S4E11: Energy Markets In Europe

We discuss: 

1. State of the energy markets in Europe and why the prices are going up. 
2. How does the electricity grid work?
3. How does the energy pricing work in Europe (excluding gas/petrol)?
4. Opportunity for startups in the energy markets. 

Transcript

Hello everyone. Welcome back. This is Valley Nordic. I am Chander in Palo Alto,
and this is Arna in Oslo.
So we are talking after a few weeks, not at our regular cadence or rhythm because of travel, covid and lot of just things happened. But I'm glad we are talking again, and today we are going to talk about a topic that we read about in the news a lot, and also, I think in future, this topic will become more and more important, and that is energy. So we'll start with, you know, the state of energy in Europe, with what's happening with the war between Russia and Ukraine, how that's impacting Europe. Then we'll get into how the grid works in terms of generation, distribution, transmission, and then how it varies in Europe. So this is more like you know us, Silicon Valley, learning from Nordic episode.
Then third
section is pricing, how it varies by residential, commercial and by country. And fourth is opportunities for startups. So if you are thinking of starting a company and you want to make a positive climate impact, what could you be doing? How does that sound? Arne, sounds good. Okay, so let's start with the state of energy. So we read, you know, in newspapers, how the energy prices in Europe are going up, and it's because the gas comes from Russia and they're not sending it. So you are very close to that, literally. So tell us, like, what exactly, somebody who has no idea is not reading the newspaper. What is happening,
yeah. So,
you know energy, you know, we're going to talk about the grill so forth. Energy is a number of things, right? It's it's electricity, but it's also other forms of energy used for maybe heating and transport and industrial production and so forth. So some of that is, you know, electricity, and some of it is other forms of energy. In any case, it's, you know, energy comes from a range of different sources, from like fossil fuels to nuclear to renewable sources of of energy, like hydro electricity, wind, solar and so forth, and and you have to have energy for all these things, from, you know, having electricity or heating in your house to to, you know, production in industry, To transport and so forth. And in Europe, before the whole invasion of Russia, invading Ukraine, Europe has sort of been leading the way, too slow, some people would say. But even so, leading the way in terms of transforming into renewable energy sources. So Europe has been through sort of investing a lot in renewable energy in terms of wind and solar, particularly, and also phasing out coal, which is the one that has the highest carbon footprint in terms of climate change, and also there is this situation where Europe has had nuclear power that have been a hot potato for decades and decades, but sort of came to head with the Fukushima accident with its tsunami knocked out a nuclear power plant in Japan and caused damage. And so I think that like three trends in Europe, preceding the war is one investment in in renewable reducing consumption of coal, and in some countries, phasing out nuclear, like Germany and Sweden and a number of other countries. And sort of filling the vacuum has been you. To some extent oil, but predominantly gas coming through pipelines from Russia as a major source of energy in Europe, and that gas from from Russia has been used for heating in homes for gas powered power plants for electricity and as a source of energy for industry. And there's been a shift over, say, 20 years, where Europe has become more and more dependent on Russian gas. And hence, when that's being used as a strategic tool in a conflict that puts Europe in a in a bad position,
when the pipelines are closed and blown up.
This, you know, move to renewables, how much of that was, you know, climate and how much of that was self sufficiency, because otherwise you're dependent on others, and without, you know, if energy prices go up, You lose elections.
I think I would say that the drive towards renewables have been more or less purely climate driven.
Yeah, Europeans in general tend to be, or at least the governments are, you know, can subsidize and you know, willing to take the cost of that migration. It's been harder in the US, while some states are doing subsidy. But like one of the pros of, let's say, not fully market based economy, where you let the market decide everything, sometimes it's good to have governments do the infrastructure things,
yeah, but I think I should have a caveat on that. I think when we talk about climate driven renewables, I'm talking primarily about wind and solar that historically have been an expensive form of energy. So the prices of these sources of
of energy started
out super expensive, have come down and have come down to a situation where they're reasonably depending on what you would put down to the reasonable term here cost competitive in a normal market, and in the current market, they're cheap compared to the lack of gas, but they're still viewed as expensive sources of energy. The one exception in the renewables category that's historically a main source, and it's very cheap, is hydro. And so in Norway, where I'm from, that was, that was actually the main driver of the Industrial Revolution, if you can call that, in Norway, to the extent that you have that. So Norway is a country blessed with a lot of rain, if you can call that, being blessed and high mountains. And that's a great place for having hydroelectric so essentially, the way that you produce hydroelectric energy is is having money flow through a pipeline from a high altitude to a low altitude, and then through a turbine. And the more water there is, and the higher the altitude difference is, the more energy it comes so in countries like Norway and Iceland, more than 60% of energies is from hydroelectric energy, which is also very, very inexpensive to produce. But you find similar situations in Sweden and Switzerland and Austria and and France areas with with high mountains. And you can find similarities in the US, although it's it's smaller, and so these sources of energy have been around for, you know, more than 100 years, and big investments have been taking a long time ago, and the cost of operating them are very, very
low. Yeah,
it's, does any other country have highest percentage, or higher percentage than Norway, in terms of the amount that comes from hydroelectric, not amount, but the percentage you said it's above 60% that sounds really high. So I think,
I think Iceland is even higher and and Iceland is the one other place where there's another renewable source that is just not used in many other places where that's geothermal. Because. Iceland is a volcanic island, and you can use that for, you know, geothermal heating, or energy for heating, it's a less effective source of electricity, but Iceland, I think, have more than 80% of their energy consumption come out of hydroelectric power and geothermal.
