⁠The Kraken Wakes: Creating the Utility of the Future

Transcript

Greg Jackson

Coming Up on Cleaning Up: Regional pricing in the UK will save £51 billion by 2040 on bills, and by the way every region will be cheaper. It is made we’re not doing this. // In a world where politicians understandably worry about the cost of fuel, it is seven times cheaper than a petrol or diesel car to fuel your car this way. Seven times cheaper. You can do 100 miles for £2.40. // I wouldn’t rule out an IPO, but it’s definitely not a plan. And there may be other ways to enable customers to participate as well, so maybe more creative solutions.

Michael Liebreich

Hello, I’m Michael Liebreich, and this is Cleaning Up. Welcome to the first episode of Season 13. Before we get started, I’m delighted to announce we have some new supporters. The following organisations have agreed to join our new leadership circle: Actis, EcoPragma Capital, Eurelectic, the Gilardini Foundation, KKR, National Grid, Octopus Energy and Wärtsilä.

Let me start by reading an extract of something I wrote 10 years ago. The electricity system of the future will have cheap renewables at its heart. We have to learn how to manage intermittency. The killer app will be a digitally controlled smart grid, which will provide the ability to shift demand to match supply, in ways either imperceptible to the customer, or otherwise remunerated by the provider. But where is the EasyJet of Clean Energy? Or the Virgin Atlantic? Where is the Vodafone. Where is the SafariCom? Where are the new services, the new providers, the innovation? The answer is they don’t exist because policy is being written with state and industry incumbents in mind. Only by releasing a maelstrom of entrepreneurial and competitive activity, will the world be able to build a high performing clean energy system, without driving costs to unacceptable levels.

One company, more than any other in the world has risen to that challenge, and it’s one of the new members of our Leadership Circle: Octopus Energy. My guest today is its CEO and founder, Greg Jackson. Greg’s mission since founding Octopus in 2015 has been to bring power to the people, by supplying them with 100% green electricity at fair prices. He’s been a guest on Cleaning Up before, episode 32, in February 2021. At the time, Octopus served 2 million households in the UK and its Kraken software, the platform which drives all of its pricing, processes and customer services, was being used by Octopus and other utilities around the world to serve 17 million households. Greg’s target at the time was to reach 100 million households by 2027. Despite its $2.5 billion global revenue, achieved only 4.5 years after its launch, Octopus’ global market share was less than 0.4%, and I joked with him that the target should not be 100 million households, but 1 billion households.

So let’s hear how Octopus has been getting on since then and whether its appetite for growth has been increased or tempered over the last 3 years. Please welcome Greg Jackson to Cleaning Up.

Greg, thank you so much for, I was going to say joining us here, but I'm joining you here at Octopus HQ for Cleaning Up.

Michael, welcome to our offices. It's great to see you again.

And before we get started, let me thank you because Octopus has become a member of the Leadership Circle. You're actually a supporter now of Cleaning Up. So thank you very much for your support.

Honestly, first of all, I think I and so many others in energy have been avid listeners, and we also tune into most of what you write. And so I think the only reason not to become a supporter was to remain independent. But let's be really clear, you've been such an authoritative, independent voice in this sector, it's really important to magnify and amplify it.

Thank you very much, and I'm looking forward to building the influence of Cleaning Up and the footprint of Cleaning Up with help from the Leadership Circle, which we're announcing pretty much as we speak. Now, you came on Cleaning Up, you were episode 32 it was February 2022, I think it was... 2021, February 2021, so three years ago, a bit more than that. And this was already a stellar success story, but you've grown since then. So can we review what you've achieved and where you've gone since then? So at the time, you had 2 million households, just under 2… it was kind of one week shy of 2 million households in the UK, and 17 million households on your Kraken technology platform. So where are you today?

So UK energy retail, we just hit 7 million households last week, and it's growing at around 100,000 a month. Well, actually, 100,000 new customers a month, and net growth probably 80,000 a month.

And that is Octopus? That's not through the relationships with anybody else that's branded Octopus customers?

Yeah, it's purely Octopus in the UK. Also, by way, about 1.7 million households across the other countries we operate in. So France, Italy, Germany, Spain, Japan, Texas and New Zealand.

Texas is its own country, I note?

Yeah, well, it's interesting, the per capita or per household energy electricity consumption, is seven times higher than it is in the UK. So actually, for one state, its energy usage is colossal compared to the UK.

That's extraordinary, seven times. That's presumably huge houses and lots of air conditioning and inefficient appliances? That's just a fascinating stat. I don't want to go down the rabbit hole, but amazing.

Very large household, lots of large appliances and a huge air conditioning load. But also, Texas has extremes of weather in both directions, so just a lot of energy usage.

