ReSolve Riffs with Vlad Aldea & Ross Fortune on Arbing the Electricity Markets

In this episode, the ReSolve team is joined by Vlad Aldea and Ross Fortune from ATNV Energy LP for an insightful conversation exploring the intricacies of the electricity markets, and how their careers led to the creation of ATNV Energy.

During the episode, Vlad and Ross cover a wide range of topics related to electricity markets, including:

  • The similarities and key differences between electricity markets and other energy commodities like natural gas and oil
  • The importance of a strong foundation in understanding the physical grid, including generation, load, and transmission aspects
  • The concept of load hedging and its relevance in the electricity market
  • The role of Independent System Operators (ISOs) in managing regional grids in the United States
  • The significance of financial transmission rights (FTRs) and their role in the electricity market
  • The increasing impact of storage technologies like hydro storage, pumped storage, and batteries on the electricity market
  • The fungibility of electrons and the accounting abstractions used in electricity markets
  • The challenges and opportunities in analyzing and trading within the electricity market
  • The evolution of ATNV Energy and its focus on transmission analysis and financial trading in the electricity market
  • The importance of adaptability, risk management, and collaboration in the ever-changing landscape of electricity markets
  • The critical role of transmission in the electricity markets and its impact on the grid’s reliability and accounting

This episode is a must-listen for anyone interested in understanding the complex world of electricity markets, providing valuable insights and strategies to navigate this unique and rapidly evolving sector.

This is “ReSolve Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management Inc.

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Mike: 00:49

I was vibing. That all right. Welcome, everybody. Welcome. Thank you so much. Thank you. I’m pretty excited about this conversation, actually, before we start that, we always have to tell everybody that this isn’t investment advice of any kind. And if you’re going to get investment advice, don’t get it from four dudes on YouTube at 04:00 on a Friday. Probably, I don’t know, maybe it would be brilliant, maybe it’s not. But anyway, that’s our disclaimer at the beginning. Nothing we say is factual in any way, shape, or form.

So, getting back to being so excited about this, because we’ve got a couple of pretty awesome guests, Vlad Aldea and Ross Fortune, both from ATNV Energy LP. And we’re going to talk about electrons and how, in talking to you guys, I’ve realized what a miracle the distribution of electrons in such a broad and reliable way is, and the functioning of the market is so incredibly beautiful and robust. I can’t wait to dig into it with you guys. I don’t know if you’ve got some thoughts too, Adam, but I’m pretty jazzed about this conversation.

Adam: 01:55

We tried to brief on this over dinner, but the wine was too good. The food was too plain.

Mike: 02:02

We still did talk for 4 hours.

Adam: 02:05

That’s true. Yeah. I’m glad to be able to revisit this in a more sober state today. We rarely have two such handsome young fellows on the podcast.

Mike: 02:23

Yeah, look at that. I got to say that Vlad hair. The hair on the Vladster, it’s always perfect like that. It doesn’t matter what picture. It doesn’t matter. You catch him in the morning. You catch him in the evening. It’s just always, anyway…

Vlad: 02:38

That is game respecting game right there with that mustache filter, Mike.



Adam: 02:46

Okay. Yeah. Actually, I felt like Vlad. You had, well Ross, you weren’t there, so I’m going to assume that Vlad would have played point anyway. But Vlad, when we chatted, you actually had a really good kind of starting place for this conversation. I believe it kind of started with where you started in your career. And that kind of gives us a good idea of how, first of all, you started in the energy business and then the kind of roles that you took on, and then how you evolved to start ATNV Energy and then what you guys do.
So why don’t we go right back to the beginning? How did you get into this crazy business, and what did you do, and how did that evolve?

Vlad; 03:25

Yeah, absolutely. I’m happy to do the biography here, and also, not to speak for Ross, but our biographies are actually very similar. They overlapped, really, since the beginning, and so he can pick up and fill in his own details, but our paths kind of began in the same place. And so, as I’m going to touch on later repeatedly, electricity markets, be they financial, physical, or a mix thereof, the key thing that they have in common is that everything begins with the physical system. And so our careers began at an electric utility where we learned about the physical grid, the transmission aspect of it, the generation aspect.

For example, Ross was involved in doing analysis for merchant generation. And so, every electrical system has generation, it has load and it has transmission. Later on, our careers evolved to focus more on the transmission side. But the basis that we got working at this electric utility which was TransAlta in Calgary, Alberta, Canada, really prepared us for being able to fully understand the electric market bottom up, from the nitty gritty, from offer strategies for generators, for import and export patterns between the different regions in western North America, the whole lot of it. And we started basically as grunts, as junior analysts on the trading desk. And for both him and I, that was, if not the first serious job coming out of university, then the second serious job coming out of university.

And so we were quite green. And the experience there was very much like jumping into the deep end of the pool. It was very fast paced, very steep learning curve and very much self driven. You weren’t really handed any of the answers. You could absorb them if you were interested and you partook in the people that you sat next to, which, we’re a close knit group. And certainly everybody else had a very high level of competence and experience. And so I have only good things to say about where I began my career and TransAlta and that trading floor, it gave us such a strong basis later to be able to leverage those early skills and early learnings.

After that, things progressed. I had a brief stint at Direct Energy, that was a couple of years in Calgary as well. So that was similar thing – a merchant trading group that was focused on more the load side of things, as opposed to generation focused, which is where TransAlta excelled. And so at Direct Energy, I learned quite a bit more about the hedging aspect of electricity markets. And so that’s where load for example, tries to protect itself from both price volatility, as well as volume volatility, which is known as swing risk in that market. It has it in common with other commodities. And that’s what I want to emphasize here really. When I speak about some of these particular aspects of electricity, it really does have a lot in common with natural gas, with oil markets.

And so a lot of the concepts that we discuss really overlap in those commodities. For those listeners and you guys that have some understanding of these other energy commodities, electricity only differs in a few key ways and it has a lot in common.

And so after that we ended up reuniting as it were. We both ended up working at Mercuria Energy Trading in Houston. And so, Mercuria was one of the Swiss merchant houses and they opened this US operation and they had again, a very small tight knit power trading group. It also included natural gas, to an extent. And Ross and I worked there for another few years. And it was from there that I went to, number one, I began then the current focus which I still hold, which is of these elements of electricity that I mentioned briefly, which are generation, transmission and the load side.

I ended up focusing a lot on transmission analysis. And so these are basically the connecting pieces between all of the infrastructure, and what I learned there, where, unlike the, call it the kind of captive business that existed, the natural business which existed either on the load side or on the generation side, at our previous places of work at Mercuria, we didn’t have any of these things to rely on at all. There was no generation fleet to dispatch, there was no load to hedge or to offer into the electricity market. There was just basically yourself, a computer, your mates and your understanding of the market.

And so there we traded only financially. And this financial aspect is something which is really key. It exists in several different ways. In the traditional way, it’s exactly like the natural gas and oil markets. You have swaps and futures and these live traded instruments which trade on ICE, the Intercontinental Exchange. And that’s where all of financial power trading takes place between counterparties.

In addition to that, I started focusing specifically on the financial trading that exists within the organized electric markets themselves, which are known as ISOs, or Independent System Operators. And these are the geographic entities, these government entities that run the regional grids in the United States. Sometimes they encompass only one state, such as Texas or California or New York. Other times they encompass many states such as PJM, the largest market which encompasses the eastern seaboard or MYSO, which is the entire Midwest, et cetera.

And so it’s those organizations which are really critical. At this present point of our careers, we mostly focus our efforts and our energies on those markets. And so they provide financial products to trade as well, of which I’ll get into what those are. The most well known one is known as FTRs. These are financial transmission rights, and these are basically point to point obligations that you acquire in an auction process, where you basically bid on the right to own the congestion revenues between two points, and the ISO auctions these off in order to generate surplus revenues for the transmission owners, which are also part of the market. Those three critical things that I mentioned. And so at Mercuria, I ended up specializing in this product. I really liked it. I thought it was a very interesting niche product that put you in a lot more control. It allowed you to be a lot more analytical and deliberate in the type of trading risk that you took, and I felt very comfortable, allocating proprietary capital to this.

