Al Gore makes appropriately hedged bet on UK power

Former U.S. Vice President Al Gore attends an interview with Reuters in Berlin
Former U.S. Vice President Al Gore attends an interview with Reuters in Berlin, Germany, June 26, 2018. REUTERS/Hannibal Hanschke

LONDON, Sept 28 (Reuters Breakingviews) - Al Gore has partially vindicated the UK government over soaring energy costs. Ministers last week indicated they expected private sector suppliers to rescue rivals that have gone bust due to the surge in gas prices, without state support. Now Generation Investment Management, co-founded by the former U.S. vice president, is injecting $600 million into British power group Octopus. It’s not necessarily a template for future deals, though.

Despite being loss-making and only 5 years old, Octopus is emerging from the energy crunch as a potential winner. Unlike smaller providers it locks in long-term power costs, reducing its exposure to the UK spot electricity market where prices for next-month delivery have quadrupled since March. On Sunday Octopus took over 580,000 customers of failed Avro Energy, committing to supply them with power even though wholesale prices are way above the maximum annual rate regulators allow it to charge.

The company shouldn’t ultimately need Generation’s cash to fund the deal, though. The UK system lets Octopus recoup the costs of absorbing failed rivals through an industry-wide levy, with a delay of about a year. The company’s 2.5 gigawatts of renewable energy capacity also provides a hedge against rising power prices. Meanwhile its “Kraken” technology, which helps consumers access power when it’s cheaper, has been adopted by rival utilities like E.ON (EONGn.DE).

Generation’s investment, which will give the firm a 13% stake, is still a handy backstop. Though talks about the financing preceded the current crisis, the cash helps protect Octopus from the potential fallout and enables it to keep expanding its share of the UK energy supply market, currently at 11%.

Whether Octopus deserves a 3.4 billion pound ($4.6 billion) valuation, more than two times its revenue in the last reported year that ended in April 2020, is a moot point. UK retail market leader Centrica (CNA.L), which has an enterprise value of about 4 billion pounds, trades at less than 1 times sales. Still, Octopus’ green focus and technology smarts warrant a premium. And Generation’s investment horizon stretches out to 15 years, three times the norm for private equity.

The problem for UK Business Secretary Kwasi Kwarteng is that gas prices are likely to stay high, pushing other suppliers over the edge. He may not be able to rely on other neat private sector solutions. That’s not Gore’s concern, though.

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- Generation Investment Management has agreed to take a stake of up to 13% in UK energy company Octopus in a deal that values the startup at as much as $4.6 billion, the Financial Times reported on Sept. 27.

- Generation, founded in 2004 by former United States Vice President Al Gore and David Blood, the former head of Goldman Sachs Asset Management, will initially inject $300 million into London-based Octopus, with a further $300 million to follow by June next year subject to certain conditions.

- Australian utility Origin Energy, which acquired a 20% stake in Octopus in May 2020, will also inject a further $55 million into the UK company to maintain its shareholding.

- Launched in 2016, Octopus now serves more than 3.1 million households, making it one of the five largest companies in the market by customer numbers. On Sept. 26 it agreed to take on the 580,000 customers of Avro Energy, the biggest supplier to have failed as a result of high UK gas prices.

Editing by Peter Thal Larsen and Oliver Taslic

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