For a long time, gas has been the backbone of the energy system in most developed economies.

But that's changing rapidly as renewables become cheaper and more widely deployed.

But removing gas completely from the energy system is not an easy task.

Despite becoming less important, a small amount of it is likely to linger on the system for a while yet.

And without a plan to manage its decline, this could come at considerable cost to the consumer.

Welcome to the Energy Revolution podcast, where we discuss the big stories that are shaping our energy transition with some of the brightest minds in energy.

If you're new here, I'm your host, Suleiman Elias Jarrett.

I've spent the last five to six years in senior government roles, both in the Department of Energy Security and Net Zero and as an advisor at #10 Downing St.

And I'm also a fellow at the University of Cambridge with an interest in all things energy.

Today I'm joined by Adam Bell, Director of Policy at Stone Haven, to talk about a few options for phasing gas out and.

Particularly the so-called Strategic Reserve approach, a version of which Adam and his team have recently published a paper about.

We go over some basics of how the electricity market works at the beginning, so don't worry if you're relatively new to this area, but we get into some gritty policy design questions by the end as well.

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Thank you so much for joining us today.

Adam, I wonder I guess if if to start with, you could talk to us a little bit about the process of phasing out gas and, and the timeline.

Like when are we actually anticipating having gas being a small, negligible or non existent part of the energy system?

So I think in answering that, it's really important to think about what you're solving for when you're phasing out gas.

You're phasing out gas because you wanted to carbonize the power system.

Ultimately, that's what this is about.

And that means you need to reduce the amount of gas that's used each year to generate electricity.

The government's planned to deliver clean power by 20-30 involves reducing the overall amount of gas that we use to reduce electricity down to about 5% of the total electricity demand in the UK.

That was very ambitious that they want to do it within this short period of time as laudable but extremely challenging.

The Conservatives historically said they want to achieve something similar by 2035.

What they want to do now is quite frankly anyone's guess given that they're or randomly moving away from various of their historic commitments just across the piece.

However, if you want to get gas out of the system, you need to make different sorts of choices.

Currently we have a wholesale market which gas isn't allowed to compete as any other sort of asset is.

We have a capacity market in which gas is allowed to compete for capacity contracts, which essentially give them a fixed pot of cash in relation to how big the plant is over about 15 years for the for the bigger auctions.

If you're taking gas out of the system, you need to look at how you would change choices either and how often you run the plant or how much, how much of that plant you actually buy, how much of that plant you actually keep on.

If you want the gas to run less, you need to would need to impose a very, very high carbon price.

So in the analysis that the system operator provided the government around its plan to clean Power 2030, they cited the number that was in excess of 180 lbs per ton.

For reference, we're currently close to the 50 or 60 lbs per ton.

The problem with that though, if you put a carbon price of 180 lbs per tonne onto the power market, even if you're a specific app for the gas plants, is the way in which the wholesale market works, because in order for that gas plant to run, it would need to be paid it's cost to run.

The cost of gas and therefore how and how efficient that plant is determines how much it which gas it consumes per amount of electricity it produces, but also the cost of the carbon too.

And this would be fine if you're only playing that glass bank, but you're not you're because the market is essentially pay is clear market, which means the last generator switch on is the one that sets the price for the rest of everything else that switches on.

You were paying the gas price plus a very high carbon price for everything in that stack.

They wouldn't just be they were said 5% of the over amount of electricity.

It wouldn't just be for 5% of the number of hours in the year.

And if you look at some of the work the system operator has done, it will be closer to 20 to 30% of the hours in the year where you're paying a swingingly high carbon price to make gas behave in the way in which you need to.

But in the short run, if you're going to keep the system secure, you need to leave gas on, and you need to leave enough gas on to meet your demand during the Dunkle flap.

That's not the same as 100% of demand.

Even when you have when it's very cold and when it's very calm, when it's overcast, you'll still get some production from wind and you'll still get some production from solar, but just very small amounts.

And that means government is probably going to need to have at least 35 gigawatts of gas on the system up until probably at least 2035, depending what you think about other technologies coming online.

Yeah.

And I think that that point of gas on the system is quite an important way of phrasing it because it's not necessarily gas that's generating.

It's a high amount of capacity, which hopefully for the vast majority of the year is just sitting there.

And it's, you know, just sitting there for, for carbon reasons that you don't necessarily want to be actually using this gas to generate power because it's carbon intensive.