Oh, wow, 80%
Yeah. And as a matter of fact, if you look at Norway, there is more hydroelectric power produced than the full electricity consumption for a year in the country, not the full energy consumption. So that means that you use, you know, other sources of energy for, you know, industry or transport or something like that, right where you know electricity is not the main mode of using energy, yeah, boilers or combining engines, etc, yeah,
it's that's good point. When we say energy, or when I think of energy. I'm thinking mainly consumption inside, you know, heating, cooling, electricity at homes, but gas or, you know, the car, bus, they all need energy or gas to move. Gas, meaning petrol, and that's also energy. And there we see migration to electric because it's more environmentally friendly in some cases, or at least it's marketed that way.
It should be forced to ask that. I mean, this varies a little bit in in the US as well. But even for household consumption, low energy or not all energy consumption is electricity. You also typically have a gas bill,
yeah,
and which is typically used for for, you know, heating the home or heating water, and that's in majority of European countries, the energy consumption is more tilted towards, you know, not, not using electricity as a heating source, but but direct gas or oil based heating system.
Yeah,
you've lived in both, you know, Silicon Valley, Norway, and you've lived in London. What? How does the price vary of, let's say kilowatt hour in the US, or, let's say it's California. You were in Palo Alto. So Palo Alto versus Oslo.
Yeah, so for
my life, which is like 50 years, Oslo would have been much cheaper than Palo Alto for 49 of those, but not the last year. Oh, wow. And that is that is a function of two things, generally, that Norway has cheap access to electricity, but the reason why it's changed in the last year is because of the grid integration in Europe. So Norway's price is set by essentially interconnectivity with the European market and the Russian invasion, invasion of Ukraine, which essentially drives gas prices sky high, and that's the marginal contributing factor to electricity production in Europe, and hence price is priced by that. And that also impacts Norway with where, where
the
the price is. Production is very cheap. And as a matter of fact, a not to make this a local episode about energy markets in Norway, because that's not in itself interesting, but but effects are kind of interesting on a global scale. So in Norway, the situation is that the grid is not, does not have a capacity to transport massive amounts of energy from one end of the country to the other, because the production and consumption have historically been relatively balanced. So during the summer months, the price of energy in the southern part of Norway was 100 times the northern part of Norway 100 times, 100 times. So you would have a kilowatt hour price at, let's say. 40 cents in Oslo and southern Norway and in the northern part of Norway would be point four cent
per kilowatt hour.
So a big surplus of production in the north with no great capacity to bring it out and the southern part of Norway priced at a marginal production cost of gas, which is lacking in the European market. Yeah,
when you say grid capacity, you mean there's no way to transport that. There's no lines connecting north to south or north. There is,
indeed, lines. They don't have the capacity to balance. Yeah, bottlenecks, essentially because it's also because there's been a uneven rain or uneven snow season, so lots and lots of snow in the mountains in the north and no snow in the mountains in the south, combined with more interconnectivity between the south of the country and European continent. So essentially, it's a bottleneck problem. So, you know, but big grid takes, you know, five years to build,
yeah, but it's, you know, Norway is rich country. It's a fixable problem with money, like, why wouldn't you just increase the capacity?
It takes five years to build their lines.
Yeah. So what? Five years is not long? Well, they will.
It just doesn't get it back to price today. Okay? And why
would Norway agree to, you know, you're kind of, you're self sufficient for energy, or, let's say, electricity production. Like, why did you agree to not you, but Norway would agree to rates being set by Europe.
The rates are not set by Europe, so the rates are set by the market.
Yeah, exactly so and
and. So the thinking is that under normal circumstances, a bottleneck, free system can be optimized for the for the sake of everyone. It's just a special situation that's hit Europe with the war, and we're probably supported by some bad choices along the way by Europe. But there are months during the year where, let's say Norway has a very dry year, then you're dependent on production capacity in other countries. And quite frankly, Norway has been a net importer of electricity the last month. So you know, it generally in a well functioning world, world trade and interconnectivity take optimizes an overall system and takes and lack of bottlenecks, optimizes both production and consumption for the benefit of everyone, unless the system is manipulated somehow.
Yeah, that's so interesting,
and the system is indeed being manipulated today, and by a gentleman called Putin and gentlemen is probably the wrong word for it. Yeah,
but you know, everybody's doing what they think is good for them.
Absolutely, it's
but I just find the whole thing fascinating how, like, nobody was talking about energy except, you know, renewables, and now that's on everybody's mind.
I think that it's, it's worthwhile also saying that it's like a perfect storm in a negative sense, in that, you know, nuclear has been unpopular for historical reasons. You know, thinking about the atomic bombs of the Second World War and the fear of nuclear power plants and so forth, although the statistics of that fear is not proven to be true, but anyway, they've been unpopular for for decades and decades, and when Fukushima happened, most notably Germany and France, now sort of Germany and Sweden decided to take out nuclear capacity and and close nuclear power plants and build a system without them and and the key short term solution to that was to. And particularly for German sake. But there are countries like Italy and Hungary and so forth. There are maybe even more dependent on Russian gas than than Germany. But, but anyway, the Germans would full willing made themselves dependent on Russia and with the theory that, you know, trade is good for everyone and creates peace, which was kind of like has been the thinking in Europe since the Second World War. I think big caveat to that, if all parties agree that that's the principle, it's a good thing, but it's clearly been manipulated by the Russians and put Europe in a very bad situation. So that's one important part of this puzzle, and for the perfect storm this year, 60% France is a proponent of nuclear power, and is investing heavily on it, in it, and has probably the most intense industry as certainly in Europe when it comes to nuclear, 60% of the French capacity is out for maintenance,
out like out, close down,
wow, and 80% of their energy come from nuclear. No so
France can look at the statistics here. France has probably about 30% of energy consumption from nuclear, and probably then about 50% of
the electricity, or whatever.