So now, three years ago, you only had operations in, I think the UK, you were just launching in New Zealand, you had Germany and presumably Texas. So where else have you gone? Which other countries have you got now?

In retail? I can't remember which ones we had then, but it's interesting. During the energy crisis, we didn't launch any new countries, and we're currently present in eight of the top 10 competitive markets globally. So I don't actually know whether we've launched any new ones recently.

And then you've also got though, you had contracts at Kraken, which is your technology platform, at the time, you had deals with Origin in Australia, Hanwa, Eon in the UK, and Tokyo Power. So presumably more now?

Yeah, so the total number of licences now is 55 million publicly announced, but I think we've got 8 million additional ones that we signed a contract on last week. So I guess the public number would now be 63, 64 million licences. But that's just Kraken Customer, so that looks after the sort of core process. But then we've also got Kraken Field, which looks after field service management, we didn't have that before. Kraken Flex, which I think was just coming into the fold then, but is now operating in maybe a dozen countries, managing 40 odd gigawatts of flexibility. And then also Kraken Grid, where we provide hardware and software for monitoring and management of grid and distribution.

Okay, so just if we go back to the number of households, right? Because we had some banter, you had a target of 100 million households using Kraken, either Octopus branded or not, by 2027, and if I add it up, you've got 7 million in the UK plus 1.7 million elsewhere Octopus customers, and 63 million households under the Kraken licence.

The 63 million includes Octopus.

Okay, so you're at 63. The number is 63 now. And your target was... because the banter that we had was that I didn't think that 100 million in 2027 was aggressive enough. And I don't think it is, is it?

No, well, it's really hard putting targets on businesses, because I think if you undershoot your targets, then you risk holding back on your ambitions and actually self fulfilling failure to achieve. On the other hand, if you overstate them, then you end up in a record where you're seen as not delivering. So, you know, 100 million is definitely looking a bit on the light side. And given the pipeline at the moment would probably take us north of that. It's a slow pipeline, it's a very, very, what's the word? It's a huge process for companies to think about moving to something like Kraken.

I'm guessing it's a two year process?

The sales process.

The sales process, bringing people on board must take a couple of years.

It's very much like an earthquake. So what you get is very, very slow movement for a long time, and then it's very sudden. So most of the people that we are talking to about Kraken, you know, we'll be having conversations on and off for two or three years, and then suddenly it happens. And given that we've now got this track record of about 30 or 40 successful migrations, I think it provides more and more confidence that, you know... Kraken is the only globally deployed cloud-based, next-gen platform for utilities, especially energy.

So I've heard that process described as 'ringing for service at the Connaught.' Apparently there were these tassels, initially, for a while, nothing would happen, and then suddenly all hell breaks loose. So that's what it's like, getting one of your licences on board. But you did have this target of 100 million for 2027, I mean, certainly at the growth rate that you've got, you will get there in probably a year, I would have thought? If you've got to 63 you must be growing at 30, 40% per year, so you'll get there. Now the question is, when would you have that 1 billion target? Is that sort of 2030?

Well 2030 is quite in vogue in energy at the moment, isn't it? So, yeah, perhaps, certainly 500 million by 2030 might be something we should think about.

It doesn't feel ambitious enough, just on growth rates, because there was a statistic that you came up with actually, in episode 32 in 2021, which was that in four and a half years, you'd grown to £2 billion, $2.5 billion of sales, but you still only had 0.2-0.4% global market share. So, I mean, it's still even now... what are your sales now? Do you reveal that?

Yeah, I think our revenue is probably in the region of $16-$17 billion, but it's very dependent on the energy price. So Octopus Energy as a retail business, the revenue is almost directly proportional to what's going on with energy prices. Generally, Kraken is licensing revenue, so it's recurring revenue. Much, much smaller, but obviously very valuable revenue from an investor perspective. And yeah, I mean, it's relentless growth. Of course, there are other things we do as well. So energy generation, the services installing smart metres, heat pumps, electric vehicle chargers, solar panels and batteries in people's houses, and leasing electric vehicles. So there's quite a lot of other businesses in the group as well.

So let's get on to those. I just want to stick with households for a second longer. It does seem relevant to say, 'What market share, what reach, what penetration into households?' And I agree, you can't compare selling somebody all their electricity versus just getting licensing, but I guess the reason I think it's interesting is, if you look at what proportion of households will buy something from Amazon globally, at least once a year? You have to assume it's 25% 40% 50%? And it is many billions, so it is possible, right?

