Is it apple pie time today?

As Europe’s power system becomes ever more decentralised, electricity consumption patterns will need to change, and change fast. Huge daily and within-day price differences will mean ever bigger prices differences for when we choose to do our laundry, charge the car or put on the oven to make apple pie. Listen to a discussion with Michiel Lensink and Jean-Paul Harreman on the challenges of negative prices, network congestion and bringing smaller firms to the market.

Host: Richard Sverrisson, Editor-in-Chief, Montel
 Guests: Michiel Lensink, CEO of ETPA; Jean-Paul Harreman, Director, Montel Analytics

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. In today's pod, we'll discuss the impact of the massive growth of renewables, primarily solar power in the Netherlands and the wider northwest European region. We will also talk about the ways in which small producers and consumers of green energy can be brought to market in the most efficient way. And of course, how they can help to keep the grid in balance and ease congestion. Helping me, Richard Sverrisson to discuss this and much, much more Michiel Lensink of ETPA and also joining us is our own Jean-Paul Harreman, A warm welcome to you guys. I think we can expect quite a Dutch episode. And then obviously we're focusing on mainly issues affecting the Dutch market. But before we go into the main issues in the Netherlands and the wider region, of course, what is ETPA Michiel? Where is it active? What do you do?

Michiel Lensink, CEO of ETPA: 1:02

Yeah, so ETPA is the newest NEMO or newest power exchange in the NEMO constellation. We went live last year and what we do we are active in the spot market. And what ETPA does, we compete obviously against companies like Apex and Nor Pool, but we are very strong in the smaller players. So we have a new technology stack that's very fast, but it also really enables smaller energy players to also become active in the power market.

Richard Sverrisson, Editor-in-Chief, Montel: 1:30

And why is that important in your view?

Michiel Lensink, CEO of ETPA: 1:33

Yeah, I think we will be discussing a lot of this today, but obviously what we've seen is that, from very centralized production of energy, we have gone to a very decentralized system. And I think that it also, we also need the smaller players. To help balance the grid, because I think that's by far our biggest challenge in the coming years.

Richard Sverrisson, Editor-in-Chief, Montel: 1:52

And I'd just like to say as well that Montel News was the first to report on your entry into the market back in 2016 when we talked to one of your predecessors. But. Okay. I'd like to discuss that a little bit further later on. But before what, let's talk about the context in which we find ourselves Jean-Paul, what's currently the situation, the Netherlands and in the region? I'm thinking here in terms of, the growth, as I said in the intro of, particularly solar and how is that impacting both the Dutch market and the German, Belgian and the French?

Jean-Paul Harreman, Director, Montel Analytics: 2:22

Yes. So one of the main topics we've seen over the past months is of course, negative prices. So we have seen enormous growth in solar development, both in the Netherlands, but also in Germany. France is starting to develop as well. So we're seeing an immense increase in renewable capacity. And this is affecting markets because a lot of that capacity is behind the meter. So there's no on off button. It will just generate at any price and basically it pushes down power prices across Europe. This is not a typically Dutch problem, but it is a very severe problem in the Netherlands because of regulations where we have net metering, which allows us to as a consumer to net off summer. Summer solar generation versus winter consumption. And of course, that's not how power markets work. So that causes an issue in in timing.

Richard Sverrisson, Editor-in-Chief, Montel: 3:17

And you've seen this year or last year, a record number of negative prices or the occurrences of these prices when they go below zero, where effectively users are being paid to use power, as you said.

