Retail energy trading with Gethin Musk (Head of Trading @ OVO Energy)

Hello. It's Ed, and welcome to another episode of Transmission. Today, we're joined by Gethin Musk, who is the head of trading at Ovo. Ovo are a retail supplier for the GB markets.

We cover lots of the ins and outs of how do you actually hedge for a retail portfolio.

We then go on to talk about how batteries might be involved in this mix. And then finally, we start to talk about some of the things that might reduce costs for consumers in the long term, as well as if you're someone interested in energy trading and perhaps hedging of of portfolios, how might you get into a team like that? I think it's a very useful and candid conversation. I can't wait to hear what you think about it. Let's jump in.

Hello, and welcome to another episode of Transmission.

Today, I'm joined by Gethin Musk, who is head of trading at Ovo.

Gethin, welcome. Thanks, Ed.

And so we're just gonna come to you straight away and say, how do you fit into Ovo? What is your role?

So you already said, I'm the head of trading Ovo. So my team's responsible for ultimately buying the gas and electricity that we buy to meet our customers' needs. So, you know, from within day to right out to kind of two years ahead buying gas and electricity in lots of different ways to try and meet their needs.

Okay. And your sort of context within the energy space, how long have you been doing this for?

Too long. So right when I started as a graduate at EON in EON Energy Trading back in two thousand and four. So I'm not gonna count the years, but a surprisingly long time. I was there doing various different roles in power and gas trading for five or six years, and then I was at NPower that at the time was domestic and industrial energy retailer at in part of the RWE group for nine or ten years and left there three and a half years ago at Tri Indovo.

Okay. Superb. And I think that gives people real context that we have a real expert on retail hedging on today. So hoping to get into all of that detail.

Okay.

And just to then round that off, so who are OVO? What do they do? What portion of GB do they supply?

So OVO is a pure domestic energy retailer. So we supply about four million customers, and we've been around since two thousand nine and growing sort of, I guess, relatively rapidly since then. Now, I don't even know if it's a big five or a big six or any whatever anymore, but we are kind of one of the largest suppliers in the UK. So we supply, I think, like, twelve percent of UK domestic demand. I'm not quite sure for total industrial demand as well. Okay.

And let let's get straight into it. So how do suppliers buy energy?

So there's a variety of different methods that different companies might use. But for OVO and previously for NPower, we went and bought our electricity and gas from the wholesale market. So we would buy that over the course of a number of years before delivering cost to customers on a daily basis or a half hourly basis. And, we would do that either through direct, transactions with a counterparty or working with a partner. So Ovo has a partner called Shell who provide our route to market services, and we use that that to kind of enable us to access to the wholesale market.

Okay. And when you say kind of go going and buying this, this is this is kind of this is someone looking at a screen, seeing a kind of a a chunk of power available to be purchased for two years out from now, and then they will kinda click on that and and and buy what they need.

Yeah. So so if you go back to the points prior to purchasing, we have to kind of forecast how much we think our our customers are gonna need on a daily or half hourly basis, daily for gas and half hourly for power. And then we will purchase that over a period of time ahead of ahead of supplying to those customers. And that time scale over which we'll purchase is dependent on the contractual obligations that we have with those customers. So the majority of our customers are currently on the price cap.

So that's a price effectively set by Ofgem. And Ofgem set that price through assessing how much the energy that a retailer will cost for them to buy over a period of time. So we will try and match that. So we'll go out and buy in line with their assessment period every day over the course of, say, three months or something like that. And then that will mean that we bought energy at a price that we can charge that's in line with what we are able to charge to our customers.

Okay. And so just kind of doing that from start to finish. So let's go three years ahead of time. So the with twenty twenty five, so we're thinking we're twenty twenty eight energy. Will you have already started purse purchasing energy for twenty twenty eight today?

Not not generally. So the majority of our customers are, as I say, on the price cap. And then we have some customers who might be on, say, twelve or eighteen month tariffs or something like that. So when a customer goes and says to us, I'd like to fix my energy costs today, we'll effectively go and buy all of that energy need at that point.

So we know that we've secured a contract with the customer, so they they know the price that they're gonna receive. We need to mitigate the risk around that, so we'll go out and effectively buy that at the same time. Yeah. So, typically, that will be up to eighteen months ahead.

So we'll have a view of customer demand, say, three or five or even longer years ahead, but we won't be doing anything to hedge that at this point in time because we we don't know. We've we haven't got a contractual relationship with the customer. Does that make sense?

Yeah. Yeah. Yeah. So so let's say and there's there's probably two types of customer there. So there's the customer who will fix with you and is the the customer who is on a sort of standard or kind of rolling contract. Yeah.

Exactly. Yeah.

And so you'll you'll kind of take a view for that rolling contract that they'll also there'll still be some of those customers there eighteen months from from now. In terms of that transaction, you make eighteen months ahead of time. So you know that at the end of twenty twenty six, you need, whatever, five hundred megawatt hours of energy. Like, what do you buy today?