Oh, totally. And I think if we look at Octopus Energy in the UK, it is at about a 23% market share. By the way, it's the largest electricity company, I think the largest energy supply by revenue in the UK. And I think we're probably the only company to have gone from startup to market leadership in a large regulated market in Europe. So you know, I'm very proud of that. But then you know, Kraken currently services more than half of UK energy supply, so we've got more than 50% market share there. And then Kraken Flex manages maybe 45% of UK grid-scale batteries. So the technology enables us to achieve high market shares, comparable with those of US-style tech businesses. The big job now is scaling that technology globally, because it's transformative for a system, transformative for a company. And we talk about the capability of that, but a lot of people have talked in the past about the importance of a smart grid, or of data and energy,but the technology hasn't been there. Kraken does that job, and it's absolutely proven now the extent to which it can make a system more efficient, thus enabling us to go through the energy transition more cheaply, more quickly and with more citizen support.

Look, this is definitely singing my song, because in the introduction, I read out something that I wrote 10 years ago, but I've been thinking this for 15 years, that this is exactly what has to happen. But you have come along, and thankfully, you vindicated some of the things that I was saying back then, but you didn't go from the 2 million to the now 7 million UK households, organically. There was an energy crisis, and you made some acquisitions, talk us through those.

Yeah, so first, I think several million, maybe 3 million, of our customers have come to us... In fact, more than that. Three to four million have come to us organically, and we continue to grow, in fact, to accelerate organic growth. Customers prefer the way Octopus looks after them to the way traditional companies did. I think the acquisitions... We started acquiring companies quite early in our existence as a company. And we always knew that acquisition would be an important tool for rapid growth in a sector like this, and wanted to be good at it. Kraken makes it easy, by the way. So our most recent acquisition was Shell Energy Retail in the UK, it's about 1.5million households. The entire migration process took 51 days from the first customer migrating to the last one migrating, and during that process, customer satisfaction continued to improve. So I think that Kraken was designed, among other things, to make this easy, not just for Octopus, but because we know that M&A is a big part of utilities. It's a big part of energy companies, and we wanted to make sure that when a company runs their business on Kraken, M&A is easy. In fact, our first big Kraken client in the UK was Eon, and the catalyst for Eon taking on Kraken, or moving on to Kraken was they had acquired NPower, essentially as a result of a series of M&A activities across Europe. They ended up with NPower, and NPower had just finished a painful 11-year migration onto a new platform. Eon had a relatively old mainframe style platform, and they just had to work out how to bring all these businesses together. And so they used the process of migrating onto Kraken to allow that operational transfer to occur. So I think the first thing to say is,was that most of our growth has been organic, but M&A, enabled by Kraken, has been very powerful. And of course, during the crisis, we took on, I think, Iresa, well that was before the crisis, so we took on Bulb.

Bulb was the very high profile one.

It was. Bulb was high profile because it was so large that it couldn't go through the normal insolvency process in UK energy, the supply of last resort. Instead, the government had to effectively nationalise it. And then they sought to find a way to take it out of national ownership.

So let's dive into that Bulb one, unless there were some other acquisitions you wanted to list? But I want to dive into Bulb

No, I think that was the big one. There'd been loads, but obviously, yeah.

So Bulb, I mean, I was following it, not an expert. You obviously would have been under the hood looking at it in much more detail, since you acquired it, or before you acquired it. But my understanding is basically that they wereselling energy contracts. So selling selling long and buying short. And then when the energy crisis happened and all the prices went up, they were just exposed, hugely exposed and went bankrupt.

Yeah, I mean, that's it precisely right, right? So one great thing about your podcast, you've got an expert audience. They will understand Bulb was essentially incompletely hedged. It had a roughly three month hedge against a six month price period.

So you sign people up and you give them guarantees on their energy prices, and then you have to meet that demand in the market. And it got really, really expensive, and they went bankrupt.

Yeah.

But you didn't. So why did they go bankrupt and you didn't?

We've always been fully hedged. Internally, the risk focus in Octopus has always been extreme. And so, for example, one feature of Kraken is the ability to model a phenomenal number of scenarios and make sure that in all of them we're covered. And so frankly, the energy crisis was obviously a colossal shock to the market. I mean, at one point, the wholesale price of gas was 15 times normal, but the risk management within Octopus was absolutely focused on ensuring that whatever the scenario, we were covered. And there are vast amounts of data in that. I think what's unusual is that when we were first being audited as a large company, the auditors had to get specialists in, because so much of our risk management is running software. We build software rather than running a gazillion spreadsheets. And if you look at what a lot of traditional energy companies do, for example, in risk management, you'll have large numbers of people running their hedging module, their volume forecasting, all this stuff in spreadsheets. And the problem with spreadsheets is tucked away, there are macros and more and more tabs, and they depend on other files, and there's no way of automatically auditing that stuff. Whereas with software, every line of code we write, everything is reviewed by humans, but then you have a unit testing, doing automated testing of each bit of software, and it's all run through version control systems. If anyone ever changes anything you can trace it back. In fact, you can roll back. And so you end up with dramatically greater risk management when you're doing it using software control tools than traditional spreadsheets.