But also often it is just more expensive to run kind of in real time than wind or solar, which if if it is windy, you know, maybe it was expensive to build the plant, but then the wind is blowing.

There is no additional unit cost of producing electricity from that wind in the same way that there is from gas.

And so when we look at something like the 95% that Nisa have defined Clean Power 2030 as, I think it's a recognition for the vast majority of time there, there will be a lot potentially a large gas fleet that is sitting there, but it's not doing very much.

It's just kind of sitting around until this kind of Duncan flout or whatever the situation that requires it forces it to come online.

But then obviously this this creates a few challenges in that you are building lots of these assets, probably not intending to use them very much and and that makes the business case quite difficult.

And so, yeah, I wonder if you could talk a little bit to the the current business case for gas turbine and also how that's changing and how maybe investors in gas are getting more nervous about the the future of committing resources to building these new turbines.

So if you're going going to build a gas turbine, right now you're thinking about two components in your revenue stack and you're thinking about what you can get in the capacity market and what you can get in the wholesale market.

Now on the capacity markets, the government has recently committed to essentially carving out a special place for gas within the capacity market, which in my view is almost certainly a mistake in as much as it will hand a considerable market power.

But if you are a gas plant, looking at that, you can say, OK, I can go in, I can get a 15 year contract for this asset and that will cover my fixed costs.

And now it will need to cover my fixed costs.

Otherwise I wouldn't be compared to the moment to get a contract.

Therefore, I need to make an assumption about what I'm going to get in the wholesale market.

And right now I just don't know if I'm a, a gas plant investor, the government says I will perhaps feel around 20 to 30% of the year if I've got high efficiency plant, but that might change.

I don't know how they're going to impose those running hours on me.

They're talking about some sort of limit for for participation in the capacity market, which is quite a high number of hours.

Will I get all those hours?

It's really unclear and especially right now, at least to, you know, wind turbines and solar, solar panels being capital intensive right now, gas is pretty, pretty capital intensive.

Turbine prices have gone up considerably.

People are buying gas turbines at an astonishing rate to power data centers in the US and to an extent here here as well.

The upside from essentially I'm building a gas turbine next to a data center is that you're going to have 100% of the running hours you could possibly achieve building it to service the UK system.

That's really, really unappealing.

It's not clear that the investment case exists even with a special carve out in the capacity market.

And I suspect a lot of developers are going well.

Why would they bother?

Yeah.

And you mentioned the the crunch that we're seeing internationally actually in terms of gas turbines, which is partly largely being driven by the AI boom.

So it's a really good point that, you know, people sometimes assume, oh, gas is cheap and renewable is expensive.

That's very much not the case.

You know, gas is expensive and getting more expensive because there is higher demand, particularly coming out of the US.

But yeah, it's it's very much like a seesaw between the capacity market and wholesale market that the the less these things are able to run and the less we want them to run in the wholesale market, the less money they make.

And therefore the more money that government needs to put forward in something like the capacity market to convince investors to build.

And is obviously something which is controversial for a few reasons.

It's it's something which is obviously controversial because effectively it's a large fossil fuel subsidy where government is giving a lot of consumer money to, you know, often large fossil fuel companies, sometimes small or medium sized fossil fuel companies, but effectively for the generation of electricity by fossil fuels.

And the other reason obviously, that it's controversial is cost in that it gets increasingly expensive to build these things knowing that they will not run most of the time.

And that becomes harder and harder to justify.

And the less they run, the more risk there is for investors, the more uncertainty it is, the more kind of a premium that they want for that upfront capital.

And so is there a point where it becomes unsustainable effectively that this sort of current model of a capacity market falls over?

I think we're at that point now, quite frankly.

I mean, right now the people who are going to win contracts and the upcoming CM rounds, capacity market rounds, are ones who are taking a point in the future reform government, letting them do what they want.

And that doesn't feel like an appropriate objective of policy.

If you've created a mechanism that allows people who are betting that the current government will lose the next election and therefore will get significant upside in the wholesale market, then if they're wrong, they'll have built assets that they can't possibly finance and you're in political chaos always comes into the market power market in this way.

That means you need to have a route for managing the kind of your gas assets that is less subject to political happenstance.

For me, you have to start raising the question, can you realistically achieve a lower rate of gas usage in this sort of context using the instruments that you have, using a carbon price when bills are already going up and using the capacity markets where you've had to make a carve out and where you're essentially demanding people take a punt on the on the next election?