Let's assume that we know that that customer is going to be there. Okay? So if there is uncertainty that at the end of their contract they're gonna be there or not, we might only buy a proportion of what we think they need. But if we've got certainty that they're gonna go and buy there, we would buy all of their base load energy needs and, I guess, we'll come on to base load in a minute and sort of at that point. So we would buy if they needed ten units every day, we'd go out and buy ten units every day on average. It might be that on some days they need twenty units and some days they need five, and that's when we have a we call a shape risk or an underlying shape exposure that we then have to kind of risk manage and try not and optimize the hedging of that over time as liquidity allows.

Okay. So the product you go and buy today is base load, and that is, say, ten megawatts for twenty four hours Yeah. Consecutively.

And that perfect.

And the reason why you buy base load is because that's the only product that exists?

Yeah. So so so we talk quite a lot in in over about liquidity. That can be quite a constraining factor for us. So that means whether you're able to transact at the whole in the wholesale market at a price that is reasonable and representative of, I guess, what you describe as fair value.

So, yeah, typically, you might get twelve or eighteen months worth of good liquidity for power, slightly better for gas on base load for power, and then you might get twelve months or so of liquidity for peak load, which is just during the middle of the day, so between seven and seven on Mondays to Fridays, but not at weekends at all.

Okay. So peak load is kind of we're starting to build in this concept of shape. So you've got this base load, which is the same power throughout the the the whole course of the day. Then we've got peak load, which is then sort of getting rid of the off peak. So when when demand is typically or has been typically lower. And then so you you start to get shape coming in in terms of base load, then you get peak and off peak. Yep.

How does that then progress to allow you to buy something that's kind of a for a specific half hour?

So the granularity progresses as you get closer to delivery. So closer to real time, you get better granularity.

So as I say, typically, you may only buy twelve or eighteen months ahead base load. And then inside twelve months, let's say peak liquidity improves as well. You then start to layer on extra products. So in particular, overnights. So that's basically seven till seven till seven. I'm gonna have to check these dates these times in case I get them wrong. Seven till seven every day, weekdays and weekends.

When we bought base load energy for our customers, most of our customers are asleep overnight, and so we don't actually need that demand, that supply in the middle of the night. So that's something we would like to sell back into the market and buy more peaks or other bits and pieces where we do where our customers are gonna need more energy. So overnights might become available, say, six to twelve months ahead. And then that improves with more granular products, individual blocks. So those are, like, four hour blocks down to half hours, and we can only really trade half hours day ahead and intraday.

Okay. So so the kind of the the overnights and peaks is a is a kind of really nice way of kind of getting to shape. So you've bought this base load, but as you say, your customers are asleep overnight and will be putting on kettles at five o'clock in the day. So you need to buy more energy in those peaks.

You need to sell the overnights. Yeah. And that same principle kind of keeps on happening as you get more and more granularity getting close to delivery. Yeah.

Do you feel like there's enough liquidity in that market to let you kind of sort out your shape and and get you to the position that matches your consumers? Or or is it kind of is it kind of constantly a battle to try and find products that are good enough?

So so I and my team spend a lot of time trying to find that liquidity, working with other partners, trading partners in the market, and and trying to stimulate liquidity in the market by showing a price that we're at which we're willing to buy or sell in the wholesale market. And that sometimes results in sudden sporadic liquidity that allows us to to better shape our position. But quite a lot of the time, it's you're kind of showering into the void. Yeah.

And the liquidity isn't great. It it's probably it's probably a bit of a disconnect between the natural, let's say, sellers of shape who have enormous portfolios of power stations and things like that and are kind of managing big hedges worth billions and billions and billions of pounds and retailers who arguably are very concerned about shape because we're relatively low margin business and the change in value of those things could could cost us money quite quickly. So we're really keen to try and get stuff done to try and mitigate the risk associated with it. Arguably, sometimes the people on the other side of the market are less they're less worried about those what they would see as little bits.

Yeah. Yeah. I think there's I think there's there's because kind of two really interesting things in there. So one is a seller of shape. Who who is a who is a seller of shape?

Yeah. So so, ultimately, if you think about it, the amount of supply in the wholesale market at delivery has to mount match the amount of demand. Yeah? But the the demand all comes from one source, customers, and the the supply of that shape effectively is made up a lots and lots of different suppliers.

Right? So gas fired power stations might do what's called two shifting or something like that. So they might they might operate in the morning and the evening or they might just sell during the middle of the day and then turn off overnight. And then you've got batteries that might also kind of sit either side of that and deal with some super peak pieces.

Then you've got things like pump storage where people get water and they basically pump it up the mountain and then let that go and it comes down and goes through a turbine and that can, like, you know, create a lot of energy very quickly for a small amount of time. But all of those different suppliers of shape might have interest or lack of interest, arguably, at different times to kind of transact in the wholesale market. So it can it can be difficult for us to kind of fit everything together, if that makes sense.