But you do take risk. So as an example, I think the very first Agile tariff, you had to introduce a price cap because you were exposing people. You were saying to people, right our wholesale price goes up and down. When it goes down, you can benefit, which is very nice, charge your EV, run your heat pump, whatever. But you had to give them a price cap because of the worry that suddenly the price would go 15x up or something like that. So you were taking risk.

Yeah, and in fact, I think we take loads of risk. The key in risk management is to know what risks you're taking. I think a tragedy in a lot of sectors, and you'll see it sometimes in energy, is companies take on risks they don't realise and end up in those situations like you described with Bulb. And by the way, that can happen for all kinds of reasons. And the more manual processes you've got, the more spreadsheets you've got, the more likely it is you've got risk bombs you didn't know about. But I think the flip of that is when you're controlling risk effectively. And by way, you can never be complacent. So I'm saying all this in a sort of slight advice way. But you can't innovate without taking risks, so we take an enormous number of measured, managed risks in order to drive change in this sector, so Agile was just one. But you know, almost everything we do with consumers, when we're trying new products and services, we have no idea whether they're going to like them, hate them. How are they going to use them? One of the greatest gifts... One of the greatest innovations from Silicon Valley , we all know about the transistor or the, you know, graphical interface.

You're going to say rapid prototyping.

I was gonna say the MVP, but yes.

The minimum viable product.

Yeah. And the whole thing here was saying, prior to the digital world, if you wanted to create a product, there was a lot of expense, you know, you had to create machinery and molding and, like, try and find a route to get it to people, but when it involves putting something on a website with a relatively modest amount of graphic design and coding in creative products, see how people react to it, and once Silicon Valley got used to that, they were able to innovate and build the products and services have changed the world. You've already mentioned Amazon as an example. Sectors like energy really haven't done anywhere near enough of that. Now it does involve taking some risk. If we launch a product and 1000 people sign up and end up losing us £150 a customer, we've lost £150,000, all right. Companies need to do a lot more of this stuff. And we see the manic avoidance of risk. You know, there are companies in this sector that will only take a risk like that if they can get it paid for by the government or by the regulator, which means innovation is 100 times slower. Companies need to take risks.

And you're taking these risks very publicly, because you're very present on Twitter, on social media. And during the crisis, there were a lot of people that, for all that you were trying to protect them, or that other people, the government, was trying to protect them, they spent tens of billions. There were some people suffering real, real stress. How did you deal with that?

Yeah, I think that first of all, if you don't listen to people, it's even worse. If you listen to people who are struggling and suffering, at least you understand what is happening. You know, often that requires, you know, it's painful, and if you're taking personal responsibility, if they know that you're there, then in a way you feel more vulnerable, but also you learn so much more and they share with you. And the insights you get from that really help you understand what matters most. And I'll give you a great example, Michael. Actually, it was one night I was going home, it was about half past 10 in the evening, I was on my way home from work, in February, and I knew that we already had customers who were too nervous to switch their heating on because they were worried about what their energy bill was going to be. And I couldn't countenance the idea of my customers suffering like that. I was picturing a pensioner sitting in a chair, cold. And I just remembered a conversation with a PhD engineer who works with us, helping on heating stuff. He said something like, it only takes 40 watts to heat a human. A typical gas boiler mightt be 7000 watts to 10,000 watts. We put an enormous amount of energy into a home in order to actually only need a relatively modest amount of it. So the question is, how do you get 40 watts into a human and, you know, it's the same as an electric blanket, that's about that level of heating. And I literally phoned up our Chief Marketing Product Officer that night, and I said to her, 'Can we get hold of 5000 electric blankets? And if a customer phones in, and they're, you know, particularly if they're limited mobility, elderly, infirm, ill, send them an electric blanket. And we cannot tell anyone.' Because we didn't want a headline saying, 'energy boss says you can't eat your home.' But after two or three months, we probably sent out well over 5000 blankets, and a few customers started posting on social media that they were glad, they were grateful, and it then got in the headlines because people loved it. The press were saying, 'this is a good idea.; Martin Lewis, a UK money saving expert, picked up on the idea, and before you know it, there was a run on electric blankets in the UK. You could barely buy any. And we know what difference it's made because we were able to look at people's smart metre data, and typically, the people that we'd sent an electric blanket to were saving £200-300 on their gas bill. And an electric blanket costs, what, 25 pounds wholesale? So you're getting an 8x payback in the first winter of this product. And that only came about because we listened to people saying what they're worried about. I could tell you more. Michael, I mean things like...

Well, you went on Radio Four, BBC Radio Four, and you talked about, there was a figure of £150 million that, I don't know quite whether you could have charged it, but you didn't. You took it off people's bills. What's the story of the £150 million?