Jean-Paul Harreman, Director, Montel Analytics: 3:29

Absolutely, yes. Keep in mind that this spring or this Yeah. We're in June now and it still feels like October, but we've had a very poor first six months of the use solar wise. So the load factor, the utilization of solar has never been as low as now since we've measured. So yeah, we've been measuring since 2015, so it could have got, could have been much worse. Had we had some good weather. Which is contradiction, but yeah, it's it is what it is. So we are seeing poor weather, very Dutch weather. And yeah, if the weather would've been a bit be better we would've had a lot more solar, lot more negative prices. But also, and this is what you were alluding to, I think was the congestion. So in the Dutch grid, like all European countries the grid was designed to flow power from large power stations all the way down to smaller and smaller connections into consumers. But with all of this solar development on people's rooftops the flow of power is starting to go the other way. And that's not what systems were designed for, and that is causing congestion and not only on on high voltage level, but also in distribution grid level. And yeah, distribution companies are basically struggling to get power from A to B. And this is, causing a lot of issues in in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 4:53

And I think it's quite interesting what you're saying there, Jean-Paul was like, we, thankfully it hasn't been that sunny. So the solar, the full solar powers haven't, solar panels haven't come to full operation. We could maybe expect more issues, in the coming months. But before we talk about some of the solutions or potential ways of remedying the situation, let, I'll bring you in here Michiel and what, how does ETPA come in here and what does it role in terms of maybe helping the system to balance or to ease some of the congestion here?

Michiel Lensink, CEO of ETPA: 5:20

Yeah. Yeah. I think the two issues that, that Jean-Paul mentioned are separate. Is that right? So first of all, on the negative prices, I think like Jpa said, it will get much much, much worse, right? So there's, it's an exp exponential growth in Netherlands in, in solar and wind. And I think now we, this is just the inflection point in terms of congestion. So in the past, ETPA build what Copax, which is the Dutch congestion platform. And indeed that it was used in the past, mostly only for on the high voltage lines. And we've seen actually that tenet has solved some of that problems on the north side connections. And it has become a much bigger issue in the in the decentralized. And the reason for that is that it's quite easy. It's relatively easy to solve high voltage congestion because they're there. It doesn't really matter. The regional spread where you can ramp up and down is quite large, but if you want to do it on a regional level. Actually you need assets all over the place. And and that is creating the chicken and egg problem. As long as you don't have those assets that you can ramp up and down, it's very difficult to do it through an exchange. And as long there's no money to be made, people will not join. So we are actually right now at a, in a position that for the first time DSOs actually realize that this will not be sold in the next 10 years. By having more copper in the ground. For a long time, that was their position. It still needs to happen, don't get me wrong. But just to give you a flavor, it sometimes takes seven to eight years to get a connection if you want to electrify your industry. So this is having a huge impact in our, on our economy. So it what we need right now and what we provide as Ed by GOPs is something that we've built in the past. It's now owned by a separate group. We gave access to go pax, and what we need is more people becoming active in GOP pax so that we can leverage that flexibility because that's the only solution on the short term.

Richard Sverrisson, Editor-in-Chief, Montel: 7:18

But what I mean, surely the incentives, as you said, the incentives are not there for people to ease the production or to turn it off so they, they're just pumping into the system and surely maybe that needs to be looked at.

Michiel Lensink, CEO of ETPA: 7:28

Yeah. So the incentive is not there because they're, the platform didn't have enough players and because they didn't have enough players, the DSO would not actually use it a lot. And they complain that the prices are too high, but obviously they, there's always a period when you need adjustment. And to be fair, last month was the highest use of go PAXs ever by the DSOs, but we need to increase that drastically. And to do that people need to be able to make money to offer their flexibility and we need more people on board.

Jean-Paul Harreman, Director, Montel Analytics: 8:01

Yeah, no that's absolutely correct. And. What is important for for players once they have the ability to to make money, is also that they have an idea on when are, when I'm, when am I going to be called on. And this is a project that we've recently done with with one of the DSOs where we actually do a congestion forecast. For a specific area, which basically means we, we forecast sort of a transmission prognosis for the area involved. And then yeah when boundaries are about to be reached, we send out an we, we send out an alert and yeah, the idea is then to also involve the public not just companies or marketplace, but also the public to yeah to become more aware of. Look, we have, we are producing energy. We should use it now, not later. So it is the behavior change that is actually needed in the whole power system where we match our consumption to when generation is available. Kind of the reverse. We had in, in the past where we had a consumption forecast and generation would be scheduled to meet that consumption forecast. Unfortunately, the sun is not schedulable. Otherwise, we don't would've had a lot better weather in the Netherlands, in the spring. So this is this is a ma major challenge. And yeah as an example, this is living in society. So recently we provided data to to a student who who had a funny way of involving the public in helping to manage the grid, which is basically an app saying, is it apple pie day today? He based on energy prices and congestion forecasts, he he calculated When was the best time to bake apple pie? Surprisingly, it's mostly on Sunday mornings, so it's very convenient.