I felt so comfortable, in fact, that after a couple of years, after two and a half years, I left my employment there, and I started at ATNV Energy on a bit of a wing and a prayer, literally by myself. And so that was the first and earliest bootstrapping phase of this company, which we’ve continued now for almost a decade, for nine years, it’ll be this year. And so this bootstrapping phase was basically me raising a small amount of crazy outside capital. People that were convinced to join. I had no independent track record, you have to understand, right? It was just basically, I’m leaving my previous employment and would you like to take a chance on me being able to continue some of what I’ve been doing over there? And some people said yes, and I certainly put all of my money that I had into this venture. I think Ross did the same thing.

Ross: 11:07

Pretty much.

Vlad: 11:10

And so we ended up this bootstrapping process, continued shortly after the following year, at about a year and a half into it, as things were going well, things were under control. I didn’t screw anything up at the beginning. And so then I recruited him, and we reunited once again under the umbrella of where we still work today at ATNV Energy LP.

And so I’ll take a breather there because I went on quite a monologue.

Adam: 11:39

Just to give you a breath. Yeah, take a breather. There’s a lot to digest there as well. I mean, I think people have a decent understanding, correct me if I’m wrong, maybe I’m wrong, but I think people have a pretty good understanding of what electricity generation is, what electricity transmission is. What’s load.

Adam: 12:04

And what do you mean when you talk about load hedging, just maybe to close the loop.

Vlad: 12:08

Right. I threw that one in there unexpectedly. So load is the exact balancing equation to, the other side of the equation, to generation. Electricity is being generated by power plants, be they thermal, renewable, et cetera, et cetera. And all of those electrons, all of that energy is consumed by various points of load. And so load is the demand side of the electricity equation. We are all load.

Adam: 12:33

I see. I got you. Okay, perfect. So you mentioned that electricity is in many ways like natural gas or crude oil, et cetera, commodities, but there are a few key differences. What are those major differences?

Vlad: 12:57

Yeah. So first and foremost, it is not storable. It’s not storable in any meaningful way. There have always been exceptions to this. We have hydro storage, we have pumped storage. There’s reservoirs that allow you to basically store some of that potential energy. But as a percentage of total consumption, they’ve always represented single digit percentages, not enough to really make it comparable to something like natural gas.

More recently, batteries have entered into the mix and so the potential for storage becoming a big thing in electricity, certainly now it’s looking more real than before. Batteries, of course, are different than reservoirs in the sense that they’re not long-term storage, they’re very short-term storage. We’re talking hours, not days or months. And so, once again, contrasting that to something like natural gas where you basically pump things into caverns and you can withdraw it years later, no, electricity will likely never have that type of storability. But we are getting more technologies and more storage than we’ve ever had before. And so that’s the primary difference.

The other difference and this, you can, I don’t know if it’s such a big difference, in natural gas, without getting too much into the nitty gritty of things, reactive power and electrons and all these things, like when a generator puts energy onto the grid, it kind of just goes everywhere. And so this idea of point to point, these are accounting abstractions. And the same thing happens in oil, for example. Just because you take a certain number of barrels out at the other end of the pipe, it doesn’t mean that those were your barrels that you injected at the source point. They’re just some barrels. They’re fungible. And electrons, in that sense, are just as fungible. And the rest on top of it is just accounting.


Transmission – the Critical Thing


Mike: 15:00

You also mentioned transmission rights and things like that and the reasons why they would auction them off and things like that.

Vlad: 15:05

Of course. Yeah. And so that one we can spend most of our time talking about, because that’s what Ross and I really focus on. And so going back to that transmission element of what makes up the electricity markets in the grid, transmission is really a critical thing, right. If you’re generating it at point A and consuming it at point B, how does it get there? And so transmission is by far the most critical element, really.

And going back to how the markets are organized and the abstractions, like I mentioned, there’s a lot of accounting that kind of sits on top of everything to make things make sense, but underneath that, there’s a physical logic to it all. So transmission lines are usually owned either by a mix of private and public entities, and they’re under the control of the system operator, these nonprofit, state level organizations that dispatch the grid.
They’re responsible first and foremost for reliability, but they also serve this really important function of essentially doing all of the…

Adam: 16:09

Ross, over to you.

Ross: 16:12

Yeah, they do all the accounting, I think, is where Vlad was going to go with that. So they’re balancing it out between all the counterparties. Yeah. So I’m not sure entirely which way Vlad was going to go with that, but I assume that’s what he was going to do, is they balance out all the flow of the molecules on the grid.

So you have all the stakeholders in the grid and you have the physical flow and they’re the ones that balance it out. That’s the important function that they serve.

Adam: 16:40

Got you, Vlad. Thanks for giving Ross a chance to chime in, buddy.

Vlad: 16:48

He knows the story as well as I do.

Adam: 16:53

Yeah. The ISOs control the accounting on the grid, and one of their major instruments to do that is are these FTRs.

Vlad: 16:58

Yes. And so regarding transmission, so they do all the accounting, all the load, pays the ISO, and then the ISO pays all the generators, and then the transmission owners are paid as well. And going back to transmission and this idea that you have a certain amount of capacity across the transmission system, that capacity is physically rated. It’s like a pipeline. There’s a certain amount of bandwidth that it can accommodate.

And so they try to maximize the usage of the transmission system within its physical specifications. And this usage is both physical and financial accounting, let’s call it. And in that accounting sense, if there’s excess capacity that’s not being used, they devise the mechanism, which is an auction mechanism, in which this excess available capacity, call it, it could be in the tens of percentages, just to give you a sense for how much is left over, that otherwise would be wasted, it would not be used. And so they’ve devised this method, this financial instrument, of basically auctioning off the excess capacity to anyone interested to participate, including financial-only participants, call them FTR Traders, such as ourselves. And by that, they raise significant revenue that then goes to the transmission owners. And what we get in return, is we get something that for us has a positive expectation of generating revenue.

It doesn’t always work out that way. And so we can get into those details, but we certainly do all of the due diligence, apply all of the analysis that we’ve been honing for years, to try to acquire things at a good price, at a fair price in this auction mechanism, to then be able to hopefully in the future, recoup those costs and then some extra revenues on top.

Adam: 18:57

I think it would be helpful to maybe put this into context by offering an example. Is it possible for you to sort of give us an example of where there was an FTR auction or a series of them? I don’t know. You guys did some analysis. You determined that there was a great trade in one direction or the other, and how that thought process evolved, and then how the trade actually manifested.

Vlad: 19:27

Yes, that one is actually, that’s a very good one to ask to Ross, here. Not to put him on the spot, but we have some great examples of that in Texas, where in years past, there have been very uniquely identifiable patterns that he was able to identify and to trade as such.

Ross: 19:51

Yeah, ERCOT is the name for the Texas system. That’s the ISO name. And basically it covers most of Texas. And Texas is interesting because it’s a very isolated grid. It’s not interconnected to the other grids in the US. So, it’s a good example analysis because things that happen there tend to be very independent to Texas. You don’t have outside influences pushing them. And most of Texas is a weather driven event and then generation mix. And Texas is an interesting grid because it had one of the largest ramp -up in renewable power in the last 10 – 15 years out of any ISO.

So you always think oil pumping, natural gas, sort of that sort of thing in Texas, but it’s actually probably one of the most green grids we have in North America. And it’s a very, it’s a really cool grid to analyze from a power market. So why one of the more famous trades there, and so the auctions there, we can trade up to three years out, and those auctions occur every six months, and then you have a monthly auction, prompt month auction. So, yesterday was the close for, say, May 2023. So just completed that. And what you do is you have a lot more transmission outage data, bit more confidence in the weather, a bit more confidence in all the other elements going into the grid on the monthly data. So you’re probably going to be a bit more comfortable spending more money, pushing more chips in, on the prompt month auctions, than you would in the long term auctions, for example, depending on your trading approach.