Yeah, so we were on track to make our first profit during the energy crisis. Not because of the energy crisis, it's because after six years, the plan was that we would be profitable. You know, we had six years of investment, five years investment. But that was the wrong time to deliver that profit. So instead of delivering 150 million profit, we changed our pricing, reduced prices, reduced margins, and also set up big support funds for our customers. And so instead of making our first 150 million in profit, we broke even, because we gave that money to customers, which was the right thing to do during the crisis. And yeah, I think for us, what it meant was delaying the time when we became a profitable company. But you know, I think again, listening to customers, you know when there's a time when you should do stuff and time when you shouldn't.

I'd love to know whether you called your investors before making that decision, because you've got some very high profile investors. Obviously, the original investment via the original Octopus organisation, which wasn't energy until you came along, or not only. But then you've got Generation Investment Management, which is Al Gore's business that famously, notably put in, I think, $600 million. You've got some others. You've got the US pension fund, you've got a few big investors. Did you call them and say, 'Look, I'm going to do this. You know those numbers I showed you at the last board meeting, I'm going to do something different.' Or did you just make the decision unilaterally?

Yeah, we made the decision internally, but shared our thinking with investors throughout. I think one real benefit of being a privately held company is that we can continually be in discussion with our investors, really focused on the long term, and in the long term... It's not like we did a cost-benefit analysis of this, but we set out to build a brand that is trusted and does the right thing, because we think that pays off. And so I think in the long term, a decision like that is not only the right thing for your customers, but actually, I think, is the right thing for the business, because in the long run people know that when they needed it, we stood with them.

I mean, I can't resist at this point asking,you know, at some point, those investors will want their return, they'll want their exit. Are you going to do an IPO? And could you do that after an IPO? Do you think the public markets would allow you to behave in the same way? To be the same Greg Jackson?

It's really interesting. So first of all, on the investors wanting a return. I mean, they are all long term, and that's been a really important part of our decision making. And so far, the company valuation has grown at such a rate that they are sitting on very, very, very strong growth in the value of their stake, and we've got a large group. So all it means is, at any moment in time, like you've got Kraken, it's got software multiples in its valuation, strong growth. There's a rule in software, the rule of 40, which means...

So it’s margin plus growth has to equal 40. And then you basically have infinite money.

Exactly. And Kraken is at 100 or something, right? Maybe higher. But I mean the point being it's incredibly valuable. Octopus Energy Retail in the UK, growing to the scale it has, is kind of fairly unique among growth businesses in regulated sectors. And then the innovations we're doing, like Octopus Energy Service, making our own heat pumps. There's loads of areas that, in the long run, will create value that we're able to invest in because of our more mature businesses. But for our shareholders, I think there are now a number of very large privately held companies. I think Stripe is one example.

The famous one is always Mars, I believe Mars is private. At least it was at business school, which was 40 years ago. Well 30.

I think it still is, but I'm also looking at sectors that are relatively new growth companies, people like Stripe, there's no pressure on an exit.

But don't you feel like you'd like to let some of your customers, who've been such incredible champions for you, wouldn't you like to sort of say, we'll do an IPO like 10%-20% and you can all benefit from this incredible success story?

Yeah, I wouldn't rule out an IPO, but it's definitely not a plan, and there may be other ways to enable customers to participate as well, so maybe more creative solutions. And just your own question, though, you know. When we launched Octopus, a lot of the time, people would say to us, 'no one cares about their energy company, they just want the lights to come on, and they don't want to think about it.' And we were like, well, that's totally cool if people don't want to think about it, but no one's ever really tried having a large pool of active customers who can get a bargain by using electricity differently. And never mind the people who automatically will get a bargain, because, for example, we can automate the powering of a heat pump or charging an EV or whatever. So there were a lot of things that people hadn't tried and we were able to invest and do at scale. There is a bit of me that would love to see if you could have a company that's gone public, but still to make long-term decisions. I'd be really interested to try that as an experiment, but anyway.

I'm sure one could come up with examples, but it's certainly not the majority.

Well, Jeff Bezos wrote a letter, didn't he, to investors that said, 'if what you're looking for is short-term profits and dividends, don't invest in this stock. We're going to invest in long-term growth.' And he was able to deliver on that for a very long time, I mean, decades. So I do think it is possible, but it's not in our plans.

We’ll be hearing a bit more from Greg Jackson, after this short break.