Yeah. No. It does make sense. And then then the kind of the final part. So then going into delivery. So what happens if you get this wrong? What happens if you can't shape what you bought to what your demand looks like?

Yeah. So so we tend to have put some more refined hedges on. So we start with the base load, and then we might have bought peaks and sold some off peaks or sold some overnights, maybe a bit of block five, which is that as you talked about that evening peak after five o'clock. And but we realized that we've got a lot of daily shapes, so different demand on different days. Actually, our highest demand from our customers is over the weekends because everyone's at home, basically, and shape within the day. So we will resolve a lot of that at the day ahead market. So in the auction, so the n two x and the Apex auctions.

So those are hourly, and then we do another refinement to half hourly in the afternoon auction as well.

And then we're obviously reforecasting, getting revised views of customer demand all the time. So we'll then transact intraday under the Apex intraday market as well.

Okay. And if you miss, if you get it wrong, what happens?

Oh, yeah. So we will run into imbalance, basically. The imbalance market is where the grid operator effectively has to take actions to match supply and demand. So if suppliers don't meet their demand with enough energy purchases or supply into the market, the grid operator takes remedial action to make sure that everything matches up.

The cost of that remedial action or the marginal cost of that remedial action effectively is then charged back to all of those players who are out of balance. So if you haven't bought enough, you will have to buy extra at that remedial price. If you've if you've supplied too much into the market, the same thing applies. You'll have you'll have you'll only receive the remedial price.

And that price can be really high or really low depending on the actions that that the operator has take.

And that drives an incentive to be sort of in balance.

Yeah. Exactly. Yeah. So the, let's say, OVO had bought nothing and just went intraday really, really short, then the operator would have to take lots and lots of actions at potentially very, very expensive price and that would, yeah, that would be extremely just detrimental.

And you run a lot of risk. If you run all of that into delivery, there's a lot of uncertainty about the price where the price might end up. We don't want to do that on behalf of our customers because we wanna be a kind of stable and and trusted energy supplier. So hedging and providing certainty that we're always gonna be there for our customers is really important. Okay.

No. It's it's really interesting. We've we've kind of ticked off shape risk. I I wonder if this is gonna go too far, but it'd be nice to talk about swing risk very quickly.

So Okay. So so so a little bit of this is kind of retail hedging kind of always loses effectively. Yep. Perhaps we could just talk about some of the conditions when it's warmer than expected.

Yep. What what happens? How does that sort of equation play out when it's warmer than expected?

Yeah. Okay. So so most most customers in the UK, not all, but the majority heat their home through gas.

So they've got a boiler. When they get in and it's cold, the heating is already turned on, or they will go and turn the heating on or something like that. We based on our forecast of temperatures across the course of year years, we talked about seasonal normal temperatures. That's kind of on average what you would expect the temperature be at a given time. We can forecast the amount of energy that our customers will need to heat their homes predominantly.

When that temperature is warmer, like, that can either be kind of lots of cloud cover, meaning that temperature is kept or the air is kept warmer in the UK or there's lots of sun that's kind of creating solar radiation in people's windows like here and heating everybody up. That can reduce or change the customer's behavior. So they might not turn their heating on or if they've got an automated kind of heating system, then it may just take less actions to keep their their home warm. In that scenario, we've gone out and bought a thousand units of gas to supply our customers.

And all of a sudden, because it's really warm, we only need six hundred units of gas because their boilers run less. So we have to sell that excess gas that we purchased back into the wholesale market to make sure that we're hedged and we don't end up with an imbalance effectively. We don't end up with gas that we don't need. Same for power.

We're one part of a domestic supply business or industry, and all those other industry players are probably doing the same thing. And industrial customers are probably doing the same thing as well. So you almost get a situation where everyone is selling when it's warm, when you need to be selling as well. And similarly, if it's cold, the price will tend to tend to not always, but tend to go up when it's cold as well.

So if your customers are are cold and and feeling that they need to turn the heating up, they'll do so. They need the extra gas. We'll go out and buy that, but everyone else is doing that as well. So when you need the gas, the price is high.

When you don't need the gas, the price is low. So it's not quite right to say you always lose, but you kind of you kind of always lose in those situations. There can be other things that go on as well that break that, like a Ukraine crisis or something of that sort or or whatever that move gas price for not fundamental reasons, but predominantly irrespective of those external factors. Yeah.

And swing is kind of an always an always always a cost for a retailer.

I think it's a fascinating insight into how do people or what do people have to think about on these desks when they're thinking about retail hedging. It's just it's one of those complex things that when it's explained to you, you think, actually, that does kind of make sense. But outside of outside of that process, never never having kind of thought it through, it just just doesn't seem so obvious.

I mean, I think one of the things I I like about energy and energy retailing is it it all comes back to reality and people's behaviors and and the decisions that they make.