These are rough figures, but that's the largest the country with the largest dependency on nuclear is France, and 60% of the capacity is out because over the last few years before, they found that there is a corrosion problem with pipes, which is a dangerous situation, but yeah, the timing of taking out the capacity for maintenance purposes turns out to be very
bad. Yeah, so I may be remembering it incorrectly. I remember reading somewhere France is like 75 to 80% comes from nuclear, and there are nuclear plants are are at the German border, yeah, and that's so how much do you think this may be? You know, I'm getting into politics, but I find it interesting. Isn't shorter Gerhard, Schroeder, one of the former German they call them Chancellor, not Prime minister.
Yes, yeah. So they He's on the board of Gazprom.
So you think that might have had something to do with Germany going in that direction?
Yeah, so, so, I mean, there are a multitude of different components here, right? And, and I think, to be fair, Germany has done this, sort of partially by goodwill and partially with like good intentions for everything. But I also think Germany has been manipulated clearly in this. And if there's sort of been bad actors in in Germany, or just naivety, it's kind of but, but the Russian connections are deeply integrated into various key stakeholders in German government.
Yeah, yeah. It's
I can spend hours just talking about politics of this, but I think we should move to the grid works. The one thing I want to mention which I vividly remember. I, you know, I forget easily, but
I remember, you know, I've
been reading the economist for a long time regularly. So I read in 2003 or four Denmark
had the highest
wind energy generation as percentage of energy generated or no consumed, like of all the energy they consumed, 5% came from wind, which was generated in Denmark, and that was highest in the world at the time, even higher than
Holland.
And I was so fascinated that. Drove me not drove me like I went to Denmark just to see the windmills. Like, how does that work? So that was first time I went to Denmark because I read that story and I wanted to see it. And now 5% sounds like nothing, and it's not even 20 years
the chart I'm looking at now. Which is like the energy mix per country that includes generating electricity, transport and heating. I'm not sure if it includes industrial consumption, but Denmark's wind contribution to the energy mix is north of 20% so in terms of electricity, probably is then, like in the 30 to 40% range, yeah. And suddenly, or obviously enough, they have no hydro because they have no altitude differences in
that country. Yep, yeah,
okay, let's go to the grid. Both you and I are electrical engineers, and you might have been a good one, or you may remember more it's and both of us are not in that field, per se. You are venture capitalist. You're in the money world now, and I'm in the tech world.
Well, I have a, you know, I am actually posh owner of a small scale hydroelectric power plant.
Oh yes, that's yes,
thanks. So reminding that Arnie, yeah, tell us what that is. You are actually generating your own electricity and selling it. You're an entrepreneur too, not just a VC, absolutely.
Yeah. So we've built a hydroelectric power plant with neighbors. So 26 people just getting together and have rights to river and built a power plant that has an installed capacity of 5.4 megawatts, and produce about 15 gigawatt hours per year. So whenever there's no melts or it rains, it produces electricity, and it's on a 4.2 kilometer long pipeline with about 375 meter altitude difference between like, the entry point to the pipe and to the turbine.
Wow. And
you can actually like, who built it? They contracted with somebody, their company, who can do, like, build a turbine and like,
Yeah, we had, like,
Project responsible project manager that we hired to manage subcontractors, and a bunch of subcontractors built it so both subcontractors supplying components, like piping and turbines and generators and, you know, the equipment to connect it to the grid, as well as, like contractors building the, you know, the call it a dam, but it's not really a dam, because it can't store any water. It just the way of getting the flow correct. And then, you know, building the pipeline, and then building, you know, the house where the turbine generator and everything, where the actual production happens, and the connection to the greatest,
wow. And it's like you did it because you thought it would be a good business.
It was obviously a good business. Calculation showed so, so therefore it was about getting a license, and, you know, going through with getting it financed and getting it out,
and it's working. Well, you are making money. And of course, now it's got to be worth.
Yeah, funnily enough, it's in the wrong part of the country relative to both bottlenecks. It's not as profitable as you would think at this time, but, but it's been in operation for nine years, and it's, it's definitely a profitable project.
That's like, very powerful statement. Like, when you go to parties, just introduce yourself. I own a power plant. Like, I think that's better intro than I'm a VC.
Depends on which party you're in, and
not only power plant. I own an environmentally friendly power plant. Absolutely. Yeah, that's great. Thank you for reminding
I did meet the CEO of which is his largest power producer in Norway once and when I got introduced to him, I said I was one of his competitors. I. Yeah,
did he laugh?
No, I didn't say travel. All of you
people, who are, you know, let's say, don't know how it works. Let's talk about how the grid works. So what is the grid?
