Insider's Guide to Energy

129 - Energy Risk Management made Simple for Insiders

July 02, 2023 Chris Sass Season 4 Episode 129
129 - Energy Risk Management made Simple for Insiders
Insider's Guide to Energy
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Insider's Guide to Energy
129 - Energy Risk Management made Simple for Insiders
Jul 02, 2023 Season 4 Episode 129
Chris Sass

How do you control an asset that converts weather into energy? Especially in today’s volatile electricity markets, balancing the risk and value associated with these assets is paramount! We discuss this and more with Brock Mosovsky, co-founder at CQuant.io, an energy focused Software-as-a-Service platform for analytics and portfolio optimization across a broad range of energy stakeholders. Join us as we learn about the world of energy economics and how market operators employ clever techniques based on statistical analyses to evaluate and manage risk and maintain balance between supply/ demand and price/ quantity of electricity.

Hosts:  Chris Sass & Jeff McAuley

Additional Reads: 

California’s Duck Curve getting deeper: https://www.eia.gov/todayinenergy/detail.php?id=56880 

cQuant: https://cquant.io/ 

Assessing the value and risk of multiple ppa structures: https://cquant.io/2021/07/14/assessing-multiple-ppa-structures/ 

Show Notes Transcript Chapter Markers

How do you control an asset that converts weather into energy? Especially in today’s volatile electricity markets, balancing the risk and value associated with these assets is paramount! We discuss this and more with Brock Mosovsky, co-founder at CQuant.io, an energy focused Software-as-a-Service platform for analytics and portfolio optimization across a broad range of energy stakeholders. Join us as we learn about the world of energy economics and how market operators employ clever techniques based on statistical analyses to evaluate and manage risk and maintain balance between supply/ demand and price/ quantity of electricity.

Hosts:  Chris Sass & Jeff McAuley

Additional Reads: 

California’s Duck Curve getting deeper: https://www.eia.gov/todayinenergy/detail.php?id=56880 

cQuant: https://cquant.io/ 

Assessing the value and risk of multiple ppa structures: https://cquant.io/2021/07/14/assessing-multiple-ppa-structures/ 

01:59.49 

chrissass 

Welcome to insiders guide to energy I'm your host Chris Sass and with me is Jeff McAuley. Jeff welcome back to the program. How's it going today. 

  

02:06.80 

Jeff M_ 

Wonderful. And today's topic risk management and renewable energy. One of my all-time favourite topics. So really excited to dig in. 

  

02:16.28 

chrissass 

Well now that we found out you’re a total energy geek let's introduce our guest Brock Mosovsky. Brock welcome to the program. 

  

02:24.38 

Brock Mosovsky 

Hi Chris, hi Jeff thanks so much for having me. I'm really excited about today's conversation 

  

02:29.80 

chrissass 

So, Brock you're a co-founder of a company called cQuant. Why don't we start by telling our audience who and what cQuant is and what you do. 

  

02:37.90 

Brock Mosovsky 

Yeah I would love to so cQuant.io is an energy-focused software as a service platform for analytics. We provide a cloud native solution to model and and do asset valuation and portfolio risk management and. Portfolio optimization across a broad range of energy stakeholders. Um, you know, independent power producers renewable developers renewable offtakers virtually anyone that has exposure to wholesale electricity market prices and we're also global so we analyze. Portfolios today across 5 different continents. So very relevant I think to today's topic 

  

03:22.39 

Jeff M_ 

That's fantastic and I'm I'm so excited to learn more about this in in particular around some broader trends that you might be seeing in the renewable energy market. So historically, we've seen Utility Scale solar really dominated by utilities and that's shifted. 

  

03:40.35 

Jeff M_ 

Maybe in the last eight to 10 years to be the corporate virtual ppa and I would say at least in some parts of the world that's continuing to shift where it's now some percentage merchant in addition to corporates. What. If you would talk about the high-level trends that you're seeing of node would love if you can share a few insights from what you're seeing from your perspective in the market. 