Richard Sverrisson, Editor-in-Chief, Montel: 9:53

Make apple pie for Sunday lunch, but I, you know what you're talking here about here, Jean Paul is really a fundamental transformation in the way that we use electricity in the household sector. So you would look. At the forecast of the weather and say, okay, on Wednesday I'll charge my car on Tuesday and Thursday and Wednesday, maybe Friday I'll do my washing for the week. So you're altering consumer patterns based on the weather pretty much. Is that, would that be a fair assumption there?

Jean-Paul Harreman, Director, Montel Analytics: 10:20

Yes. Yes. It's a fundamental change for the whole of society. If you think about it.

Michiel Lensink, CEO of ETPA: 10:26

And to add to that I don't believe we should leave it to personal people's actions, right? So you need to automate this, otherwise it will not work. So I think price signals and that, that's what exchanges do and forecasts have to, to lead a lot of the processes that we have. And I think when we speak about flexibility, we tend to think a lot on production and things like that, that obviously are flexible. A lot of things in our lives are flexible. By definition, right When we charge our cart, when the washing machine goes on when our heater goes on. So there's a lot of stuff and the technology is out there. I think I, I just believe that we have not realized we were so focused in putting on, solar panels on our roofs, and we have not realized enough, or at least not acted upon it that the consequences would be so severe. And I believe for the first time there might be outages in our system if this gets out of hand. So this is quite pressing. And and but also we're quite exciting, right? So we are, we, when I started at, by year ago, the world looked different than it does today. It really changing at a very high speed.

Richard Sverrisson, Editor-in-Chief, Montel: 11:32

It's uncharted territory, and as you say, maybe blackouts or outages across the system will force politicians or policy makers to make a change. But hopefully in the right direction. But the other question would be, at times of oversupply and when the system is overloaded. Jean Paul, isn't this also something that would interest people in, batteries, bat energy storage, these kind of solutions, these are part of the flexibility issues that, that Michiel is talking about?

Jean-Paul Harreman, Director, Montel Analytics: 12:00

Yes, absolutely. What is crucial is that you have those decentralized, flexible assets in across the grid. And there's quite a lot of initiatives going on for battery investment. There's a lot of arguments, what to say, why the Netherlands is not the best market to invest in batteries, but there are also few very good ones which are congestion and and good price spreads because of the delta between solar generation and the evening peak when conventional power plants have to start up to fill demand. So that creates la large price deltas. I believe Netherlands is a very interesting market for batteries and congestion markets can really help solidify the business case because it's it's a market that's not got a lot of data yet. So it's very difficult to include in business cases. So in, in principle, we either make an assessment or we say it's an upside to a business case. But the size of that upside is considerable. And I think yeah, what is like ETPA facilitating small market players, but also facilitating GOP packs, which is the congestion solution that's put in place. This combination is a very strong driver for those parties to actually also be active in that.

Michiel Lensink, CEO of ETPA: 13:17

I totally agree on that Jean-Paul and what we see from battery players is that, let's say one or two years ago the whole business case was only about frequency regulation. And now actually intraday trading is a big chunk of that already. And then if you add, go back. So I believe there's a fundamental change in how batteries should be operated, where you have multiple business. Cases and where you choose where to play depending on the situation. And that really adds to the business case of a battery. And unfortunately in the Netherlands, we have not seen the level of home batteries that we as you see in Germany. I think the system of grants in but is very focused on solar only on the panels and not on, on home owner ownership, a battery. But that might change in the future. And as you said there are more batteries coming. But the irony is that because of congestion there's also little place to install them because the lines are not not big enough. There's, there's some challenges to overcome there.

