Joe McDonald, Co-founder and CEO of tem: Fixing the $900bn problem in energy

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0:32Thank you very much. Hello and welcome back to the Scaling Europe show. I'm Seb Johnson and I am thrilled to be here with Joe. Joe, welcome to the show. Thank you for joining me. It's a pleasure. Thanks for having me. Can you give a super quick intro into who you are and what you're building? Yeah, so I'm Joe. I'm one of the co-founders and CEO at Tem. Tem's building a modern transaction infrastructure for a modern energy market, effectively looking for a way to allow for businesses and the generators of a market to have much more direct transactions, cutting out those transaction fees, putting money back into the pockets and the users of a system.

1:09um i've been in energy for just over a decade now it seems crazy how quickly things have changed um but an interesting origin story i don't think anyone naturally goes to become an entrepreneur in energy these days um so it's always fascinating for me speaking and meeting and sharing my story how i got here in the first place and how did you get how did you get into the world of energy why did you decide to build the business that you're building um that's a funny one actually so i actually qualified as a as a lawyer um i think back in the day my dad was a software engineer and he got made redundant multiple times so i remember asking my mom like what is a job that is like future proof to all technical like technological innovation etc um the irony being that you know in law that's not safe with with ai but i decided to be a lawyer and then very quickly realized i just want to be the client on the other side of the table um and i was fortunate actually after getting rejected from google somewhere like fifth or sixth round um i was introduced to an individual um who was at british gas centric in the uk and he was starting an energy company i had no idea when you flick a light switch on like how it all works i honestly didn't but i got very excited about this concept within energy and specifically electricity and this was back in 2013 that it was becoming fully decoupled from the commodity so when you move oil and gas around the world you're kind of tying the transaction and the money you pay to the barrel itself whereas electricity is like ethereal it's much more about data and a data reconciliation game and we kind of saw an industry that was still using pieces of paper they hadn't even moved to excel in 2013 so i just got very excited about a huge problem area that i think was kind of right for disruption um and then we ended up having a very exciting sort of seven years building our our first company from 2013 to 2019 in the UK.

2:59Amazing. And how did that lead you to TEM and where you're at today? Yeah, so our first company was building like virtual power plants. It's kind of like the 1.0 version of the VPP virtual power plant space that now exists in the kind of energy investment sphere today. We ended up aggregating a lot of battery storage assets together and renewable generation and created a trading company here in the UK, like a vertically integrated utility. Interesting, it's quite a slog on the investment landscape, like no one really was looking at NTECH back then as a good investment opportunity. Most VCs were telling us that it's too incumbent driven, too much market risk, too complex.

3:43So actually after one of our later rounds of funding, we got about 20 to 30 applications to buy us from strategics like Shell and BP, etc. So we ended up selling our company to Shell in 2019 and integrating the kind of trading aspects of our company into Shell and actually ended up earning billions for Shell through the short-term trading power markets with our product. And it was kind of that point where I realized I'd seen the Electron transaction like genuinely end-to-end. It's probably only a handful of people in the world that had actually seen that at the time. and I started to really think about rather than just innovating in this space around the peripherals of the energy market, the customer application layers or trying to make the way the market works more efficient, we thought let's just go real big here with our ambition and just rebuild the way we transact the electrons end-to-end.

4:38Taking a lot of inspiration actually from the fintech companies post-2008 financial crisis like Strikes starting in 2010, we kind of saw the same parallels in 2022. And that led us to actually start 10 with three other co-founders that I'd worked with before at my company, LimeJump, previously in end of 22, start of 2023. That's so interesting, the stripe for energy. And what's it been since then? I think you started in 2022 at the beginning of 2022, maybe the end of 2021. Around that time, before GPT released, before the AI bubble, we were in that sort of different market dynamic sense where we are where we are today energy now has become an incredibly hot topic um you know there's a huge huge demand for energy both from tech companies but also politically we're seeing a lot of people are talking about the lack of energy generation here in europe and specifically the uk how has this conversation changed or you know how has the market changed the way that you're thinking about the business it was interesting i guess from it hasn't really changed from even back in 2013 i think the rest of the market has woken up to realize a couple of fundamental truths like one this is probably the last biggest industry that's left not disrupted by tech generally like you've had massive innovation in fintech in cyber in health tech now a defense tech and we'd had almost nothing in energy and energy is perhaps a bigger market than most of those combined.