I don't think you can.

I think you're forced to do something else.

You have to remember the capacity market was designed to solve a very particular problem, which is ensuring you have enough generation at peak, at the peak of demand.

What we're trying to solve for now is a different problem, which is do you have enough generation when none of your renewable assets are available and you've maxed out on your storage already.

That is a very, very different problem, and trying to solve with through an instant that does one thing is not going to really deliver you value for money.

And you see the government essentially trying to ignore this and play with the existing toys via changes to the CM.

But in the in the long run, if you want assets that are going to be available for a specific purpose at a specific time, you should buy that rather than a weird proxy version of that which is what the CM reforms currently seem to be intended to do.

Great.

So capacity market doesn't seem to be the way.

What do you think is?

So although I'm instinctively a big fan of the market, I think there's a very strong case in this.

In this particular case, we're taking gas out of it entirely.

The impact that gas would have in the wholesale price in the world where you had to use carbon prices to force it to generate less is just too much.

The the deadweight costs, the well for your listeners, deadweight costs are costs that essentially attacks, puts on the system, but doesn't have any real upside.

It's just purely a cost that's passed through.

They will be very, very high.

If you're under 80 pounds per ton of CO2 and you're a gas asset, then your price goes up considerably and you're forced to pass that price through directly to consumers as well as through other assets in the system that are bidding at the wholesale market too.

It's just too expensive.

And sorry, do you, do you have a sense of order of magnitude of what that kind of carbon price would look like on a consumer bill?

So the work that we've done looking at essentially the cost of gas in the wholesale market right now and the carbon price, which is about 60 or 70 lbs per ton probably adds about 1.1 billion to the consumer bill.

If you triple that or or quadruple it, that number will go up to between 4:00 to 4:00 to 5 billion depending on your assumptions on the running hours of those gas plants, of course.

But it doesn't get lower and and it becomes a significant cost.

And as a proxy for that of every billion pounds worth of cost in the system probably equates to about 10, five to 10 lbs on on the average consumer bill.

So it's it's chunky and it is meaningful and it is a risk that we need to avoid.

But if we can't use carbon pricing because of its deadweight costs, we need to find a way and we still need the gas plants, of course.

We can't just switch them off.

We need to find a way of ensuring that they only generate in line with what we need for security and supply purposes, while ensuring that you can continue to invest.

A lot of our gas plants are older.

A lot of the kind of bids in the capacity market offer refurbishing existing plants, which means just keeping the turbines running because they're so expensive to buy.

You need to be able to allow cash to flow into those.

So if we took gas out of the wholesale market entirely and said you're no longer choosing when you switch your switch yourself on and off gas plant operators, the system operator is going to do that for you.

You solve one problem and by putting them into a strategic reserve in which they can benefit from a structure which is called a regulatory asset base, which essentially is an indefinite right to recover their costs from the consumer.

Something that's enjoyed by the network companies and the water companies and essentially all the regulated utilities.

You provide a route for them essentially being able to cover their costs and cover the cost of any investment that they need.

Now this is a significant change because you're removing the kind of the kind of device and that's that's always set the price.

And one of the big challenges I've got from this proposition is from traders going, so what's going to set the price now?

And our analysis, we expect it to be an interesting mix of interconnectors, batteries, long duration storage and some demand side response.

It will depend on where the market is on day as it always should be.

People have asked me how on earth could the battery know what to charge in the market if gas isn't there?

Batteries will charge whatever the thing they can get away with.

That's how markets work.

People will charge the the highest number they possibly can, but in our analysis, essentially they will always be capped out by the willingness of the consumer to pay.

And if you have gas plants sitting in reserve, you kind of almost create a price ceiling.

If you know that above a certain amount of a certain limits where there's going to be not enough generation in the system, gas plants will come online, then you're always going to suppress prices and you're going to create a price ceiling which would benefit consumers.

Now announces probably the tune of about another 4 billion and on top of the 1.1 billion and upside from essentially removing the carbon price for these assets that are now out of the market.

And So what you're describing is it sounds like something like a strategic reserve is a term that people might have heard as a policy option is, is that how you would describe this option?

Yes, it is very much a strategic reserve and the difference is that in the strategic reserve traditionally those assets are owned by the government or the system.