So every company has a different style. There’s over, probably in the FTR space in ERCOT, there’s probably up to 125 – 150 participants now, I would say companies, individual entities, and so everyone has a different style and approach. Results are public in these markets, so you can see what everyone else is doing. That’s another unique feature of these markets. And so one of the trades I would say go back to, one of the most famous ones in ERCOT history, was the Panhandle trade, which was in far west Texas, northwest Texas.

There’s the Panhandle there, and they did a massive build out of wind in that region with very limited transmission build out at the same time. And it was a very appealing area from a geography/topology standpoint to install the wind, because it has some of the highest capacity factors for wind in the country. But if you’ve ever been to west Texas, there’s not a lot out there. So they didn’t build the transmission, they didn’t do anything to pair with it. So a famous constraint was called the Panhandle constraint, which basically made that region go negative, zero-to-negative pricing.

So the generators actually had to pay to put their electricity onto the grid. And the only reason that worked for the generators was that they were on various tax credits where they could actually produce electricity at a negative price, but receive positive revenue either through hedging or through government subsidies. So it’s a really cool play from a power standpoint if you’re trading the financials, because theoretically, it wouldn’t normally make sense for someone to pay to use your product, right? And so that was a really famous one. It went on for, it’s still occurring now in the market, but it’s been priced in. But I would say, I think we’re going back six or seven years now, probably was the first instances of it. And then it got really strong, probably for a good four or five years after that. It’s winding down now. There starting to, the physical support in the system is being built out. So it still pops, it rears its head. But that’s one of the most famous trades in Texas, one example.

Ross: 22:50

So prior to that event happening, you’d get a transmission queue. So you see all the projects that have been approved by ERCOT. So you look at the projects, you look at where they’re being installed, you say, wait a minute, there’s 4000 gigawatts of wind being installed in an area that only has 1500mw of transmission, for example.

That’s an extreme case, but that’s pretty much what happened. And you go, are they planning on installing any transmission? And then you look at the transmission queue and you say, they’re about five years out on doing anything about this. And then you go, okay, this seems like an opportunity. And so, yeah, I didn’t do enough volume of that trade. We wouldn’t be having this conversation if I did enough volume. But it was like one of those like, that was one of the that was one of the retirement trades that you really caught it.

Adam: 24:16

If you did well, we would have been speaking to you from your large retirement yacht.

Ross: 24:24

In the middle of it would be the yacht.

Mike: 24:28

Yeah, we’d be speaking to you in the Caribbean somewhere.

Ross: 24:33

Well, that trade was interesting too, because this goes with asset allocation and risk management. At the time, the company was in its infancy. So if I was at Mercuria, probably where we had hundreds of millions of dollars to draw from, just on the power desk alone, you probably would look at that trade and you’d say, okay, whatever. We’re going to commit tens of millions to this trade. At ATNV, we’re in our infancy, so there was a limited amount of capital and a limited percentage of capital from each book we were willing to commit to it, and we did extremely well for it. It was one of the foundational trades that helped the company grow. But you have to manage within the book that you’re given as well. That’s just one of the broader rules. Traders…

Mike: 25:16

I think that’s the old and bold traders. There’s old traders and there’s bold traders, but there’s not old bold traders. No. So you hit on a point that we chatted about that I thought was really interesting. And it’s this intersection of looking at the project development and some of the other things on maintenance I think you guys were talking about, too. Just sort of simple, maybe dig into that, because, again, I sort of remember this, but I thought this was a really interesting Arb that you’re looking at and saying, well, these things aren’t going to match, so we’re going to have a mismatch here, and so let’s go in and provide some capital for this mismatch.

Ross: 26:02

Yeah, you can call it arb. I think it’s just analysis. The thing with the market is it’s easy to get caught up, especially with some of the more, I can’t speak for other shops, but it’s what I’ve seen from more inexperienced traders in the market, is they’re very hung up on the digital aspect, the trading of the market itself. But behind everything in power trading, it’s very physical. It’s a physically driven – there is physical generators, and the storage component is the key component.

So imagine in an, I mean, it’s almost impossible to imagine, but imagine in oil or gas trading, there’s only instantaneous supply and demand on a pipeline. So imagine there’s an interruption at any stage in that. What does the price go? You’ve seen in isolated gas pipeline market,. what happened to Algonquin, or recently in California. What happens when you just slightly isolate a gas market? The prices go completely unhinged, and so in power, we have this volatility that is really hard to be modeled, and it’s all down to physical scarcity and instantaneous supply and demand. And so what we try to do is, there’s so many different ways to trade power markets.

So you can trade blocks, you can trade monthly products, you can trade six month annual stretches. So you have to figure out where the risk is, because some of the best opportunity is very short-term and these instantaneous pops in the market. So you’re looking at a seven gig wind drop in the ERCOT power market. So you’re just looking at, suddenly a cold front comes in, something happens and all of the renewable jet in the west Texas drops off the grid.

You are probably going to see a price event happen in the market in that case, depending on some of the other factors. You’re certainly probably going to see some congestion. So you have to figure out, you’re not going to trade that in a monthly CRR product. You’re going to trade that in a cash product.

Mike: 28:00

So would that also flow through to some of the natural gas stuff you’re talking about? So you see this renewable drop and now there’s going to be a heavy consumption somewhere else in some other transmission line.

Ross: 28:10

Absolutely. And so you always have to be aware of those components. Where is natural gas? Where is the shelf? Like where is the input? What is the next resource? Sorry, I guess in power, it’s what’s the last resource to be dispatched to meet the equilibrium of supply and demand. And so, if you think you’re on natural gas, then you have to figure out your various spark spreads, you have to figure out what natural gas prices are, all that sort of thing. So a year ago when natural gas prices were quite high, you just naturally had a blowout in volatility in the market, from the standpoint that now your input price of natural gas is so much higher, and that’s a multiplier to power. You know, your heat rates and power range from, you know, 5.5 to 15. So you’re multiplying the natural gas.

Mike: 28:54

Yeah. So dropping a lot. I love it. I love it. And I want to know what it is, too.

Ross: 29:03

So that’s your input price. So natural gas power plant, it’s basically the cost to produce the electricity. So it’s your natural gas price times the heat rate of the plant, the efficiency of the plant efficiency.

Vlad: 29:16

Call it your conversion ratio of fuel into electricity.

Ross: 29:21

Yeah. So, if it’s a ten heat rate and it’s $5 natural gas, it’s $50 a megawatt hour to produce your electricity. So if natural gas prices are $2 or natural gas prices are $8, you see the spread suddenly in the electricity prices really widens out. And then the same goes for coal, the same goes for nuclear, I guess is a little bit more base loaded. So natural gas would be, historically, the most important, significant thing for power markets, in terms of, because usually it’s the marginal unit, it’s the thing that sets the price in the market.

And then when you get into scarcity pricing, all bets are off. So you’re talking about a daily volatility, I can speak to ERCOT, recently, in winter storm Uri, we sat at $9,000 a megawatt hour for multiple days, which is why that was such a major event and a crisis.
The average price of power in the market is probably these days, around $25 a megawatt hour. But you’re sitting at $9,000. That’s pretty bad, right? This is really…

Mike: 30:30

You lost your house to heat it. Yeah.

Ross: 30:35

So this is the volatility in the market. I would say the average range of volatility, that’s the most extreme event we’ve ever seen in the market. But in summertime, ERCOT, it’s not uncommon to see $1000 to $5,000 prices, and going from low teens in the morning to triple digit, four digit prices in the afternoon. That’s not uncommon, hourly prices. And so you’re seeing this volatility in the market all the time. So not to move on to other things, but when you talk to crypto traders, or they’re all young, but crypto traders are like volatile market. I’m like, have you ever traded electricity before? This was crypto before crypto.

Ross: 31:15

The volatility in this market is so much more extreme and it’s on a daily basis, so you have to pick what volatility you think is going to happen and why. So fundamentals? What fundamentals are driving it? Are these short- term fundamentals? Are these long- term fundamentals? And then you have a number of products you can pair with that, and you match the best product with the volatility that you’re seeing.