So the grid is a set of power lines that connect the sources of energy, the generation where energy is generated, to the consumers of energy, which are homes and businesses and and so forth. So it's just and of course, there are the lines. There are also transformers on the way here, yeah. And you know, there are different parts of it, like there are the long distance, high capacity lines, which are transmission lines that sort of move energy, longish distances from, you know, if there are large sources of generation to a large cluster of consumers, and then there's sort of the distribution part of the network, which, you know, gets it the last mile, which is kind of what we call it in telco right to to the individual consumers around the
world, essentially, yeah.
But there is, you know, how I see it, there is the generation of energy, there is transmission that's traveling long distance, and there's distribution that's connecting the last mile. Let's say these are the three parts of the grid,
yeah, and there's also consumption, oh, yes,
yes, otherwise you
will be very hot somewhere, yeah.
These are the four parts so in Europe or in Norway, which ones are regulated and which ones are deregulated, or market based of these. Well, the fourth part consumption is, you know, let's say the same people are consuming energy. But actually that could be also regulator, deregulated, depending Do you have a choice or not? So what? How is it in Europe and in Norway specifically, which parts is controlled by the government and which parts are market based?
Yeah, so
it's a little bit of a complex situation, and to be frank, it's different from country to country, but Europe has gone quite a long way in deregulation. But deregulation doesn't actually mean that it's not regulated. It just means that it's not when it's deregulated, it's market operated within constraints of the regulation so, so like, if you're an operator of a distribution grid, for example, you're not free to do whatever you want. There are still rules and regulations about what you're allowed to do, but within those constraints, you could be free to operate your business. And so if we take, like a normal Northern European situation, the distribution of electricity in the sense that you sell the energy or or electricity to end users, is very market oriented, and it's very competitive. So, for example, I as a consumer, and also I can, regardless of the physical connection of the grid, I can buy my energy from anyone. Like,
how many choices do you have when you say anyone hundreds, hundreds,
hundreds, no way, yeah.
So money like that doesn't make any sense. There is not much differentiation. Like, how do these people make money? It's a commodity.
The energy itself is a commodity. Yeah, so, but I have to buy my grid connection from whoever owns the grid, right So, and I could buy my electricity from the guy from from the company that owns the grid, and, you know, get one integrated billing. Or I could, I could buy my energy from someone else and get a bill from the grid company or, or if I buy energy for somebody else, they might Bumble the the billing of the of the grid Park, and I don't, don't see the grid company. Specifically the grid. You know, it's kind of like, think of it as market, where you have, like, a railroad market, right? That's theory, like, you can have many train operators on one set of of Rails you buy, you know, the tickets to the train from any train operator, but the different train operators generally operate on the same rails. It doesn't make sense to have many rails going in parallel, right? And that's kind of how the grid is, right? You don't want to have, like, different lines going into the same building because the neighbor wants to buy energy from somebody else, right? So, so that's why they sort of decoupled the physical layer and and the energy itself. And that's a pretty normal European situation, and, and, and the sourcing of the energy
is pretty
decoupled from the operations of the of the grid itself, yeah, but to be, but to be the grid operator. So in the original situation, the transmission lines, ie the long distance, high capacity, is run by one company, and that's a government operated one, whereas the distribution lines, so the one that connects from a big,
sort of, what's it called, again, a place where, sort of the, you know, it's, it's going from a high, high voltage to a lower voltage system and out to the various households and so forth that like the last man part, yes, it's a number of companies, and they're they're local, and they're regulated, but there's a lot of change for Their consolidated and and so forth. But so that's less regulated. It's still regulated.
Choices you are you have are the last the last mile part.
Well, I don't actually have a choice as to who
has the
the physical line into my house. That's typically a local monopoly, but it's kind of like if you live in Palo Alto, right? And you want to have fiber connectivity, then most of the buildings have Comcast simply because they've done the piping, yeah. But if that was truly deregulated, you could, you could have bought the internet service on that, or the TV channels from somebody else, yeah, but, but that's in in the US for fiber. That's Bumble but if you have that no analogy to electricity. You know, there's somebody who owns the the wires into your home. You have to deal with them simply because they maintain the wiring. But whoever provides them energy on top of that, you can
choose. That's what I mean. Like you have the 100 of choices you have are the people operating on top of the last my line. Yeah, there. Lot of people are doing that, yep. Okay, and so let me make sure I got it so generation, anybody can generate and sell to the grid, or the whatever the entity is, that's, that's government.
It's irregulated. If you start generating electricity, the grid has to take it,
yeah, there are some exceptions to that.
I mean, if, if you were to start. I mean, in Norway, you wouldn't be allowed to start a nuclear power plant, but if it's some sort of big generation facility above a certain capacity, then there's no longer an obligation to take it, and you either have to place it in an area where there is capacity for it, or you have to build infrastructure connecting
it. Yeah. So basically, anybody can generate it up to a certain limit and connect it to the grid. So like your hydroelectric plant, you so it's kind of, let's say market. It's, you're right. It's not as straightforward. You they have to agree to take it, but then you can sell it at a rate mutually agreed upon.
Yeah, so the size of the power plant that I have the grid has to take on, and that's why it's regulated. To some extent. It's it's a deregulated market in the sense that anyone can do it if they just have. Of the but it's regulated, in sense that the grid operators have to take it, yeah, yeah, I see. But when,
how long are the rates locked, so they have to take it, but at what rate?
