10 Million Customers - Where Does Octopus Energy Go From Here? Decentralised Energy, Battery Storage, Nuclear Power. Chief Strategy Officer, Tim Heal, Reveals a Vision for the Next Decade.

0:06We've got 300 ,000 customers who have electric vehicles and we choose when those EVs charge. and in return we give the customer a really really big discount on electricity price. How much has it cost me to run this system by just doing solar and battery instead of doing all this other stuff? And the answer is it's now basically getting competitive.

0:30Welcome to Curious Customer, the consumer podcast. This show is for anyone curious about the world of consumer. From insights, trends, companies, brands and design, we'll uncover the hidden stories from the people at the forefront of consumer industries. The show has a wide range of guests from marketing leaders to startup founders. So whether you're in the world of brand building or the startup ecosystem or simply curious about the world around us, then this podcast is for you. My name is Matt. I hope you enjoy the show.

1:02Super. Tim, thanks so much for joining today. Really appreciate your time. You are Chief Strategy Officer at Octopus Energy. You're also on the board of Octopus Energy Generation, which manages their assets, which generate the power. And you oversee various things within the company, including acquisitions. So folks might remember the acquisition of Bulb not that long ago. You also cover International Strategy. You cover Kraken, which we'll talk about in a minute. And fundraising as well. So the business has raised over£2 billion today. And to give a sense of scale, so Octopus Energy launched in 2015.

1:39Today has well over 7 million UK households, about 25 % of the UK households, and well over 10 billion in annual revenue. So it is a bit of a beast. And Tim, let's start with your overview of Octopus Energy and just perhaps the way that you see the world and maybe go into a few of those main services as well. Yes. So thanks, Matt. That's a good description of the business. So we've actually got 7.5 million customers in the UK, but we've got 2.5 million outside of the UK, which is not known to many people. So we have businesses in Germany, Italy, France, Spain, New Zealand, Japan, and in Texas as well.

2:16So while the business obviously started here, it's expanded to lots of other places. There are broadly four bits to Octopus Energy. There's the retail energy business, which is what people see, which is where we sell gas and electricity to household customers and to businesses. There is what we refer to as low carbon tech or services, which is how do you electrify demand, energy demand? By this, we mean things like heat pumps, electric vehicles, solar on your rooftop, home batteries, etc, etc. So how do we get that into people's homes? Because that is a huge driver of decarbonisation and a better, smarter energy system.

2:53And then, of course, we have the generation business, which you referenced, right, where we manage around sort of nine or ten billion dollars of funds for institutional investors who are investing in lots of renewable projects around the world. And then finally, the fourth one is Kraken, which is the technology business. Kraken operates separately to Octopus Energy because it provides critical services to businesses that compete with Octopus Energy. So in the UK, Kraken isn't only used by Octopus. It's also used by Eon and by EDF and a company called Good Energy. So together, those four retailers make up about 50 % of UK households.

3:29Kraken is a big business in its own right with more than 70 million customer relationships through its utility clients. So those are the four main bits. And then the final thing to say is I mentioned the eight countries we're in for retail, but we also operate through Kraken or through Generation in other countries as well. So probably our global footprint is about 20 countries around the world. I just want to dive into a piece which will feel very nuanced, having just heard you say all of that, which is around the electric vehicles, Oxfam Energy electric vehicles, and how they can actually combine together to create effectively a very large battery.

4:04Can you just touch on that? Yes, we have around 270 ,000 electric vehicle customers who are in a tariff construct where we guarantee them cheaper electricity when they are charging their cars. And in return, they allow us to control when that charging happens. So from a consumer perspective, it's a really simple proposition. you get cheap electricity but i i need to be able to choose when your car charges subject to some core constraints like it needs to be fully charged in the morning by 7 a.m because that's when i need it for example so we always solve the customer's needs first and then we can do an optimization after that the reason that's worth doing is that the price of energy is not the same all the time so while if you have a a normal household electricity or gas contract you get a fixed price for that electricity, usually for a year and gas for a year, the price that actually we are exposed to as the retailer varies all the time, changes every half an hour.