So, Panhandle, for example, there was a cash trading opportunity when it first started coming in, but really, that was more of a long-term opportunity. That was a structural spread issue in the market that was going to exist for a number of years. And if you were there early enough, and the long-term auctions, trading it, and buying it for two years out at a very cheap price, you would have done extremely well. And just because it’s a structural issue, that was going to happen and it was unavoidable, and that was just adding up all the physical factors and then pairing it with the best product to trade.

Vlad: 32:17

On that point. It’s a very important distinction. I emphasized here the spread definition. And so Ross mentioned that we have a variety of different products at our disposal, including these purely financial, aka cash spot products that trade on ICE, similar to the way that you would trade near-term natural gas.

Futures, we have that available in power as well. And sometimes we do dabble in it. But our preference by far is to focus on a spread product. This idea that we feel much more strongly about the relationship between point A to B, than we do about the overall energy level in the market.

Ross: 32:59

Yeah, we prefer relative relationships. So this, ERCOT, example is a very relevant one. We can work with this one because it really clarifies what I’m trying to say. So let’s say, for example, that you have this cold front and you expect tomorrow that wind is going to drop severely over the course of the day.

Some of this is already going to be modeled significantly in the day-ahead market. The day-ahead market is what the ISO runs every day. It’s our forward financial market for one day into the future. And a lot of very sophisticated modeling goes into that, both from participants, physical participants, that is, financial participants, and the ISO itself. They have the best forecasting methodologies to predict how quickly is that wind drop going to occur? No one, absolutely no one, is going to be caught by surprise by the wind drop. We’re all seeing it, we’re all expecting it. And sometimes maybe it’s faster, maybe it drops slower, and maybe if it drops really fast, prices are going to spike. But that’s a very uncertain type of risk. That’s not a risk that we have an edge in because we’re not meteorologists, we’re not professional wind forecasters.

And so this idea that tomorrow looks like it could be a very volatile day, okay, yeah, that’s fair. And so, you can financially acquire a long position into that event, but without risk appetite, this thing about old and bold traders, like, we’d rather be old than bold, because you don’t get to become old. The idea is that we try to focus then on more risk adjusted returns. And so wind in ERCOT, for example, signifies a geographic spread between the region that contains that wind generation and the region which consumes that electricity.

And so you then get to look at a different type of risk. You get to say, okay, we’re pricing this in at $20 for tomorrow. And if everything completely does not meet our expectations, what’s the worst case here? Let’s say that the worst case is $10. So our downside is $10. But if everything really manifests, like the wind does something quirky, it’s not priced in, real time is a wildcard. So real time is what these products ultimately settle against, what I’m describing here in short term ISO products. So what happens in the five minute? They’re not just hourly, they’re actually five minute prices that then get aggregated into hourly prices. And so if that really fulfills its potential, let’s say the upside is $50. And that’s how we try to formulate more specific, attractive, risk adjusted bets. To conceive something that has a downside of $10 and an upside of $50 is much more interesting to us than hoping that tomorrow maybe everything goes crazy and it ends up being $1,000 for 3 hours. One is a lot more quantifiable than the other. And we like those types of things. Yeah. So you have broader zones in ERCOT that you can trade. So you can trade Houston to north, north to Houston, south to Houston west, and there’s central nodes, San Antonio and Austin, but also, there’s about 800 other nodes, individual nodes that can be traded. So you can technically pair almost every one of those nodes to another node in the market at any point in time.

There’s some natural elimination you should do, to never put certain things to others, just from a historical risk standpoint. But you have the flexibility to basically take any one of these buses, load nodes, generator nodes. They’re very various physical reasons that they exist on the grid, but these are why they exist. And then they’re all tradable and so you can trade them long-term, short-term, and you can get very creative. And with each, the more I think nuanced you get with how you trade, the more risk exists within the trade, because you’re exposed to individual volatility at a generator level or at the individual load level.

Whereas if you zoom out into a zone, you’re aggregating a number of points into the price. So it depends how you want to trade. But the fact that you have tens of thousands of options of how to execute or submit or create trades, is what also makes it an interesting market. And there’s ways to trade a long bias. There’s people that trade short bias, so they’re actually trying to sell volatility all the time in the market. That’s a historical one that I’ve seen. And I’m not going to talk anyone out if they want to. I’m just saying I don’t ever do that. And I’ve had a 15 year career.

Mike: 37:56

You mean short vol is a career ender?

Ross: 38:00

Yeah, exactly right. Short volume, power market, same in a lot of places. Yeah, a lot of people like to coupon clip, right? There’s a lot of different nuance to it.

Ross: 38:16

And again, like Vlad brought up, the other main component that keeps these markets so interesting and so exciting is weather. So much of it is weather and even the best meteorologists cannot predict six months in the future weather. You can have averages, you can have expectations, but you know, the biggest events that have happened in all, most of these markets, are weather related and predictable in the sense that maybe a week in advance you started to see it come together. But winter storm, Uri and ERCOT, no one saw that coming, no one had that priced in.

Mike: 38:28

So generally then, could a trader say, well, generally speaking, or is it priced in that generally speaking, this season has these events and I would like to buy over many years this season. Do I get paid on that or is it like do I lose a lot and then win one big one? How is the payout structure on these types of things?

Vlad: 39:02

Let me say a little bit and then Ross can get into the specifics here because there’s some great examples there in ERCOT as well. I know Adam and I touched on this a little bit. So, we have a lot of seasonality in power. We have daily seasonality, hourly seasonality, monthly seasonality, it’s all about seasonality. And so when you have what we call predictable seasonality, you have a lot of built in expectations and so things that pertain, for example, to the demand side of things such as weather forecasts months into the future, like Ross just said, nobody knows. It’s not knowable. You have historical averages, you have bands of outcomes, you know, what is high, what is low, and that’s about it.

On the generation side of things, it’s more complex still When you’re talking about maintenance seasonality, generation is perhaps a bit more tangible, a bit more predictable. You can form some better metrics around it and there’s public data services to aid you in that.

Transmission is the one that’s really quirky. That’s the one that we actually focus on the most. Like I mentioned that, when I was first describing what our focus is. So transmission has its own seasonality, which is broadly informed. It’s broadly useful to know during which months it will occur. But within that, there’s a lot of discrepancies, a lot of changes in particular. And so, yeah, to simply buy in a long-term manner, that which is expected, does not make you money, not in electricity, not in anything by definition, even though our market is not as super competitive as something like equities, but expectations are priced in.

And so the nuance comes from, okay, I mentioned one of the really key things for us is take, for example, a live two way market like equities. You have a constant price for an instrument which is always there. You always know what is the sum of market participant expectations. And it’s a two way continuous auction, right? There’s always people jockeying for being the best offer, and there’s opposing people jockeying for being the best bid, all the time. And so that makes it, I call it a two way auction. Our markets don’t really work that way. What we have is a one way auction, a one sided auction in which the ISO kind of, they are the offer, if you will, they’re standing offer. And it’s not it’s not really a dynamic offer. It’s dynamic in the sense that they run these very specific simulations which produce usually very accurate pricing. But on the other side, from our standpoint, from the participants that are looking to bid, you have basically, you have the utmost control as to what you bid.

And the bidding, as much as it is happening concurrently, it’s blind. We don’t see what the other participants are doing in real time. We simply submit our best bid. They submit their best bid. I apologize for the background noise here. There’s some city noise. And the resulting auction clearing price is that which stands. That’s the one that sets the price for everyone. And so if you were competitive, you’re awarded something. If you weren’t competitive, you’re awarded nothing. And so that really is what we focus on, this bidding strategy, this how do you buy the thing that you want at the right price, at an attractive price, that gives you a positive expected risk/return risk/reward? That’s the real finesse. That’s kind of like the art in the process. The science in the process is in identifying these types of opportunities, be they demand driven or transmission driven, or this idea of geographic, call it fragility, that Ross described, in which a particular region is overbuilt or under transmission, under service by transmission. And so that’s the sciencey part. The art part is this idea of what am I thinking? That they’re thinking, that I’m thinking, how do I bid competitively, knowing that we get pretty much one shot at this.