  

04:07.10 

Brock Mosovsky 

Yeah, for sure. Um, it's ah it's a very rapidly evolving space and so I'll echo some of the the things that you mentioned which is you know a lot of utility scale solar at the outset utility scale wind was was primarily being off taken by utilities by load serving entities. We saw this really big transition to corporate entities that are pursuing aggressive sustainability targets just buying a lot of direct renewable energy purchase through power purchase agreements and that really started I would say. You know it started with some of the really big players. The Microsoft and Google and Amazon and and the ones who were who were really focused on kind of achieving aggressive sustainability targets maybe ten or fifteen years ago they started that really in earnest and and you know a lot of the other commercial organizations kind of followed suit there. Um, we saw a transition away from node settled contracts more to hub settle contracts through that process because a lot of those entities those commercial entities. They either have their native power. Position which is generally short right? They're running data centers. They're running office buildings. They have a short position in the market but most of that is more tightly tied to the hub than the node and so there became with that and with the kind of. 

  

05:31.80 

Brock Mosovsky 

Increased competition in the market to sell power purchase agreements offering these hub settled contracts became kind of a value ad um and what we're seeing today in the corporate space at least is that almost no node settled ppas are being signed almost everything is at the hub. Much better aligns with the risk exposure of these corporate entities than a node settle contract and the offtaker then is exposed to all that basis. Um, so there's there's potentially another emerging trend where we're starting to see more interest in merchant generation again. Um, some of that could be due to some of the elevated pricing that we've been seeing over the last couple of years particularly as gas prices have been really elevated and power prices have been up merchant assets have looked really good over the last couple of years whether that's a trend that continues you know through the next. 2030 years of an asset's lifetime remains to be seen. 

  

06:27.93 

Jeff M_ 

Great and I know this is a podcast design for insiders. But I always get confused from from time to time so want to make sure that we review when we talk about hub versus node. So we are talking about deregulated markets and if you could go through. 

  

06:45.77 

Brock Mosovsky 

Um, right? um. 

  

06:47.27 

Jeff M_ 

We're talking about locational marginal prices and these are either very deep. They highly traded nodes or the the more distributed how you can give a better definition. 

  

06:56.66 

Brock Mosovsky 

Yeah I think I love an overview of that. That's that's an important kind of foundational bit of knowledge for sure. So so yes, so most of the a lot of the power purchase agreements that we're seeing are in. What are the competitive power markets or the deregulated power markets. These are the the regional transmission operators of the independent system operators around the country markets like the California iso ercot Pjm New York new england myso sbp um the contracts then the power purchase agreements are basically an agreement between a seller of energy or an owner of the asset and an offtaker of the energy and it can be either physical or financial but generally the offtaker is taking on at least the financial exposure for the energy. As well as off taking the attributes the renewable attributes and that's a really key component of the puzzle. That's really why these corporate entities are out there procuring renewable energy is that these renewable attributes the renewable energy certificates are what they are using to claim sustainability for that energy. The contracts can settle at the node and a nodal price is the price that is locational in nature. So every location on the grid has a separate price and it's also marginal in the sense that it indicates the kind of value to the grid of adding one additional megawatt to the grid. 

  

08:25.60 

Brock Mosovsky 

And of course the supply and demand because energy is essentially a non-storable commodity the supply and demand is constantly being balanced and so in the Us power markets I think there's there's over one ah hundred thousand different nodle prices across just the deregulated markets alone. And any given instant in time every single one of those could have a different price and so that's when we when we say a node settled power purchase agreement. It's very very locational, very specific to a given place on the grid and those nodal prices tend to be. Much more sensitive to local fluctuations because it's just one single point on the grid. So. It's much more sensitive to congestion on transmission lines. It's much more sensitive to very regional local supply and demand dynamics a hub is essentially an aggregate of many nodes. Um, and it's a it's kind of a synthetic quantity that is traded on in the market. So if you have um, you know financial derivatives being traded in energy markets those will typically settle at hubs not nodes. Um and so it's a regional center so in the California markets you have a northern hub. Np 15 and you have a southern hub spfifteen and you have kind of a central hub zp 26 and that's where contracts are traded. That's where financial products generally settle and those prices can detach from the nodal price and that generates what's called a basis spread. 

  

09:54.99 

Brock Mosovsky 

And that's an extremely critical thing to understand when we're talking about renewable energy because that basis can be very material to the value and risk for renewable energy itself physical energy and also contracting. 

  

10:07.50 

chrissass 

But I guess that leads to some risk and you know if you go to a renewable portfolio right? That's intermittent and it's It's slightly different than we done energy in the past. So So how does this all play out in when you're starting to look the risk exposure that folks have with. Renewables as opposed to maybe a standard base load and a traditional generation. 