Well, the rates are regulated,
but for how long, or they can change anytime, like, when,
no, no, that's, that's the government regulation, or it's not a government regulation, but it's essentially a, it's calculated on a quarterly, quarterly basis, what you're allowed to charge you for that based on sort of a cost profiling and so forth. So the so the network operations itself
is, is
regulated in the sense that you're not it's not a free pricing mechanism of physical asset simply because there are lots of local monopolies, and it's not possible to make a a full competitive situation in terms of operating grid, whereas when it comes to energy, you know, if you Have 100 players in the market who can buy from me or other power plants and can sell to consumer and businesses, that's a real market because it operates, you know, or essentially separated from the from the physical grid.
Yeah, I understand that part I'm trying to get to, the whole system beginning from the generation. So generation, anybody can generate within the confines of government regulation. And then the grid entity, the transmission is run by government. It's they run these big, you know, long pipes at high voltage, and then the last mile distribution is generally a monopoly that has the line. But on top of that, it's completely deregulated, meaning anybody can become the billing company, yeah. And so that's how it works in Norway. So when I am, let's say you and I start a company, RNA Chander, Nordic Valley electricity. Do we? Does everybody buy the electricity at the same price? How do we buy it? Because we are buying it from somebody to sell it to consumer. Like, how does that pricing work? And that, or the, is there open market? What? How did they work? Yeah. So
there's a company called norpool, which is started as an emerging company, but they operate electricity market in Sweden and Denmark and Baltics and a number of, I think you can buy in other regions as well. And they have both spot prices. So, you know, sets prices hour by hour and day by day. And you know, some forward prices, and that's a clearinghouse for setting the market. And so, for example, we generally sell at spot price from our power plant, and I also as a consumer, have decided that I want the company I buy from, I buy at spot price, and then they charge me $4 a month
for billing me.
So I am transparent on both sides and just buying at the market price, but
sophisticated, like, how many consumers you think would go check the spot price and okay, at which varies can vary by hour or day. So you do that every day.
I don't check it every day, but it's priced every day, and the most popular new energy. So as a consumer, I buy my electricity from a rather successful Norwegian startup called tibber, t, I, D, B, E, R, okay, and they have an app, and it shows me the price at any point. It shows me the price per over the day. And essentially, you can say, Oh, I better put on the dishwasher at two o'clock because the energy is cheap then. And I would say, I think they have about between five and 10% of the Nutri market that has real time information on energy prices on their phone.
You're not making the buying decision every day or hour. You are basically saying, buy whatever the spot price is. Yeah.
So their subscription, which is the one I have, they charge you $4 a month for being a subscriber. They sell it at the spot price of the market, and then they tell you what the spot price is, so you can adjust your consumption to price, yeah. And
that goes how long? Like? They tell you the price for next 24 hours, or next hour? What? Yeah, they
tell you the next 24 hours, typically, and there's a price per for those 24 hours, because the market isn't set that long in advance. Any. Right? Yeah, but, but, you know, if I could as as a generating company, I can go to any energy company and say, like, you have subscribers that want to fix their price for the next month. What do you want to bid me for my energy that I generate next month to sell to your subscribers and and you know, that might be one of the other 100 companies out there, right? And exactly I might be, you know, willing to pay premium as a consumer, but knowing what my energy price is, so I could go to different energy expire and say, I want to buy a fixed price for next year. And so there's a market. There's truly a clearing market here, right?
Yeah, I see. So let me repeat this to make sure I got it. So the new company, we are starting RNA Chander, Nordic Valley electricity. We can go directly to RNAs hydroelectric power plant, and say, I want to buy from you, and, you know, for next one year, and I'll pay you this much per kilowatt hour, yeah, and I can do whatever I want. And there's somebody in the middle the clearing house that you gotta pay who, you know, routes or does the clearing of this transaction,
where you can go via the Clearinghouse, you can go outside of the Clearinghouse. So part of the market is sold in the Clearinghouse, and some of it is sold directly, where you have instead of using the market, you sell Isa, if I'm our generating company, Chandra and arnos, oh, no, sorry, my power plant decides to sell to Arna and Chandra at a fixed price. Arn and Chandra decides to buy it at a fixed price and then repackage it and sell it to consumers at some other thing. And it could be back to back, or we could speculate and try to make a profit on that. Yeah, but, but because we're like Arlen Chandler's energy distribution company, we're a middle man. We don't use, we don't actually use the Clearinghouse. So you can do anything the energy trade itself is sort of independent of the grid. Yeah,
okay, but then when you're the electricity, let's say RNA Chandra energy is selling it now from RNAs hydroelectric plant, and we made a side deal. We are paying you X dollars per kilowatt hour, and we are selling at x plus 10%
and in that we are paying,
or somebody's paying the ground for use of the transmission line. Well, how that charge? Like, is that per kilowatt like, how do you pay?
Yeah, that's
as an energy generator. I get a bill from the grid company every month, and that's based on how much production I've had, and based on given regulated rates, based on cost of operating grid and and the same as a consumer. But the consumer side of is generally easier, because in on the consumer side of it, historically is it's been a price per kilowatt hour consumed, but now they're changing that to now I'm taking a very Norwegian approach to this, but I there are variants of this. I think we're always one of the most deregulated markets in this sense. But it's it's similar to what the rest of Europe is going and Europe is going in this direction. So say today I'm paying for grid usage per kilowatt hour, flat fixed rate. But next year, or I was actually supposed to do this year. The idea was that there was going to be a variable component to consumption, but there was also going to be a semi fixed, semi fixed price for use of grid, where the monthly rate was based on my peak consumption of the whole month. And the reason for that sort of semi fixed monthly rate was to take down peak demand on the grid.