Sometimes we get multiple shots, but things quickly can become very efficient. If something does clear in this auction format inefficiently, the market jumps all over it in the next sequence.

Mike: 44:06

Yes, I love, it’s Princess Bride all over again. I’ve, we got somebody – we’ve got somebody here asking are they open to investors?

Vlad: 44:12

I guess that’s a question for me. There’s a question. Are they open to investors? Good question. So as I mentioned from the history of the company, we’ve been bootstrapped basically since the get go. What that means is we’ve been reinvesting our earnings back into the company since its inception and we continue to do that. To this date, we’re basically call it trader owned, employee owned, if you will. For being capitalists, we’re actually pretty communist. It’s like a cooperative.

Ross: 44:52

I wouldn’t go that far.

Mike: 44:56

It’s unusual, right? You want us to share the goose that has the golden eggs?

Vlad: 45:06

Let me explain the reasons. Because there’s not a dearth of capital seeking deployment in this space. If anything, there is a surplus of capital trying to deploy into the space. What really sets this space apart, this product, these call it ISO financial products apart from other things, other commodities even, is that we’re limited significantly by scale.

I mentioned at the beginning that the very things that we’re bidding on are treated like surplus capacity. And so we don’t have this inherent leverage which exists in traditional financial instruments where you’re involved in a zero sum game against competitors, where in derivatives you can have an infinite open interest. In our markets, by definition, we cannot have infinite open interest or even very large open interest. We can only have as much open interest as there is physical capacity to be auctioned off. And so this this is a key limiting factor to the space.

Ross: 46:16

Yeah. And so what we’ve done to kind of accommodate that, though, is we’ve expanded into other geographic markets. And so we had our areas of expertise to start with, which was California ISO, and Texas, and then we’ve expanded to New York Midwest ISO, and we still have a large open area in PJM that we’re exploring as well, and SPP. So there’s plenty of markets. Some of them are harder, how can I put it? The rules are different because you have to remember, it’s not just the physical transmission of the market. The regulators and the rules of each market can be so different that you might be an expert in the Texas power grid. You go look at TGM, and it’s just like you’re learning a completely new language. And it’s important to know the history of the markets. It’s important to know the nuance of the markets. It’s important to know the landmines.

We’ve all traded multiple, multiple ISOs. I’ve traded Alberta mid sea, which is the Pacific Northwest. I’ve traded Midwest ISO. I’ve traded SPP, traded all of them. And I’ve found the market that suits me the best, that I’m able to deploy the best risk and understand the best, which is ERCOT. And I’ve traded even within that market. I know there’s traders that just trade screen on ICE. They only trade the BalDay product. That’s a huge financial market. BalDay PJM and BalDay ERCOT. For most of the conversations people have with power traders, I think that’s where a lot of the speculative guys are focusing their energy, time, and money.

Vlad: 47:48

Directional price trading, which I would be I would be so gray, I would be very stressful. That’s one where you’re glued, you’re chained to your desk for 8 – 10 hours a day, you would say.

Ross: 48:04

And you have days like, and that’s a two way market. So you’re on ICE, and you’re in a two way market and you’re trading hub north, typically, and you have days, volatile summer days where ERCOT, to answer your question, Mike, about seasonality – so in Texas, I tend to see the market being more spread focused for almost all the year except for the summer. They enter into what they call the reliability window, where they reduce outages, they reduce transmission work on purpose, for reliability, over the summer because that’s when Texas, the load, the system demand peaks.

So they like to keep all resources available. So spreads tend to not be as available or as typical throughout the summer. We also have wind dying down as well in the summertime, seasonally. So what happens is people tend to focus more on directional trading in Texas in the summer.

And imagine trading your BalDay product and you come in and someone’s got a two way set up at 150 at 250, like 150 at 250. And then it starts focusing in, say, trades, 200. Then the next gap up is to 250 again. Now it’s 300, now it’s trading 175. These are the gaps that it goes through in the market in the day. And it’s all based on dispatch. It’s all based on people maybe expecting a cold front to come in, not come in, a little bit of wind coming in because the margins are so tight.

So on that screen trading, to me, that is a great way to, you don’t have to be bold, but you’re not getting old if you’re a BalDay trader.

Vlad: 49:33

No, that’s a great example. The numbers that Ross used, those are very real numbers.
You can have two trades, two consecutive trades minutes apart that are 30% different in price.

Mike: 49:44

Yeah. Wow. Well, I guess that is selling a perishable product that perishes in minutes, right?

Vlad: 49:55

That’s the instantaneous supply demand.

Mike: 49:59

Yeah. There’s a really interesting question and I actually don’t understand the acronyms and we’ve mentioned. PJM, but it’s by John Weirani. If you could flash this up, because maybe you guys can comment on this, maybe you can’t, but the PJM PAI event from December and it’s 2 billion in penalties might be of interest. Does that ring a bell for you guys?

Vlad: 50:20

Good question. So I’m only vaguely familiar with it. Like Ross mentioned, we don’t actively trade PJM right now, and we certainly, we don’t watch it so closely that I would be able to comment on the magnitude of those things. I can speak generally to this idea that when we do have an extreme weather event in one of the regions, in one of the organized ISO markets, that the fallout and its implications – like Ross mentioned, the rules in each market and the way that each market handles these extreme events is very different. California is distinct from Texas, distinct from PJM, et cetera. And so, I only feel comfortable really speaking to the markets that we’re actively involved in and how things played out.

Texas, for example, is perhaps more laissez faire in this regard, insofar that they would just let the market outcomes stand. But even there, we can go into the details. We almost had a market failure. One really critical role to explain that these markets serve is they’re not just doing accounting and physical reliability. They’re serving in the exact same way that, let’s use ICE or let’s use CME, whatever commodity exchanges you guys are familiar with. These are clearing houses, right? Clearing houses are an accumulation of members which are financially mutually responsible for the other members, should one fail. The ISO is the same thing. If a financial member or physical member should fail, the other members are responsible for the shortfall there. And so we have counterparty credit risk. We have actually significant embedded counterparty credit risk which has been pushed.

In almost every market they’ve had some kind of a blow up along these lines. In Texas of course, what happened during winter storm Uri ,which, maybe this is a good parallel to this PJM event where they had reliability issues. Physical everything failed. Physical generation failed. And ultimately load serving entities that also had generation, ended up having to declare bankruptcy because the economic impacts were so large, and that affected all of us. We, even as a separate class of participant, ended up having to pay significant amounts into the clearing house in order to keep the market whole.

Mike: 52:55

Yeah. That’s an interesting point because I think Vlad, you and I had this discussion generally on what it takes to become a member of this group of people that is actually allowed to trade in this way. I recall sort of something like that. And maybe you could kind of walk through that a little bit for folks to understand what it, as a member, you’re kind of beholden to these issues that you’re talking about and what it took to kind of get there. And you’re actually very thoughtful about why you exist and that you’re at the behest of this market as a participant, it’s sort of something to be, I guess, thankful for or grateful for a little bit. I don’t know how to put it actually, but do you sort of recall what I’m talking about or not really. Too many cigars and too deep in the night.

Ross: 53:58

Can I give just a winter storm Uri as an example for the physical guys? So winter storm Uri was a purely physical failure of the market that transpired in the price the actual clearing of the market as well. But the storm knocked out gas lines, it knocked out power plants, it froze all the water, so the cooling ponds. So it was a physically driven event, right? Theoretically, if you were one of the load serving entities and you were able to in advance, or properly acquire financial contracts to hedge your power properly, you might have gotten through it unscathed. Many of them were actually paying customers to leave their network. They were writing two days before, they were saying, we will pay you $500 if you leave and go with someone else, like two days before the event, knowing what was going to happen and knowing that they no longer had the ability to hedge.

And so this speaks to the reason why these markets exist. If someone else wants to take the risk of the short side, maybe it’s not a generator, maybe it’s a speculator not dissimilar to us that says, I don’t think it’s going to be that cold, so I’m going to sell $1,500 power to you, not realizing it was going to settle $9,000 for three days or four days. But you know what I mean? So this speaks to, again, the reason these markets exist. There’s only so much physically the market can bear, and you have to go to these other parties, this liquidity, in order to operate efficiently in the market. And generally speaking, these markets operate far more efficiently than the old monopoly/oligopoly generator system that we had before. The regulated systems we had before.