Jean-Paul Harreman, Director, Montel Analytics: 14:14

Exactly. No, that, that is also part of the study we did for for this grid operator in Netherlands, where we actually said, okay, what is the ideal profile for a battery in this grid? What's the limitation that you impose on a battery, and how do, how much impact does it have on his revenues? That could be a bilateral contract for a service between A DSO and a battery operator. And of course then it would become available for for either limiting or solving congestion. But it has to fit in the transmission capacity of the area. And having this tool that we built now we can simulate market-based patterns. Into a grid load. And that's that's very cool to do.

Richard Sverrisson, Editor-in-Chief, Montel: 14:58

Absolutely. And of course the Netherlands, it's not known for its space, you know, it's not it's it's a sort of heavily densely populated area. I mean, you can't sort of have floating batteries on the dikes or something, could you? No. That's maybe a step too far.

Jean-Paul Harreman, Director, Montel Analytics: 15:10

Yeah. It's very few things float on dikes there, Richard.

Michiel Lensink, CEO of ETPA: 15:13

Problem is not necessarily the area of where to put batteries, but the capacity of the grid. And so I mean that in houses you could. Put it in the, but the grid capacity is the limiting factor here. And I heard a very interesting story why that is. So we had, have had in the past a lot of gas, so our grid, and we, so we heat our houses with gas. So our grid was not as extensive as in Germany and France, where they also use energy for for heating of houses. So our whole grid system is just not as strong.

Richard Sverrisson, Editor-in-Chief, Montel: 15:43

Very interesting. Of course the clue going forward would be seasonal storage. That would be the answer here, but we're quite a long way off that, don't we Jean-Paul.

Jean-Paul Harreman, Director, Montel Analytics: 15:50

Yes. And especially in the Netherlands where we don't have any mountains, so anything seasonal would would have to come from abroad.

Richard Sverrisson, Editor-in-Chief, Montel: 15:57

Yeah, I know. Or the technology would've to make massive massive progress. Yes. And I think the, there are a lot of issues here, but how do you get the small players into the market? Michiel? How do you get them to come in and, 'cause you know, I dunno, it reminds me a little bit of the discussion a few years ago around blockchain, when you're talking about peer to peer trading. Is that now completely out the window and now you're looking at platforms like like your own one?

Michiel Lensink, CEO of ETPA: 16:21

Yeah. Yeah. I think when the exchanges were started they were actually they were quite a limited of peop number of of people trading, right? So the utilities, and there were, you had some prop traders, and the whole system is geared towards those large players. So you need a lot of collateral, you need bank guarantees. The whole IT system is quite old-fashioned. What we do differently in many ways is no. Obviously we build an IT stack. Like everyone would build if they had the luxury of doing it today. So it's in the cloud many pods that can ramp up and down. Extremely flexible, very modern APIs. So all these new players are like us. Also IT players, right? This is an IT play and we are an IT player compared to the other large exchanges that have much more old fashioned technology. The second one is cash. The amount of cash that you need to trade is the way that, that all the exchanges do that they looked at the financial sector and they copy that. They're also owned by large that Euro next. And Dets, we look at cash in a very different way. You have a wallet. You deposit money, even if it's a thousand Euros and you can start trading. And we do direct settlement. So if you sell something, you get the money direct. Directly. So the amount of cash that you need when you trade at PAC compared to at the Apex or nor Pole, is about 70% less. And those two aspects, so the IT aspect and the cash aspect is really lowers the barrier to entry for new players. And I think that's very important. These are, you know, we need to get. New business models, we need to experiment. We need to start trying out new concepts. And if you can only do that, if you're a very big player and it takes a year to onboard, where with us, it takes a week to onboard. And those are the aspects that are important for this market. So that's how we do it. We really try to lower the barrier to entry. And to allow new payer players to to be active as well.

Richard Sverrisson, Editor-in-Chief, Montel: 18:11

And how is it in terms of liquidity? How are you building up in terms and how does it compare with other intraday platforms?

Michiel Lensink, CEO of ETPA: 18:17

Yeah. The beauty of it is that five years ago the European Union mandated that the exchanges have a shared order book. So we co-own the order book with nor Pole and apex. So our liquidity is a hundred percent the same as they have. If you come and trade with us it's cheaper. You lead less cash, it's faster, and you have the same liquidity. What's not to like?

