Navigating to Net Zero: Power Price Drivers and Transparency | André Bosschaart, Montel

It's nice to be here again. So my presentation will be a bit of a summary of this morning, but more like looking at the implications. And Joanna already used the word navigation, and that's also my title of this presentation. It's navigating to route to net zero. And that's also sometimes how I feel. There are different ways to roam. And if we would drive, we get all the time new information. And yeah, our navigation tool is all the time re-estimating, let's say, the estimated time of arrival. And that's also sometimes how I feel if I look at the different information that we receive. So also based on the information that we have received this morning, maybe I need to revise and adapt my navigation. So that will be the story line as well. So I will present it based on navigating to net zero. So I'll go, the merit order is mentioned. And I'll just go one step back. What was it again? And then we will move like the current market, the market in transition. Seven forces that will shape our future. And then the last one is like, yeah, forecasting in the dark. So how can we change our forecasting methodologies to have, let's say, a predictable future? Because on the one hand, variation in prices is great, especially if you are a trader. But a variation in prices if you are an investor, that's a different story. But still, we are here all together as experts. So we like the variation in that sense. So this is a bit like that route. So our navigation, this is a picture of how the world looked like 10, 20 years ago. In that sense, quite simple. There is a policy track, well presented by the ministry this morning. Sometimes I feel that we are at the slow track. And yeah, sometimes we are also at the fast track. So it's like, yeah, switching lanes in that sense. But the picture itself, well, not too much. Big power plants, a good grid, low carbon prices still back in the days. And yeah, in that sense, quite some emissions. So if we then look a bit at that merit order, it was already explained this or mentioned this morning. In essence, if we look at it, we have, let's say, wind, solar at low prices, nuclear, coal, gas-fired power plants, and let's say, the peaker power plants. And where demand is matching, let's say, the supply, we get the clearing price. Very important that they are ranked by marginal cost. But also very important, and that was also what Fleur already mentioned, is we are moving, let's say, from a very predictable demand, which is, in essence, all our behavior. Going to bed, waking up, the shops opening hours, etc. But in that sense, very easy, and that for every hour you could present, let's say, demand as a stable line. But yeah, we will move. So now, yeah, we have also more solar and wind. So yeah, what's happening? So we're going to be saying, the merit order is shifting to the right. Yeah. And the prices are going down. OK. So that's the weather. And then the next one, fuel prices. The discussion already this morning, gas prices are very high, carbon prices are high. So at the moment that they are high, in that sense, the variable costs are rising, and also our clearing prices are rising. And then the next one, availability, very important. So yeah, at the moment that the availability is reduced, then prices are shifting back to higher territory. And yeah, in that sense, the higher prices again. Imports, very important. If we have imports from our neighboring countries, the merit order shifts again to the right, and we get lower prices. And the other way around, if we would have export, in essence, more demand, and prices are being higher again. So in that sense, if we would make a conclusion about the merit order that we knew in the past, it's all about the different factors. Weather, availability, let's say the prices, the transmission, if we put it as a line over here, and demand. And I put flexible demand as a very, very small one. Because yeah, there was not too many flexible demand in the past. And in that sense, if we look at availability, availability was, with let's say weather, let's say the biggest driver for us that we could forecast prices. So if the availability would be different, that's what we have seen, prices would be different. And that's also very important. We had ReMed, yeah, covering for that. And if you want to know more about ReMed, we have an expert in the room as well, Jair De Leo. But yeah, very important in that sense to make prices transparent and forecastable. So if we then move to where are we today? Well, the picture is already getting, yeah, it's more crowded, let's say, on the road. Yeah, what do we see? We see houses with solar panels, maybe already a battery. So things are already happening behind the front door, as Fleur stated. We see already some batteries in the field, maybe some data centers, the high carbon prices that we are talking about. But yeah, also the geopolitical crisis, the gas and carbon still setting the price. Also negative prices and a lot of curtailment for solar panels. Yeah, and BESS scaling up fast. So