And the reason for that is that
now it's solar and EVS and and stuff. The the the network gets denser. There are more generating points, and there are also more heavy consumption points in the grid, and and that increases the the and. The the dynamic load in in in the grid, and that's harder to manage from a grid operator perspective. And if that dynamic load increases the peak load of the overall grid, you have to invest much, much more in grid, fiscal grid, and therefore having an incentive scheme where you sort of keep the peak demand down on each consumption point is the value in itself, because it it reduces the need to over invest in the grid.
Yeah, it also, what I learned recently is there's this concept of peaker plant where, you know, grid doesn't have any storage, so supply and demand always has to balance. So when the demand increases, then they have to get this immediate supply which comes from like a diesel or gas power plant, which you can turn on right away, but it's not good for the environment, and you pay a lot of money, so that's why the utilities want to avoid the peaks to Turning that thing on.
So this is mainly true,
and historically completely true. I think the way that it's the direction it's going, right, there are homes that sort of have battery packs and this sort of thing. Yeah, it's a very, very small fraction of the energy consumption in the world, but, but there is an A an idea also, now that you have EVs that may be connected to the grid, that you can use them as buffers
if you can orchestrate it.
Yeah. Say more like, how does it work?
Yeah. So say,
demand. Drops and you're over producing electricity, then you can offer EV EVs, EV owners with a smart app to charge cheaper, right? So, if the wind blows, you can, you know you, you and wind energy is cheap. You can offer lower prices for for EVs, or, then, if, if, opposite way, if, if you know, demand spikes and you don't have elasticity on the generation side, you can offer EV, I mean, anyone with storage, but in theory, the biggest storage to fleet of EVs out there owners EV to put energy back in the grid after your car battery, and therefore take down the elasticity of of the generations, the traditional generation side of things. But of course, this requires the very dynamic grid, and it requires orchestration that that isn't there end to end today.
Okay,
so let me make sure I got it conceptually. The idea is, when we have lot of electricity, and you know, you don't want to waste it, so you basically offer it for cheap, for EVs, because they can store it, they have battery. And then when
this is actually kind of done today, that if there's overproduction from renewable sources, the price drops in the market, yeah, yeah. So that part is actually functionable somewhat today.
I think where what I understood from what you said, the idea is, okay, they charge their battery in the car when it's cheap, yeah, expensive. They can sell it back to the grid and make money from that.
Yes, and therefore avoid having to turn on new power plants or new power plants or whatnot, right?
I see, so instead of turning on a peaker plan, you just turn on the EV that are plugged in at that specific moment in
time. Yep. Okay, is you, there's
that much power you can get from EVs and so many people can sign up. I mean, have signed
up today, a this is not functional. And the it
that's a vision. It's a vision.
But you know, if in in in Norway, now, 90% of the car sold last year was an EV, you know? So I think you'll get there at some point. But there are multiple other other ways of of doing the same thing, right? So the biggest battery for electricity you have. Are dams for hydroelectric power plants. That's just a mega battery, right? And so in Switzerland, they have opened up a power plant now that has to pump, right? So when electricity is cheap, you pump the water back up the pipe, and then sort of the water at the top. And then when electricity is expensive, you you pour it out, right? And that's, that's a mega version of the same thing, right? That you operate in a hydroelectric power plant both ways in the pipe. Yeah, yeah. I
see. What do you think of using the refrigerator that batteries. So when it's cheap, you just cool it more. When it's expensive, you turn it up, because there's a curve at which the temperature declines. I think you know, in
theory that works well, how well and efficient relative to other alternatives. I haven't done the calculations on it. I'm probably not the right one to do those calculations. But in theory, it's, it's a sound idea, assuming you operate within the right ranges of temperatures in the refrigeration systems. Yeah, yeah, you there are regulations around that, you know, for food,
yeah, yeah. How this is, I should know this, but I, as I said, I don't remember my double E days. What? How like, physically, when i Let's go back to the company we created, RNA and Chander energy Valley Nordic energy. We buy it from RNAs hydroelectric grid. How does the routing work. Like, how do you now send the electricity to me so I can sell it to the you know, your house? Like, how does the electricity routing work after the you said it the the financial market for energy operates separately, but somebody has to route and send the electricity to that point.
It, it doesn't work that way to To be frank, because, I mean, whatever. So, so the way that it works, you know, the inputs and outputs, right? Yeah. So, so, you know, say on the generation part, right? I know who I'm selling to, and, and they have to pay me for whatever I put into the grid, because, and, and if I'm not selling specifically to somebody, then, then I'm selling to the market clearing house, right? And, and likewise, and as the sort of the small scale producer I am, I'm not the elasticity of the market, right? I'm not the one that, you know, turns it up or down. I just sell whatever I have, right? And likewise, as a consumer, you know, the grid knows who my supplier is. So you can't have two suppliers at the same time. You have to, you know, declare to the network who I'm buying from, right? So, so then it becomes like, that's why there's a clearinghouse, right? If, if my, you know, our, our company that sort of buys and sells. We're the market maker here, one of the suppliers, yeah, you know, we know how much our customers have consumed, and we know how much we have bought from generators, if there's a if there's a difference between that, we know, you know, the volume of electricity and and time period of consumption, and then we simply have to pay the market maker and market clearing For whatever is the difference here.
