249. World’s largest VPP - Oct26

With Laurent Segaland from London and Gerard Reed from Berlin, this is redefining energy. Today on redefining energy, we're going to look at virtual power plants, PPPs. And Gerard, do you know who is Dr. Shimon Howard Book? No idea. Well, Shimon Howard Book is a US economist and finance scholar who invented the term VPP 30 years ago. OK. He died at the early age of 51, 20 years ago in a light plane crash over the Alps. Right. But he did a foundational work in '96 called the virtual utility, where he said that electricity generation must be treated like a financial portfolio, and that renewable are a powerful edge again fossil fuel volatility. OK. Fascinating. So Dr. Shimon Howard Book, it's in your honor that now VPPs have become so big. The global capacity market right now is assessed at 100 gigawatt plus or minus 20 gigawatt, because it depends where you look. And it's a 7 billion market expected to grow at a keger of 20% in the next five years, to reach 40 billion within a decade. So that VPP thing is really becoming big. And the whole point is to digitally coordinate flexible network of distributed resources, which are cheaper than big central stations. Yeah. Well, listen, I'm looking forward to the discussion here, Mark Rose. Mark is the CEO of NextCraftWork, which is, well, it's definitely Europe's because VPP. It's the world because of VPP. So 15 or 16 gigawatt. We had Volters a few years ago, 9 gigawatt, Tesla's one. And it's a tough one to enter. The names are in Europe. StartCraft is doing it, NLX, and the US called Renew Home, C-Power. So it's fascinating to have a few very big companies doing that aggregation and management of all those resources. Let's bring Mark in the show. Mark, welcome to the show. Thank you for having me, Laurent Gerard. So Mark, maybe let me kick off and just sort of ask the question, you're the CEO of a German business called NextCraftWork. And you know, part of the Shale Group. Could you talk a little bit about what NextCraftWork is, what it does. NextCraft is actually mostly known for being a virtual power plant. And you can imagine a virtual power plant being a network of assets that are connected digitally. They're linked together and treated like a single large power plant. And these assets are digitally connected and they're centrally controlled and marketed. NextCraftWorker, and as to give the kudos to the founders here, they started 15 years ago by aggregating a couple of backup generators. And then they added lots of small solar PV biomass assets. They found a very neat way in pooling those assets and placing those assets into the market. So if I look at the NextCraftWorker today, we are a virtual power plant that aggregates around 14,000 customers. And those assets are very tight. We have everything from offshore wind PV, small PV, big PV batteries, industrial flex and biomass in our portfolio. If we add up all of the capacities together, we should be around 15 gigawatts of assets. So we have become quite a large energy trading house that has a lot of technology stuck in it. That's very interesting because you present yourself as being able to provide additional power. But we had a few years ago voters on the show and they present themselves as reducing demand. So you're also reducing demand. And I guess it's mostly wrong age vac systems. From our perspective, if we look at the market, we actually see a great system change ongoing. We see a great trend towards electrification and actually that demand for electrification is growing. So I would see that we actually need more power. But that power needs to come from different sources. What we are taking away is base load plants and we are exchanging those with assets that are virtually connected, that are decentralized, that are big and small and distributed over a great region. These VPPs, they play an important role throughout this energy transition that we're going through. The energy transition is probably less about being able to provide the renewable energy, but more about the orchestration of that. Focusing on how systems work, on how grids work, how flexibility works. And the VPP is actually the tool for that orchestration. Mark can I ask you just if I just maybe talk about a little bit of the current market situation. What you're seeing in the wholesale markets and how you help your clients through this situation. In the history of next craft worker, our first purpose was to help the small unit go to the market in the so-called direct marketing agreements. We actually trade on behalf of the customers that energy for them. Now this is warping into a much more pronounced power value stream, where we actually want to look at the end consumer. So how do we aggregate all of the power, how do we add flexibility, how do we not look at it from an asset, per asset specific, but look at it more of a composite portfolio, and how does that allow us to structure power agreements that actually are end consumers the B2B customers like, because if I go into the combination of Shell and next craft worker, we bring that ability to physically orchestrate that power, and Shell brings in the B2B customers, the balance sheet, the know-how on how to treat flexibility. And together we have a larger share of what we call the power value chain, and it allows us to actually structure the products that our end customers need. So you did not really reply to my question, which is how much power you push in a much demand reduction. So the way your structure, you