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So exactly why are electricity prices so high these days? Given that it is a huge cost for both our business and our members, we asked Michael Allen, an electricity trader at our supplier, Inenco, to explain the background.

Like most inputs these days, the main reason is the escalating price of oil. Gas prices are linked to that, and many of the UK’s power generation plants are gas fired. In addition, the UK is now a net importer of gas.

The second major factor is the cost of coal, which is again affected by oil - prices for coal have trebled. Added to that, shipments to the UK have been affected by storms and then there is also the ‘China factor’. In total 40% of the UK’s electricity generation is gas fired, the same percentage comes from coal and the rest from nuclear sources.

“The main drivers of oil are tight supply and increased demand, the US dollar and speculative market trading activity. The dollar has crashed against other currencies and that puts the oil price up. Meanwhile the speculators are pulling out of equity investments and piling into commodities instead, including energy. They are driving the market up significantly, as supply and demand for oil are pretty much in balance,” said Michael.

So where will prices end up? Michael Allen couldn’t say: “In the short and medium term, oil and coal prices look set to increase further. Oil has risen over 50% alone this year.

“Despite being ridiculously overvalued, some investment banks/oil producers are talking the market up to $200+. Unfortunately the speculators are controlling the marketing and just the sentiment of talking it up sees the market rally. $200 per barrel doesn’t seem that unachievable based on current price of $140 and market conditions,” said Michael.

The key to minimising the impact of these rises is wholesale purchasing via First Milk Direct. In what are very volatile markets, one of the main benefits of our wholesale market purchasing approach is the risk management strategy that we are able to adopt. We trade a number of blocks of energy over a period of time to create the core energy price that your actual contract rates will be based on.

Compared to a standard traditional retail form of negotiation, our wholesale purchasing product will provide reduced risk premiums, reduced supplier margin enabling us to procure proportionally more cheaper energy blocks than the expensive peak energy block.

All trading decisions for these portfolios are made by Inenco’s expert traders, in conjunction with First Milk, who use a combination of trading screens and market information to intelligently time the trades that we make. Wholesale procurement gives the added benefit of a lock-unlock facility in that we can sell back to the market and buy again when the market falls.

One of the major benefits of wholesale energy market trading is that we are able to consider making purchases well in advance of the point of use and given the authority you provide us, we are able to consider looking at your requirements well ahead of time when market prices could be attractive for delivery further out.

So how does buying wholesale differ for members from what First Milk Direct does now?

Now: All members whether on the First Milk group deal or in an individual contract must purchase their full electricity requirement prior to the start date of the new contract.
FM Wholesale: Offers full flexibility and it is not necessary to buy the full amount prior to the start date. This ensures members can take advantage of the best market conditions.

Now: Members are offered new contracts as and when the energy providers wish to do so.
FM Wholesale: Members energy will be purchased when the market is most favourable to do so.

Now: No individual farmer is able to purchase wholesale energy. Members must buy energy from the retail marketplace
FM Wholesale: Unique to First Milk members. By working collectively and with the First Milk Cheese Company. members can purchase energy on the wholesale market.

First Milk Wholesale offers members electricity supply with purchasing power unavailable to any other UK farmer. Members will have access to a market previously unavailable; will be adopting the best risk management strategy against rising costs and ultimately will save the maximum possible amount of money.

Members who have received forms should return these as soon as possible and those who would like further details about First Milk Wholesale contact Fiona Fraser on 0141 847 6817.