And, and really and the question that is is often put is when you put things in the strategic reserve.

I think if you allowed assets to reach their end of the life and government bought them up, then you could have a quite a small strategic reserve that is just holding on to things just in case you need them.

I think if you do it now, that's the only way you can realistically achieve your 2030 target.

That's the only way you can use a power price in the short run anyway, in a sort of chunky way.

Yeah.

And so the problem again, just to take this back to the, the, the bid stack stuff that we talked about earlier in the way that you have pay as clear auction, that's right, pay as clear market basically an auction.

Is that effectively what you're saying is that renewables are cheap, batteries are cheaper, demand side response is cheaper.

We want them to charge a lower price rather than charging or getting whatever it is that the gas price would be.

And therefore by taking these gas turbines out of the regular wholesale market as it currently stands and putting it into this alternative administratively set mechanism, strategic reserve, whatever you want to call it, you're saying that, OK, renewables are now basically we're consumers are paying less for the electricity that is generated by renewables or the kind of discharge or recharge that's happening from batteries.

Is that effectively it that you're reducing what might be seen as a, you know, a windfall that renewables are making because of high gas prices?

That's absolutely right.

I mean, it's important to bear in mind that during the energy price crisis, the windfall that renewables enjoyed was so much, the government has so fit to levy a special tax on them.

The electricity generation levy trades about £2.12 billion at the height of the crisis.

Prices are still high relative to the 20 tens.

In the 20 tens, the average wholesale price is about £50 per MW hour.

It's between 70 and 80 lbs in the last couple of years.

So if you bought, if you invested in wind at that point, then you have made a lot of cash over the last 10-5 years from both the energy crisis but also the fact that prices just haven't come down.

Yeah.

And one important distinction I should make actually again you'll probably know this, but for some of our listeners is that this is only really applicable for existing renewables which were built, I don't know exactly how long ago, but probably in the mid twenty 10's and before.

Because for new renewables, the vast majority of those are built through the contracts for different scheme.

And at least that means for the first, previously 15, soon to be 20 years for some of the assets, they have a fixed price where what they charge or pay is, is not determined by the wholesale market, is determined by a an auction which is held and for which they get a contract for a particular unit price for every unit of electricity that they generate.

So again, without having to recap the whole CFD, basically what it means is that you have this auction, you set a price, let's say it's £70 per MW hour.

That's a completely random number.

Please do not read too much into that because there's an auction that's coming up.

It'd be excellent because £70 per MW hour and the auction excellent.

And and, and effectively what what that means is that it doesn't matter what the wholesale price is for the next 15 to 20 years.

If the wholesale price is above £70, then those generators pay back into the scheme and that money is distributed back amongst consumers.

If the price is below 70 lbs, then the scheme pays out to these generators, it's at 60 lbs, then the scheme will pay an extra 10 lbs to them.

What that effectively means is for the vast majority of new generation, actually from a good portion of their life, they are already decoupled from the wholesale price.

So really what you're talking about is the yeah, the, the profits that you see existing things that may be supported through the renewable obligation scheme, which is again, an earlier subsidy scheme which does not decouple the price that renewables get from the wholesale market.

Basically.

Yeah, you're, you're looking at the the profit that they're making and trying to reduce that against what they'd be making in the current scenario.

That's right.

Well, the renewables obligation plants with all steel nuclear plants, there's about 30 gigawatts of those sorts of 0 marginal generation plants in the system that are still in the market and a lot of them will be in the market for quite a while.

A lot of the a lot of the renewables obligation plants were built in the 20 tens.

They will be receiving payments under the RO and still be open until well into the twenty 30s.

Some of the nuclear fleet will of course shut down relatively soon, but there's still a lot of generators out there that are making a lot of cash.

And it's also important to notice that there are a surprising number of merchant renewables still being built, especially solar, because if you can build solar and a battery together right now and you can do it in the Southeast, you actually can make quite a bit of cash.

And the gas plants are partly how you weren't able to do that.

Yeah.

And and I guess, and I know that you're someone that's generally primarket by moving gas plants out of the market, presumably you're also reducing the upside that some of these merchant projects could obtain.

Are you disincentivizing kind of merchant investment basically in solar and batteries as a result?

I think in the short run, yes, absolutely.

And I'm actually quite comfortable with that.

There's no God-given rights to your return.

You're always taking a risk in the market, especially in this market which is so heavily political.

