In conversation with…John Palmer

You’ve been at EIC for eight years. You must have seen quite a lot of changes in the industry and the company as well?

My role has actually changed quite a bit during those eight years. I started out as a risk management consultant and I was responsible for the trading strategy for all of our clients. I’d support the client-facing teams with meetings. I’d go out and explain what’s happening in the markets and what we were doing with the trading, and make changes to risk management policies.

Then I took over as the manager of the flexible procurement team. I’ve got a team of six flexible account managers and it’s a really good team to manage; they’re really good people. They know what they’re doing and I’m there to support and help out when they need it.

Quite often with customers it’s sitting and working with them to understand what they are looking to get from their flexible energy contract – do they want budget certainty, do they want a market reflective price? So it’s working out what the right strategy is for them.

What do you think has been the impact of the Covid pandemic on the energy sector?

There’s been quite a few changes as a result. The biggest thing in the pandemic was the way that consumption changed, particularly early on with businesses closing down or reducing what they were doing significantly. Because we were pro-active with EIC customers, none of our flex customers were penalised for going outside of their forecast consumptions – as we were able to mitigate that.

For a lot of organisations, people aren’t returning to the office full time. Some businesses are moving entirely to remote working. So that will be a change in the way we use energy. Last winter was a good example. With more people working at home, it changed the profile of energy use over the winter.

“This year we’ve seen the bounce in energy prices, from long-term lows to record highs. This will drive people to look at how efficient they are being with their energy, and how flexible they can be with their demand”

This year we’ve seen the bounce in energy prices, from long-term lows to record highs. This will drive people to look at how efficient they are being with their energy, and how flexible they can be with their demand. There are various schemes to try to make demand flexibility pay off for customers, as well as the opportunity to avoid certain non-commodity charges.

There’s a change in the way we generate our energy in the UK, with the move away from coal generation and closures of some of the nuclear plants. Also the move towards more renewable generation, which typically is wind, wave and solar (which there’s an intermittency to) – could mean our system margins are going to be much tighter in the coming years.

Recently we saw really tight system margins, which meant that day ahead prices went up to over £500 a megawatt hour for electricity. That’s something which is going to become more of an issue for consumers and suppliers to manage; there will be that change in the volatility of market prices.

“The cheapest kilowatt hour is the one you don’t use.”

Procurement will always be important. Buying energy as efficiently and cheaply as possible is always going to be a key part of the puzzle. I think net zero and carbon reduction will become a much bigger consideration for all energy users. It will be about how you can balance your procurement alongside those wider needs of low or zero carbon energy.

What are your predictions for the energy markets over the next year?

That’s a loaded question! At the moment the big thing is obviously wholesale prices and what they might do. I think we are going to be very much driven by weather over the winter, and how much gas becomes available.

I think with Nord Stream 2 coming online, and sending gas from Russia, that might well bring prices down. Certainly if we have a mild winter, prices could come down. But if we have a horrible winter and a shortage of gas, then it will be a case of, when will this stop? Prices can’t stay where they are forever, I think there’s a point where they’re going to come down. It’s just what the drivers are going to be for that.

More generally, it certainly looks like there’s going to be a tightening of what is considered to be a green energy contract. At the moment, a Rego [Renewable Energy Guarantees of Origin] backed electricity contract may not be linked to your electricity in any way. Accusations of greenwashing suggest that there might be a tightening of those regulations. There will definitely be a push towards green contracts. Hopefully green gas will become more established or an alternative option – perhaps hydrogen in the longer-term – which is being looked at as a cleaner way of doing things.

“If we have a horrible winter and a shortage of gas, then it will be a case of, when will this stop?”

I know that there’s a project in Humberside, Zero Carbon Humber, that is looking at how they can capture carbon from a number of carbon intensive businesses including Drax power station as well as other ways to make a net zero industrial cluster in the area. That will be a really interesting project to follow, to see if other areas try to replicate it.