  

10:29.29 

Brock Mosovsky 

Yeah, it's completely different and the biggest difference is the non-dispatchability right? That's really then this is you know at this stage of the game here in 2023 the idea of intermittency and the idea that that is a fundamentally different paradigm than. Centralized Dispatchable thermal generation is nothing new but I will say the market is still grappling with how to manage those risks and that's that's something that you know sequant is very very involved in is helping to understand those risks. The.. The big difference is that when you have a centralized dispatchable Generator. You essentially have a gas pedal right? It's like when you're driving your car if you need to you need to ramp up the generation you step on the gas if all of a sudden market prices become you know uneconomic. You hit the brakes right? You you either ramp down or you shut down the generator and so you're avoiding these periods of Uneconomic Market Prices. You're avoiding losses and you're taking advantage of periods where the economics is in your favor right? So you have essentially a real option. And there's value to that Optionality. There's also risk mitigation inherently baked into that optionality when you look at Renewables. You don't have that optionality to to some level you can curtail the asset when prices get really bad. But. 

  

11:54.56 

Brock Mosovsky 

Ah, but then of course you're losing your production volumes and the associated attributes as well and so generally you don't have any control over when the wind blows or when the sun shines and these assets are just converting weather into electrical energy and so the risk management of those assets rather than managing a portfolio of options. Really becomes managing a portfolio of distinct statistical profiles right? because at the end of the day a wind farm and its generation is essentially a statistical profile. It has some maximum output has you know the minimums typically around 0 if the wind's not blowing. Um. And then you have some seasonal signature and you have a diurnal signature and you have a variability around those and 2 different wind farms that are spaced even just a couple miles apart can have pretty significantly different generation profiles because of the way that the wind blows. Because of the way that you know the topography is kind of you know, moving wind currents the same thing for solar facility. So it's really becomes developing a deep understanding of the statistical profile of generation and how that profile aligns with the pricing. And again either the nodal pricing if you're looking at the physical value of generation or the hub pricing if you're looking at a contract that may settle elsewhere. So that's that's really the biggest difference it becomes kind of an exercise in statistics and and really understanding at a deep level. What is driving value and risk. 

  

13:25.76 

Brock Mosovsky 

And that overlap between the peas and the queues right? The price and the quantity of energy that's generated. 

  

13:33.38 

Jeff M_ 

Um, so let's talk about basis risk because that's a question that I get all the time will you handle basis risk so who's handling basis risk and in the virtual ppas. Just to be clear also not to be confused with tax equity eligible basis. A nice general confusing term. We're talking about hub node spread the name of the game in Vppas with corporate counterparties seems to have been try to pass the buck. 

  

13:51.15 

Brock Mosovsky 

Right. 

  

13:57.63 

Brock Mosovsky 

Yep. 

  

14:05.21 

Jeff M_ 

If you can and then the corporate counterparties got smart and they said no way we're not taking basis but nobody wants to take basis risk. So I guess is that the number 1 question that you hear in the market or say ah one that is bigger than that and what are people doing. 

  

14:05.77 

Brock Mosovsky 

Um. 

  

14:12.30 

Brock Mosovsky 

Um, yeah. 

  

14:24.47 

Jeff M_ 

To Manage Basis risk. Is there something out there financially to manage that risk. So. 

  

14:28.30 

Brock Mosovsky 

Yeah, that is. It's definitely one of the biggest questions that we get asked and 1 of the biggest drivers of of risk and or value within these these virtual structures virtual or or physical and the idea. Of this basis right? again is the idea that the contract itself can settle at a hub location but the the energy. The physical energy is still valued at the node. That's that's the physical energy is always valued at the note that's where the energy is being injected onto the grid. That's where the locational marginal price is valid. Any hub settlement is a purely virtual construct right? It's just an agreement between 2 counterparties. It says. Yeah, okay I know that the energy is really valued over here. But I am going to look at this price over here. That's correlated, but it's not going to be exactly the same and I'm going to value this financial contract over here. And that opens up this basis spread between the physical and the financial now exactly what you said is what we've seen happen is that initially the corporate entities were just accepting these nodes settled power purchase agreements which meant that the corporate itself was exposed to that basis. Because often their load right? take the example of ah of a large corporation that's running data centers right? They've got these these data centers. They're very energy intensive. They run with essentially just a very flat load profile. The the computers. The servers are running you know day and night. So. There's not much. 