6:10Even if we think about the total amount of transaction fees taken out worldwide in electricity transactions is over$900 billion. That's more than every kind of fintech valuation company on earth. It's just huge, but kind of unknown. And so I think it's become far more aware that the cost of the electron is now setting the new world order. So every government, every VC, every business is now acutely aware of the cost of electricity and what it actually means for their future sovereignty, their future competitiveness. And obviously, what we saw with AI had two effects for a company like us. One was the demand and understanding for the demand for electricity is becoming more and more important because it's one of the number one inputs into the cost of compute, which derives the cost of a model.

6:59And number two is that even our business wouldn't have been possible without the advancements in machine learning, reinforcement learning and data engineering for us to solve our problem. We couldn't have replaced the human labor cost and resources and human brains that are currently involved in the electricity transaction without this technology innovation. so what's been is just like awesome to be feeling like finally we're at the right time and we're the right people to be trying to tackle this problem and we finally have the right uh rest of awareness of the market in terms of investment um regulatory and just general tailwinds which you can only really dream of as an entrepreneur of like landing at the right time um uh to be able to build a company that we're trying to do and how are you solving the problem you're solving how are you able to bring costs down well effectively when a electricity transaction is done today, it's like a human daisy chain of decision making in order to effectively move money from those that need to buy energy to those that need to sell energy.

7:59And it just goes through utilities and middlemen and trading firms and ultimately through in like well over 100 markets in the world, something's called a wholesale market. And what it means is that in order to complete a transaction, businesses and generators are losing about 30 % of the power costs in transaction fees in order to facilitate that and that kind of worked for oil and gas because there was a necessity for transactions to take days to be done on very aggregate large scales and to be done by centralized big trading parties that are holding the risk of holding oil and gas like your typical big energy companies but electricity is far more like cash like when i move money from my bank account to my friend's bank account no one's actually picking up the physical cash and moving it there anymore right it's all about data reconciliation and that's the innovation we're seeing in electricity if you can create fulfillment algorithms that allow you to disintermediate all of that human labor cost so you automate the entire transaction process and decision making and then you shift more probabilistic models where you can predict the prices that are needed to complete the transaction between the users of the system you simply take that 30 and actually shift it back into the pockets of the users and become far more efficient.

9:14So as we operate in the UK, we're now helping over 3 ,000 businesses transact their electricity. And in doing so, we're effectively introducing a new floor price in the infrastructure cost of transacting electrons, which means you create a price advantage as a company like us in a very price-driven market. But you're using innovation with your actual technology and the liquidity you're generating through this fulfillment engine to deliver that rather than, for example, just trying to reduce your cost to serve and reducing the customer experience or loss leading for one year and then having to make the money back in other products the next year.

9:49This is a genuine pricing innovation in the space, which has been empowered by machine learning, data science, data engineering tools. It's just far more accessible. I think Uber took over 90 PhDs to build its kind of fulfillment and surge pricing algorithm ours is like that but 4d chess it's far more complicated but we could actually start doing that now with six data scientists so it's just that factor increase in the ability to build in this space that has made um what we're trying to do possible as a startup and what's response been like from the 3 000 businesses that you're serving so i think in reality with the businesses that we serve there's two things that we had to really focus on yes it's really cool to geek out about the technology and the innovation we could deliver in order to reduce the cost of transacting but if we required like a behavioral change it would not translate so we are really here to try and serve the 99 of a market the lifeblood of most sort of manufacturing and business operations which is SME through to medium-sized enterprise customers who are currently working with the utility in a traditional way to buy their power on one, two, three year contract basis.

11:01So we needed to find a way to reduce any friction on that behavioral change and then lift the customer experience through what we have ended up building, which is kind of a near utility layer that actually allows the customer to switch to us, get their bills from us, facilitate conversations with us all through a much more, let's say, elevated customer experience and far more automated on our end all of that was just to get liquidity into our infrastructure it's it's funny when we first started 10 we went to about 18 utilities saying hey we've built this infrastructure why not use it as a replacement for how you do business today i think typical founder naivety i didn't expect all 18 to say no and actually forced us to build our own customer application layer that allows the businesses to switch to us in the first place which is what you'll see if you go to our website it's red that's our neo utility layer underneath that is the infrastructure that we spent two years building and actually red is providing now an amazing case study of what a great experience can be for a business that's looking to buy their electricity um but equally empowered by an amazing price which in many cases we have to deal with the this is too good to be true problem in terms of how we're growing today with businesses.

12:15That's amazing. And yeah, it's an amazing problem to have, I guess. And you spoke about building the infrastructure and then building the customer application layer. Do you think you're going to go anywhere else? Are you happy with the role that you're playing right now? Or would you like to go even further into the energy market, even look at doing generation one day? Or do you like, you know, do you see the role that you have being the role that you play for forever? Yeah, I think if you're rebuilding the transaction infrastructure, It's kind of the nucleus where everything else is built around.