So things like the energy crisis changed people's behaviors a bit, And we've seen that become a permanent change. And so therefore, we've had to adjust the way in which we forecast our customer demand and all that kind of thing. And, you know, that has a real effect. Like, I during the energy crisis, I personally got solar panels on my roof. For me as a customer of OVO, that's changed my profile and the way in which I consume energy.

At scale, on a macro scale, lots of people doing that has a really material effect on the way the whole energy system works. It's really interesting.

Well, as a supplier, that that must be really interesting for you. Right? So you've just talked about how you think about getting energy in for customers almost eighteen months ahead of time, thinking about almost the half hour by half hour consumption.

Mhmm.

When a when a customer goes and gets a solar panel on their roof, that, again, completely changes Hundred percent. Their consumption. Right? So you must be having to think quite a lot as a company in how you hedge for these these customers that actually the shape of what their consumption looks like is is actually in a net zero world. Could be totally different. Hundred percent. Not only solar panels, but EV, heat pump.

Yeah. Hundred percent. I think EV is really interesting one. Right? So so I mentioned a lot of our demand is at the weekend. So, typically, when you think of a a retail business supplies businesses and customers, they will have their biggest demand in the middle of the day driven by industrial customers, and they will tend to have lower demand over the weekends and stuff like that. For domestic energy retailers, so just you and me, I hope you're a Novo customer, Ed.

He's not answering.

Yeah. No. Go on.

I have been. You have been. I'll take that. Yeah.

That that demand is very different then. So we have evening peaks and then weekends where our demand is highest. EVs change that again. But EVs are really interesting because they're not necessarily just a one way or may not necessarily ultimately be a one way thing. So we know that some suppliers developing or some vehicle manufacturers developing vehicle to grid capabilities.

So everyone suddenly has a battery at home which can be optimized. And even if it's just demand, there's a lot of interesting stuff around how how supplies will kind of try and help customers optimize that demand so that they can get the best price possible as well. And, ultimately, that changes the way in which you forecast that demand as well.

Yeah.

I think that's another kind of fascinating as you say, it's kind of everything comes back to behaviors, but, also, it's the things it's the technologies that sit behind that Yeah.

That are then starting to change the whole picture. So it's it is very much at the edge of the transition.

Just to ask a question about supply. So we've talked a lot about Ovo here. Can we kind of take it as read that the what you've described on Ovo is very much how others think about it, or do you see differing flavors of how to hedge in industry?

So so so I guess I've described a relatively low risk approach trying to mitigate the risk because it's really important to be there. We are, for a better way of putting it, lucky. We have good credit available to us that allows us to hedge in in ahead of time. For some suppliers, that may be more challenging. So one of the big consequences of the energy crisis has been around credit and liquidity. So to be able to trade in advance, you have to be a company of good standing who the whoever you end up trading with is taking the risk against, essentially.

So credit allows us to do that. If you're a supplier with less good credit for any number of reasons, then you may have to hedge over a shorter time frame because you may only be able to hedge three or six months ahead rather than twelve or eighteen, let's say. That potentially leaves you with different risks or potentially having to offer slightly different services to your customers and that kind of thing.

Okay. Let's talk about credit, and then let's go to the the gas crisis because I think those two are really nicely linked. Sure. Let's start off with credit. Why do you have to post credit?

So if I want to transact with Ed Porter Electricity, I wanna buy from Ed Porter Electricity.

It's a great deal.

Yeah. I can only imagine.

I will come to you and I'll say, I wanna make a transaction with you. I will commit to buy electricity from you at seventy five pounds, and I will do so November this year. Is that alright, Ed? Perfect.

Okay. Cool. But little do I know that Ed Porter electricity is a bit of a shiesty operation. Oh, no.

I should never have signed up for this.

And, and it's possibly gonna go bust. So I've I think I've committed a contract with you for seventy five pounds. And then in the intervening period, because you've been having too many parties, you spent all your money and you've gone bust. Yeah.

When it comes to it, all of a sudden, you're not supplying the energy that I've committed to at seventy five pound. In the intervening period, the price has gone to a hundred pounds. So I need to go and acquire that energy for a hundred pounds instead. And because I thought I had committed to a deal with you, I've suddenly lost out on twenty five pounds that I had sort of baked into my plans and expect it to to be there effectively and have and all of a sudden, I'm loss making on what I bought that energy for versus what I thought I was gonna be a profit making position.

Okay. So everyone is kind of having to post credit to make sure that the the kind of the change that happens within the market is covered by the kind of cash that's there.

Yeah. Effectively. So so rather than what the scenario the very unrealistic scenario that we've just talked about, I can't imagine you'd ever end up like that. We would have limited our exposures to each other. So we would say we'd only be able to buy I don't know enough about you as an operation. I'll only buy one megawatt of electricity from you rather than ten, and then I'll spread the other nine across other counterparties, therefore diversifying my risk. So I haven't got my risk with one counterparty.

