When Shell decided to exit its fledgling UK and German household retail energy business earlier this year, a rival was waiting in the wings.
Octopus Energy is paying an undisclosed sum for Shell’s unit in a deal that will complete this year and make the London-based company the UK’s second-largest retail supplier after British Gas with 6.5 million customers.
The move is the latest step in Octopus’ meteoric rise since it was founded in 2016, with financing from London-based Octopus Investments and a favorable push towards a transition to clean energy.
Founder and CEO Greg Jackson described the group’s early days as “a street fight” as it raced to build a large customer base.
These scrappy instincts and the company’s customer service platform, Kraken, have led some to liken Octopus Energy to a tech start-up rather than a traditional British utility.
But like many tech start-ups it has yet to make an annual profit, although it now operates in 17 countries and had revenue of £4.2bn last year, supplying gas and electricity to homes, as well as making wind power, leasing electric cars and Install heat pump and solar panels.
Asked whether investors should expect profits anytime soon, serial entrepreneur Jackson said he remains focused on growth. “We are moving towards what is really important to us, which is building a global electrification business.
“We will be investing in growth for a long time to come,” he said. “When we choose to be profitable, that’s our choice.”
Octopus’s credentials as a disruptor have helped win over investors, including Generation Investment Management, led by former U.S. Vice President Al Gore, but it may need to refine its startup mentality as it prepares for more than 1 in 5 UK households are served.
Octopus offers stiff competition and is the biggest winner in a push by UK regulator Ofgem over the past decade to shake up the dominance of the so-called Big Six suppliers.
The effort proved controversial. After the energy crisis broke out in 2021, dozens of Octopus’ competitors collapsed, which intensified the following year, exposing many undercapitalized and poorly run players.
Octopus has emerged from the ashes, taking over Bulb Energy in a controversial process last year, adding 1.5 million customers, as well as Avro Energy, which powers more than 580,000 homes.
It is now part of the new “big six” that dominate the market – traditional suppliers British Gas, EDF, E.ON and Scottish Power , and another former challenger Ovo. Their combined 91% market share is greater than the share held by the larger vendors since at least 2017, according to Cornwall Insight.
Are families better off under this new version of the system? The energy crisis has stifled competition over the past two years, with tariffs centered around price caps set by the Office for the Gas and Electricity Market.
Jackson defended the company’s position in the market, claiming it leads others in customer service and brings innovation.
“Before you could have a bunch of companies but no differentiation,” he said. “It’s like going to a souk – a bunch of people selling the same thing and everyone shouting louder than the other.”
The innovation includes taking part in a new scheme run by National Grid last winter where households were paid to reduce their electricity use during peak times if the operator was concerned about power shortages.
National Grid launched what it calls a “demand flexibility plan” as a tool to deal with extraordinary circumstances last winter, when output at France’s nuclear plants was cut and there were concerns about natural gas supplies after Russia invaded Ukraine.
The program posted photos on social media of participating families sitting by candlelight, but Jackson believes participating families actually ended up receiving “free electricity” for the day. Such schemes are expected to play a larger role in an energy system dominated by renewables, with supporters arguing they reduce the amount of new infrastructure needed.
“We spent several years working with National Grid to help them see the benefits and possibilities,” Jackson said.
“If you get a bumper harvest of green energy, you get cheap energy,” he said. “If we don’t have a good harvest, then we can pay you to use less when supplies are short.”
Octopus is building its business around the growth of managing and optimizing renewable power supplies, such as by developing software and tariffs to optimize electric vehicle charging, a point in an increasingly competitive market.
“For the current group of large vendors, things are a little different,” said Tom Goswell, director of consumer markets at Cornwall Insight. “There are some examples of more innovation happening, which is benefiting consumers.”
Octopus’s meteoric rise has not been without controversy: last November, rivals including Scottish Power and British gas company Centrica took it to the High Court, arguing that the government unfairly favored the company in its deal with Bulb The company. Octopus said the case was “desperate” before the deal was allowed to go ahead.
A key test now will be the prospect of Kraken and Kraken Flex software, which Octopus licenses to other providers to manage customer accounts and dispatch and use power from renewable assets.
The technology helped attract Generation Investment Management, which invested £311m in Octopus Energy for a 9% stake, as well as other shareholders including Japan’s Tokyo Gas and Australia’s Origin Energy.
Kraken currently has about 30 million accounts, accounting for about half of Octopus Energy’s enterprise value, and Jackson aims to grow that to 100 million by 2027.
However, while the Kraken business is profitable, Octopus is not: last year it reported a loss of £165.7m. “The underlying business is basically break-even,” Jackson said, but it’s helping to subsidize customer bills.
He added that the UK was a “great place to start a business”, although it did a poor job of helping businesses grow.
“I think the UK provides a less than friendly environment for building Google and Amazon,” he said. “If you said that in the UK you’d be laughed at – whereas in the US you’re raising investment.”
This article has been updated to indicate that Octopus was funded by London-based Octopus Investments, rather than being backed by venture capitalists.
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