  

16:02.80 

Brock Mosovsky 

Hourly shape to that load and also the corporate entities that are owning and managing these data centers are typically on retail rate structures where their cost of energy is much more tied to a particular market trading hub. Then to a specific node on the grid. So when those corporate entities were buying node settled power purchase agreements. What could happen is that the nodal price could take a dive due to congestion on the lines right? Congestion is basically ah is basically a phenomenon where the line is. Is exactly that it's congested. There's not enough kind of bandwidth on the line to push the generation through and that causes the market prices to decline. So if a corporate was buying power through a ppa as a hedge against its load what it would generally be seeing is that. The hub price could be very high which means it's very expensive to satisfy load and the nodal price could be very low which means the value that they're getting from the ppa is not doing a good job at offsetting their increase costs at the hub if those 2 tracked perfectly. They have a short position at the hub and they have a long position at the node and if those are the same price There's a perfect offsetting of risk there in practice. They were getting kind of burnt by the fact that the nodal prices were typically lower. 

  

17:25.53 

Brock Mosovsky 

So as the kind of as the the gold rush so to speak happened where more and more corporates were getting into the market to buy these power purchase agreements and more and more power purchase agreements were being offered the developers that were offering these deals needed a way to differentiate themselves. And what they did was start baking in contractual structures that were more favorable to the offtakers as kind of a hey by my ppa because I'm not going to expose you to that nodal basis risk and that became very commonplace and again. You know we work with a lot of large corporate entities I haven't seen a node settled ppa that a corporate has was signed for for 5 years It's just not happening at all and so what happens is now the developers wear that basis risk because they are now offering a hub settle contract. Their cash flows right? The developers cash flows the seller of the ppa. Those cash flows are defined by the hub price but the value of the energy is defined by that nodal price and so the developers are now building portfolios. Or the owner operators of these these assets are building portfolios of basis exposure and managing those portfolios. Um really requires a very locational understanding of what that basis is looking like. 

  

18:44.20 

Brock Mosovsky 

It requires an acknowledgement of diversification across the portfolio and that can either be by asset class or by location you have a diversity of different basis relationships even within a particular market and you also have various different diversification that you can get from combining wind with solar. Or other generating assets so um, bit of ah, a bit of a long kind of circuitous way to get there but but there's been ah, a dramatic you know change in the contracting as far as basis is concerned and I think now that basis primarily lies. With the seller of the ppa whereas ten fifteen years ago it was with the offtaker. 

  

19:25.58 

chrissass 

Um, in my experience with with energy right? There's a couple things you could do right? I think we can use financial contracts or derivatives or some other way to hedge and do some sort of hedging but you know with Renewables. There's this whole concept of storage and and battery right? So How do. Batteries play In. You know the description that you just gave shows an Electron kind of needs to be used in real Time. It's out on the wire and I kind of need to use it. But if I could store that couldn't I play with those rules a bit. 

  

19:50.36 

Brock Mosovsky 

A bit you can yes and it's something that is it's a primary focus I think across the entire industry right now is is the idea of using the flexibility of batteries to time shift when the energy actually hits the grid right. Um there's there's many different value propositions of batteries I think time shifting energy is just one of them. You know you'll hear ancillary services thrown out a lot. That's things like frequency regulation or spinning reserves or responsive reserves or various different. Kind of you know capacity products that are in place to make sure that the grid remains reliable but in terms of combining these batteries with renewable energy one of the goals is to add some flexibility there at the margins. And to be able to shift energy even just by a couple hours and even just a small amount to kind of avoid instances where you might have a lot of congestion even at a regional level. So even if you have a hub settled contract I mean we're seeing hub prices now that are going negative. Used to be a phenomenon that was primarily only in terms of nodal prices because they were so sensitive to the locational dynamics now npfifteen goes negative all the time in California right? Um, and you're seeing that at other hubs and around the country as well with the penetration of renewables. Um. 