Generally, customers are going to be looking at how they can reduce their energy consumption or generate their own. The cheapest kilowatt hour is the one you don’t use.

What are the pros and cons of flexible contracts, and who would you recommend them to?

I think the benefits are that instead of buying all of your energy on one day, which you do with a fixed contract, you can buy over time. You can sell back energy. Whilst with a fixed contract, if you sign one now, those are the prices and you’re stuck with them for the duration.

If the way you’re using your energy onsite changes then you can reforecast, so you don’t have to worry so much about volume tolerances. In a fixed price contract everything is set up at the time that you sign the contact, so it’s more rigid.

The benefits of flex are very good, but you need to be a reasonably large energy user to do it. With a consumption of more than 2 gigawatt hours annually. You can look at baskets and, if you’re a much larger customer, stand-alone flex contracts. Baskets allow smaller energy users (who may not be able to get a standalone flex contract) to be grouped together in a basket that allows their consumption to be traded together with other organisations.

Do clients need an in-house manager to handle flexible contracts day-to-day?

Having a point of contact to discuss things with is useful but you can have as much or as little information as you want. If you’re someone who wants to see information regularly and know exactly what’s going on, then flexible is a good way to do it, because you’ll be getting a lot of information. We’ll be actively talking to you about what the market’s doing, how it’s moving and what that means for your position.

“We’ll be actively talking to you about what the market’s doing, how it’s moving and what that means for your position.”

We have customers who are really used to the energy markets and energy contracts, but we’ve also got some clients who’ve never done flex before. We can do as much or as little as you want. We can deal with all the trading and we can agree a strategy and walk you through how that works.

We’ve got customers where, initially they wanted to be really involved because we were new to them. It’s then got to a point where they know us, they trust us and they get less involved and leave more to us to do.

If you were in your clients’ shoes, what would you be thinking about when considering an energy purchase?

I would definitely go for a flexible contract, if I was big enough for one. If I was signing a fixed contract, I would sign a shorter contract at the moment and be ready to sign another one if the markets went against me. I’d take a short term position.

“Since 2014, we’ve saved £79 million for clients on flex contracts. Ben Sherbrooke and John Dawson have done a fantastic job.”

For a flex contract, I’d be looking to get things set up and look for a strategy that protected me against the market rising but also gives me flexibility to make some savings if prices fall.

What do you think is the biggest misconception or myth in energy?

The myth that’s been exploded this year is that prices always come down in the summer. That’s been a general assumption, and this year has certainly changed that.

From the flexible procurement team’s point of view, we’ve got a really experienced team. We deal with a whole range of queries – new connections, disconnections, changes of tenancy, site additions and volume queries. The team are very focussed on looking after customers and making sure they have a good experience. That is something that I think we do very well. The customer hopefully knows they can come to us with a query or a problem and we’ll work hard to try and solve that problem for them.

In terms of sustainability, what do you think clients should be focusing on?

The first thing any business should be looking at is reducing the amount of energy they use. That is going to deliver the biggest savings. Projects to replace old lighting or upgrade out-of-date equipment will bring savings on energy contracts.

For companies with the opportunity, onsite generation is something to look at. Solar is becoming more financially viable for a lot of clients and payback times are less now than they were three or four years ago. Alongside solar I suggest battery storage too.

If someone is installing solar I would definitely say consider battery storage alongside it. If your solar is generating electricity during the middle of the day, store that and use it during peak times – because that will help you avoid some of these potential price fluctuations and some of the non-commodity costs that are charged based on when you use your energy. From a green point of view, obviously looking at opportunities to buy green electricity and gas – although green gas is incredibly expensive at the moment. So potentially for some customers, carbon offsetting might be an alternative. And that’s something we can do.

What are your hobbies?

Cycling is definitely one of my main, spare time activities. I’ve got a summer bike and a winter bike. I don’t want the summer bike to get messed up in the winter! I’ve got a carbon fibre summer bike, a Canyon, and a more sturdy winter one with mud guards. I’m a member of a cycling club called ‘Chapter 2’, although we haven’t been out since the pandemic.