have extra generation pretty much everywhere. So you're not really into demand reduction, is that a strategic choice, or you believe this much more value into pushing power rather than reducing demand? We believe it's about pushing power, but the right kind of power, because we need to look at it from a system perspective. The grid and the system that we're going to go into cannot just take endless solar power. We need to be smart about it and help to stabilize the grid. So that's why if we look at our portfolio, it is pushing the PV, the wind, the biomass yes, into the system, but we also add to it the flexibility from the portfolio. Mark, follow up on that. Can I just ask, and just to be really specific, if you look at what's going on in the power markets across Europe, I would just definitely describe it as high volatility, and I would actually say a lot of stress, because in particular, when there's sunny days, you have zero prices sometimes minus. Can you talk a little bit about that, and how you really help your customers, as I said, through this volatility? How we help our customers through that volatility is to be able to steer all of those thousand assets and give the customers the best possible prices that we can achieve. We achieve that in the day ahead markets, in the intraday markets and auxiliary markets, but the key comes there on how to orchestrate these thousands of customers. And like you say, in the day where you have a high solar penetration, then we need to curtail many of those assets in order to stabilize the grid. To bounce back on Charles' question, and if we look at the case of Germany, so you are the VPP, but they are also the IPP, so independent power producer, and we've seen a bit of a disaster in the past 12 months, because the supply chain is going up, the government probably give less support, or the negative prices, so that stress that J.R. was talking about, and that we've seen the balance sheet of the IPP in our park going bust a few weeks ago, you feel the same stress, or on the opposite, is very good for you. This volatility has good potential for our trading activity, of course, but we always look at it in context that we need to look at on how what our balancing costs do. That's why, coming back to the portfolio question, it is important to have a good mix of it, because in high stress situations, the batteries in the portfolio perform well, and if there is lower volatility, then the balancing costs of those renewable assets go down. That's why it's always important to look at it at a mix, and if we look at it at the end consumer, the one that buys the power, the better we are at doing that job, the more competitive we can be to those corporate PPAs at the end. And Mark, I'm interested also, maybe, can you talk a little bit about how you contract with your clients in the sense that, are you just saying, "Hey, this, we're going to take your assets and I'm going to trade them for a year, five years, do you put our purchase agreements in place, how does it work?" The main business is still linked to the direct marketing of the assets, that means that we would have direct marketing agreements between one and three years with customers. A new stake in there is that we are also offering fixed price agreements for producers, that allows them to have certainty on the income that they have, and anything in between as well. We look at customers that are able to offer flexibility, for example, batteries. we have already seen. signed a big tolling agreements. Those would then range from one to seven years with major battery developers, for example. And then the other cluster of customers is actually industrial customers. We always see that they are not using the power generation that they have. They would always have some spare capacity in their systems. And what we do for them is we optimize the availability and spare capacity that they have in the markets. In that model, we would most commonly upside share the profits that we make. So I'm glad you introduce batteries, because the pace of development of batteries is absolutely staggering. Now we see certain market, which are even saturated, not just the frequency thing, which is central to pretty fast. But if I look at Texas Australia, there's so much battery that it kills volatility. So would you say batteries are an ally for your business model or a competitor? They are definitely an ally, because we look at them together with renewables. Of course, we would not go long endless amounts of battery lengths, but we would size us towards our renewable exposure. Because at the end, we combine those two things and then sell it onto corporate customers. The growth of flexibility needs to accompany the growth of renewables exposure that you have on the portfolio. What we do is we look at various renewables and look on how they look at on an hourly basis. But then we supplement that with flexibility. So Mark, you talked about industrial customers. Tell us a little bit what you do for them. Give us a range of the services that you offer them. I'm also interested in what you see the range of services going forward for them. Are you going to expand them? Are you going to contract them? What's your view on that? So one good example there is, for example, a tetastole in the Netherlands, big deal plant in Europe, is very important for the European steel production. But they have a high energy consumption. And of course, when you set up these big industrial complexes, you want to make sure that