And in addition, I may ask you to give me some money in advance or me to give you some money in advance to kind of offset and mitigate the risk of me or you not being there at that point.

Okay. So this all sounds very sensible and kind of a very pragmatic approach.

Mhmm.

When the market gets hit with kind of the the shockwave that is things like a gas crisis, how does that change everything?

So the gas price the the gas price crisis resulted in prices that I don't think had ever been seen seen before in the market, not at least in my time, however long that is, far too long. It's probably almost certainly outside of any of the models. Yeah. So no one thought that you would end up with, I think it was eight pound or so gas for one day. I mean, that's absolutely insane.

What is what is his price today just for people who don't spend so long ago?

Let's say about a pound, but that's historically really, really high levels. So long term history, fifty p was probably fair ish. Very, very long time ago, it was ten p. You know?

When when the UK had lots of gas supply in and of itself, it was ten to twelve p a unit. Maybe we'll come onto that a bit later. So if I if I've got a position against you, I'm trying to assess how much risk I have, and we've transacted at today's levels, a pound, I probably still don't think the market will end up at eight pounds. And therefore, my risk my risk distribution of how much I might lose is kind of not including that very, very, very old black swan tail event kind of thing.

Yeah. Makes sense? So when we get into the black swan tail event, if you're someone who's on one side of those contracts, if you're potentially losing out, you're saying, well, hold on. I've now got this really big exposure. So I had to go back to you and say, could you pass me more credit, more cash to cover that position?

Yeah. And if you're theoretically like like like so we probably shouldn't go into this too much, but I'll try and summarize in a very generic way. If you're a supplier who only has so much available credit and has to get money in from customers to be able to pay Yes. Yes.

For the energy that you've been supplied. If all of a sudden I'm asking I'm being asked to pay some pay pay par no. No. No.

Post more and more cash, that's getting that's getting harder and harder to kind of balance the cash flow and stuff like that. Yeah.

Yeah. No. I think it's a super interesting space and, like, it's kind of probably where retail hedging was at its most talked about.

Yeah.

It was in the early twenties.

I never expected my industry to be the front page of the news. Right? Yeah.

Yeah. Exactly. Okay. So perhaps then going on to the the next next topic I really want to cover. So we saw last year, Octopus Energy sign a toll agreement with Gresham House storage fund. Gresham House own lots of batteries, and Octopus Energy obviously supply customers.

And they signed this, toll deal where effectively Octopus are going to do the trading for Gresham House's assets.

And what's really interesting about it is that you think about suppliers sorry, Consumers at home. I I consume at five o'clock, and I don't consume when I'm asleep more or less, but a battery goes in the other direction. So a battery might be charging overnight and discharging into the five o'clock peak.

Is that is that useful for a retail business to have both?

So so a very long time ago, before before the energy crisis, back in the old world, there used to be a a concept of a sort of vertical integration.

Yeah. So that would mean that energy companies would have customers and generation assets as was kind of gas fired and coal fired power stations and potential also wires businesses as well. And effectively, you you use those as a hedge against each other.

The difficulty that kind of I think lots of those industry or those big integrated energy companies found was they couldn't do everything brilliantly.

So I talked about at the beginning about power station operators just being focused on kind of hedging their power stations and stuff like that. I think you might argue that those big companies that were vertically integrated spent all their time thinking about power stations and little of their time thinking about retailing and didn't optimize that very effectively.

So there was a there was a move in the industry to kind of break those off. So retailers became pure pure play retailers. Generation companies became carbon intensive generation, then renewable companies may be separated out as well. And you you kind of saw a big change where the intention was that each of those types of industry would optimize. What you're describing is probably a little bit of a kind of reversal of that. And I can definitely see the case that having battery assets kind of offset some of the risks associated with with retailing. I can't talk about Octopus specifically because I don't know the details of their hedging operations, but you can definitely see why you would why you would see those two things as natural offset.

Having said that, battery batteries kind of are are operating in a really dynamic way and much more so probably in in out turn. So they get turned on and off thirty five times providing, you know, across across a week or something, providing support for grid services, which is completely divorced from domestic energy supply and demand. But, yeah, nonetheless, I can I can definitely see the I can definitely see the rationale as to why those two things might fit together?

Yes. I suppose it comes down to, like, do you have the ability to find the the products within the day ahead of the interstate market that match what you need as a as a someone who's responsible for the trading for a retail portfolio. And provided you can get that within day ahead, inch day, how much do you need this?

Yeah. Exactly. So so so yes. So we we make sure that we match our supply and demand by the day ahead market.

The auctions definitely support that. So those are really important constituent of ultimately making sure that the energy system works. The arguably, kind of some of the, like, the the cost of transacting shape may be higher when the market is in a period of system stress, and clearly, that's an opportunity for battery assets. At a portfolio level, they might well present a good hedge in the same way that I talked about, like, integrated vertical, vertically integrated companies.

Yeah.