5:06Now, there are various things we can do to lock in those prices. But fundamentally, we operate in a dynamic energy market. And it's our job to manage all of that variability so that we can offer good prices to customers. So we're effectively absorbing a lot of that risk for them. But because the price of energy is changing all the time, it can be a lot cheaper to use energy outside of peak periods. So for example, if it's the middle of the night, generally people aren't using as much electricity and so the price is lower. Or if, for example, it's the middle of a very sunny day and there's lots of solar going, the wholesale price will be lower.

5:41So if we can actually match the charging to that specific time of day, we can access those lower prices in the wholesale market and we can pass those savings on to customers. The other thing we can do as well is we can enter a sort of form of contract with the system operator, which is called NISO, National Electricity System Operator, and they will essentially pay us for helping them to balance the grid. So by moving this demand around of EV charging, we also get payments from the system operator and then we can funnel those back to customers in the form of cheaper price as well. Got it. Okay.

6:14So let's just take a step back and I'm an Octopus Energy customer so let's just leave my heating aside and focus on electricity. When I flick the switch to turn the light bulb on in the early evening when I get home from work what is actually happening? Where is that power coming from specifically with Octopus Energy? We need to separate between the physical world and the commercial world here. So physically there is a national grid that supplies electricity to all homes and businesses in the UK Unless you're off grid and very few homes and businesses are fully off grid. And that grid has to be balanced at all time, which means the amount of electricity that we put into it needs to equal the amount of electricity that comes out of it.

6:56And obviously the demand on that grid, so the amount of energy people are using is changing all the time. And therefore the amount of supply that we're putting into it is also changing all the time. So when people get home, as you in that example, and turn the light switch on, but also start to use lots of electricity in cooking, for example, or running the washing machine, that creates more demand. And that means that somewhere in the country, there needs to be more energy that's generated at that point. Now, that can happen in a few different ways. For example, we can burn more gas. We can put energy from batteries or electricity from batteries back into the grid.

7:30We can release it from pumped hydro. Or if we were curtailing renewables, which means effectively stopping them from generate, we can allow them to generate. That job of balancing is done by the system operator, who I mentioned, Niso. So in reality, of course, is lots of people start to use energy at the same time, because of course, we all kind of get home from work at similar times. And then we have to kind of turn on generation. So that's what's happening in the physical world. So what happens when you turn on the lights from a commercial perspective, or in terms of the money flows, is that additional consumption of electricity at your house is recorded through the meter, whether that's a kind of smart meter where we can see exactly when it's happening or it's a done meter in which we see it over an extended period of time.

8:16That is applied to a tariff. So there's a price per the kilowatt hour. And there's also a sort of, there's some other charges as well that are done day by day. And then we collect that money. And then we, as the supplier, then we pay everyone else in the industry on the customer's behalf. So we pay the generator. Actually, what we really do is we buy energy from a wholesale market, which generators are putting their energy into on the other side. So we buy energy from the market. And then we might buy directly for some generators. And then we also have to pay for all the other stuff in the energy system.

8:50So the distribution networks, which are the wires that go into your house, the transmission network, which is the big pylons you see across the fields that carry the electricity up and down the country. and then a bunch of other charges that effectively are there to help the system operate. And these are things like subsidies for energy efficiency and insulation and the warm homes discount. And there's some stuff on renewables that are subsidized, et cetera, et cetera. So there's a whole bunch of stuff like that. And that is fundamentally the job of a supplier in this market context, which is to collect money from the customer and pay all of those other industry participants.

9:30And then what we're left with is a margin to cover the cost of operating ourselves and then a profit. And then essentially there is guidance about where that profit margin should be. And for suppliers, it tends to be around 2%. So that is basically the sort of fundamental model. We can kind of get into it, but where we're going is more interesting. And actually it's to do with how we build a more digital and a more renewable oriented energy system. Let's go there. Let's carry on this thread. Yeah. OK. For a long time, as long as we've had energy systems and grids, they worked in a mode which was we try to predict the demand in the energy systems.