What was the one thing you missed during the lockdown?

Cycling with other people was one of the things I missed most. To be honest seeing friends and family, particularly as my best friend lives round the corner from me. It was a shame that we could see each other’s houses, but we couldn’t see each other. I sort of saw my mum, from a few metres away to help with shopping and was able to do more for her during the later lockdowns. I didn’t see my sister for a good six or seven months. I only saw her on video chat because she lives down in Kent. It took a long time to see her – we are very close and we get on very well.

60 seconds with John Palmer

What do you think has been the impact of the Covid pandemic on the energy sector?

There’s been quite a few changes as a result. The biggest thing in the pandemic was the way that consumption changed, particularly early on with businesses closing down or reducing what they were doing significantly. One of the big things we had to do was to react to that and reach out to customers, to reforecast their consumptions.

Because we were pro-active with EIC customers, none of our flex customers were penalised for going outside of their forecast consumptions – as we were able to mitigate that.

“This year we’ve seen the bounce in energy prices, from long-term lows to record highs. This will drive people to look at how efficient they are being with their energy, and how flexible they can be with their demand”

We are going to see a lasting shift in the way people work so, for a lot of organisations, people aren’t returning to the office full time. Some businesses are moving entirely to remote working. So that will be a change in the way we use energy.

This year we’ve seen the bounce in energy prices, from long-term lows to record highs. This will drive people to look at how efficient they are being with their energy and how flexible they can be with their demand.

Generally, customers are going to be looking at how they can reduce their energy consumption or generate their own. The cheapest kilowatt hour is the one you don’t use.

“The cheapest kilowatt hour is the one you don’t use.”

If you can generate your own energy onsite, you will be avoiding a lot of the non-commodity charges.

What are your predictions for the energy markets over the next year?

That’s a loaded question! At the moment the big thing is obviously wholesale prices and what they might do. I think we are going to be very much driven by weather over the winter, and how much gas becomes available. I think with Nord Stream 2 coming online, and sending gas from Russia, that might well bring prices down. Certainly if we have a mild winter, prices could come down.

More generally, it certainly looks like there’s going to be a tightening of what is considered to be a green energy contract. At the moment, a Rego [Renewable Energy Guarantees of Origin] backed electricity contract may not be linked to your electricity in any way. Accusations of greenwashing suggest that there might be a tightening of those regulations. There will definitely be a push towards green contracts. Hopefully green gas will become more established or an alternative option – perhaps hydrogen in the longer-term – which is being looked at as a cleaner way of doing things.

If you were in your clients’ shoes, what would you be thinking about when considering an energy purchase?

I would definitely go for a flexible contract, if I was big enough for one. If I was signing a fixed contract, I would sign a shorter contract at the moment and be ready to sign another one if the markets went against me. I’d take a short term position.

For a flex contract, I’d be looking to get things set up and look for a strategy that protected me against the market rising but also gives me flexibility to make some savings if prices fall.

From a flexible procurement point of view, our trading team is really good. They get really good results for clients. Since 2014, we’ve saved £79m for clients on flex contracts. Ben Sherbrooke and John Dawson have done a fantastic job.

“Since 2014, we’ve saved £79m for clients on flex contracts. Ben Sherbrooke and John Dawson have done a fantastic job.”

What do you think is the biggest misconception or myth in energy?

The myth that’s been exploded this year is that prices always come down in the summer. That’s been a general assumption, and this year has certainly changed that.

In terms of sustainability, what do you think clients should be focusing on?

The first thing any business should be looking at is reducing the amount of energy they use. That is going to deliver the biggest savings. Projects to replace old lighting or upgrade out-of-date equipment will bring savings on energy contracts.

For companies with the opportunity, onsite generation is something to look at. Solar is becoming more financially viable for a lot of clients and payback times are less now than they were three or four years ago. Alongside solar I suggest battery storage too.

