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Don’t bet on the UK ending the power of gas to set energy bills

The electricity price is set by the most expensive generating asset, but uncoupling the two would be very complicated

In the dark days of 2022, it became clear that despite the growth of cheap, clean, renewable power generation, the UK electricity system was still, ultimately, controlled by gas.

The wholesale price of electricity is set by the most expensive generating asset. As gas prices soared after Russia’s invasion of Ukraine, average household energy bills more than quadrupled to more than £4,000 and the government stepped in with billions to cap those bills, the peculiarities of the market structure were clear.

This is most obviously the case for wind and solar power supplied under old-style renewables obligations contracts, which cost the equivalent of sky-high gas prices for electricity with much lower production costs. More recent contracts for difference offer a fixed price for renewable generation instead.

One result was that the government decided to impose a revenue cap on low carbon generation, an odd move given the urgent need to attract vast investment in order to decarbonise the UK grid.

Another was what the government called “the biggest electricity market reform in a generation”, the snappily named review of electricity market arrangements or Rema. This explicitly set out to try to decouple different parts of the market, stopping volatile fossil fuels setting prices for renewable production.

Don’t bet on it happening, though. An interim report, scheduled for this autumn, is expected to rule out or delay this type of decoupling, after officials concluded it would be too challenging. Gas could hold sway in the UK power market for years or decades to come.

This sounds perverse. But there is a case to be made that splitting the market into gas-generated versus renewable power, a fiendishly difficult task, doesn’t bring sufficient benefits to be worthwhile, except when there is an international gas shortage and prices are soaring. It would be a solution, one without international precedent, to 2022’s specific problem. 

The realities of having two separate markets, which would need to interact in real time to balance supply and demand and bring on capacity when required, are fraught. One proposal, from UCL’s Michael Grubb, proposed the government in effect act as a single buyer for all green power, creating a “green power pool”. 

When the report is published, expect some fudge, though, given that the idea of freeing consumers from the effects of volatile gas prices was central to reform efforts. The government could dust off last year’s failed attempts to negotiate with generators on renewable obligations contracts to switch to CFDs, uncoupling another chunk of generation from fossil fuel prices. 

Another option would be to play up the virtues of what is going to happen anyway: the gradual dilution of the influence of gas in the system as more and more renewables come online. Those renewables, especially if they are located in places that can generate electricity at varying times, combined with more storage in the form of batteries should start to reduce the role of gas in setting the market price.

To achieve decoupling over time, the government must avoid the mistakes of its annual renewables auctions in September, which failed to attract any interest from offshore wind developers because the price for electricity generation was set too low.

Another reason not to bog the entire process down in a formal market split, is the need for other crucial reforms under consideration as part of Rema.

Renewable obligation contracts start to wind down from 2027 and those assets could be modernised under new fixed-price contracts. New types of fixed-price contracts are needed to incentivise renewables to be built in different places. Enabling low carbon generation to help balance the grid requires reform of the capacity market — the mechanism for ensuring there is always enough power available. Meanwhile, there is a furious debate going on within the sector about whether contracts should be priced according to location, to incentivise the investment needed to reach net zero.

The awkward truth is that these changes would still leave gas with a central role in a decarbonising power system. Even by 2050, argues Dan Monzani at Aurora, gas production offset using carbon capture could be fulfilling just a tenth of UK power needs but setting the price more than half the time throughout the year. In this vision of the market, even with vastly more renewables, the wholesale electricity price could routinely swing from near zero to the gas price.

All very well, until the next gas crisis.

London-listed Energean had to supply 60% of the Jewish state’s demand in early stages of war against Hamas

About 75km off the coast of northern Israel sits a vessel once targeted by Hizbollah, and now guarded by two Israeli warships, tasked with ensuring the lights stay on in Israel during the war against Hamas in Gaza.

The giant floating production facility is the primary asset of London-listed Energean, which started producing natural gas from the Karish field last year.

Although a relative minnow in the oil and gas industry, Energean “has been providing at times up to 60 per cent of all of Israel’s gas demand” from Karish since the October 7 massacre of about 1,200 Israelis by Hamas, the company’s founder and chief executive Mathios Rigas said.

“We had to produce to keep the lights on in Israel . . . ‘just keep the gas flowing’ was the message, so we went to maximum capacity,” Rigas told the Financial Times.

The responsibility was thrust upon Energean after the Israeli government ordered a temporary shutdown of the Chevron-operated Tamar gasfield, which normally meets about 70 per cent of the country’s energy needs.

Tamar’s production platform, visible from the north of the Gaza strip, sits only 25km off the coast of southern Israel — well within range of Hamas’s rockets, although production was restored after a month.

For Rigas, the dangers for natural gas producers off Israel are not new. In July last year Israel shot down three Hizbollah reconnaissance drones that the Lebanese militant group claimed were heading for the Energean Power floating production vessel as it arrived at Karish amid a territorial dispute between the Jewish state and Beirut over control of the gasfield.

Gas production only began at the site in October 2022 after the US brokered a landmark maritime border deal between the two countries, leaving Karish on the Israeli side of the line.

The war with Hamas has reignited fears that Hizbollah could try to target Energean again, leading to a 20 per cent drop in the company’s shares as the conflict started. But having stabilised in recent weeks they are down only 6 per cent from pre-conflict levels, valuing Energean at £1.7bn, helped in part by Rigas and other senior figures stepping in to buy.