Being the manager of political risk should be part of your part of the way in which you get finance.

At the same time, over the longer run, we will ultimately return to a stronger role for the wholesale markets, depending on your view about the future of the CFD, of course.

And there will in the longer run be a strong role for merchant renewables.

It once we've gotten past our initial build out of infrastructure in a world in which we have a lot more renewable assets playing in the market, they can do very, very well if we don't build too many of them.

I think that is the kind of big question facing the system right now.

How much renewables do you really need to buy in order to meet demand, and how much is too much?

And who should take that risk?

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Coming back as well to the the idea that moving this these gas turbines out of the wholesale market could reduce costs.

How quickly do you need to do that for there to be a benefit?

So I think there are kind of two versions of this.

If you go fast as you do it before the end of this parliament, you will get a significant bill reduction between 40 to 60 lbs off the average consumer bill.

But you can always do it later when a lot of these assets are reaching end of life and put them in strategic reserve in the mid twenty 30s is also an option.

I think quite frankly, you end up doing strategic reserve and the mid twenty 30s regardless of what you do now, you do need to weigh the manager's assets off the system system and it's very hard to do so in the market.

In the Netherlands.

You're already seeing some of the owners of these plants essentially seeking to hold the system to ransom by demanding that they get paid a lot to keep their plants open.

There's no position the government can be in.

It needs a tool to manage the route out of the market for older gas plants.

Without it, there will be a lot more cost to come.

And this maybe brings us actually to the point that you mentioned about the distinction between this model and the strategic reserve where things are government owned.

Is that not a risk anyway that in order for gas plant to agree to be taken out of the wholesale market and put into the strategic reserve?

And by agree, I mean do it without basically closing down and saying we're no longer going to keep this plant operational because you know, government can do it and just say, OK, this is the way that the policy market is that the policy or the market is evolving.

But you know, gas turbines and investors generally will often rattle Sabres and say if you do this, we're going to pull investment etcetera.

Is there not a risk that anyway in order to get them to agree to this, they say we need a really high price and therefore you end up paying them an extortion amount anyway to take them out the market and operate them under a regulated asset base?

So I think if you're going to intervene the market to this extent, you need to be willing to wield a big stick and that means you need to look at measures that would essentially eliminate the value of the of the asset outside the strategic reserve.

So that would include a couple of things.

It might include saying you can no longer participate in the capacity market and it might include saying we're going to limit the running hours of all markets and gas assets to a very small number.

If you have a trajectory over which their revenue will shrink, if they're not within the strategic reserve, you can essentially come home.

I wouldn't say compel, but heavily, heavily encourage people to participate in the reserve.

But presumably again, they still need a a certain amount of return for it to make sense to continue to run the asset.

Yes.

So my expectation is that will be the fixed cost that you'd otherwise by paying by a capacity market contract.

And looking at the numbers that we've got on Castle and operation versus returns in the CM, it seems very clear to me that people are benchmarking their capacity market bids at their cost to run the plant and assuming that they can get all the recover all their kind of what's called variable operational expenditure in the wholesale market.

So that's the essentially how much gas you need to buy and the wear and tear in your machinery.

If you pay pay for that indirectly via essentially a charge that the system to the system operator based upon your actual costs, then you can avoid a lot of the costs that you would otherwise be imposing the rest of the market.

Yeah.

But but presumably you're right.

So the capacity market contract seems like it may basically covers their cost and they assume that they're going to get their upside from these in the markets.

If you are saying you're no longer allowed to participate in these other markets, then the base amount that you'll have to pay them will be higher than what the current capacity market contracts are.

Yes.

So you probably add in much as you do in the networks a fixed chunk of revenue based upon their overall cost.

So for example, the the the cost of capital that you normally see in the networks, it tends to be set by 10 year gilts which are currently hovering about 5 to 6% you and you'd review that every five years.

Again, same the way you deal with the networks.

You look at the kind of total capitalisation value of the plant, whether it be the residual asset value itself or some sort of nominal figure based on the value to the system.

And you say this is the book value of your plant.

Every year we're going to pay you your fixed cost plus an uplift based on that book value.

Got you.

And I guess what I'm getting at as a little bit is that, you know, regulatory asset basis can be controversial and you know lots of people think that they can be poor value for money because there is this basically information asymmetry or bargaining asymmetry where you are required to say this is what we think it costs for you to run this plant.