10:09That's when people use energy. And then we respond to that expected shape of demand by turning up or down fossil-based generation. So in the evening, when everyone's cooking their dinner and watching TV, et cetera, et cetera, we burn more gas. And then in the middle of the night, when everyone's asleep, we burn less. And that's kind of fundamentally it. And so if we ever need to have more energy in the system, we just burn more or less fossil fuels. And we balance the system. And by the way, that's quite a fine balance because there isn't a sort of a pot of electricity somewhere that we can use to make up.

10:42Once that gap gets too big, actually everything stops working. You know, things shut down. So the national grid, the national system operator has to keep that in a very fine balance. And they do an excellent job of that. What you then do is you say, well, what happens if I add loads of renewable energy into that mix? And this is a, oh, what happens when, you know, the sun isn't shining and the wind isn't blowing problem, which is both a challenge inside a single day, an intraday problem, but also it's a challenge through the winter in particular, both because people are using more energy because it's cold.

11:13So they're heating, but they're also inside more. And because you have this thing called the dunkelfloutter, which basically refers to a period, an extended period of time where it isn't Sunday and it isn't windy and so we're having to rely completely on fossil fuels. So the question is then, okay, how do we balance that system? That feels a lot more difficult. And there are broadly two ways of doing it. The first way is kind of fairly obvious which is we can store electricity. So we can just put it all into big batteries and then when we need that electricity we can take it out again. That actually works very well.

11:47We do that today. It's mainly focused around very near-term balancing. But as the battery technology is getting cheaper and cheaper and cheaper, we're able to store for longer periods. The second way we can do that is less obvious, but actually in some ways are just as powerful. And that's called demand shifting. What we mean by that is we actually change when we use electricity. So let's take that sort of example of within a day. We say we want people to use as much electricity as possible in the middle of the day. And when it's not sunny and windy, we want them to use as little as possible. and you go, well, that feels sensible, but actually how do you do that?

12:21Because people are going to use electricity when they're going to use electricity on and I'm not going to not use it because it's not sunny. Now, what's interesting is that for your average consumer who's just got a TV and a gas boiler and some lights and a microwave and all the rest of it, that is kind of broadly true. There is a limited amount of demand shifting that you can do with that type of household. But once you start to add an electric vehicle and you start to add in heat pump and then solar and batteries, suddenly you discover that you can shift demand around. You either can shift it because there's a battery in the house and that essentially does the same job, or you just charge the EV at a different time.

12:59And actually, that works very, very well. We do that today. We've got 300 ,000 customers who have electric vehicles and we choose when those EVs charge. And in return, we give the customer a really, really big discount on electricity price. And that works really nicely. And you can actually also do it with heating, believe it or not. And the reason is because most of the expensive electricity happens between 4pm and 7pm. And most buildings, particularly if they're made out of brick, which basically all our building stock is, have quite a lot of thermal mass, which means that they retain heat energy.

13:35So if you heat the building before that peak, so you heat it, let's say, between 1pm and 4pm, it's nicely warmed up. You stop heating for three hours. It gets a bit colder, but not very much colder. Maybe the internal temperature drops a degree. And then at 7pm, you start heating it again. And lo and behold, you have demand shifted electricity for heating. And you have simultaneously helped the grid and at least a much lower cost of electricity. And that's what we do. That octopus is a global leader in this. Utilities and governments and research businesses and all the rest of it come from all around the world to learn about how we do this.

14:08Because we are right at the cutting edge of this form of demand management. We refer to this collectively as flexibility in the energy system. And so the more flexibility you have, the more renewables you can stick into it. And overall, through time, that drives the price down. A lot of the success of both of those areas seems to come down to batteries, both in the sense of the quality of the battery in the EV so that you can charge it quicker when it makes sense for demand shifting, but also the ability to store it and maybe discharge it. Can you talk a little bit about innovation in battery, how that is accelerating and your involvement within that, if any?