the energy is available all the time. So they have different processes that have different energy requirements, but also spare requirements that they do not use all the time. And given the tolerances that the industrial partner in this case would provide us, we take that extra energy, which we then put into the markets. That would be intraday markets, day ahead markets, and auxiliary services. And we get the best of those markets. And that's where the secret sources, the traders, the algorithms behind it, they are basically taking the most value out of whatever the market situation is at the time. And then one of the models that we have today is upside-charing those benefits with the customers. From the customer's perspective, we allow them to reduce their power bill. From the grid perspective, we actually sell grid stabilizing services to the grid. If I can add one thing, we see that especially interesting in the Belgium and Dutch market. Now the big question is, what will happen in the German market? Because the industrial base there is probably the biggest. And it's probably an untapped territory. So if we look at behind the meter flexibility, yes, we see EVs, yes, we see heat pumps, we see what is happening with battery storage at home. But we also believe that industry has a lot of potential in their current installed industrial processes to allow a more flexibility into the market. And we should tap that because all of those industrial sites, they have active grid connections. So you don't need to wait. It's there. It's more about the modeling, the connections, and the ability to be able to participate in those markets. Mark, you've been working also in the US. So how would you compare and contrast the European market to the American markets in terms of VPPs? In my time in the US market, I was in the western part of the US, so closer to Kaisel and Pacific Northwest. A couple of things come to mind when I talk about Kaisel. It is a little bit like being able to look into the future of it because there we already see what high renewable penetration does. And on top of that, if you have a big battery stack in the system as well. And we see that the batteries are picking up all those peak hours that cause high volatility in the markets. It is like looking at Europe and saying, OK, what would the market look like if we add another 10, 20 gigawatts into it? That piece is fascinating. The other piece that isn't a little bit strange coming from the US to Europe is the limitation on the interconnection of the renewables. I mean, the US is blessed with a geography and geology with respect to renewable energy. And there it is quite fascinating that you can capture the big California sun. And then when the sun goes down, you have the New Mexico wind coming in. So from that perspective, I always think that if you want to convert your system to have close to 100% renewables, you need to look at it from a big geographical area. And then if we look at Europe, it is country by country. You cannot connect the north with the south, the sunny with the wind, that feels limiting. So from that perspective, a Europe should take a look at what they have and a little bit more geographically on how they can harness the potential better. That would be one thing. If I look at ERCOT, one thing that comes to mind that is very different than, for example, in Germany, is related to the ease of change, the ease of doing business. ERCOT, yes, they have crises, et cetera, but from fixing those, the regulatory side, they go very fast. In contrast in Germany, where we look at where the DSOs are today, 800 or more DSOs, how will you ever be able to change a system with so many players that has to go through such a systematic change for us? So a little bit of contrasting of those two markets and why sometimes we feel they are going so fast, or what would it look like if we would do it differently over here? So Mark, I think this is a very interesting point that you just bring up on the German situation. And I'm always surprised and trying to look forward and look for a solution. So what do you think the solution is going for? Because the one thing we haven't talked about is AI. And I think AI changes everything because it means that there's a need for more electricity. And you're hearing sort of, you have the head of the European Central Bank even coming out saying it's an economic risk that we are not building AI, data centers, quick and off, et cetera, et cetera. But you do that, you need your grid source, right? So what's your view on all of that? I don't believe that AI is actually a positive opportunity for Europe. I do see that the electricity demands will go up, but we should use that in a positive way and make sure that we can get the right kind of energy to feed into these new data centers that will be built for sure in Europe. With respect to regulation, I also believe there's a chance because AI actually is a great tooling that will allow us to do many changes faster in the future and coming back to the situations of the DSOs. My hope is that they can jump, maybe they can leapfrog from where they are today to having something that is a lot more connected and faster. AI will actually allow us to do all those jobs that are nitty gritty where we have to sort the data much, much quicker. So I hope that we can get to that better future sooner in terms of regulation. If we don't get in our way, but I'm an optimist there. If I want to summarize in terms of demand flexibility, you've got three