  

21:13.84 

Brock Mosovsky 

And so some of you know some of the hope is that these batteries can shift energy around so that if you see a negative price. The battery can actually suck up energy from the grid right? A negative price for power is kind of ah it's a bit of a unique attribute of of electricity as a commodity. You don't typically see negative prices for other commodities because they can be stored and so if you had a negative price. That's basically saying I will pay you to take this commodity. Well, that's great for a battery because the battery can soak up that energy get paid to actually consume energy. Hold that energy for a few hours until the price goes back up and then dispatch it to the grid and that's called arbitrage and that's one of the big value drivers for batteries in today's market is to arbitrage price spreads and the fact that the batter is being cited with a renewable resource. By arbitraging those price spreads. You're actually adding flexibility to that renewable resource in terms of when its energy actually goes on the grid. So instead of feeding that solar energy into the grid when the price is negative which means you have to pay to put your power on the grid you instead divert it to a battery. Battery can soak that energy up hold it for a few hours and dispatch it when the grid actually needs it and when the price is reflective of that so batteries can be a really good physical hedge to renewables. But of course there's a limitation in terms of how much energy they can. They can hold. 

  

22:45.50 

Jeff M_ 

So one of my favorite apps here iso today since we're talking about California the best way I've seen to visualize what's going on at the nodal level. So I'm zooming in around San Luisa Bispo it looks like a negative. Thirty three cent nodal price. So and and and if we zoom out here. It's actually a good chunk of Southern California is at the lower end of the scale I love looking at this because. 

  

23:04.88 

Brock Mosovsky 

No. 

  

23:18.43 

Jeff M_ 

You can really track just how weird these phenomena are getting and and same thing in in Texas when I've looked at batteries in the past energy arbitrage just isn't a very big component of the value and so do we actually have hope here you talked about diversification if I think about a diverse. 

  

23:20.58 

Brock Mosovsky 

Are. 

  

23:37.69 

Jeff M_ 

Portfolio of basis risk. It's all going bad all all for the same reasons all over the country and so and even with batteries coming on if you've got 1 battery at 1 node, you've got 1 battery at 1 node. It isn't really systematically helping something that might be across town in the adjacent zip code. So. 

  

23:49.42 

Brock Mosovsky 

Now. 

  

23:56.91 

Jeff M_ 

Are you sitting here from a perspective saying we need to raise the alarm. This is bad. It's not being managed. Well let's manage it better and or do you have actually a point of optimism where you can say. If we combine flexible load and batteries and financial risk management. Maybe there's a way to solve this which which end are you on of the optimism versus alarm raising. 

  

24:17.46 

Brock Mosovsky 

Yeah I tend to be a centrist in in most aspects. So it's I think there's there's some some reasons for alarm and there's some reasons for optimism and I think that that. You know in terms of batteries. You're right that that plopping a battery down at a particular node. You know there is a limit to what it can do. Um, you're you're restricted to those nodal prices and in a lot of cases if you're if you're looking at energy arbitrage sometimes the battery can actually eliminate some of that price volatility that was there in the first place. So in some way. Batteries can kind of cannibalize their own price dynamics that they rely on to make money and to remain economic at the same time. Batteries are extremely flexible and there's many different ways that they can provide value to the grid right? I mentioned just briefly ancillary services and in today's market almost all the batteries that we're seeing are are driven. Their economics is primarily driven today by regulation up and down and in some cases spinning reserve or or kind of the the analogous counterpart for the the market now. Generally there's consensus in the market that the ancillary services prices will drop pretty precipitously within the next five years and that's really due to market saturation. It's that the the grid only needs so many resources that can provide frequency regulation and once it's regulated the frequency. There's. 

  

25:47.83 

Brock Mosovsky 

Not really a need to regulate it anymore right? So after you have enough batteries on the grid and that frequency is regulated. There's 2 things that can happen either. The additional batteries won't get their bids accepted because the market says look I only need this much this many megawatts of Regup. And I have way more than that being bid in by battery storage assets and I'm I'm just not going to accept all those bits. The other thing that will likely happen is that the prices will go down from a supply and demandd perspective. So there's a lot of kind of consensus. It remains to be seen how this plays out but generally the market has consensus that. Ancillary services prices are going to tank within the next five years essentially nationwide because of all the battery deployment and so the battery's flexibility to be able to provide energy arbitrage. It remains kind of you know it can just shift the way that it's making money and as the renewable adoption continues. You're going to start to see these price spreads widen just like the duck curve phenomenon in California and energy arbitrage may become quite quite more. Ah, you know of higher importance to the to the grid. And to the battery's economics and and so as those prices as the shapes within the day of prices widen the difference between the lowest price and the highest price becomes wider and that creates a bigger arbitrage opportunity. So I think that the flexibility of batteries is really the the thing where I have the most optimism. 