Richard Sverrisson, Editor-in-Chief, Montel: 18:39

Absolutely. Unfortunately, APEX and Nord Pool aren't on this pod, so they can't give maybe the contrary position, which I'm sure they will. But but maybe that's for another pod Michiel. But you've made your point and made it very well. Jean Paul, I'd just, I'd like to continue what we were talking about earlier, about the then and the negative prices. Okay. We've been lucky on the Netherlands that it hasn't been that sunny, but what if July, August and September, what are your expectations here? And Mika said it's gonna get far worse. You know what, this is gonna be negative prices every Sunday, every time when, you know there's a bit of a public holiday and it's a sunny day.

Jean-Paul Harreman, Director, Montel Analytics: 19:12

Yeah. That's what we've seen so far. So that, that'll probably continue. Usually if we look at past years July, August are relatively quiet in terms of negative prices. And the reason for that is that wind is usually absent during those months. Yeah it depends what summer will do. It's not looking like it's going to be a massively interesting summer in terms of solar. The wind will probably also not be there. So yeah I don't think it's going to explode unless the weather massively improves. Our prognosis is still around 600 hours of negative prices for this year. For Netherlands, Germany. So that looks similar. But something else that we do see, and that is in, in light of what ETPA does, maybe also quite interesting is that balancing risk is going up. So one of the things we're seeing in spec specifically for the Netherlands is these dual balancing prices. So there's a price for positive imbalance, a price for negative imbalance, and whatever imbalance position you have, it's always bad because it's always much worse than market price. We have seen slightly more than than in previous years. And the reason for that is that the Dutch system allows for passive balancing. So that's market parties helping to balance the system by using price incentives as as published by the TSO. The problem is if too many people do that, they flip the balance the other in the other direction. The TSO splits the prices and everybody loses. So this is. Issue. Because due to the amount of solar in the system and the spreads between high solar and low solar periods in market prices, you see a very high spread also in the balancing market for upward and downward regulation. And the more speed the TSO needs to, to ramp reserves up and down and the faster they get to the end of the merit order and. This is a real issue in the Dutch markets. People have contacted me saying, what can we do to tackle this risk? And one of the easy ways to do it is just. Trade out your imbalance on on ETPA. And I'll let Michiel explain how that works.

Richard Sverrisson, Editor-in-Chief, Montel: 21:26

Yeah, so Michel how would that work? How, what's your view here? And you can explain how it would work in practice if you have that balancing risk where you either have too much or too little power and you have to, you have to and deal with the TSO there. Or pay a very hefty fine. And and balancing fees.

Michiel Lensink, CEO of ETPA: 21:41

I agree with Jean Paul that there's a fundamental issue to be solved, right? So it, it used to work very well in the Netherland imbalance. But we are overshooting a bit. So what we have an exposed market. After gate closure, 10 50 minutes of gate closure people can trade their imbalance if it is a re regulatory state. Two, and a regulatory state two is when you have a up and downwards price for for imbalance. And actually you can meet in the middle. And what we've seen is a growth in the, in the percentages. So it used to be about 8% of the quarters used to be recommendation two. It's slightly higher now, but the spreads have gone up. So there's a lot of trade now exposed to mitigate that cost, right? So you can actually, if you have the imbalance in one side and someone else, the other side, you can actually. Trade that, and it's a very liquid liquid market. So there's a lot of trading going on. It has increased considerably this year. And last year the average. Savings out in top 185 per megawatt hour, euro per megawatt hour. So yeah it's quite substantial.

Richard Sverrisson, Editor-in-Chief, Montel: 22:45

That's quite a bit. Absolutely. I'd like to I think, we are gonna, obviously the world we are coming into is always gonna be, there's not gonna be any less decentralized, so you're gonna have to see some of these solutions, the flexibility, the aggregators, the batteries come into the market, and a platform in which they could do this on a per, conduct trading from their portfolio. Jean-Paul, I'd just like to round off by asking you what, what keeps you awake at night, in these markets? What are your main concerns here?