blocks. You've got the data center, new source of loads. You've got all the development around heating, cooling. And the third one is transportation of those three, which one you think will bring the more flexibility or maybe depends on the country. The biggest potential in general of untapped flex is actually behind the households, behind the EVs as well. Those are not connected today in the flexibility to the grid. The sheer mass of tip flexibility that we will have in the future there when every house has a battery, when every car has a battery, that I think has the biggest potential. It may be not for us because our business model is more for the B2B customers, but in terms of general size, that is probably the biggest cake. We are going to focus around getting the industrial park that Europe has up to speed to be able to help them decarbonize, to help to lift the flexibility that they inherently have. And of course, we're very interested in data centers and how they can provide flexibility to the network once they are built. Mark, maybe just go back to the data center. I think how do you as next craft work see them? And how do you see yourself servicing them going forward? Data centers will also develop in being flexible as they shift computing load around the world. In the future, they will also be able to meet the exact situation of prices that are in each of those markets. That will be where the flexibility is. - Well, I beg to disagree, because in my opinion, data centers are totally price insensitive. They just want power, okay? If you look at the biggest concentration of data center in Europe is around the bling. It's also the most expensive power prices. So when somebody tell you, oh, we cannot go there because power is too expensive, that guy is an idiot or is paid by guys who just want something cheaper. 'Cause if you look in the grand scheme of things, the pure price of power into running a data center is relatively low, so they could pay double treble, They want fast access, fast access. taxes. So that's my personal opinion. The speed rather than the price, is that something that's important for your potential clients? Absolutely, if we talk to data center customers today, they want the power yesterday. That is the biggest value driver. But if I look into the future, there will be a lot of competition on the computing space, and that will reduce the margins again, which will make the importance of having cheap green and affordable power more relevant. Technology will end up being able to shift that load around the world, if I now look way ahead into the future. But I agree with you today, speed and what the actual power cost is not as relevant. Okay, so batteries is the thing that is totally changing not only the electricity grid, but also your business. So can you explain a bit how you integrated with the trading capability of Shell? You can manage that all flexibly that's coming. Yes, sure. We bring the physical power expertise that is required regionally and the connections with the TSOs and DSOs locally on how to connect and interact with the grid. What Shell brings is because they have a lot of history in being able to move molecules or electrons over time. They know how to model those time spreads and that expertise together with the risk appetite they have and the balance sheet actually allows us to go into these tolling agreements, which I think are different because we're moving from a world where everything is subsidized to something where the economics need to make sense. Risk plays an important factor here and being able to offer and be able to model that risk that comes with tolling a battery. So it's a very neat way of looking things together. We bring the algos. We bring the capability to steer those assets. They bring the know-how on how to trade it, hedge it against the curve market risk it. That's where Shell trading is the expert in. Well Mark, I've been fascinating having you and I've just really one more question which is I look at the area that you're working in the wholesale market for power and I just think it's incredibly exciting and it's going to probably stay that way the next few years because I just can't see. I see a whole pile of supply coming on and you've got batteries in the middle and then you've got demand growing. Give us a view of how you see it the next few years. What's in your head? Yeah, I feel very fortunate being able to work in a market that has such a high degree of electricity in the energy system and that piece of electricity and the electrification is even growing. Where I see ourselves in a couple of years is actually doing the same thing but at a much larger scale. Today, with the 15 gigawatts, yes, we're having some impact but we are punching far below the weights that we can be. We're not in all the countries that we want to be. The systems are not as fast and as scalable as we want them to be but if we fix that, then we have a great future ahead of us and we can take even more base load power plans offline. We can make that grid smarter or we can support that grid being smarter and most importantly, like we always say, our mission is actually to have close to 100 percent renewable energy in the system. We just now need to think about the grid and the flexibility. The renewable's pieces are easy. We figured that out. And as this in Germany, stumphistrumph. When Mark, thank you so much for coming on the show and shading light on what the VPP is but I can tell you one thing is that when you want