks completely different than this. So to my surprise, humans are still alive and kicking and I think they will be for the next five years because risk taking is still something that's very difficult for algorithms to do. So speaking of five years, let's go to 2030. I want to talk about how you see the German energy transition, because for me it's paradoxical. The paradox is that Germany can't even put smart meters in. So one level, they can't digitalize at all. And then at the area that you're working is, which is the power markets, it's the most digital power market in the world. It's the most liquid power market, it's the most innovative. Give me a view of 2030 and how you see the energy transition in Germany and what it looks like. As an entrepreneur, I'm a natural optimist and I actually think the things that we need to fix in Germany are not that big. We need to get some regulations out of the way to get the smart meter rollout done. If we do this well, it should be possible to get this done in two, three years. The situation is ridiculous. I absolutely agree with you. We need some better regulation in place when it comes to redispatch. I think we need a price zone split and then we need to push for the build out and not slow down and be strategic and make sure that we have energy prices that allows industry to stay in Europe. All of these things can happen. So I hope that we'll be in an energy system where we have around 80, 85% renewables and the biggest export that I think the German energy transition has for the rest of the world is how to build the system and how to make the system work. And we are relatively still a rich economy. So when you think about it in terms of climate, I think it is on us to make some of these mistakes and pay some of these prices to then hopefully arrive at a system where others say this is actually working. We're copying this. And to use one of the words that I've been hearing on your podcast, I really hope we'll be in electro state by the time of 2030. Amani, thank you very much. Absolutely great having you on the show and I wish you all the best in the future. Thank you so much for having me. So, Job, what do you think? Well, it's in a scenario, Ramon. I've been doing a lot of work in the last few years, you know, so I'm very, very clear that what we're seeing in the whole renewable and infrastructure space is a change in power and value add from it used to be the developers were the high value add, sort of profitable guys and then you had at the other end you had the asset infrastructure players which had to have huge scale because the margins and if you'd like to say the yields were very, very low. But now I look and I say, well, all the value's in the middle and that's where somebody like this is. There's a moment during the conversation where I say, oh, my God, this guy is so good. And he told I have five guys in New Zealand. So they work at night and there's somebody on the phone 24 hours a day. And that tells you what it takes to monitor 24 7. You need to have five guys in New Zealand. So when it's night in Germany, that's their day. And they continue to monitor the market. It's absolutely crazy. Yeah. And listen, if you don't do it, you're not competitive, Lauren. Yeah, but I don't know when lwe or E on is going to open an office in New Zealand or in Australia. Now they have 50 guys. Okay. Their structure has a cost. Okay, let's say 5 million a year. And the amount of capital they were allocated is below 20 million. And so with 20 million in terms of collateral and everything, they had to make more than 5 million a year just to pay for their structure and certainly make money if they were acquired by Citadel. So do you imagine the profitability of that capital? The investment must have returned 30 to 40% a year. And that's what trading is all about. I would say, at least, because I think all the values, again, I say all the values. Now in the middle, you can see this developer prices are falling. And as I said then, you've got yields on the asset ownership side going down and risk going up. So there you go, you got the guy in the middle and he's really needed going forward. Can't get away with this. He can't be. If you really want to have value as a developer, you need to be able to understand how that power market element, because it's not just about selling. I've got the rights to build 5 megawatts of solar in East Germany. That's not enough anymore. And then on the other side, the guy who owns the asset, he looks and goes, oh, my God, I've got negative prices. What am I going to do? So either you outsource it to these guys, you partner with them, or you try to do it yourself. So it's a very, very interesting moment in the whole renewable space and this whole area of power TR and optimization is critical. Yeah. And when the hedge fund guys are really going to invest, you're going to see a level of optimization that we have no idea right now because they are used to liquidity, which is something that is relatively new in our energy system. Okay, Gerard, we thank Amani for coming on the show, those guys and all the one who came from Next Kraftwerk. They all came from Next Kraftwerk. That was a seminal company. It sure was. Yeah. I wish them the best, but they really know what they're doing. Yeah, they should do okay. Gerard was an interesting conversation and I talk to you next week. Looking forward to it. Thank you for listening to Redefining Energy. Don't forget to rate the show and subscribe on Apple Podcast, Spotify or the platform of your choice.