Yahoo Finance How Octopus Energy swam into a winning position despite the crisis ruining its competitors
It has been a good two years for Greg Jackson and his Soho-based team: their six-year-old company Octopus Energy has raised more than $1.5bn (£754m) from a string of international investors since April 2020.
A $300m deal announced with Canadian pensions giant CPP Investments last week adds to $600m in September from former US vice-president Al Gore’s fund Generation Investment Management; $200m last December from Japan’s Tokyo Gas; and almost $400m from Australia’s Origin Utility.
“This is really a global investment into a company built in the UK,” says 50-year-old Jackson, founder and chief. The challenger is now valued at almost $5bn, knocking on the door of British Gas owner Centrica.
What makes the latest round even more striking is that it comes at a time of unprecedented turmoil in its core retail energy supply market in the UK.
Twenty-five suppliers have gone bust since August faced with soaring wholesale gas costs. Bulb, one of Octopus’s key rivals, is being bankrolled by the taxpayer after running out of money in November.
Both Bulb and Octopus brought fresh entrepreneurship into a creaking sector, as two of the challenger suppliers founded over the last decade to take on the legacy Big Six suppliers - with better customer service and cheaper deals.
But their divergence in fortunes is down to Octopus's better hedging strategy and, predominantly, its software platform. Called Kraken, it uses sophisticated algorithms to slash suppliers’ and customers’ costs and is increasingly licensing its technology to rivals, following the model of Ocado and others.
Key to Kraken's long-term appeal, Octopus says, is its ability to make the most out of the growing wind, solar power and batteries on the energy system to deliver cheaper energy for consumers. Earlier this year, Octopus Energy bought sister company Octopus Renewables, meaning it now owns £3.4bn worth of renewable assets.
“In a nutshell, Octopus has built the energy system of the future,” argues Jackson, who wants to build an Uber or Amazon-style disruptor. “And that’s what people are investing in.”
With investment growing and rivals floundering, Octopus looks increasingly well-placed to fulfil his vision.
The road ahead is far from risk-free, however. Large losses and wafer thin margins - £46m loss in 2020 on turnover of £1.2bn, compared to £30m loss on turnover of £456m in 2019 - are par for the course for a high-growth, well-backed challenger, but cannot last forever, as Bulb found. And further licensing deals for Kraken are not guaranteed, with some potential buyers resistant to change.
In the shorter term, Britain’s gas price crisis shows no signs of abating, and it is unclear how customers will behave when the price cap is hiked by hundreds of pounds in April. Octopus has recently taken on 580,000 customers from collapsed rival Avro Energy - an almost 24pc increase to its books which now stand at 3.1m. With the opportunity, however, comes risk.
“They’re good at customer service,” says Investec’s Martin Young. “One of the challenges when you grow pretty rapidly is onboarding all these new people without disrupting your customer service.”
Jackson stresses Octopus’s focus on customer service is “relentless” with him joining other senior managers every Monday morning to go through 200 pages of customer reports sent through the night before.
Building an energy company was not the original goal but the sector was chosen for its reputation of high costs and poor service. The founders had been searching for tech platform opportunities having sold their software company.
“One of the challenges in any sector is they don't believe [the digital revolution] is going to happen to them,” he says. “We thought, the only way we can really bring this technology to bear is to build an energy company, to demonstrate how technology can make a difference.”
Kraken Technologies has been licensed to Octopus’s Big Six rivals EDF and E.ON, as well as Australia’s Origin Energy and others, serving 25m customers. Octopus hopes it will be serving 100m by 2027. Jackson says it means companies can cut operating costs by up to 75pc, and argues its cloud-based platform gives it an important role in the global shift to cleaner energy.
“It’s the same platform, whether you're in Australia, Tokyo, London, or Munich,” he says. “What that means is, when you learn more about how to optimise charging a car battery in Houston, the same optimisation is instantly available around the world.”
The technology is also helping Octopus weather the gas price crisis, giving it highly accurate demand forecasts that can help it buy energy at decent rates in advance and avoid some of its rivals’ buying mistakes.
With such strong growth, a move to the public markets is an inevitable possibility, though is unlikely for now. “We have such outstanding private shareholders that are really focused on our long-term objectives,” Jackson says. “I think we’ll be able to create more value for society, for our shareholders, for our staff and for our customers than we would if we were public.
"There's no plans right now, but you wouldn’t rule it out at some point.”