Cleaning Up is brought to you by members of our new Leadership Circle. So that is Actis, EcoPragma Capital, Eurelectric, Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation and Wärtsilä. For more information on the Leadership Circle and to find out how to become a member, please visit cleaningup.live, that’s cleaningup.live

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Let's talk about some of those things, because you said that what had not been tested was, for instance, whether people would engage, whether people would... you know, you talked about sort of gamifying, so that people can make a bit of money by charging their EV or whatever. But you've done a lot of work on flexibility, on delivery, which was also unproven, the idea that a utility could actually deliver flexibility into the system, so, if it's not windy, you can actually do something about it. So not just with a small minority of customers who might be super engaged, but large numbers of customers. What has been your experience so far on that?

Yeah, I mean, it's been relentlessly, every time we test stuff, we find an appetite. And it's a bit like going fishing in a lake that is full of hungry fish, you know, put some bait in the water and there's plenty of people wanting to take it.

Give an example. That sounds marvellous, but give me an example of what and how. Give it a scale as well. Give it some megawatts or some gigawatts.

So at one end of the spectrum, you know, we've got well over a gigawatt of flexibility on electric vehicles on just one tariff, here in the UK.

So how many electric vehicles have you leased? Because this is Octopus EVs. Just to disclose, my wife is a customer, and we're just about to get our second one, so we've been a customer for three years. How many have you got? And then you say you've got a gigawatt? How does that work?

So the two businesses are separate, but in EV leasing, we've leased over 20,000 electric vehicles to people who are not necessarily customers of Octopus, although I suspect most of them will end up being. But separately, we've probably got around 300,000 energy customers, maybe more, assuming 350,000, they've got electric vehicles and are customers of Octopus Energy. Among those, there's about 185,000 currently on a tariff called Intelligent Octopus. With Intelligent Octopus, we connect to their car or their charger and just automatically charge the car at the best times. Every car gets a different schedule every day. It's optimised against 28, I think, different parameters. Processes four and a half billion items of data to do this. So I mean, among other things, the system uses a bit of AI to estimate when each car is going to come home.

I was going to say, that's a big spreadsheet.

Exactly, yeah. Then estimates how much battery each car is going to need. It's done a whole load of forecasts on grid pricing, but also other measures like grid balancing requirements, so that it can create a schedule for each car. Collectively, those cars currently, I think, are 1.2 gigawatts of flexibility. By the way, a year ago, it was probably a couple of hundred megawatts. I mean, it's growing at a phenomenal rate.

And let's put that into context for the UK. That's a system with, what is it, 45 gigawatts peak, so 1.2 is over a couple of percent...

Yeah, it's worth having, right?,

... of all of the UK's power demand is under your control.

Yeah. I mean, I think the second bit about it is that's just today when only 5% of cars in the UK are EVs, only about half of EVs can integrate with the system in the correct way, because they don't all have the kit for that yet, but it's coming. And Octopus has only got a 23% market share. If you multiply all that up, even if you just go from 5% of cars to well, simulate it would be 100%. Octopus would go to 20 gigawatts. Never mind all the other fact that there's other companies out there, and not all cars are compatible. So the point really being, this is huge. I mean, it's colossal.

What have you done with that 1.2 gigawatts? Have you used it? Have you actually wielded it as an actual tool to help the grid?

Yeah, I mean, it participates in as many grid services as they allow us to, and we're always talking to the grid about how that could be useful. By the way, there's no humans in the loop. This is all just fully optimised, fully automated. So it's managing this kind of balancing at the edge on millions, sorry, hundreds of thousands of devices. But then the drivers, the drivers get... in a world where politicians understandably worry about the cost of fuel, it is seven times cheaper than a petrol or a diesel car to fuel your car this way. Seven times cheaper. You can do 100 miles for £2.40. With petrol diesel, that'd be like £16.

I've just been to Chile, where they've got 3,000 hours per year in which the marginal power price goes to zero. And they said, you know, 'Mr. Liebreich, this is terrible, what should we do?' And I said, 'So you have people who are filling their cars with petrol and diesel whilst you're constraining… whilst you're not generating as much as you can from wind and solar. It's pretty darn obvious what you do.'

Yeah, it's incredible. I think, you know, people coming from an incumbent world struggle to get their mind around this change. But we've had an enormous amount of negative publicity about EVs, generated largely by, not necessarily cynically, but by incumbents who just can't get their head around it. But the reason that 93% of people in the UK who own an EV would never go back is partly because they discover just how astonishingly cheap it is. In fact, you know, I said 93% would never go back. On top of that, 4% don't know what they'd do. It's only 3% that want to go back. That is the astonishing opportunity of electric vehicles.

So with that flexible tariff, the Octopus Intelligent tariff, what I was fishing for back then was: there was a point where there was a power outage and you were able to deliver some considerable amount of electricity into the grid. Not deliver it in, but actually just stop pulling it out. So what was that example?

Oh man, I'm actually struggling to remember, Michael. I'm so sorry. There were so many examples fizzing through my brain. I haven't got that one in my head.