I mean, go going back to that I would just a little bit early in the conversation, but going back to that kind of swing risk point, the kind of retailers always lose is kind of the the maybe how I describe that. So you get a really high or really cold snap that a really big cold snap that comes in. The retail position suffers because of that swing risk. Yep. But your battery position actually would perhaps welcome that that volatility net shape because it's really looking for the kind of biggest possible spread to trade between.

So Yeah. Exactly. Yeah.

At a kind of top portfolio level, interesting. But as a Sure. Can I trade a particular half hour of power, you you can kind of do that today?

You ultimately can match you need to.

Okay. Okay. Super, super interesting. So moving to from perhaps some real specifics to something far, far more general, which is that we often hear that energy in GB is expensive. Given your experience in the space, how do you think that we might be able to change the system to get bills down for consumers?

Yeah. So so I think compared to historical norms, it is expensive now. But it's worth understanding the context of why that feels expensive now, which is that the UK historically had lots of gas fields out in the North Sea that it was able to exploit, so extract all the gas. And that results in very low gas prices in the wholesale market and therefore very low prices for consumers. Actually, at the time, the UK used to spend a lot of time exporting gas the continent as well, and therefore, kind of getting revenue into the UK, etcetera, etcetera.

Those gas fields have reduced in the amount of available supply significantly, so we are no longer able to meet our needs both from a gas fired power station perspective and a domestic and industrial demand perspective through gas from those fields. So we now have to import gas from elsewhere.

So the change is we were we were self sufficient, and now we're part of a global market. Yeah? So we have to pay the global market price for for gas and electricity as well effectively. We've got lots of interconnection into Europe.

We also have a lot of LNG terminals in the UK. So that allows customer people to send ships from the US or South America or from the Middle East or something. We have super cold gas in the tanks. And then to deliver them into the UK where they get sort of decompressed back into sort of, the natural gas that you and I might see.

But to pay that to do that, you have to pay the price that the market is is balancing at, and that is expensive compared to historical norms.

It kind of is what it is.

Just I and it sounds a bit flippant.

Go on.

So then it's going to build on that.

Yeah. To build on that going from the, like, what has happened to how do we get to a world where we can see relatively lower bills?

So there is some normalization. So we talked to him a little bit about when gas was kind of two, five, eight pounds a unit. It's around one pound a unit. And I I guess it's worth pointing out, I use gas because, a lot of power prices are are kind of indexed to gas prices determined by gas. So we we've we've returned to a more normal world. But customers build still, what, sixteen hundred, seventeen hundred pounds on on average.

That's still expensive for customers.

To go back to, let's say, one thousand pound bills or something, we probably need a world where the UK is the UK and Europe are more energy independent. Yeah. So how do you how do you solve for that? You could choose to to exploit lots of the gas that's capped caught in rocks and stuff through fracking and all of that kind of stuff. Personal personal opinion, I imagine probably Ovo's opinion as well is that that's not a good solution for climate crisis.

Renewables has to be a bigger part of the solution. That can't be part of the solution on its own because of the complexity of the energy system. You need batteries and you need inertia. It's probably a bit technical, but you need the ability to increase or decrease supply very, very quickly in in particular reasons. But increasing the amount of renewables and backup capabilities to kind of manage the variation in renewable supply is really important.

Yeah. I think geologists would also agree that that fracking for GB is just not suited to the geology that we have. Mhmm. So even though it's very successful in the US and it's keeping US prices very low, it's not not the same thing for for for GB.

What's really interesting is is that link between gas and power prices. So the UK is very linked in that the power price is set by the marginal plants and the last plant to turn on. Yeah. That is often a gas unit Yeah.

And historically has nearly always been a gas unit. The really interesting thing that we're now starting to see is that on some days, you're starting to see times when those last gas units are being turned off. Yeah. That's quite exciting.

For for example, last year, we saw day ahead markets. We saw around hundred and eighty hours of negative pricing. Mhmm. And those are kind of periods where clearly gas isn't selling the price because gas doesn't turn on for a negative price. It doesn't it doesn't it doesn't want to pay to generate. Yeah. But that's more of a phenomenon where we're starting to see that kind of the renewable portfolio just starting to peek through on this kind of price setting.

Hundred percent.

Okay. So so last year, we saw in terms of the power prices in GB, we saw a hundred and seventy five to a hundred and eighty hours of negative prices on the day ahead market, which are times when the renewable portfolio and renewable fleet is starting to kinda turn off those last gas units.

And it creates a negative price. And all of a sudden, the link between gas prices and power prices is broken. Do do you think that that is a way that we can ensure lower bills for consumers? Or do we do we need something more radical?

So so you're describing the the effect of renewables and nuclear fleet displacing gas entirely from the system. Negative prices are slightly complex to kind of to to to explain, but in any but the simple way of thinking about it is there's too much there's too much electricity for for what we, for what customers demanding at that point in time. That needs to be smoothed out one way or another. And, obviously, one way of achieving that is through batteries. Batteries have an associated cost with them, but those negative prices support a business case for batteries to be built and therefore smooth out that that that's imbalance.