if you would ask me right now, where is batteries? I feel that they are on the fast track. And that, let's say, the solar and the wind, well, it was already explained as well this morning by the ministry that, yeah, offshore wind has slowed down because of hydrogen. So in that sense, also moving paint over there. Yeah, and again, data centers also driving new demand. Yeah, so what does it mean, the geopolitical crisis? And that was not mentioned this morning because, yeah, this was already stated here. We have the Russia pipeline, the Iran war and the new fighting, let's say, in August. Yeah, the question might pop up again. Does the system still hold? Does it merit order system? Yeah. Is it a good system? Because, yeah, back in the days in 2022, there was, of course, a discussion. Yeah, should we keep this system of marginal pricing? And if we first would look at carbon prices, and that was, yeah, in that sense very well explained. So, in early this year, we had a revision. And, yeah, that was, in that sense, initiated by some countries like Italy asking for a suspension of ETS because the cost of carbon in our prices, as was stated, like 20 euros per megawatt hour. So, quite a big price added on it. Yeah, but the trigger in itself, the trigger was, let's say, the energy shock. The outcome is what we have seen this morning is that we keep the system. We might have some changes on it. And, yeah, what's important in that sense of this picture, oh, sorry, going back down, is that, is that we see, like I said, all the time with these kind of policy measurements, is that we all the time see also price shocks. Price shocks that are quite, yeah, significant on our prices. But what I think is the most important, if we think about that merit or the pricing mechanism, is that, yeah, also with this vote over the conclusion, let's say, in July, is that we want to keep the system as is. And the goal is still that we want to reduce emissions. And ETS is an important element of reducing emissions. So, in that sense, if we think about marginal pricing, yeah, we could conclude that that system will hold for the next period as well. And, yeah, as stated already, we will have in Q1, 2027, let's say, the final vote, but not a lot of change to be expected over there. Now, Eris talked a lot about gas prices and why they are high. Well, yeah, we can see, let's say, the prices, how they have moved. And this is quite an old picture because they are, at the moment, even higher. But, yeah, after the Ukraine war started and with the very high prices, we started to debate, like, is the marginal pricing still a good solution? And, in that sense, yeah, the system survived. So, that's, in that sense, good news because also, yeah, over there, we can expect that this pricing mechanism will be there for the next, yeah, decades, maybe even. Of course, some measurements have been made, for example, the excess, excessive revenues on wind or solar have been reduced by the contract for differences. Well, some things have expired, like the Iberian cap. But, in, yeah, of course, now with these high prices, you could state, like, yeah, is the debate reopened again? And, no, it's still, we reject the market design because, yeah, the problem is that we are gas dependent and the market in itself is not an issue. So, also stated in the presentation this morning, flexibility and renewables are the solution. And, yeah, that's the thing that we have to focus on. So, okay, but what does that mean? So, this is a situation of, let's say, demand. I've drawn here the residual load. So, in that sense, demand minus production of wind and solar. So, we can see over here that, yeah, in the, yeah, during, let's say, the solar hours that the residual load is very low. And, now with, let's say, first curtailment, then we have, we see all those negative prices and solar and wind farms start to curtail. So, that means that, in that sense, the production level is, or the residual load is increasing. And, now, as well with batteries on top of it, we, that will be, oh, that will be even more. Because, we will charge during the solar hours and discharge probably in the morning and in the evening spike. So, yeah, we are start to flatten, let's say, our demand. And, yeah, Fleur has given a forecast of how that could look like in 2035. But, in essence, this is already happening at the moment. Ah, okay. So, if we then look at our merit order, how does it look like today? Well, in that sense, the, there are two differences. So, we have, let's say, curtailment now when prices are negative. We see that more and more happening in our data and the demand is not a straight line anymore. But, it starts already, yeah, to be adaptive based on the prices that we observe in the market. So, yeah, if we are, we have seen like where we are now. Well, the merit order is already a bit adapting. But, how can we, yeah, create, let's say, a view on the future? And, yeah, how might that look like? Well, again, the ministry has given their policy track this morning. And, yeah, we might see differences along the way faster and slower. But, how I