14:44So this is a really exciting area. And the massive, massive growth in battery capacity and the reduction in battery costs is going to completely change how our electricity systems work. We will move from being supply following demand, so burning more or less stuff in response to the amount of energy we need, to being demand led, which is using more or less based on the amount of energy that we have. And this is a flip that's happening in the energy system now. Without going to a whole sort of rabbit hole about battery technology, broadly there are two big things that have been happening in batteries.

15:23The first thing is that electric vehicles have enormous batteries. An electric vehicle has a battery between 50 kilowatt hours and 100 kilowatt hours. Your average UK home uses 10 to 12 kilowatt hours a day. So you've got something like 5 to 10 days worth for an average home of storage plugged into your house, okay? That is really, really significant. We've never had that before. So we're making these really, really big batteries. EV sales are going up, whatever the sort of naysayers say, you just have to look at the data. And so there's just a lot more batteries around. And because of that scale, the cost has come down.

15:56The second thing is that there's been an enormous amount of R &D spend that has gone into battery chemistry and battery manufacturing, particularly in China, and the costs have just completely plummeted. And the fall in battery prices is even steeper than the fall we saw in solar prices. So when you combine solar and battery together, solar is already cheap and getting a bit cheaper. Battery is pretty cheap today, in fact, and getting a lot cheaper. You kind of go, well, how much has it cost me to run this system by just doing solar and battery instead of doing all this other stuff? And the answer is it's now basically getting competitive, particularly for places in the world where there's a lot of sun.

16:34So in the kind of sunbelt, you can pretty much run a system on solar and battery if that's what you wanted to do for the equivalent cost of burning gas and diesel and those sorts of things. You can't do that yet in the further north and south hemispheres because we have these annoying things called seasons, from an energy perspective at least. Actually, quite a lovely thing, in fact, but from an energy perspective, it creates a kind of challenge. But because we're moving so quickly in that direction, this will begin to solve more and more and more of the problem. So I'm very excited about batteries.

17:06The final thing I'll say about batteries is I think we're going to start to see more really small modular batteries just available for people to have in their house. So in Germany, you can actually plug a battery just into the wall and it will take electricity out and put it back into your sort of mini house grid. And that is, that works. That's not like science fiction. You can just do that today. And these things cost for 500 euros or something like that. So the payback on them is one to two years. Sadly, we can't do that in the UK yet because of our electrical regulations, but it's likely that that's going to change.

17:43And so you think, okay, we're going from a world where there are kind of no batteries in the energy system to one where there are grid scale batteries, there are EVs plugged into houses, there are big batteries in homes, and there are small batteries in homes. That's a lot of batteries. And so suddenly we have all this amazing capacity and that whole intermittent renewable generation problem is vastly reduced. It's a fascinating future that. I just want to take you into the environment today and take you back out into the field, into the solar, into the wind. And the question I have is why the UK consumer seems to be paying more for the energy than our European counterparts.

18:21And I can't get my head around this. We've invested a huge amount into renewable. And I think maybe one of the interesting ways to break it down is if you can talk to some of the variables, some of the drivers behind cost structures and what we can change and influence and what we cannot yet. Yeah, this is the topic in energy at the moment. I would say that in your sort of top list of things that people talk about in energy right now, we are talking about cost of energy and we are talking about this change and this energy transition and battery stuff. So cost is the big thing. Let's do UK versus the rest of Europe.

18:56So actually our prices are pretty high. Germany is high as well. It's cheaper in France because they built loads of nuclear ages ago and it's basically kind of depreciated and it's part of the state. It's cheaper in Spain because they've got loads of sun. You know, there are various reasons, but broadly kind of UK and Germany have some of the highest prices. And it's mainly to do with either the purchasing power parity in those countries or the generation mix in those countries. But that in itself is a very big involved topic. So I want to say it's actually more complicated than that. So there are sort of simple answers and there are more complicated answers that relate to the second part of what I'm about to say.