Jean-Paul Harreman, Director, Montel Analytics: 23:12

Main concerns are not well thought through policy changes. Yeah, politicians can come up with crazy ideas like net metering in Netherlands and the first few years it looks like it's working perfectly. And then suddenly you find out, oh, we made a design error and now the market's the market's not able to cope anymore. Yeah, so that, that's what keeps me awake. And basically thinking about solutions. And it's good to have like small, inno innovative players in the market that, that think alike and that have similar approaches to looking at those issues.

Richard Sverrisson, Editor-in-Chief, Montel: 23:48

So Jean-Paul, stick with you and say, what would your wish for the policymakers be then?

Jean-Paul Harreman, Director, Montel Analytics: 23:52

Give me a call. Give me a call, I guess, one wish. Happy to think along,

Richard Sverrisson, Editor-in-Chief, Montel: 23:58

But and I can ask you the same, Michiel what keeps you awake at night?

Michiel Lensink, CEO of ETPA: 24:01

Yeah. I think. First of all, this is extremely complex and I think Jean Paul I'm always very impressed with your knowledge, but it's not something people get very easily. And and it's changing. So it's not, it is, it was already complex, but then also it's changing very fast. And so I think it's quite hard for policy makers to, to keep up with what's needed. At the end of the day, like you said, decentralization will not go away. And I believe that know we have an inherent risk that the market does not adapt fast enough, and that will lead to big issues. And where. Two, three years ago, I thought maybe, I would think hydrogen is not a solution, which with a negative prices, it at some point it might be interesting. Even things that were not interesting a few years ago it's it might be become interesting in the future. And I dunno if you heard, but the new Dutch government now say they, they're gonna build nuclear power. It's exactly the opposite was with Niri, right? So we need flexibility in our grid. It will not really solve solve our issues. So what keeps me at night is that I think it will get worse. We had, we come from a luxurious position where you can always have power whenever you switch on. Electricity. And I think that will change. And we already seeing that mean the I mentioned seven to eight years for a factory to get a a connection. Right now areas are not being built because of congestion. And I have, I don't think, the public has realized what that effect will be on our society. And we really need to tackle this.

Richard Sverrisson, Editor-in-Chief, Montel: 25:36

It's obviously a very complex area. Area and for the public at large way above often it's way above my head. So sometimes I'm sure it's way above the public's head as well. But would you agree, Michiel, that the policymakers and regulators should give Jean-Paul a call? If in doubt?

Michiel Lensink, CEO of ETPA: 25:53

I think anyone in the energy space should give Jean-Paul a call. At the other hand, what we see is that we know we are also part of the system, right? I do think policy makers do reach out. We, we talk to policy makers quite a bit. At the other hand a decentralized system also needs a decentralized solution. At the end of the day even though I'm very pro a more socialist society, making money out of the problem is the solution. Giving a price to the problem, like with congestion, like with negative price. So let the negative prices be and see if there are other business cases around it. So that's, at the end of the day, that will, that is the only solution we have. I don't think, and we should expand our capacity obviously on the grid. That goes without saying, but that's a 10 20 year project now it, the problem is it will be here in the coming years is already here.

Richard Sverrisson, Editor-in-Chief, Montel: 26:42

Maybe coming months. Even Jean-Paul, would you agree?

Jean-Paul Harreman, Director, Montel Analytics: 26:44

Yes, I do. And I do wanna have put one defensive word in for the grid operators. So one of the, one of the policies that backfired in the past is the fact that to keep grip grid fees low for the public and for companies and grid operators were not allowed to invest proactively. And now everyone's saying why didn't you invest earlier? You did see people building solar and wind. It's because they weren't allowed to. So it's also policy gone bad, basically.

Richard Sverrisson, Editor-in-Chief, Montel: 27:14

That's an important point as well. Gentlemen, we've, we're running out of time. A fascinating discussion to be continued, I'm sure. Thank you for a very interesting and insightful Dutch episode. Thank you Jean Paul, and thank you Michiel.