This is what we think a valid return is.

That's what we're going to allow you to charge often, particularly the first bit is hard to determine and I'm trying to figure out if it's easier or harder to determine for something like gas turbines where there are more of them.

I guess on the one hand, it could be easier because you can benchmark across and so there is a degree of divide and conquer that government can do where you're not in negotiation with one individual actor.

That's got a lot of market power.

On the other hand, I'm imagining it being very difficult to kind of accurately audit and assess the individual costs of all of these different plants, which will differ.

And so, yeah, I'm partly thinking of this from a, you know, former government official designing schemes and trying to bridge that information asymmetry in a way that means that you will actually get good value for money without some kind of mechanism which forces people to reveal their price, which you kind of have at least through the capacity market, through the auction.

Whereas if you don't bid competitively enough, you don't have the contract.

If you're in a strategic reserve model, effectively you're not having to take their word at it.

But there is this asymmetry and there is a risk that you end up overpaying anyway and that you're just moving costs from the current system to this new system.

I think it's a very, very reasonable challenge if you look at the history of economic regulation in the UK.

So what regulators like off chairman of what?

Of what do They've historically intervened during mergers between network companies because of precisely the point that you make because the information availability lowers when you have fewer players in the market.

Luckily, we have a lot of gas plants and they all have slightly different cost structures and all of whom will have slightly different requirements from any sort of regulated solution.

That gives the regulator almost more information than it has the networks that are currently regulated in this way.

And that I think can give you some confidence.

You also have a global effect.

You know how much it cost to build a gas power power station overseas.

You can benchmark against overseas projects too, as well as projects within the UK.

If you are refurbishing any sort of assets within the UK, you might want to say, OK, we knew, we know we're going to need some of you to stay online, some of you not.

You might want to induce some sort of competitive comparement to this too.

That'll be quite novel and economic regulatory terms.

Yeah, and.

And is there a reason why either short term or long term, you see private ownership of these assets being better than public ownership of these assets?

So there's, there's obviously the, the obvious reason, which is like upfront costs and that you'd have to buy these assets basically.

And and government is not exactly flush with money at the moment, but as you said, often strategic reserve models, the model is that government owns it because they need an ever increasing return in order to keep these assets online.

Government does not need that ever increasing return so it can hold them and run the more cheaply.

Is, is there kind of an economic rationale for a model where it's continued to be owned by private sector or is it more of a practical thing?

So we looked at the kind of what we thought the book value of all these plants would be, looks to be about £15 billion and brutally we didn't think the government has the money for those plants where the book value is close to 0.

There's a very strong argument the government that simply buys them, it's a ticket price that reflects the value of the assets plus the income streams that they might have squashed in various different ways.

You can have a mixed model, doesn't have to be purely private or purely public ownership.

Where it makes sense to leave something in private hands because you want to reinvest and you don't have the cash, that's fine.

Where it's an end of life assets that you keep on struggling on for a few more years, there's no reason why the public can't own that.

It really does become a judgement about how much cash you have on can as the government, what's the cost of the asset versus leaving in private hands and how much investment do you think you're going to need.

Yeah, that makes sense.

And, and I, and I guess the earlier you move to a strategic reserve model, if that's the model you decide to move to, the harder it is to take into government ownership where it's, if it's a few plants knocking about towards the end of life, it might be easy and potentially cheaper for government to say, OK, we're just going to buy this upfront.

We are going to hold it there, not run it.

You know, it's not going to make as much money, but that's fine.

We don't want it to make money.

We're buying it because we think that there is security of supply benefit that's public good, everyone's happy.

If there were, you know, at the moment still a really significant portion of the market which are gas turbines, the government is just not going to be able to front that cash.

Indeed, I suspect if you don't do this now, you end up with a situation, 2035 where most of GBE's portfolio, Great British Energy's portfolio is the one to clapped out oil gas plants because that's where you would logically put them.

That, I'm not sure is something that the governor had ever envisaged when it said GBE up, but it might be a useful function for it.

Yeah.

And I guess this is tricky political thing as well in that, and it can be counterintuitive in that on the one hand, you don't want to be giving more money than you need to for gas to decarbonize.

But at the same time, having that like backstop insurance policy does allow you to push the system slightly harder the rest of the time.

And so I'm like, I'm definitely more relaxed now than it was maybe 10 years ago.