  

27:20.23 

Brock Mosovsky 

So many different ways that you can leverage a battery. There's a resilience aspect of it. There's a you know a frequency regulation revenue stream. There's energy arbitrage and as the market evolves the battery is flexible enough to Adapt its revenue strategy to kind of align with an evolving market. 

  

27:37.34 

Jeff M_ 

And batteries are hot right now so that that is a point of optimism even merchant batteries taking advantage of the ancillary today energy arbitrage tomorrow kind of ah approach so that makes sense. You also said the magic word duck. So now we have to talk about. 

  

27:39.66 

Brock Mosovsky 

Um, extremely hot. Um, yeah, that's right. 

  

27:53.53 

Brock Mosovsky 

Ah, right. 

  

27:54.71 

Jeff M_ 

All of the different animal I've seen a few different utility load profile curves with names I think in Hawaii they had like a lock nest Monster California also had an elephant or is a whole whole zoo if you start to look at these load profiles long enough. So. 

  

28:02.86 

Brock Mosovsky 

Um, did a very good age. 

  

28:11.39 

Jeff M_ 

How worried should we be about the the dut curve and and maybe put this in context for us. We're not talking about basis risk. We're talking about shape risk and solar capture value wind capture value. So where again maybe same spectrum. 

  

28:18.10 

Brock Mosovsky 

Um, pay brisk. Yeah. 

  

28:30.47 

Jeff M_ 

Alarmist versus optimist where are you when it comes to shape risk and. 

  

28:33.71 

Brock Mosovsky 

Yeah, and you know just in the interest of of clarity. Maybe I'll back up and just define what I mean when I say the duck curve I think for a lot of people that's probably a term that resonates but the kiso years ago I think this was like in 2012 or maybe even before that put out a forecast. Related to the increasing adoption of solar in the state and what's happening what what they forecasted to happen and it's it's been amazing to see how the how accurate the forecast actually was was that in the middle of the day you had a ton of solar generation and in some of the shoulder months you know March and April. You know, even October November there. There wasn't you know it's pretty mild in California in those months generally and so you don't have a lot of cooling load. You don't have a really high demand on the grid but you have a lot of intermittent generation that's being put onto the grid and that is lowering the marginal price. Um. And so what they forecasted was that the price would kind of dip in the middle of the day and the net load would dip the load net of renewables that must be satisfied by traditional assets and so when you kind of overlaid a bunch of these forecast curves you you had to structure a plot that kind of looked like the shape of a duck. You had this big belly in the middle of the day and that has played out remarkably accurately to the forecast and it's also shown up across other markets in the us Texas is starting to experience a duck curve I've seen a really extreme drawdown of prices in Iso New England 

  

30:09.35 

Brock Mosovsky 

Um, you know you don't really think of new england as being a ah hotbed of solar. Let's think of new england especially in the winter months as being kind of cloudy and dreary. But even new england is having a duck a duck curve type of phenomenon so to get back to your question of you know how concerned should we be about this phenomenon. It's certainly going to happen you know nationwide it's it's going to happen in response to solar adoption. Um, there's a lot of solar being deployed and it's all intermittent and batteries where we are today I think with the lithium ion battery technology. You know we mentioned that it's it's very efficient. It's very good at providing frequency regulation but that is really geared around short bursts of power and not a ton of energy right? Energy is is power times time. So it's sustained power output for long periods of time. Batteries are not great at that and when we look at energy arbitrage and we say well I'll just plop a battery down and just shift all this energy over here. It's really expensive to do that because you have to overbuild the battery because its energy capacity is not it's it's not wonderful right it becomes very expensive on a Megawatt hour basis whereas it's much more economic on a megawatt basis. So um I think that this duck curve phenomenon or this phenomenon where you have an oversupply of renewables at a certain point in the day. 

  

31:38.60 

Brock Mosovsky 

When the grid doesn't necessarily need all that energy. We need to find ways of mitigating that and and you mentioned responsive Load I Think that's a really important component of this I think that it's you know. From my perspective I don't see a future where we can solve the problems that we have in the grid without some type of Behavior modification. Um, some of that can be automated right in terms of like when do we charge our electric vehicles. Well if everyone comes home and plugs them in all at the same time we're going to make a mess. But if we can figure out a way to just automatically schedule that through demand response programs and and different programs like that. That's one way to kind of even that out. But I think the combination of responsive Load. So The idea that you can just not consume energy or at least as much of it. And then shift your consumption to different times that combined with flexible resources like battery and hopefully other more energy dense storage technologies can help get us there. 