There were a couple of power stations that dropped out, gas-fired power stations. And there was sort of 400 megawatts or 800 megawatts, I was just looking for a number like that.

I tell you what, why don't we do, I'll do a two-minute snippet at the end, when I've double checked with the team and I've got the data for you.

You know, it's simpler than that. We'll just put a link into the show notes. If anybody wants to know a really nice example, then we'll link to it whether it's been written up either in the press, or you can put something together. But that brings me on to, there's a number of different areas of flexibility. You've got your EV business, which we've talked about. I want to get on to locational pricing and how the system needs to accommodate what you're doing, but before we go there, we need to talk about heating. The last time we met was at the launch of the Kenza shoebox heat pump. So Kenza, network heat pumps. We had Tamsin Lishman on the show. I can't remember which episode, but we'll put that in the show notes as well. And Octopus invested in Kensa, but you've been doing huge amounts on heat pumps, and you have whole academies training people to install them. How is that business going?

Yeah, at the moment, we can't keep up with demand, right? So first of all, on installing heat pumps, I think we've hired around 2,000 engineers to do this in the UK, and we've still got a really long backlog of customers waiting for heat pumps from us. Obviously, by way, we let them know there's going to be a delay when they sign up. But you know, we need to get to the point eventually where we can install the heat pump same day or next day, as you get with gas boilers. When your gas boiler goes bang, as they do, we can get you a heat pump quickly. So that's where we've got to move towards. But the reality at the moment is, despite a whole pile of unnecessary headwinds, some of them driven by policy, the demand for heat pumps is flying. We're manufacturing our own, and we spent a lot of time on r&d to create heat pumps that are designed to be managed flexibly. Great example, people assumed the heating load was non flexible. Reality is, even in the UK, with badly insulated homes, a typical home holds heat for three or four hours. So a heat pump that is grid aware, using Kraken to understand what the likely cost of energy is going to be over the day is able to schedule itself to preheat your home prior to peak electricity costs, avoid the time when the grid is stressed, and use very little power, if any, during those peak times. And also, our heat pumps run at high temperature, which means that typically they're hotter than a gas boiler, so you don't need to think about new radiators and insulation, any of those kinds of disruptive changes. There's still some room to go, for example, homes that don't have a hot water cylinder and don't have room for them are challenging, but what we're doing is we're able to pick off large chunks of homes and make them doable.

So you've been criticised for sort of creaming off the easy homes to switch to heat pumps. Do you think that that's a valid criticism? Because, I mean, clearly to go fast, that is sort of what you've done, right?

Yeah. I flip it around and say that the existing industry is largely focused on large, expensive homes, because a heat pump is a large, expensive job. And actually what we've done is we've invested enormously in everything, from literally buying our own factories and kind of creating our own designs to training installers at scale in order to be able to get the cost down for low-cost homes and for more modest homes. And the reason for that is, if we're going to replace gas with heat pumps, we have to be able to do the vast majority of homes at a cost-efficient level, as a society. I think it's much more like the Ford Model T, right? So by the way, I don't know if you know, but Ford, prior to the Model T, manufactured quite a lot of different models of car. They were all expensive and quite bespoke and all this stuff. And it was Ford that said, 'Look, if we really standardise we'll drive the cost down in doing so'. And by the way, all of the existing industry said Ford is going to go bust, there's not a market for low cost cars, these are luxury items. But they did it, and by creating a mass market, they also influenced policy makers to do things like building roads. They influenced other industries to do things like building petrol stations and garages and mechanics. And that then fostered a whole load of other companies who could make cars and make the most of all this infrastructure. That's what's happening here. So if we can make heat pumps a mass-market product, which is what we're doing, there is an enormous amount of opportunity for people to do the more challenging homes, the more complex ones, people who want more esoteric solutions, and to build all of the support industries as we change the entire heating sector from gas to electricity over a period of time.

So I've just remembered the last time I saw you was not at the Kenza heat pump launch. It was at my lecture, and then you came on a panel at the Imperial Energy Futures Lab. It was my response to the Lord Mayor's lecture on how marvellous hydrogen was, and I was pointing out some of the issues there. What would you say to somebody who says we should not be doing these heat pumps? We should be waiting because it's all going to go to hydrogen. What would you say to them?

I first of all say they should watch the video of that lecture. It was a tour de force, which, entirely driven by data, demolished any argument for hydrogen heating.

And by the way, apparently both Cadent and the Lord Mayor complained about it.