12:46We much more see us as an AWS or a stripe for energy than we do being seen as like a revolute for energy or like literally going into building infrastructure. I think the moment you move that direction, you slow yourself down to a degree. Building supply and moving into physical assets is difficult. And I think we can see in every market there is enough impetus and enough competition in building generation today, whether that be renewable or not. Frankly, that's not a debate necessary we sit on. But we know that nuclear fusion and modular reactors will come at some point. We know that there's decentralized wind and solar and hydro.

13:21We know that biogas, biomass and even nat gas is coming back. All of this is decentralized supply being built by others and all of this needs a route to market. So we like the idea of building the kind of rails that everything moves on in this modern world and really ripping out the wholesale markets role and the traditional kind of players that sit on that. The customer application layer ourself was something we didn't want to build, but we ended up having to. Interestingly enough, that in itself becomes a huge business opportunity and value proposition. But more and more, we want to move towards, we want to create hundreds of new NIO utilities.

13:53We want to turn every council into a utility. The fact that we kind of allow for that route to market to become so much easier to access, for us, hopefully democratizes the way people look at buying, selling, managing their energy more generally. I think when we think about expansion, we think about the UK. It's actually an amazing proof point for the rest of the world. We actually lead many market setups. It might not feel like it, but we have a very efficient market to a degree. and so you get countries like Japan, Australia, Texas, the east coast now of America copying how the UK has done things.

14:36So what we love about this is the opportunity for international expansion of our infrastructure and that's the key thing that we want to be working on over the next few years. I said there's nearly a trillion dollars in transaction fees coming out worldwide. Imagine the impact we could have on humanity if we put even a third of that back into the pockets of users of a system. It will be a huge opportunity in production and efficiency gains across manufacturing, compute, even living standards across the world. And that's our main, main ambition is to do it in more countries rather than getting into a more integrated model in just the UK.

15:11Yeah, the potential here is absolutely, as you say, like massive. And when you look at the other markets, when you look at international expansion, do you have a view of where you'd like to go first is it the us is it deeper into europe what does that look like yeah it's it's interesting because i mean everywhere has this problem of fulfillment right everywhere it doesn't matter if you're a state-owned monopoly um and so unlike a normal energy market expansion plan where you need to think about regulations and who's there and you know can we compete and can we set up our ownership layer and you know that sort of thing falls away for us you know like we could work in china we could work in india we can work in in Australia, we can work in Germany.

15:51So for us, it's about trying to understand a couple of dynamics that allow us to at least to start with more similar market structures like the UK. And so I think, you know, somewhere like Texas, the East Coast, so New York State and Massachusetts, very interesting to us. Australia is very interesting to us. But actually, what gets me most excited is, for example, India, India, UAE, these countries that are rapidly progressing towards a much more complicated system and i think have the opportunity to build bottom up a far more efficient infrastructure that we could help them do so in like markets that are just sizably 10 20 times the size of the uk market europe is interesting and i think we still struggle in the same way most companies whether you're fintech or for us entech is the fragmentation of europe can still be difficult it doesn't necessarily make as much sense however that is becoming uniform and we really like the look of countries like spain italy um and certainly germany is one of the leading energy markets in the world too so there's some some crossover potential there interesting that's a it's a long list of potential countries to get into that's the problem is like the for us though the biggest problem is like how do we stay focused and execute there's so much market pool from territories companies um different areas of the market actually picking your next bets are by far the hardest thing we have to do at 10 again it's a good problem to have and how you how do you think about assessing that is it about you know the infrastructure that they have the size of the market the disparate nature of the energy market how are you assessing which countries go after first yeah so we look at a couple of things so we look at the total transaction fees being spent in the market so we just get an idea of the size of the problem um that's always a good starting point we look at markets where you already have your kind of bps your shells constellation traffickers the people who are facilitating the kind of market dynamics like we have in the uk is another great sign that that there's going to be an opportunity and then we start looking at things like how decentralized is their supply so how fragmented is that market how what's the regulatory support in a lot of cases yes we are very regulatory light in the energy space which is a complete rarity but we still want to know what's the direction of travel for that regulator what is things like access to data because that's so important to our platform is we get access to the data to build the models to be able to deliver our product so there's sort of small things that we would look at around the ingredient mix of an industry in the direction of travel of the regulator but after that it really is a question of things like your general interoperability of the platform language all of those sort of things that more and more with the use of our like pricing agent and being able to use voice ai based systems that can change language overnight actually a lot of your more traditional limitating factors of where you launch um are really changed fundamentally to what it would have been like four or five years ago in building our our model interesting and look we're going to go a couple minutes left you're building a i guess like a company really at the center of a lot of what we're seeing across ai um the ai wave you know energy cost being too high the huge demand for data centers um you know when you look to the future of ai you look to the future of energy generation what do you think is going to change over the next five or ten years you know are you do you expect to see more sort of uh decentralized energy production do you expect to see a re explosion of renewable energy a return to gas oil coal what do you think is going to happen i think it's actually interesting i think it's quite almost first principles is every nation on earth is realizing that they need an unfair advantage in how they produce electrons and if they don't produce electrons cheaper than another nation they will drop in the world order i think you look at the uk the uk is at risk it's not about like we saw in the budget hey we've saved you 150 pounds on your energy bill you know we've saved you two three percent and that's better than last year we now need to say are we able to produce electrons cheaper than india china the us other european countries because if we are not we become a tourist state it's as simple as that manufacturing cannot compete compute and data centers cannot compete so all becomes actually far more less about cultural wars or you know or subsidies and much more about what is the cheapest way of producing the electron and so you can see that you can see china is very good at renewables at scale and a nuclear right their nuclear facilities producing about the same amount of power of one of our new nuclear facilities costs 10 times cheaper like that is no longer register oh that's an expensive infrastructure project that is now your compute costs in the UK are 10 times more expensive and those sort of uh decisions are really forcing everyone to go back to the drawing board and work out where their strengths lie right if if the US is not gas it's going to be not gas led if India would be coal or renewables can be coal led if China's nuclear so what does it leave for the UK I think there's strong arguments around using the kind of natural resources that made us a superpower back in the day.