  

32:38.44 

Jeff M_ 

Great and when you think about the duck curve and we we think about parameterizing this There's a solar capture rate. Do you have a sense of what that is and where that's trending my sense today is that it's. If I had to guess maybe 75% and falling meaning ratio of production weighted solar value versus round the clock power is that a metric you use and where do you think that's trending. 

  

32:57.84 

Brock Mosovsky 

Staff. 

  

33:07.80 

Brock Mosovsky 

Yes, it. It definitely has been trending down in a lot of Markets California Texas is is seeing a lot of solar adoption right now and is very rapidly developing kind of a duck curve even the northeastern markets as I as I mentioned. Capture rate is essentially the the concept of you know, exactly what you said? it's a production weighted price for the production of a particular renewable facility or you can look at capture rates at a project level where you have a renewable facility and you have various different financial derivatives. In place to hedge that renewables. Um and and the trend is definitely down and I think it's an important metric to kind of benchmark a particular asset or project relative to the market because you know that rate if the the capture rate is essentially the the. Ratio of that production weighted average price of generation divided by the flat market price over the same period and you can look at this in different slices right? You can look at an on peak capture rate and an off peak capture rate really ah the off peak is more relevant for wind. 

  

34:17.52 

Brock Mosovsky 

You can look at a weekend capture rate you can look at a capture rate of the physical asset plus various different financial hedges and that's something that actually a lot of our customers are doing with our software is looking at those capture rates for either prospective assets and comparing the capture rate as a way to prospect new. Um, generation that they could potentially purchase or new projects that they could develop but also looking at capture it as a way to benchmark portfolio hedging strategies and to come up with a perspective hedging strategy and say okay what I'm really looking to do is one mitigate risk. But 2 potentially increase my expected capture rate and there can be some strategies that are using shaped products or even financial transmission rights or congestion revenue rights products to kind of shore up some of the the shape risk that we've been talking about. 

  

35:09.35 

chrissass 

And and that leads me where this conversation had my mind going is the users of this data because it's It's pretty analytical right? I mean I I can't imagine I'm sitting over at my big data center and I'm I'm doing power buying for my company that I that I have all these skills right out the box so is is it. The developer is it The power who. Who's using this data and who's making these strategies based on what you're doing. 

  

35:34.89 

Brock Mosovsky 

Yeah, so in in many cases. It actually is folks at the organizations and and it's ah it's maybe a good opportunity for a shameless plug for cquant is that one of the things we've been really focused on is taking this analytics. Providing a really sophisticated analytics offering but condensing it in a way that you don't have to have a ph d or you know a master's degree in in applied math or economics to be able to use the tools I think that there's a way of offering these analytics in in a transparent and kind of. Very kind of open way so that procurement managers at some of the big tech companies are using this tool in some cases they may have an actual risk management department but that's only at the largest of organizations but being able to kind of understand the idea of shape. And shape risk and capture rate and basis risk and all these different components. Um, you know with ah with a good analytical framework in place. It just becomes configuring the details of your portfolio and querying the system to say what does this look like for me. And how am I exposed because every portfolio is a little bit different so I would say that you know the other component of this is that um, most of the folks who are coming out and working in the industry today have some level of analytical training through their college degrees today that definitely was not the case fifteen years ago right 

  

37:04.30 

Brock Mosovsky 

Analytics has become so mainstream and that um, you know we're seeing folks coming out with business degrees that know how to program in python and r um and that is a huge enabler for analytics consumption because it makes folks a little bit more comfortable with data I mean almost everyone knows how to use Microsoft excel. Um, but then even going beyond that into some kind of platforms that allow you to wrangle much larger datasets that's been a huge enabler to be able to really develop an analytics-driven business strategy and to say inherently these things are analytical. We're not going to be able to manage a portfolio of complex power purchase agreements without understanding data and leveraging data because that's what these things are at the very beginning of the discussion. We said really this is ah a portfolio of statistical distributions and we have to understand those statistics in order to understand the risk and value. That that portfolio has. 

  

38:00.69 

Jeff M_ 

Now that you have a customer whether that's a developer or a corporate buyer. They've got their renewable energy positions. They've got a data analytics platform to start to understand their basis. Their shape exposure against load. What can they do? What are the financial products that they can then go purchase to manage this load and you you threw out a few so I want to hear at least 1 you mentioned congestion revenue rights that one or maybe another one that's popular to actually take action. 