But having some gas switches on the system and sitting around and not doing very much because it means that 90 plus percent of the time we can say, yeah, let's just go for helpful leather on renewables and batteries and DSR.

And that will solve 99% of the problems for the other times we've got this stuff here at Backup.

But there is a point where, A, it becomes very expensive and B, it becomes very politically difficult to say, you know, renewables we're not going to spend lots of money on.

We are going to be spending lots of government money on these old, at this point, possibly decrepit gas plants, which are very expensive.

So yeah, I imagine there is that balance that will need to be had.

I think that's right.

I think you're in the world where you don't have any of the alternative to gas in the short run, possibly not even in the medium run.

And if you do find that you can produce hydrogen cheaply or you can do fusion cheaply, and you therefore have another molecular store of energy, then you'll probably want to find a way of switching to that.

But you can't switch the gas plants off while you're figuring that out.

You're going to need to leave them on the system because the alternative is, quite frankly, blackouts.

And as I've said earlier on, the political cost of that, and importantly, the cost of the transition of a failure of supply is so high that it can't be born.

Yeah.

And I think you're, you're right to point out the cost of alternatives and that it might be that you can fulfil this function with other 0 carbon things earlier, but much more expensive for a relatively marginal gain of a few percent.

And at that point, you start to get to a point of, is this the cheapest basically ton of carbon that we can abate.

And usually it will not be like instead of maybe particularly in the interim buying something which is an expensive, you know, for example, green hydrogen to power, which probably has a role kind of long term in the energy system.

It's going to be more expensive, reaches a point where it's like, OK, we could spend all this extra money on green hydrogen to displace this unabated gas which is only running 1% of the year, etcetera.

The cost of that versus the cost of investing in home insulation, EVs, public transport, etcetera.

The cost for carbon just becomes, it doesn't necessarily stack up.

I think that's right.

I think this is a problem throughout the transition.

That last 5% of carbon is always going to be the hardest and the most expensive.

And the quick real question is, do you really want to spend the cash sorting out the last 5% of carbon in the Power 6 sector now when you have bigger challenges in transport, in heat where the cost term per ton of carbon debate is so much, so much lower?

Yeah, it's not that you don't do it, it's just that you don't do it now when as you say there's, there's better value for money basically for carbon abatement.

Excellent.

And I'm trying to think if I have other questions on this.

I, I guess I have one in terms of the, the actual functioning of how this works in the market and, and apologies if, if you're still listening, hopefully you're up for getting into a little bit of nerdy market design stuff in that practically, I assume at least in the short medium term, most of the time, the first market or the real market of renewables demand side response storage will not actually meet all of demand.

And so how do you close the price at that market if the supply that's there does not reach the level of demand?

And so there isn't that natural cut off of this is the price that's determined afterwards we establish the strategic reserve and dictate that they come onto the system.

So there are two ways of doing it and I'm quite frankly undecided as to which is optimal.

The first is quite simple.

You establish a price ceiling for bids in the market and then everything above that, whenever the market hits that number, you say we're going to switch the gas plants on, meet the rest of demand.

The alternative is that you essentially create kind of almost kind of a mini market.

So you have some criteria that specify when the capacity margin is adequately slim, we will turn the gas plants on like existing notifications of the market about the short form capacity, except you this is specifically about low carbon capacity.

You say, OK, in 24 hours we think there's enough renewable capacity system to meet demand to the four hours after that there might not be.

And we will provide a notice that says we will switch the gas plants on in their schedule in order to satisfy demand after the rest of the market clears.

But our assumption is that the rest of the market will clear first.

I'm not sure which one is cheapest.

And quite frankly, the impacts on dispatch and gaming especially I need to work through.

They are not easy.

It is a significant market intervention.

And as I said earlier on, I'm a big fan of markets.

They're very, very good.

But in this case, I think you need to find a structure that enables almost to start with clearing price for low carbon assets if you're going to maximize the value of this intervention.

Got you.

And, and in terms of, because I guess another counterpoint might be really what you're trying to get at is a windfall or perceived windfall, because I'm sure there are some RO operators at the moment that will say, we're not actually making that much of A windfall, but the windfall of these existing assets.

An easier way to do that might be something like the windfall tax or the, what was it, the energy generators levy as it was called.

And just basically reducing where that is.