to go to other countries, you might want a different name because next Kafka is how to pronounce. Sure for next. Okay, exactly. Mark, thanks for coming on the show. Thank you so much for having me. Was it pleasure? Job. I think we only scratched the surface. I actually was thinking the same thing as well because when I was listening to Mark, I was listening to talking about the supply side all the time and actually it's about bringing the supply and the demand side together now. And I don't mean that just with batteries but just so much flexibility on the demand side as well as on the supply side. Yeah, but the demand side I think is really managed by prices and corporate reacts to prices. I don't think that consumers really react to prices. It's a tough one because there is a lot of theoretical discussion. Okay, the V2Gs or right now, you've got base power and Texas. They want to put batteries in everybody's home and there is a lot of money good for them. In fact, those VPPs, they are fighting against the Incubans. The Incubans, they want more plants, more grids. And here you've got some independent people who say we might not need that much power because we manage flexibility. That's why the system has always been reluctant to give more place to VPP. That's a very good point, and actually if you want to keep the cost of electricity down, you're not only flexibility, but I do believe flexibility also includes residential because for me when you've got a fleet of batteries sitting there which is particularly in the form of an EV, just managing them in a smart way, in other words, smart charging et cetera, et cetera. And I as a customer, I don't want to think about it. I really don't, but for the system, it's really good if somebody does think about it. But again, this requires regulatory change. But as you said, there are parties out there that the business model is to build more grid and bid more generation. They're not interested. Now, I'm going to give you a personal memory, and that was 30 years ago, and I was, would you believe not, managing a recycling plant in the north of France? And one day, it was in winter, the head of the factory comes and say, how we've been called. An hour ago, we received a fax from EDF, and we have the EJP, Ekretman Jordepoint, which was the proto-test of VPP. And what EDF was doing is that they would give you a very low tariff all year long, if you accepted that for 22 days per year, from the 1st of November to the 31st of March, they would shut you down. And you would know it a few hours before. So, you know, they were checking the weather system. If it was cold because there's a lot of electric heating, they would just send the fax and say, you're cut tomorrow. And I was like, what? I said, I don't know, it's fine. The next day, the old plant was in the dark. Well, they were doing maintenance and so on, so they were kind of used to it. But that's true. The price of power we had was 343 days of the year was pretty low. And the worst thing we had is when you had a mild winter, they didn't use those AGP. So, you know, come mid-March, they would use them anyway. So, the, and of course, that system does not exist anymore. Now it's much more sophisticated and so on. But that tell you that that concept existed 30 years ago. The thing that I take out of it is from the VP perspective is, what you've got is somebody is managing all this huge group of assets from a trading room, right? And that's for me the most interesting thing about, right? In some ways, it gives you a little bit of a vision of the future, which is that you can coordinate all these demand and supply units together in a much more intelligent way than we're doing in a present. I mean, that's set up one of the takeaways I take. Especially with AI coming. AI enables this in some respect. Yeah, and it's a good compliment to the episode we last week with the energy management system. Yeah. The unsung heroes of the energy transition are all those software platform who manage to aggregate and optimize that supply and demand. And that's why we have light even when the grid is on the stress. But what I was also very interested in is the fact that you say we need, compared to the US, we need more interconnections. Yeah. I mean, it is obvious, really. You need north-south. That's it. And you need the west, but north-south is probably the most important. If you take the case of Germany and even France down to Spain, that's exactly what's missing. Is that north-south? Yeah. And that's what the Bulgarians have been extremely good at because they are in the middle of the Greece to Romania corridor. And our friends at Contour Global they put some huge battery in Bulgaria. And guess what? They are literally milking the system. Yeah, yeah, yeah. Of course. Look in the system. I told you, right? Well, Gerb, it was an interesting, not only episode, but series of three which just did on all those software who are changing the way energy is track, traded, reported and so on. And that gives I hope to our listener some hopes because those guys are not sitting on those big conferences and you know, talking about LNGs and you know, nuclear and stuff like that. But these people are the one that optimizes and improve the system every day. Absolutely. And again, I just wanted to thank Mark for coming at the show and I took to you next week the photo. Thank you for listening to redefining energy. Don't forget to rate the show and subscribe on Apple Podcasts, Spotify or the platform of your choice.