Okay, so the
So technically, when I'm stuff directly from you or not RNA Chander energy buys from RNAs hydroelectric company, I may not be getting the electricity the RNAs Electric Company generated, per se, because to the grid, and you're sending, you know, whatever, X kilowatt hour. And then that's the pool that's in the clearing house. And then they, it's okay, then they are the ones doing quote, unquote routing, send this one at this price to this person, and send this one at this price to this person. So I'm getting what you generated. I'm getting something it may have come from something completely different.
Exactly. It's not an end to end. Electron here. It's, it's kind of like, you know. If I get $1 it might not be the same dollar that you put in the bank, right? Yeah, okay, yeah.
So I want to talk so much, but it's so interesting. So why? Like, I would think this would like heavy machine learning usage model, like you can use do so much in prediction usage, but I don't hear anything machine learning applied to this, or AI like or maybe because I'm not in that field, all that is happening, and I just don't know. Do you know why ML is not being used here, or maybe it is. If it is, tell us, well,
it is, to some extent, but, but you have to say that. I mean, it's used a lot for the trading purposes. And I think the issue with like the actual consumption is that you don't have access to to
both closing the loop practically and also not all the data real time.
But I think this, is an area of
activity that will grow over time. But, and it's also like, just to be frank, like, PG and E don't operate this way. They're just not very advanced,
yeah, if, yeah, if I have to, you know, let's say intuitively it basically, the data is not labeled. You don't know. You know how much of this we predicted, how much we write, we were right, and how much, like this person we thought will consume this much, they actually consume that much. All that labeling may be in process, but nothing probably doesn't exist.
Some of it does exist.
Okay, it in, like worldwide, in Norway, in the US. Mean they do have, I know this concept of demand response in the US, where I don't know if, in the US, everywhere in California, you have it where, basically, they look at, you know, the electricity you consumed last 10 days only for businesses, and they say, Okay, if you can curtail or consume less tomorrow between this time and this time, then we'll give you money. So there's some ml or maybe not ml statistics are there that they can look at the past data and say, Okay, this is their baseline. If they consume less, we'll pay you, because tomorrow the load will be higher. We predict it'll be high. But to me, that's more stats than ml. Is it the machine constantly learning and predicting and increasing the predictability, but by maybe getting into weeds, no,
but I mean, there's a lot of activity going on on that front. Okay, that's
good to hear. I'm glad it is okay. I think we this may be a long episode, but I'll try to get to the last section. But before before that, I have one more question. When you get your bill in Norway, do you get to see what percentage of electricity came from renewable sources and what came from, you know, coal or bad stuff.
It depends, depends on who you buy from
in the the
the one that I'm buying from, it's all renewable. They only buy renewable,
and you're and it costs the same, yep,
of course, then you would do renewable. I mean, it's, of course, meaning, yes, you are a good guy.
Now, there's, there's, there's, like, they do the spot price, but it's bundled in the $4 per month.
Yeah, yeah.
It's like, just trying this out. Makes me want to move to Oslo. Let's see how that works. You can get to see what price you're what is the spot price of renewable energy that day? Okay, so let's so we can't, I think we mixed kind of grid and pricing, which is fine. It was very interesting for me to learn. Now let's get to the final part, opportunities for startups. So let's say we are actually doing a startup. Where do you see opportunity? Where can we, you know, solve the problem that I. Helps customers and make such
money. So there's, I think there's an opportunity along the whole way, and it's more a question of which ones are big enough and scalable, and you can do, like, right now, and, and you would, I mean, I would say, like, take a top down approach and find out. What are the big Where's consumer comes or consumption pick, and how can you do something about it? So, so, so, for example,
if you look at
household, households in the EU, 63% of the energy consumption by households is heating,
heating, overall in winter.
This is the average overall year statistic, as far as I know. And 50% and 15% is the water heating
like 50% of the 63%
No, 63 plus 1501.
Five, okay, 15, yeah, 15,
so the sum of 17
and and water heating is then 78% of your energy consumption, wow. And I assume this the you know, this means that very few people have EVs, for example, that or that doesn't come under the household under transport himself. That means that, to me, these are the two you have to attack, because and, and so I think, like, how can, how can, what can you do in in Europe, if you're going after household. Well, you either, I think there are two obvious things, you can probably cycle things better, right? You don't need to heat your whole house if you're not at home, right? So, so just having like this first layer is just having smarter ways controlling your heating cycles, right? And that's probably the cheapest solution too, but that only will take out so much of it, right? If you actually want to go after this, you just have to insulate homes better, and you need to go from direct heating to heat pump based systems.
Okay, say more. What do you mean by that?
Well, if your home leaks heat, you know that's double glazing your windows, or more insulation in your walls, like these things are not cheap to put in, yeah, but, but they will make a big difference. Uh, alternatively, the way that a lot of homes are heated in Norway, you have like panel or it depends on your home, but you have like panel ovens, which is like a big resistor. You put electricity through the resistor gets hot, and it heats your home. That's much less effective than putting the electricity into heat pumps that moves heat, takes heat out of the outside and puts it into your home, like a refrigeration right? It's a it's an AC operated in
reverse, yeah?
Japan, like, did that, like, it's a regulation, or they saved, reduced the energy consumption by huge percent, just by making people use heat pumps
Exactly. And I mean, there are a number of homes that have it, but there are also number of homes that don't have it, right?