  

38:25.64 

Brock Mosovsky 

Sure. 

  

38:37.10 

Jeff M_ 

To manage some of these risks and. 

  

38:38.95 

Brock Mosovsky 

Yep, yeah so crrs congestion revenue rights and ftrs financial transmission rights and their associated options. You can either have obligations or options. Those are some some components that some of our customers are are using to kind of manage basis risk. Because you can sign a contract for you know, Crr or an ftr that pays off based on the nodal basis essentially between the hub and a node or even between 2 different nodal locations. Um, those contracts are not extremely liquid right? So it's. They're a little bit harder to transact they they certainly come with a lot of risk so you really need to know what you're doing when you're transacting in those contracts. Um, but the idea of risk and risk management is that not all uncertainty is bad if it were there'd be nothing that we could do with it. But. There's offsetting uncertainty right? when you look at a corporate customer who runs a data center. There's all kinds of uncertainty in the cost of the power that they're going to have to pay to run that data center just by their native position. They've already got uncertainty in their portfolio. So if you can sign contracts that offset that uncertainty those contracts themselves if you look at just a power purchase agreement. It has a lot of risk but it's an offsetting risk to a large extent. 

  

40:03.84 

Brock Mosovsky 

Right? It's ah it's an uncertainty that kind of cancels the uncertainty in the native portfolio and it it really goes straight back to modern portfolio theory where you look at kind of anticorrelation between different portfolio components that creates diversification so crrs and Ftrs that's one component. There's a lot of structures that are being baked into ppas themselves today that are risk management structures things like $0 minimum clauses that expose the settlement price to nothing lower than 0 right? You can have negative pricing if you're long a ppa when the prices go down. That's bad for your position. But some of these deals will will threshold that settlement price at 0 you can even have collared structures where you may give up a little bit of upside in exchange for a better price on the Ppa. You can have proxy generation swaps you can have volume firming agreements that give you a fixed shape. Um. Can even have basis buyback provisions where it says okay I'll I'll take I the offtaker of the power purchase agreement will take the first million dollars of basis exposure within a year. But if things get really bad. We're going to split at fifty fifty with the developer. That's a new structure that we've been kind of seeing and so really, you know to assess. What can be done and I think that's really the root of the question is we can understand all these structures we can understand the portfolios. What can we actually do about it. Um, and how do we combine in an optimal way shaped products and ftrs and Crs and power purchase agreements and diversified portfolios. 

  

41:38.55 

Brock Mosovsky 

How can we manage this very intentionally from the outset and really the the biggest driver there is having an analytical framework that can allow you to kind of do what if scenarios on the portfolio composition as it's being composed. And that's that's one of the most important things I think that sqquant does for our customers today. 

  

41:59.60 

Jeff M_ 

Rock What a tremendous journey in a short conversation. You've managed to take some really really complex ideas and concepts on the grid boil them down into accessible language and then give us a hint at that. There's more to come. And so it's inspiring in this conversation to recognize risk is real. It's out there but we don't need to be afraid of it. There's tools to understand and products to help manage that so this has been a really fantastic conversation. 

  

42:20.90 

Brock Mosovsky 

Um, yeah. 

  

42:31.68 

Jeff M_ 

And I thought you did a great job of ah boiling down some complex concepts here. So thank you so much. Really appreciate the time. 

  

42:38.76 

Brock Mosovsky 

Yeah, thanks to you guys as well and and to insider's guide for for having me today I think it's ah these are really important topics. You know as the grid continues to evolve and um, you know there's always new challenges that are posed by new technology and. There's creative solutions to those challenges right? That's that's one of the great things about our industry and it's one of the great things about being involved in energy today. It's just things are moving so quickly and I feel you know personally and as an organization Withq Quat really fortunate to be where we are today to be able to assist the industry. So thanks so much for the conversation. It was really enjoyable. 

  

43:13.87 

chrissass 

For audience we hope you've enjoyed this conversation as much as we did making it There's a reason we call the show insiders guide to energy I don't think you get this kind of conversation. A lot of places so I hope you enjoyed the the depth and the the technical background if you did enjoy the content. Don't forget to subscribe follow us find us on Facebook and we'll see you again next week. Bye. 

 

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