look at the market is, in essence, like, yeah, what is kind of certain? And, what are the least certain things if we look at that supply and demand? And, that's, yeah, I present it by seven forces. So, let's look at them. So, first of all, we have laws. Then, we have, let's say, capacity markets. We have subsidies. We have various policies, on the one hand, on prices. And, on the other hand, more on supply. Feasibility is a quite important one. Is it all possible? And, then, the last one is also the market. And, how we look at it is that, yeah, again, the law is the most certain one. And, the market is the less certain one, in essence. So, let's look at them a bit, step by step. So, in essence, where do we see the law in place? Well, the law is quite clear on nuclear power plants. Belgium, yeah, 10-year extension. But, also, yeah, now in the Netherlands, it seems to be there that there's a law to extend the Bostele power plant. Coal ban, the coal decommissioning is all set in stone with the law. And, in that sense, quite clear that in 2030, we will not see coal plants anymore in the Netherlands. And, also, on import-export, we see some various regulations, laws, that we need more interconnectors. So, for example, there is a target that 15% of the production capacity, yeah, you should be able to import. And, also, in the day-ahead market, 70% of the interconnected capacity should be available to the market. So, that's the first one. Then, the next one is, let's say, capacity markets. Capacity markets also help to make the supply stack more certain. So, in Belgium, we have this capacity market. And, in essence, what we do see is that batteries and CGT's have been constructed, or will be constructed, based on the capacity market. And, in essence, the capacity market makes it very clear what's the real need for supply, but also gives a good incentive to invest, or that you will be paid to stay online. And, in the end, it's a payment to be available, and not for producing. And, also, in Netherlands, yeah, there are some more and more talks, again, about a capacity market. So, let's see what that will bring. Well, then, subsidies. Subsidies, well, subsidies, we have seen in the past that they were very good to increase the renewable production, both based on wind and solar mainly. Of course, there are also maybe some subsidies here and there on demand, but it's very, in my view, quite limited still. Yeah, and we might need, if we need, let's say, more offshore wind with the current prices and low prices, yeah, we might need, again, subsidies over there. Yeah, then the next one is policy on, I would call it, on prices. So, we have various taxes, for example, on carbon, of course, you could look at it as one, but also taxes on gas prices if you would burn it in a power plant. We have the grid tariffs. And, yeah, what we have seen as well as, like, especially with those policies, that they can change fast, yeah, if a country would speak up, like what happened with the CO2. And then the other one is policy, yeah, more on the supply side. So, I think, yeah, one of the concrete measurements of the ministry was the Routekaart Wind op Zee in Netherlands, which made it very clear, like, the expansion plan for offshore wind. Yeah, and if they are there, yeah, it makes it more clear of where the supply chain could be. Yeah, and then the next one is feasibility. So, already mentioned a bit. But, yeah, we have a full grid. So, yeah, is new demand even possible? But also, yeah, hydrogen and CCS, is it really feasible? So, yeah, in that sense, already explained this morning, like, that the prices of hydrogen are very low, if you would have an offtake. Yeah, in that sense, the feasibility is reducing over there. And then the last one, the market. Do I have to speed up? OK, sorry. Yeah, the market. And the market is quite interesting, because there it's especially batteries and demand. So, where we expect the growth, yeah, we have the least certainty, in my view. So, in that sense, yeah, policy would be really appreciated. And, yeah, question would also be, like, how much flexibility, in the end, is in the system? So, yeah, we have also hidden flexibility there, because we are moving, let's say, from a situation where the forecast sets the prices, and now, yeah, the demand and batteries will follow prices. So, we get a lot of, yeah, variation over there. Yeah, that's provided over here. So, based on demand starts to follow the prices. We get, like, this chicken and egg, and the price range, yeah, might be quite different in this range, or in this area. So, where availability of power plants was a main driver, we are now moving to an area where, yeah, demand sets the price. And, yeah, that's quite intransparent. That's also what I would call a chicken and an egg problem. So, that's something new. That's something, yeah, we are not really used to. Yeah, maybe in an imbalance market, you do an action, and it has a consequence for a price. But we will see this more and more in the day-ahead market as well. And that makes our predictability already, let's say, for tomorrow more difficult, but, of