There was no incentive to operate efficiently. There was no incentive to operate cost effective. You got a guaranteed percentage – price signals, typically from the prices from the government. So your idea was, if I operate the most expensive, highest price plant, I then got the highest percentage on top of my power prices. That’s certainly how Alberta used to operate.

Mike: 56:00

That’s how we operate on this island, I think. Definitely, cost plus, yeah.

Ross: 56:07

Pass on to the consumer. Plus. Plus. That’s true.

Ross: 56:14

Anyway, not to interject, but that was just my thoughts on Uri specifically, where the markets could have saved – it hurt some people that were short, but it could have hit some of the physical generators that were able to acquire and hedge properly ahead of the event.

Adam: 56:27

Right, Vlad, you were going to say something.

Vlad: 56:32

Yeah. Let me see if I can answer your point there, Mike, if I can speak to what you’re saying. Yeah. The rules are really the nitty gritty in these markets. And so I’ve kind of made it clear to my guys, to the traders that work for our company, that we’ve had this discussion on so many occasions. It’s not just about doing the right thing, treating the market with respect within the letter of the rules that are set out for us, which I mentioned are complex, they’re ever changing, and they’re different in every region. And so, just staying on top of that is a full time job. But also the spirit of those rules, to not be jackasses, to act within what is rational economic interest, to do things that are justifiable logically economically, to never engage in behaviors. In fact, there’s many examples in the public literature. It’s one of these markets which is so complex that people sometimes take a focus which is overly focused on the rules. And there’s famous examples of cases that have been litigated.

The regulator which oversees ISOs is called FERC. F-E-R-C. That’s the US government federal agency’s that handles enforcement. It’s like the CFTC or SEC equivalent. And so many of these examples, so many of these cases, are people that are so focused on the rules that they try to manipulate these minute details to their advantage. When I described, there’s so many different dimensions to this volatility that were blessed to have, because it’s just so volatile compared to other things. And you can try to set up intelligent bets in so many different ways, be it spreads or outrights or momentum or short or long, mean reversion, whatever you want.

There’s so many intelligent ways to act within the rules of these markets without being an ass. And so, unfortunately, we have a small percentage of participants that, I like an arbitrage more than the average person, but in our market, sometimes this concept, these concepts get misinterpreted in which people try to manipulate, if not the actual letter of the rule, then certainly it’s spirit. And so we actively do not even contemplate it.
And this is a conversation that I have with my guys all the time. We’re able to pick and choose our spots, and the risk/reward that I mentioned, due to this one sided auction based market, we get to specify a la carte as we wish, anyway. There’s no need to be reckless in the sense of, okay, I want to set up a structure in which is absolutely impossible for me to lose money. No, this doesn’t compute. And so, so that’s really to your point. We’re blessed with enough natural opportunities that it behooves us to be a good and a responsible participant. These clearing house risks, these other counterparty risks yeah, we’ll bear those in order to be able to deploy capital into attractive, risk adjusted returns.

And so this idea of, we operate at the behest of our government overlords yeah, that’s true. It’s at their pleasure that we’re allowed to participate in the manner that we participated. And that’s kind of the bottom line. That’s entirely accurate.

Mike: 01:00:06

And you mentioned the actual limited capacity that can be deployed as capital that helps smooth out the system, if you will, whether we want to call it arbitrage or whatever.

Vlad: 01:00:27

This liquidity point that Ross made is a very salient point. The idea, remember, is that this concept of having actively focused participants that are analyzing fundamental factors all the time and putting in bids, be it on the supply side, demand side, whether it’s long-term, short-term, we have instruments ranging from one day out to three years out.
And so this idea of completing the market, of providing bids in everything from spread based things to directional things, from short-term to long-term, that’s what creates a complete market. That’s what creates rational price signals.

And this is the stated mission of the ISOs. In addition to system reliability, which is number one, it’s the idea of running an efficient electric market with price transparency, with multiple products overlaid that are all competitively bid. And so that’s what we strive to do. And so that is the liquidity provision aspect that financial participants drive in these markets.

Ross: 01:01:38

Yeah. The sum I’d say of the liquidity of all the markets is in the multiple billions, like if not over 10 billion in terms of all these products. It depends on which products you want to include in it. But to give you a sense of the scale of it, it is still in the multiple billions of dollars, and it just depends on which slice you want to look at. If you’re going into no congestion trading, if you’re trying to look at ICE, that’s a completely separate pie. And I think that’s where it could really explode into a much larger number just because of the daily risk changing hands on that. But if you look more, I think, in just the ISO numbers changing hands on the short-term, the long-term auction trading, you’d easily be in the billions anyways, like between five and 10 billion, I would think easily.

Mike: 01:02:25

That’s a physically constrained market. When you get into the ICE market now you have that financial ICE situation where a bunch of speculators, hoping, I guess.

Ross: 01:02:35

Yeah. And that open interest could be anything.

Ross: 01:02:40

Go ahead, Adam.

Adam: 01:02:43

Yeah. No, I was just wondering who’s typically on this, is there a persistent loser and is it the ISO who sort of says, I’m going to tolerate a certain amount of losses on our end of the trading, right, so to speak, in order to, that’s kind of what the cost of delivering an efficient, reliable market is?

Vlad: 01:03:06

I think that and typically sort of I think…

Ross: 01:03:10

That is more, I think, more opportunity cost than losses.

Vlad: 01:03:16

It’s more philosophical because these are not zero sum. These are not like player versus player trades, right? Like these are market completing trades. These are… You can … pluses is in the case of transmission revenues, it’s a bit more complex. We do have different products, some of which are directly zero sum, but either reallocating surplus revenue or something along those lines.

Ross: 01:03:54

But a lot of the generators are granted FTR rates at no cost to them or it’s part of the contractor to build out. So they might be selling it, but it might be a profit in their books. It’s the opportunity cost, the delta of maybe, but they might not be doing the same combination of pairings and different structures. So everybody, that’s part of the nuance of the market is everybody’s looking at it from such a different viewpoint and has different goals. And so much of the generator’s sort of goal is hedging and consistent revenue, versus chasing the last 10%.

Adam: 01:04:29

Yeah, we talk about that all the time in terms of commodity producers selling forward, right? It’s worth it to them to sell forward and allow the speculators to earn a premium because their weighted average cost of capital is so much lower because they’ve lowered the variability of their earnings.

Ross: 01:04:47

Yeah, 100%.

Vlad: 01:04:50

That’s a good point. And what Ron’s raised in terms of the specifics of, let’s touch on FTR markets for a moment, that’s a good example. In FTR markets, both load serving entities as well as generators receive what are basically grants, that is free allocations of FDRs which then they come into the auction, and you can think about the two sided liquidity there. So, we are on the bid side and they are on the offer side and their goal is to maximize the revenue from selling their granted allocated free rights into the auction and our goal is to try to purchase them as cheaply as possible. And at some point we meet in the middle and we buy everything we want and they sell everything we want on a pass by pass basis. Ultimately, over multiple rounds that is achieved. Everyone buys everything, everyone sells everything, and we both walk away happy.

Adam 01:05:48

So the generator doesn’t collect revenues directly from customers. They collect FTRs from the ISO and the ISO collects the revenues from the… or am I, like, way out on the…?

Vlad: 01:06:01

So the generator primarily gets paid for generating power, but what they also get are essentially free allocations based on how much transmission is required from their generation to the nearest load. And so, yeah, you can think about it as surplus. They get these transmission rights for free by virtue of generating power in that direction, and then they wish to monetize those to sell them.

Ross: 01:06:23

Yeah, I don’t want to ruin anyone’s day that’s like, signed up for like a green electricity contract. It’s like I’m only getting wind power. But guess what? You’re not getting wind power, you’re getting molecules on the grid somewhere. They might allocate a certain amount of wind or whatever. They might be buying directly from wind farms, but that molecule you’re getting could be from anything. So that’s kind of one of the funny marketing lies people are allowed to tell.