What was the one thing you missed during the lockdown?

Cycling with other people was one of the things I missed most. I’m a member of a cycling club called ‘Chapter 2’, although we haven’t been out since the pandemic.

You can read our full interview with John Palmer here.

Gas and power prices surge – take action

The Winter 18 gas and power contracts are up by 52% and 50% respectively in the last year. The following seasons have also risen, however not by as much. Winter 19 gas and power contracts are 34% and 38% higher year-on-year.

If you’re on a fixed contract, all is not yet lost, though we’re urging you to act quickly.

 

A clear impact of the price rises is that gas and power for next year are much more expensive than a year ago. However, next year’s prices, and the year after that, for gas and power are still at a discount.

The market remains in a heavy period of backwardation. This is when contracts for a commodity are cheaper in the future than they are for periods closer to delivery. This isn’t because the market expects prices to be lower in the future, but largely due to the market pricing for current supply shortage levels.

Gas remains in high demand, partly because of the cold winter and the earlier effects of the ‘Beast from the East’ depleting storage reserves. Injections this year have been strong but may not be enough to reach the highs from last year.

Another factor at play is that gas prices elsewhere in the world are much higher. This is encouraging those with the ability to move gas to higher price destinations. The recent market rises have been substantial, but have only returned prices back to where they were trading four years ago.

 

Furthermore, it’s only the front seasonal contracts that have risen to this elevated range. The front Winter gas contract is holding between 65p/th and 75p/th, with the Summer market range between 56p/th and 66p/th. If you haven’t fixed your October 18 start contracts yet, don’t delay any further.

 

What’s the risk to your energy bills?

Even if the market only moves to the middle of the above stated ranges the wholesale element could still increase significantly.

If the above curve flattens in line with the longer-dated contracts moving up to the range that prices were at just four years ago, you could be hit with a further 20% price increase. The below table outlines how your annual electricity spend would increase if your business were hit by this rise:

 

 

Current annual electricity spend

Contract start date

£10,000

£100,000

£1,000,000

1 April 2018

£10,057£100,573£1,005,725
30 August 2018

£11,412

£114,122

£1,141,219

Further 20% rise

£12,483£124,826

£1,248,258

 

The shortage now is partly due to the low storage levels seen at the end of winter, which has prompted substantial injections. However, structural problems remain, particularly in regard to a lack of UK storage capacity. Dutch gas production will continue to decline, as will supply from the North Sea. The ongoing worldwide transition from coal to gas will also support demand. As a result competition for gas is here to stay, encouraging higher gas prices for the UK to attract sufficient supply.

Wholesale costs for suppliers have risen significantly in the last two years. Many gas and power contracts are at record highs, after prices accelerated their move higher earlier this year, and again during August. These increased costs will be passed on to consumers in the form of higher bills, with suppliers paying more for their energy at a wholesale level.

 

It’s time to take action

EIC can help you manage these price rises. Back in April, our energy experts advised businesses to fix their October 2018 contract starts immediately for 24 months. Those that followed our advice at the time saved themselves 42% on their wholesale gas cost and 34% on their wholesale electricity cost, compared to what they’d be paying now.

 

How we can help you with energy procurement

Here at EIC, we pride ourselves on our market knowledge and giving timely advice to our clients. We can help businesses of all sizes to find the right energy contracts for their needs.

If you’re a larger energy user, we can help you with fixed price energy procurement to help you secure prices and provide budget certainty. We’re also on hand to help you with flexible energy procurement, should you find fixed contracts too restrictive; we can help you take advantage of a volatile energy market and make sure you capitalise on market rises and falls. Our aim is to maximise contract flexibility whilst minimising your costs.

We can also help you budget effectively for your energy costs by providing year-on-year price projections for the next five years with our Long-Term Price Forecast Report.

To find out more about our energy procurement services, and how we can help you find the right contract for your business needs, call us on 01527 511 757 or email info@eic.co.uk.