course, also for our future projections. So, I think there are, let's say, four blind spots that could help us making our plans better for the future. So, first of all, a bit on the long term, it would be very good if we get more insights on project pipelines. So, we have a lot of information about everybody's plans, but also, yeah, which phase are they in. So, we have heard, for example, 28 gigawatt. Yeah, is it true? Is it false for batteries in Netherlands? But also, an important one is, let's say, the real dispatch. So, how are batteries dispatched and in what market? So, a battery can be used in 15 different markets. Yeah, how much will, in the end, move to the day-ahead market? Or how many batteries will be used, for example, for congestion? So, that's the third one. And what I think is really, really important is that we get a demand breakdown of what's happening behind the meter. Because we would love to keep that away, yeah. But behind the meter, a lot of things are happening. And that will increase, let's say, noise on the forecasting in the end. So, yeah, transparency now is remit. It's on the bigger power plants. But I think we really need to start a discussion altogether that we need much more transparency on what's happening with batteries. And not only the big ones, but definitely also the small ones. And also what's happening, let's say, behind the meter with the households. But also, let's say, about pipelines. What's really already in the pipeline and what phase are they? Would help to make better projections and also better investment decisions. So, when I showed this picture to Jean-Paul, he said, that's way too busy. There's way too much information on it. I said, yeah, you're completely right. But I've also believed that it's the situation that we will be in. We get more, yeah, small assets on the road. Small assets on the road or cars on the road means traffic jams. More, maybe accidents. And, yeah, that will make our navigation to Rome will be more difficult. We need to adapt all the time. And that's something that we need to get used to. More data will be present every day in real life. And that will change our route. Yeah, forecasting in the dark. Yes, gas and carbon will still set the price. So, I still believe that the merit order will be there for the next years. So, that's maybe a good thing. Now, yeah, the most certain areas are still a bit in the fossil fuel fleet. So, with laws. The laws are quite certain. And it's on nukes. It's on coal. And the least certain. But that's especially what we are focusing on. Is the demand growth and the flexibility. That's still driven by markets in my view. So, I'm more than happy that more policies would be there in the end. But flexibility will start to reshape the curve. Yeah, and we need to get used to that with the chicken and the egg thing. That forecasting gets harder. And that will have an effect also on the future. So, I believe that if we do more on transparency. And I hope that we really can start a discussion today all together on it. That we can overcome various pitfalls that we might see. Well, grid congestion is definitely something that needs to be done. Well, that's good to see that there is an idea to make it more transparent. But yeah, we have also seen that policy can change fast. So, yeah, maybe be aware of that as policy makers. I think in demand growth, we need to have more certainty also on what's really there. For example, the different types of demand. And the flexibility behind the meter. So, what's happening in these houses is very, very important. And the more we get transparent over there, the better it is for our projections. That's my story. Thank you. Excellent. Thank you. Thank you very much, André. Perfect. In the interest of time, I'm only going to ask you a very short question. Where, I mean, there's a clear call for transparency here in terms of this part of the market that is certainly driving prices and is an unknown factor. Where and who should that information be published, André? So, now if you think about behind the meter, so I think everyone that has here solar panels has an app that he can see right now how much is produced. Probably for your electric car as well, your heat pump. So, there is a lot of information behind the meter available. But there is, for example, in Netherlands, there's no obligation to register it. Or for example, batteries are only, we expect 50% is registered. So, I think we should not be afraid of big brother, but we should get an obligation just to register everything. And make those, let's say, all those available data of the PVs, et cetera, aggregated and make it available on a country scale. And that would give much more certainty about what's really happening. Because like I said, the bandwidth in which demand and battery start to form the prices will get bigger and bigger. And increase the need for that transparency. Yeah, exactly. Yeah. Very good point. I hope the relevant people are listening to that call, André. But once again, thanks again. Give him a round of applause. And here's a little present for you.