It is clearly a sign that renewable penetration is getting larger and larger, but there are points when the wind isn't blowing and the sun isn't shining, etcetera, etcetera, where gas at the moment is still really important. So we're in a really sunny period right now. And during by about, I don't know, ten AM till, say, four PM, we're getting lots of solar production. But most people are waking up, waking up between six and nine AM. I was thinking about you and your baby then or your child then. Yeah.

Four thirty and nine AM. Yeah. And turning their kettles on or or whatever it might be. And that kind of additional demand at that point in the day still has to be met at the moment by gas high power station.

Same thing applies at the end of day. So as the solar sort of tails off as the sun goes down, something needs to come in and ramp it out. Realistically, gas is likely to be part of that solution for a time yet until you've got so much alternative flexibility, I guess, predominantly provided by batteries on the system to kind of compensate for that.

Okay. No. Really interesting. And those kind of within Europe as well, we're starting to see at the start of March, we had some strong solar periods.

Prices in Germany went down to near near zero on the continent. I think for yesterday, it was we had some negative pricing at the start of March, which feels crazy considering that it does. Yeah. Solar driven.

Right? Yeah. It yeah. It just feels very odd to not be in summer or just out of winter, and already solar is kinda driving those negative prices.

But I I like, I think it's interesting in the context of being winter and a sunny day driving that. And then on the other hand, we had the period.

Mhmm. Excuse my pronunciation.

Cold weather Yeah.

Low winds Yeah. And for, like, a prolonged period of time.

And just gray. Just gray. Just like horrible, not very nice, dank kind of uncomfortable conditions across the UK and across Europe as well. And we saw some extremely high prices right across Europe as a consequence of that. So I think that really shows even in the winter now that we we're seeing some periods of sort of real price volatility in those two situations, which are both likely weather conditions across the course of the winter. Obviously, we all love the kind of blue sunny skies and that kind of thing, but certainly in Britain, we get lots of gray days as well. Right?

Yeah. So it's a actually, we definitely do. To put some numbers on that, the the eighth of January, I think, was when we kind of had the tightest period, and some of the prices taken for gas plant were two thousand, five hundred per megawatt hour, which is kind of it's just orders of magnitude beyond kind of where the market traditionally trades for that type of generation, which is typically kind of a hundred pounds per megawatt hour for gas. Mhmm. So, yeah, hopefully, some some context on the types of conditions we're seeing, Yeah. Coming through as the system transitions towards a more renewable system.

But I guess it's worth I guess it's worth just pointing out, though, that these individual days kind of average out.

Yeah? So when you think about how much you're gonna pay to supply customers across the course of winter, you know you're probably gonna get one or two days of two thousand pounds or whatever. But the more days that are fifty pounds or zero price or stuff, that's gonna drag down the average. And to kinda go back to your question before, that will help lower consumers' bills in the long term. Yeah? The more days where you have low prices Yeah. Even if you can have a few days with really, really high prices, the lower the average cost is gonna be.

And there's there's a there's a role for kind of media in this because the the when you get the two two thousand five hundred or the five thousand pound per megawatt hour price Yeah. Hundred percent that will be on a newspaper headline. Mhmm. But it is very unappealing to write about a twenty five pound per megawatt hour day or just a slight oversupply. Kinda normal again.

It was kind of normal.

It was a bit sunnier, so your bills might be a little bit lower. Just isn't the kind of sensationalist headline that that people will write.

So I think it is interesting. Like, I guess this podcast and and things like this are are helpful in that regard because understanding the energy transition at large and what's going on is is when I talk to people about it, they're way more interested than I thought they would be.

Yeah.

Like I said, I thought no one would ever be interested in in my industry.

But, actually, people understanding that stuff we talked right about big about right at the beginning, that link back to what people do every day. They you can talk them through that and and you get some real engagement from it.

I think so. I think so. So I I wanted to touch on one more thing before I ask you the two final questions, and that is that if anyone's listened to this and they are a graduate coming through or they have just finished school and they're thinking energy trading, energy industry sounds interesting, fun, how do you how do people get into those types of positions? How do people get into sort of energy energy trading?

Yeah. So so OVO, we just run a graduate scheme for a couple of years. We're not doing one this year, but hopefully maybe back next year. I would definitely keep an eye out for those.

Graduate schemes are a great opportunity to to enter and experience lots of different places around an energy company. You don't necessarily need to start in energy trading, I'd say, as well. So if you were to join a graduate scheme and then transition in roles over time towards energy trading, that's that's a perfectly reasonable thing to do. But to be honest, you don't have to join a graduate scheme.

I've had some really amazing people that work for me without a background in who may not have a degree, but or might have a degree, and they started in customer service, for example, but have shown sort of drive and determination and taken the opportunities, kept an eye on the job boards as they might be in and and move towards it. There are some definitely skill sets which I think are beneficial. So a passion for it obviously makes a difference. And analytical mindset is, I think, is really important.