20:57It's the wind, it's the seas, it's tidal. It's the kind of small entrepreneur-focused innovation around the technologies, hopefully like fusion and modular reactors. And so I think in that sense, I'm very hopeful that we will produce the electricity we need. I think it's going to be a big question about who wins overall in that space on a global stage. And I think fundamentally, the risk we see in the next five years is if we're so hyper-focused on subsidizing the costs that go into, for example, compute, the lifeblood of industries, the SMEs, the businesses, the manufacturing also can't suffer for that reason.

21:35They can't take that burden of that cost of innovation on the next best AI model if it means that they're paying 30 % more on their bills. So it's so important that a country gets it right across the board in how they implement their new energy policies, supply, and market dynamics. And for all of those reasons, I'm actually really hopeful because it allows for competition to come in. It always is the case. You'll get more transparency, more competition, more innovation. We needed a 2008 financial crisis to birth fintech. We needed 2022 to birth, I think, the end tech revolution, which is only just getting started.

22:10And I see some amazing entrepreneurs around us that give me actually a lot of hope of what the next five to 10 years are going to look like in every market. And what about, you know, the UK, we just had the singleton review about nuclear energy there's a lot of people calling for the government to kind of adopt his review on uh trying to progress the nuclear agenda across the uk you think that's the right approach nuclear is awesome at how it does what it does right it's incredibly safe it produces baseload power which is incredibly important um it is actually very not uh it's not a damaging environmental product right it's it's as green as you can almost be when you look at the actual like carbon per kilowatt hour produced however it's the cost and that's something we cannot ignore we cannot build things that cost 10 times more than another country currently builds that infrastructure at and if large easy to kind of win centralized nuclear power stations what the government thinks that they can bet the uk's future on that would be incredibly scary for me like what we do very well is put wind turbines up in farmers fields build anaerobic digestion plants build more biomass plants look at using the tides around our shores phenomenal case for energy we're very good at subsidizing that first like innovation leap in producing the technology and we've been very poor at scaling that up and if scaling that up on nuclear is large centralized power stations uh you know that um like i said we have lovely architecture for people to come visit in london but that's about it in terms of a country's competitiveness over the next 10 years amazing that's good to hear uh yeah it's interesting you know that report has created so much noise on like social media x linkedin uh it's interesting to get your viewpoint from somebody who like lives and breathes energy uh well joe thank you so much for joining me today it's been great to chat um and i look forward to kind of seeing you and 10 you know go go and grow and grow no it's it's a pleasure um and i would be forgiven if i didn't say for my marketing team if you are a business uh looking at your next energy contract just reach out to us like we'll help you in some way i'm sure um and we're we're here to obviously uh put money back into your pockets love it love it love it love it thanks joe take care bye you too bye