So, so, so to me,
I mean, there, there are services in the market now where, essentially, like, you go into website, you put in, you know your address, and it pulls out data, finds out where you live, and it kind of does that analysis, and it says, Well, if you did this, insulate your home or change the double glazing, this is the effect you have. Would you like to book somebody to come and put in triple place windows or
their websites like that, sorry, in the US, I can go to website and do this.
I don't know what there is in the US, but I would assume that there's the same thing in the US.
You see the like you have, you know, an example on top of it, I want to go check them out online.
Yeah, there's one called for example. How do you spell that? V, I, L, D, A, okay, sure. Hmm. And they would say, right, okay, you know, I think, I think this can be more or less automated, right, depending on how good integration you have with data systems of properties and whatnot, right? And analyzing what sort of savings you have and these sorts of things. But to me, it seems like insulating homes better and having more efficient ways of heating is obviously the biggest, biggest lever you have because of the size of that
bulk, right?
And the thing is that I think, like in Northern Europe, because you have cold winters, it's probably in better shape. But if you go down in further south, in in Europe, like homes are just terrible, from like an installation perspective. And, of course, putting in insulation and triple basic is not a very high tech thing, but you can, you can probably do a lot of the processing around getting right things done very, you know, tech enabled right exactly like examples I talked about,
yeah, yeah. It's even like in my home, the AC,
I don't know where it gets the temperature, but in all the rooms, the temperature is different, and it goes on and off wherever the you know, thermostat is just the you know, zoning or distribution differently in different areas would help a lot. Yeah, yeah, yeah. Okay, so that's one opportunity reduce heating consumption by insulation or using heat pumps. What else? Well, also
by just regulating better, right? Like the first idea, that's
the cheap idea,
regulating better, meaning you
don't hate when you're on the home.
Yeah, yeah, okay, yeah.
You know smart. It is kind of like smart house, but not all that smart. It's just, you know, start,
let's say Not, not dumb house. Exactly, not dumb house.
Yeah, yeah,
okay, what else,
yeah,
I mean, I mean there's, I think there are, like, two ways of and this goes, like parallel from like, whatever thing you do, right? So generally, the way that you can do things is you can reduce loss, you can optimize operations. You can have better duty cycles. Or you can recycle,
recycle
well, so heat
so, for example, if you talk about industry, right, you have, like, a lot of wasted energy. And that's a, you know, industrial heat pumps, we'll do that the duty cycles and optimization is back to the thing you talked about refrigeration, right? You can move your duty cycles and you can optimize it for whatever pattern you're looking at, right?
And I think, like if you talk about
machine learning, I think all systems, whatever the systems are, is that a home? Is it a national process? Is it refrigeration? Whatever it is, I think, like everything you do today, sort of very sort of dumb building blocks that do basic functions, and all of them are, are pretty sub optimal in terms of system operation. And this is where I think like more measurements, more feedback loops, and then AI ML to sort of just optimize end to end operation is, is is in obvious technical direction of where things are going to Yeah, to reduce waste. Yeah, it's
the I think what you're saying is currently all the equipment that uses energy at home or in business, let's say electricity or gas. If they're discrete units, they don't talk to each other exactly. We take a systems view where we see how everything's working, and we have all the systems are not discrete, but talking to each other. We can orchestrate in a way that. The overall consumption goes down. Yeah, yeah. Isn't that like EMS? Is that energy management software?
Yeah, I think it probably is called different things in different ways. I talked to one, one startup they operate within, like optimization of processes in in chemical industries and so forth. And, you know, just end to end processes in the plant, simply by people not terming, turning off things, because they take time to start up again. And and there's just so much waste end to end in processes like this and and whether that's called energy management or just it's some, some sort of system optimization. And I think, I think all, all systems in life, whether you look at like energy or materials flow, or whatever, all of these things tend to be very sub optimal, because they're all building blocks. And that's whether it's a home industrial process or what, what not.
Yeah, it's,
it may be just, I think building blocks that are not interconnected exactly, so we have to connect them so we can orchestrate them.
Yeah, yeah.
This is so much fun. Arne, I think we love I want, I think our listeners always say we gotta make short episodes, but I just like them, so we make long ones, so we'll have
we don't listen to our listeners.
Well, you know, it's like Apple doesn't listen to customer feedback. They make what they think is the best for users. So we are doing but I want to talk more. Maybe we can do it offline, or do part two of this, because I'm fascinated with the opportunity that exists in that space. And it's because it's all industry. It's the things haven't changed so much now they're starting to change. I think the crisis we are facing may help accelerate the change, because now people will start thinking about these things.
So I say, I think if there's any silver lining to this energy price thing here is that people have to be aware of, you know, cost drives ingenuity and and and there is a lot to improve,
yeah, yeah, yeah.
There's a lot of opportunity to do not dumb things, exactly, yeah, maybe that's what we will title this episode. Not dumb things for energy, yep. Yeah. Thanks, Arne. I know it's late your time and it's Sunday. It was a lot of fun. I like this, you know, kind of we are Valley Nordic. So the idea of exchange from Nordic perspective and silicon perspective, that this is more what Silicon Valley can learn from Nordic countries. So thank you for sharing your insights.
Well, thank you. Yeah. So we'll see
you next week. Thanks everybody for not next week, I think in two weeks or three weeks now, we are kind of doing this bespoke episodes, but we'll see you in next let's say two to four weeks. How's that? Aren't it sounds good? Okay, see you. Bye, everyone. Bye, bye, bye.