And for energy trading specifically, being able to to sort of deal with uncertainty, and a lot of what we've talked about today is around uncertainty. Yeah? And be able to make decisions in uncertainty.

It's quite a tricky thing to do. So you don't know you don't know with certainty whether this is a good trade or not. Yeah? And you don't know exactly whether the trade is going to completely mitigate your risk or not, but you still need to make a decision because the worst outcome is freezing. And there's it's interesting that some some super clever people will struggle to make that decision.

So it helps to have a certain mindset and be able to kind of, you know, make the best possible choice even though you don't know all the outcomes that are available to you.

Okay. Is there is there still like a a trader's morning meeting where you kind of everyone sits in a room who's trading, and on the right hand side, there's like, oh, this could drive the price up. On the left hand side, this could drive the price down, and people still kind of, like, balance that seesaw.

Yeah. Yeah. Yeah. So that yeah. So we still do that. I imagine other companies still do that as well.

It's really important. And be yeah. So it's a really important point actually. Being able to communicate and share views to come to, like, a a consensus or a common view of what we think is gonna happen and then take action on the back of that.

That's critical. So, yeah, that's probably an important skill to have as well.

Okay. Superb. So anyone listening to this who who has made it this far but also really wants to get into entity trading, hopefully, some useful tips there. So final two questions.

So the the first of those two questions is is there anything you'd like to plug?

On energy trading, not particularly. However, I'll take the opportunity to kind of plug for a charity that that's important to me. So my eldest daughter has a condition called Prader Willi syndrome. It's super rare, results in lots of complex difficulties, learning difficulties, and most kind of challenging really is not the ability to feel full.

So always feeling, like, painfully hungry almost, and therefore, not being able to kind of manage your diet and stuff like that. So it takes a bit of effort. It's a really unusual condition and therefore a small charity. So my check my my plug would be to go out and have a little look at what what that is.

And if you're interested and like to make a donation to that charity, please go ahead and do so. And, yeah, just to try and understand a little bit more. And maybe there isn't the charity for you that you want to support, but think about the small charities, I guess.

Okay. Superb. And we can we can definitely put a link to the charity in the show notes as well. So if you could be consignor.

Prader Valley Syndrome Association or the Foundation for Prader Willi Research. Okay. Perfect.

And onto the the final question, which is, do you have a contrarian view to something that you believe that the majority of the market doesn't?

So this is maybe not an well, maybe the energy market. I it's hard to know what the market thinks at large, but I'm a bit of a kind of like a car fan.

Okay.

Right? And if you kind of browse lots of YouTube videos about cars like I do occasionally, Lots of the comments are about how EVs are dead and things like that. Right? I think that's so my view is that ninety percent of people think in those environments think EVs are dead.

I think that's rubbish. Right? I was reflecting a little bit on this. I I have a plug in hybrid van for the family.

I have a petrol car that probably produces way too much CO two, and I'm looking at transitioning to an EV and waiting and waiting and waiting. I think now we're starting to foresee the opportunity. So the Renault five, super interesting car, like, much cheaper, much better value. We're starting to see small, fun looking cars again, like like the Renault five, like the Alpine a two ninety, the Polestar BST two seventy.

There's loads of, like, interesting fast cars that'd be fun to drive in the UK. I think EVs have got it wrong. They think the the story today has been I can go really fast in a straight line. In the UK, no one goes fast in a straight line.

We've got corners. So, like, having fun going around corners is much more important. And we're starting to see cars that come out that that that will support that. So I don't think EVs are dead.

I actually like, I think they they are just on the cusp of growing really quickly. I'm hopeful that, you know, the next car my father-in-law buys will be an EV. Yeah. And it becomes normalized.

And that's because he's not buying a six hundred horsepower monster that's completely unnecessary for him, but he can buy a two hundred and twenty horsepower car that goes around corners fun.

And and and part of that controlling view is that we've we've kind of we focus too much on, like, say, straight line speed.

But actually, when it comes to EVs, a lot of the fun comes from the actual driving of it going around corners. There's a cars underappreciated.

Exactly. Car cars are fun going around corners around a track and like, I live in the Cotswolds. Right? So I have to deal with country roads that are quite twisty and occasionally overtaking a slow car, probably more than my wife would like.

But that involves, yeah, cars that have good dynamics, right, and are fun to drive in that environment. Yes. And we're starting to see them happening. You don't need tons and tons of power in a straight line. Yeah. Yeah. You do need five in the corners.

I was really worried there for a second that we were gonna go and try and explain what the magic roundabout was to our US listeners. And I just think that's better if that's completely left, but please feel free to look it up on Wikipedia. Gethin, thank you very much for coming on.

You've been a fantastic guest, and I really look forward to people listening to this and letting us know how they found it.

Awesome. Thanks a lot.