Because if you're going to have a strategic reserve at some point, as you've said, you basically reach a price ceiling anyway, because at that point, the strategic reserve is activated and the wholesale market is basically quiet.

And why go through all this effort of creating a strategic reserve when you can just set a price ceiling and do that separately?

Yeah, like what?

What would be your your counter action to that?

Essentially, this is about the role of electricity in the economy.

And there's some really fundamentally important here about the transition.

We need cheap power if we're going to switch to E pumps, if we're going to switch to E VS we don't have cheap power.

If we the energy, energy duration level levy is not paid for by the generators.

They get essentially above £75 per MW hour.

They get 65% of their upside.

The rest goes to the Treasury.

The public pays for 100% of that.

If you move towards a windfall tax, it just becomes another tax on the public as opposed to a tax on the generators.

And that quite frankly is not great for a vector that we need if we're going to decarbonise.

Fewer taxes on power mean more power used by the public for low carbon purposes.

And if we have decarbonized electricity, and that's what we should be doing, that is the goal, not to provide more cash down to the Exchequer.

Admittedly, that viewpoint probably won't be popular with the Treasury, but another tax is not what we need if we're going to make power cheap.

Yeah, but, but presumably, again, that's a set of policy choices in there.

You know, the, the, the functional everything is still the same in that, you know, generators are foregoing what would be a windfall.

And instead of giving it, you know, instead of keeping it, they are giving it to treasury in their strategic reserve.

I guess they wouldn't take it at all.

It would kind of disappear and consumers would get it back immediately.

Is there not a policy choice where we'd say, OK, we're going to have something which is basically a levy, but it's just redistributional.

It stays within bills.

We charge this X amount if they reach the ceiling.

Anything above that ceiling we take back in the form of tax or plevi, whatever it is.

And then you just immediately redistribute that to consumers again.

And you know, Treasury don't like to do that kind of thing.

They don't like hypothecated spending.

But it might be a, an easier to operationalize version of what we're describing in the strategic reserve.

I mean, the problem is exactly as you've outlined the Treasury hate hypothecation and you will bear the scarce on your back as I do, from trying to persuade them as he take this sort of actions in the market.

It may seem baffling, but a more complicated solution may be easier than trying to persuade the Treasury that it needs to rethink its position on tax and sometimes in within, especially within the UK, managing our approach to accountancy because almost the objective of public policy.

And I don't think that's optimal, I would agree, but it's almost certainly where we are.

I think the other point though I'd like to make is that's the point of the strategic reserve isn't simply to lower costs, it is also to manage these assets during a period in which the their usage going to decline.

It's not clear that you could prevent them from generating in the market even with an additional generation tax on top of them.

You would need a very high carbon price.

And if you had a very high carbon price plus a tax, essentially all you're doing is charge is, is charging the system twice, once for the carbon, the carbon price and the generation.

And then once again on the upside for the low carbon generators, it becomes a double tax, which again, even if you redistribute that in some way is incredibly distortive.

And, you know, as we're coming to a close on the episode, I guess, what would be your final pitch of this idea?

So I think this, if you want to decarbonize power by 20-30, if you want to have gas plants run a particular way, you need to control them.

You can't do this through a carbon price.

It'll be astonishing expensive to consumers.

If you do try to do this through a carbon price on on gas plant, you will end up with incredibly expensive power for at least a third of the year and you will prevent people buying EVs and buying heat pumps and you'll end up, as we may very well do at the present rate.

It's not achieving our carbon budget at all.

Wonderful.

Well, yeah, thank you very much for coming on and discussing this idea with us.

I think I'm, yeah, I'm yet to come to a full decision on if I'm pro or against, but this has definitely been really interesting, given us a lot to think about.

I think it really, as you said it gets into the the guts of market design and I do increasingly think that something like a strategic reserve for the long term of managing gas makes sense, makes more sense than trying to do something like capacity market.

You know, maybe there are some things which I'm undecided on in terms of the exact design, et cetera, how quickly you do it, et cetera.

But I, yeah, I think I share the belief that probably the capacity market is not the right tool and something which is a bit more managed, probably more radical.

It's probably the way to go.

But yeah, this is a great idea to be throwing into the mix and hopefully also generates others.

I think historically there hasn't been much of A willingness to grapple with radical changes in this way, particularly around gas.

Hopefully that's starting to change and people will think more boldly and more bravely about what what is possible.

I hope so too.

Thanks very much and beyond.

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