Alex Smith, an analyst at Investec, said: “Despite the fact the company has a number of operations across multiple countries, it is largely exposed to the Karish asset and there is arguably single-asset risk.”

“As it ramps up production, it is the key driver to current and future cash flows,” he added.

Rigas said he was confident the vessel is well protected, with the two Israeli warships carrying the maritime version of Israel’s “Iron Dome” anti-rocket shield.

The floating facility had one brief shutdown in October because of a faulty meter reading but has otherwise produced flat-out throughout the war. A skeleton crew is keeping production going, while non-essential staff have relocated to Greece and Cyprus. Rigas said crew members were being flown to the vessel from Cyprus.

Another major short-term challenge the chief executive faces is managing a diverse group of staff at a time when tensions are running high in the region. Energean has offices in Egypt where it is drilling for gas with Italy’s Eni as part of its Eastern Mediterranean-focused strategy.

“We have people in the Israeli office that have their children at war, who have to go to bomb shelters multiple times a day, who are living with the horror of October 7,” Rigas said. “But their view is they have a job to do, and they get the job done.”

“But we also have the Muslim people who feel very strongly about the situation in Gaza,” he added. “Working in this region you have to be able to manage these tensions.”

Rigas, a petroleum engineer and former energy banker, founded Energean in 2007. Having started off with a small oilfield in his homeland of Greece, the company acquired the Karish field in 2016 as Israel looked to diversify the groups operating in the country.

Israel historically relied on imports of fossil fuels to meet its energy needs. But after major gasfield discoveries since 2009 and the start of production from Tamar and the larger Leviathan field, the country has been able to become a natural gas exporter.

Rigas contrasts the speed at which Israel has developed its gas discoveries with other countries such as Cyprus, where development of similar finds has barely begun. He also criticises the failure of many smaller oil and gas operators that have overpromised to investors.

“We have shown you can actually build a substantial oil and gas business and return money to shareholders because our sector has been horrible at delivering results,” Rigas said.

He argued that Energean’s focus on the Eastern Mediterranean had paid off as he “knows the rocks and we know the above-surface issues too”.

“So we understand how to produce gas, which has been proven from our operational success,” he said. “And we understand how to deal with geopolitics as we’re proving today.”

Warren Buffett’s longtime lieutenant and business partner was vice-chair of famed investment conglomerate

Charlie Munger, the vice-chair of Berkshire Hathaway, died at the age of 99 on Tuesday morning at a California hospital, the US investment conglomerate announced.

Warren Buffett, Berkshire’s chief executive, said in a short statement that the company “could not have been built to its present status without Charlie’s inspiration, wisdom and participation”.

Listing of luxury trainer brand in Milan could come as soon as the first half of 2024

Permira has selected Bank of America, JPMorgan and Mediobanca as joint global co-ordinators for the forthcoming market listing of the private equity group’s Italian luxury sports shoe brand Golden Goose.

The banks could be joined by others in leading roles on the deal as Permira prepares to list Golden Goose in Milan as soon as the first half of next year, according to five people with knowledge of the decision.

Golden Goose’s initial public offering, one of the most anticipated in Europe, is expected to value the company at roughly €3bn ($3.3bn), one of the people said. Investment bankers at Lazard are advising Permira on the IPO process, people familiar with the matter said, cautioning that the plans were still subject to change.

The brand, whose shoes sport a “Super-Star” logo and cost about €500 a pair, is a favourite among stars such as Taylor Swift and Selena Gomez. Permira bought the company, which was founded in Venice 23 years ago, in 2020 from rival Carlyle for about €1.3bn.

Golden Goose’s distressed trainers have become a status symbol among aspirational luxury shoppers in the US, according to New York-based luxury brand consultant Robert Burke.

“They resonate with the US shopper because they are a made-in-Italy product and they have this distressed design that sets them apart,” he said, adding that “their existing customer is very loyal”.

Carlyle, which had bought the company in 2017 from Ergon Capital Partners and retains a minority stake, propelled the brand’s expansion into the US and China.

Chief executive Silvio Campara, a former Armani group executive in Asia, was installed in 2018 with a remit of expanding the brand’s sales internationally. Campara, who has worked for Golden Goose for more than a decade, is its second-largest shareholder.

Before becoming CEO he ran the company’s commercial operations and focused on strengthening the brand’s distribution and retail network, which sparked sales growth. The brand has recently expanded into clothing and accessories.

Golden Goose said last week its revenues had risen 16 per cent in the third quarter to €145mn, while adjusted core profit grew 18 per cent over the same period.

This month the brand completed the acquisition of one of its suppliers, Sirio.

The IPO would be the latest by a European footwear brand, following the $8.6bn listing of German sandal maker Birkenstock in October.

The Birkenstock deal and a few other high-profile IPOs launched since summer were touted as potentially heralding a rebound after global listing volumes cratered last year due to falling valuations and rising market volatility.

However, lacklustre share price performance among newly listed companies has dented the hopes of bankers who were expecting it would bring a return to normal activity levels. Activity in the IPO market has slowed again in recent weeks.

Permira, JPMorgan, Bank of America and Lazard declined to comment.