Mike: 01:06:50

Interesting. So we talked a little bit about the consistency of power generation and there was a question earlier on about why aren’t we building more nuclear as a base power rate? Do you have any thoughts or comments on that and how it integrates into all of this? And interesting, obviously the Texas green side of things and then the lagging distribution side. But is there any insights you guys have into that sort of question?

Vlad: 01:07:23

Boy, that’s a philosophical one. I’m generally pretty agnostic when it comes to the types of generation. My slant though is having been a participant and witnessed a lot of these procedures and meetings and ISOs is I really sympathize the most with their focus on reliability. And so I lean very strongly in that direction.

I think one of the great ironies with the build out in renewables is that it’s been, it’s been pushed. In some markets the ISO really lines up ideologically with the government of that state, like in California, for example. In other markets they’re independent from each other. But what tends to happen between economics and ideology is, the reality is, we’ve gotten a very fast ramp up in renewable buildouts. That is wind and solar energy in these US markets.

It’s happened in California, it’s happened in Texas, it’s happening in other regions. And one of the great ironies behind this is that it’s been done with the best intentions. It’s been done with the intentions of basically greening the grid in the sense of reducing the intensity of carbon emissions. But in reality, what we’ve witnessed in our trading, weather aside, completely ignoring the volatility caused by weather, this push has diminished reliability. That very primary tenet of the ISO itself, maintaining reliability, has been made much more difficult by the penetration of renewables so quickly.

The idea of having it be firmed – so firming is a concept in which, when you have an interruptible resource, you have an equal dispatchable resource that is available to meet these ups and downs. There’s been such a focus on building these, call them non controllable resources, the renewable resources, without really any technical, any physical solution coming from the firming side, from the reliability side.

And so that’s the part that involved…

Mike: 01:09:48

I just connected all the dots. I want in now. How do we get in it?

Ross: 01:09:53

That’s the opportunity.

Mike: 01:09:56

So good. Perverse incentives. Anyway, keep going Vlad. I’m sorry to interrupt you.

Vlad: 01:10:04

Yeah. And so, on that note, when we think of something like nuclear, which is this large, stable, baseload resource, it’s very much the friend. It should be the friend of renewable resources. It’s a big firm resource which is there and you can ramp it. Certainly newer nuclear… I’m not an engineer, but I know that it is ramp-able. You can diminish its output. You can increase its output safely. It would be very good if in a political way, we took a different attitude in the US. They took a different attitude to that generation. But in reality, what we’ve seen with nuclear is that you end up with these enormous cost overruns. The bureaucracy around it, since it’s had its safety failures in the past, it’s so big now, it takes some of these projects that haven’t even come online yet, have been underway for decades.

And so no, I think in reality it’s just super complicated. It’s very complex. And what is a bit sad is that the best dispatchable resource, the best firming resource when it comes to pairing with renewables is actually natural gas fired generation, relatively clean and it is relatively quite low CO2 emitting. But ideologically, it’s painted with the same shit brush as coal and all the rest of it. And so I think that’s very much like a cut off your nose to spite your face type of attitude from the people that generally… I think they have good intentions, but yeah, in practice, they’ve eliminated what are actually some very good sister resources to renewables.

Ross: 01:11:52

Yeah, and another one, just because I have a background…

Mike: 01:11:56

… profitability of, at ATNV.

Ross: 01:11:58

Another one, because I have the background, hydro is another one that just to me continues to be an underutilized resource. And that’s a big one. That’s a NIMBY one, right. Not in my backyard. It’s flooding plains. It involves, I shouldn’t say short term, but an environmental change. You have to create a reservoir. You have to alter the environment behind it. And most people nowadays won’t approve it. But when you think about the overall greenness and the sort of overall benefit it provides, it’s effectively a battery. It’s the most effective form of battery storage that we have.

Every ounce of water behind the dam, that is battery storage, and that is long term battery storage. That’s the closest thing that you have. It’s efficient. It’s a really basic technology. We’ve literally had it for hundreds of years, In terms of just using water for creating mechanical purpose. It’s very proven. And there’s some interesting things. Like if you look at the Pacific northwest, all of this generation tends to be politically driven and usually on a federal level. And so most of the dams were built from the 30s through the 70s. When was the last time you heard of a new hydro dam built? And this was just part of a US Infrastructure build. The highway system, the dams, all these things were built.

They’re aging infrastructure, but look how well generally the hydro dams have held up and what they’ve done for the whole west coast. Tennessee Valley Authority, they’ve done really well with it. And to me, it’s underutilized.

Nuclear was the big thing in the 50s, 60s, 70s and to Vlad’s point, what happened was it really fell out of favor and people just viewed it as this massive risk. And there’s political reasons, there’s public relations reasons. And then the thing is, the plants have a natural life cycle, and at the tail end, it gets very expensive, and very risky for those plants. And these are still intended to be profit generating enterprises. And as we learned in things like winter storm Uri, when a company has the option to spend a few million dollars on winterizing pipelines or fixing things, they tend to take the approach, a lot of them tend to take the approach, I’ll deliver the value to the shareholders versus spending the money, unless I’m forced in some other way or there’s tighter government restrictions. And that’s just a sad reality. That’s actually what’s happened in a lot of these plans.

Mike: 01:14:15

It’s interesting too, when you mentioned that, I think of, what was it? Is it the new deal? The Big New Deal. I mean, whatever, the Hoover Dam was built.

Vlad: 01:14:32

It’s The Original New Deal.

Mike: 01:14:35

I know now we could do a Green New Deal. Now, that would be an interesting thing. But you had Hoover Dam still in operation today kicking out electrons all day long. Storable, but the green, I guess in this case, when you’re talking about hydro, has a cost, an environmental cost that comes along with that NIMBY cost that you mentioned, Ross, where it’s like, don’t do it to my pond, stream, whatever, dam and electrons for 100 years and continuing. It’s a really interesting set of circumstances that lead to some somewhat perverse outcomes or decisions.

Adam: 01:15:05

Well, look at you look at things like rivers.

Ross: 01:15:09

Oh, sorry. Rivers don’t tend to stay within one state, so you also have to have interstate agreements, like who’s upstream, who’s downstream. In Canada and the US for example, the Columbia River Treaty is one of probably the most important agreements between the two countries. And that thing is, that’s ripe for political contention on both sides, because basically, Canada controls the Columbia River effectively, if they really want to, and what happens if they decide to go a different way with it? And so who gets all the benefits? Who owns the land? Who owns the water? These become really complicated.

Ross: 01:15:46

When you’re building a gas plant, you own the land, you get a pipeline in there, that’s really straightforward. And so that’s where all these issues come from.

Adam: 01:16:03

For natural gas, one of the issues is, and I just learned about this recently, but depending on the jurisdiction, somewhere between three and 9% of the gas leaks out of the pipeline, and natural gas methane is about 15 times more powerful from a greenhouse gas impact than carbon dioxide. So it’s not, like the gas burns reasonably clean. I mean, it’s still, you know, one of the products of burning natural gas is still carbon dioxide. But that’s not the problem. The problem is the gas leakage, which is 15 times more destructive from a greenhouse gas standpoint than the carbon dioxide emissions. So that’s something that I’ve recently discovered about natural gas. It’s very difficult to manage that.

Ross: 01:16:53

This is a dynamic nature of power markets, which makes them interesting. Just pulling it back there is so you have the gas markets, then everyone’s talking about batteries. So batteries is a big conversation in the future. So we’re going to build these large scale batteries. As Vlad said, they have multi hour, not multi week or month or day capability. Where are you getting, what technology are you using to produce that? How much lithium can you find to build these batteries? If you’re putting them in every car, if you’re putting them on every solar array, if you’re doing all this other build out, how are you going to accomplish this with massive electricity grid replacement, or pairing it with every resource, every renewable resource? There just simply isn’t enough of the raw material in the world.