19:31Only a portion of the energy bill is the generation bit. Actually, a lot of it is the networks and other subsidies. Now, when you go and build new generation, you're spending lots of you're spending billions of pounds, for example. And when you go and build new transmission networks, you're also spending billions of pounds. And the fundamental economic model is that the investors who invest into those things are either given a guaranteed price to sell that energy at. And in the UK, we call that a CFD. Or they're given a guaranteed rate of return on the amount of money they've invested into the assets.

20:08And that's kind of how it works in the networks. And the reason that's a deal is because the investors are basically bringing a massive amount of pension fund money, which is highly risk averse. And it wants to know that it's going to earn that rate of return for 20 years or whatever it is. And they say, we're not going to spend this much money if we do not have a very clear line of sight and confident view on the amount of money we're going to earn. And so what happens is those prices effectively get locked in every time that these investments take place. And so even if we do other things that bring the system cost down, there are still contractual commitments, essentially between the system, if you want to simplify it, or government, and those large generation of network businesses that keep those prices locked in.

20:52That is fundamentally the challenge. And that is the reason that when you're trying to bring the cost of energy down from the sort of centralised system perspective, you can't just wave a bit of a magic wand because actually the decision about who gets paid what has already been made. And then there is what we refer to as a merchant market, which is where the price of energy is changing and that is susceptible to the amount of new renewables and capacity and the rest of it. And broadly, if you put more stuff into that, the price does go down. So we've got to distinguish between prices that are locked in and prices that are in a true market.

21:26And what we would say is you need a lot less of the locking in and you need a lot more of the kind of market based activity because that will encourage competition and that will kind of drive the price down. The other thing is that because energy systems have always operated in this way, which is we build generation somewhere, we build a network to carry electricity to where we want it to be. And then when it's needed, we turn on the generation. the current system regulatory framework is all based around that concept. So if you start doing things like saying, well, I'm just going to generate my own energy over here at the edge, or I'm actually not carrying the energy over much of your network just a little bit, you know, I'm only next door, or, you know, well, why can't I put energy back in and get paid for that?

22:11You can't just do that because the regulations and the economic models are already kind of set and pre-agreed. So you, and if you change those, a lot of people get upset. So you've got to do this really difficult job, which is called market reform, where everyone has a different opinion and everyone has lots of vested interests and no one can agree on everything. But that's fundamentally what government has to do to get the price down. And it does mean there will be winners and losers. It means that there is a finite pool of value. And actually, if we want it to shift towards consumers, that means that someone else has to lose out.

22:41What we think we need to do is reform the market so it's actually much, much smarter. and then any new money that we spend in the system, whether we're spending on generation or batteries or whatever, will actually just be more economically efficient and over time that will bring the prices down. The final thing I'll say is that I think a phenomenon we are going to start to see more and more and more is decentralisation of energy systems because that problem I described, which is trying to get the central system cost down, doesn't exist if you go off-grid. If I just go and buy some solar panels and batteries and maybe some kind of diesel backup or whatever it is, I might be able to pay effectively a lower cost of energy than I get from the grid.

23:23And if I'm like a big business or an industrial player or data center or whatever it is, I might actually think that's a better way to go rather than buying from the grid. That's both good and bad. It's good because it actually meets that new demand and it allows people to access a lower cost of electricity. And it happens faster, right? So from a broader kind of national economic competitive perspective, it's good. It's bad because we are putting less volume over the centralized grid. And that's creating a cost allocation problem. The less volume, the less traffic we have over that grid, the more expensive each one of those kilowatt hours is.

23:59And actually, that does need to be paid for. And the people who end up paying for it are probably the ones that are more vulnerable and don't have the ability to kind of take themselves off grid. And that becomes a big problem for governments socially. And we're already starting to see this kind of this effect happening. So I think there's a real imperative to do this market reform so that the centralized system can continue to remain competitive with the decentralized alternatives. And I guess one of the catalysts for decentralization is EVs and having batteries in the home. But let's not go back there.