Mike: 01:17:36

The other thing…

Ross: 01:17:38

I think we have new technology…

Mike: 01:17:41

…yeah, we’re familiar with as Canadians, what an open pit mine looks like and the size of the vehicles and the consumption of petrol, diesel, carbon based consumption, in order to extract that from a monster scar in the earth, I do giggle. And then we have the tailing ponds to deal with and all that sort of stuff that comes with mining, anyway.

Vlad: 01:18:05

It’s not giggle worthy. I think it’s hypocritical. I think that producing green technology things, be it batteries or panels, is actually extremely carbon intensive, but it’s not sufficiently well accounted for. We’re looking at the emission side of things after something is deployed, but to produce it, it can also be extremely carbon intensive. It’s a question of politics, unfortunately, which one gets accounted for.

Mike: 01:18:48


Ross: 01:18:50

And so that’s the other major part. Every time you have a political shift at the federal level in the US, like when you went from Obama to Trump, Trump to Biden, you get these massive shifts. And one of the most affected markets is the electricity market, because you have so many subsidies, so many credits, so much direction on what you’re building, where you’re going to build it. And then the States protest, or they don’t protest or they want to roll things back.

Somehow the grid, thankfully, survives, regardless.

Mike: 01:19:06

It’s crazy. In the conversation with you guys, in the Tweet, you ever wonder why your fridge runs all the time? Your alarm clock runs all the time. Like the reliability of the charging for your Apple phone. It’s a goddamn miracle. And then you hear about in the ERCOT sense, how they went and built a bunch of wind turbines and didn’t think how that they were going to fully connect that source of electrons to the power grid in order to run those fridges and charge those iPhones. I mean, wow. I’m just wow.

Ross: 01:19:50

You’re right. The good news is they’re going to build, like 25 gigs of solar now, too, on top of the wind.

Vlad: 01:19:59

In the same area?

Ross: 01:20:05

In the same area.

Mike: 01:20:07

Why wouldn’t we? No power line. Yes.

Mike: 01:20:10

I love it. Well, gen, I mean, Adam, do you have anything else that you wanted to ask these gents?

Adam: 01:20:15

No, we covered a lot of ground. Let’s leave some for next time.

Mike: 01:20:20

Yeah, I’d love to have you guys back. I think you guys are on LinkedIn. I don’t know if you want to be found by anybody.

Vlad: 01:20:28

We’re public.

Mike: 01:20:30

There you go.

Vlad: 01:20:31

We like to chat with friendly folks. Yeah, we’re not secret nor hiding. We’re just living a quiet island life and are generally semi-private individuals.

Mike: 01:20:41

Love it. One other question that came up. Is there any other way you can invest in this kind of world of power management besides you guys? Obviously you guys are closed and have the communism capitalism version, but not open to investment. Not really a lot of ways to participate?

Vlad: 01:20:59

So it’s never clear. No, our business evolves and it changes. Our capital needs evolve and change. We’ve taken a very measured approach, like I said, a very bootstrapped approach to growth. One that, remember going back to this concept that it’s a very difficult to understand, a very humbling, extremely volatile commodity. Ross mentioned, and I want to emphasize that neither of us, and not just the two of us, but the rest of our traders, even though we could have decades of experience in one particular market, we quickly come to understand that we’re not experts in the other ones.

The expertise is so, and ultimately this best self risk management that comes from a trader itself without having to police people from doing silly things. It comes as a result of realizing what you don’t know and how specific geographically your knowledge actually is. And so when we grow in this business, it’s ultimately a people business, like I just described. If we want to trade a new region, I have to find somebody so similar to myself in my manner of thinking, in order to be comfortable handing millions of dollars in capital and risk to that person. And so far, very few have made the cut. And so we’ve had turnover. We’ve brought people on and let them go. Sometimes after a while, sometimes shortly thereafter.

They breeze through the interview process. They seem like geniuses. And then when you actually see, and very well credentialed, extremely well credentialed on paper, brilliant at people. And then when you see them in action, you’re like, holy crap. No. This person does not share my view of how to trade electricity. This person is reckless, for example, or this person is actually not knowledgeable, demonstrably not knowledgeable nor skilled in this thing of ours.

And so, yeah, we’ve had those moments, I’ve had those eye opening moments where I’m like, holy crap, I’ve committed a terrible error. And so it’s not to offend. It’s just a statement of fact. We’ve had let’s call it 50% turnover, which is a fact that, personally, I’m not happy with because I hire, perhaps the most I’ve ever hired is three persons per year. We grow very slowly and deliberately, and I take those decisions with great care. And so the fact that we even have that type of turnover makes me mad at myself, and I want to be more selective about how I grow and how I hire, and I’m perfectly fine with that.

We’ve shared this philosophy with our fellow traders. It’s slow and steady that wins the race. Nobody’s in a hurry here. We don’t need to bet the farm. We take risks that are well risk adjusted. Things that we like and that we understand, and we often bounce ideas off each other. And everyone philosophically, from a risk perspective, is on the same page. Nobody has done, of our core group, has done something where the other people object and say, like, wow, this was really crazy. This was really reckless. No, in fact, the vast majority of comments that I’ve provided to my core guys that have now been together for a number of years and gelled into this good team is honestly, most of the time, I tell them, I wish you had done more. I wish we had done more of that. And that’s a problem I would rather have than the other type of problem in which you’re like, oh, wow, we didn’t keep a tight enough leash on these risks, on this person.

And so what I’m saying is that growth, growth keeps happening for us. We keep expanding into new regions and new products and that comes with capital needs. Now, as a preference, we happen to self finance that, but that’s not a fact for forever. That can easily change as well. And so typically what happens in our space is people look for equity investments. We’ve had numerous conversations with people where we’ve proposed a type of debt structure, a type of credit structure where we look to raise capital by way of providing a fixed rate of interest.

We’ve had very little uptake on things like that. People are looking at this more like a venture capital type investment where you put in a million dollars and you hope to 10X your money or that sort of a thing. And honestly, I don’t see a lot of parallels. This is not like a zero to one situation. This is not like a VC, we’re not creating a tech startup. It has very little parallels. And so that’s something that I try to be very honest with people, but ultimately I also understand their perspective.

Debt, you can now get 5% and more risk free, and so why would you lend to us at 10 or 15%, or what have you? And so that part I also understand. But to summarize here, Mike, it’s not one of those things where like, oh no, never say never. We’re super content with what we have and how we grow. No, I love to talk to people, I love to talk to investors, I love to talk to guys like you. We love to have conversations with people that are in our industry directly or indirectly.

Mike: 01:26:29

Yeah, I love it. All right, well, why don’t we, well said. Why don’t we wrap up there? If you want to find Vlad and Ross, they are on LinkedIn. I don’t think you guys are Twitter yet. Nothing like that.

 Ross: 01:26:43

I have a really bad Twitter account. I don’t keep up to date.

Mike: 01;26:50

I’m not going to find bad. I don’t know what’s on it or whatever. Not to offend any midgets here. And ATNV Energy, does it have a website or not really?

Vlad: 01:27:03

It has a very basic website. It’s more of just a formality so that there’s something there on our domain. But it’s basically a summary of what I’ve said. It’s my very low key recruiting pitch, which says that we pay skilled traders really well.

Mike: 01:27:18

Perfect. Gentlemen, I have to thank you. I have been enlightened in so many ways on…

Vlad: 01:27:27

So happy to hear that.

Mike: 01:27:30

The markets, even since we’ve had a couple of conversations, I marvel when I see a light go on. I’m like it’s, it’s incredibly complex, the electrification of the world. And we didn’t get into some of the other things that we talked about. Maintenance of the system, these lines that run in certain ways and people that own them.

Vlad: 01:27:50

Yeah, we got pretty technical.

Mike: 01:27:53

Yeah. Anyway, I appreciate your time today.

Adam: 01:27:57

Yeah, thanks, guys.

Vlad: 01:28:02

I appreciate you guys. Thank you so much for having us on. I really enjoyed the conversation in person and online, and I’d like to repeat it. Thank you so much. Do it again.

Mike: 01:28:22

Absolutely. We agree. We shall meet again at the Grand Old House.

I think you can roll the music, Ani.

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*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.