Okay, you know, I think that vested interest will always complain, right? And I think the reality is, there are only two ways you can create hydrogen at scale. Really, there's blue hydrogen, where you take methane, natural gas, break out the hydrogen, separate off the carbon dioxide that creates, somehow bury or sequestrate the carbon dioxide, which, by the way, I don't think has been successfully done at scale in a commercially viable way. And then you take the hydrogen and pump it into people's homes. That means you'll start with natural gas and then doing a ton of stuff, so obviously it's very expensive in order to be able to get into people's homes. Now we just had a gas crisis in the UK. That one gas crisis cost the UK something like £100 billion. For as long as we are dependent on a single source of fuel, gas for our heating, we're going to be subject to that kind of risk.

So for me, the answer on blue hydrogen is just very, very simple. The gas industry's own figures, and this is in the lecture that I gave, and we'll put a link to it, since you've been very kind in your remarks about it. But the gas industry's own figures are that if you do blue hydrogen, that it will be 2.2 times as expensive as natural gas per unit of heat. So your utility bills are going up by 2.2 in the best of cases. And green hydrogen, which is the other way, is going to be worse.

Six times more expensive than a heat pump.

So I don't want to go too far down the rabbit hole, but I did want to get that on the record.

Tell you what Michael, sometimes I get accused of being negative about hydrogen for heating because we've got a vested interest. It's the exact opposite way around. Several years ago, we sat there and said, 'Look, we can't be a clean energy company and carry on selling gas without working out how we replace gas. We did the work. We went and looked at, 'what do you do to escape from gas, to create a clean heating system? And as a result...

And it's not hydrogen.

No, we didn't have vested interests either way. But anyway, hydrogen would be easy for us. As an energy retailer, we could be billing for hydrogen like billy-o. In fact, we won’t, because it'd be expensive. But you could see it was not feasible that a nation, any sensible nation, would go down that route for the majority of its heating. And that's why we invested tens of millions of our own money into heat pumps, because we did the maths. And so it's not that we've got a vested interest. It's literally, we did the maths and put our money where our mouth is.

One other question on heat before we move on to flexibility and what the system needs to do to accommodate all of this. Is it just heat pumps? Or have you looked at other forms of electrification, whether it's resistive heating, whether it's radiative heating, all those. There are a number of other technologies, will you be offering those?

Yeah, it's a great point. So let's be really clear, it's electrification of heat that we're really talking about. But you know, today in the UK, we talk about our heatings powered by gas. But actually 20% of homes can't get gas, they're not on the gas network, right? In the same way, in a heat pump world, there might be some homes that don't have heat pumps, but instead, they'll have district heating powered by electricity, or they'll have resistive heating, or they'll have a combination. One of the great things about electricity is that it's fungible. So you can have electricity to your home, use most of it for a heat pump, but have one or two rooms heated with resistive and it all balances automatically. You don't even need to think about it, because electricity is so controllable.

Okay. So electricity is controllable. We're all sold up to this point, but the UK in particular, and Europe as well, has very expensive electricity. So this is a recipe for people's bills going up, unless what happens? What is the way to get those bills down?

We desperately need locational pricing. So the reality today, when it's windy, people in Scotland, where the UK has got tons of wind power, are paying the same price as they do when it's not windy. They're paying the same price as they do in areas that don't have wind power, and we pay the wind farms to turn off right? So you've got a commodity, a valuable commodity, clean electricity, and you throw it away, rather than selling it cheap to the people that could have it. Now, analysis by FTI Consulting, literally commissioned by the government, so not commissioned by an industry body or anyone's got an ax to grind, found that regional pricing in the UK would save £51 billion by 2040 on bills. And by the way, every region will be cheaper than it is today. It is mad that we're not doing this. On top of that, it would attract investments to the right spots. Instead of building wind farms where you're not going to be able to transmit the wind or transmit electricity, you'd build them where there is a need for electricity.

So let's just dig in a little bit. Locational pricing is where you split the pricing. Currently, we've got one price across the whole of the UK, and what you're saying is, where there's lots of renewables, that price should drop, maybe go to zero. Just dump it, rather than stopping producing or paying generators to stop producing. How many zones in the UK? What's your sense? Because there's kind of nodal pricing, which is where every substation is its own pricing zone. Would you go that far?

I mean, for me, as granular as possible. The technology exists to do it. It's relatively straightforward.

It should be said, there are plenty of markets in the world, big markets, that do this.

So, you know, again, this sort of energy exceptionalism is a real problem. But look, there's no point in being religious on this. Give us as many as you like, but one is definitely not enough. And then I think the other bits, Michael, kind of important here, are the more granular pricing. Not only do you say, we'll build a wind farm where there's demand for electricity, but things like batteries, you know, you'd be able to put batteries where you've got supply constraints. We'd even sell electric vehicles in the regions where... we would put more effort into selling electric vehicles and getting cheap power in the places where they can soak it up. There is so much more response you could do to this. And then data centres. Slough, to the west of London, is the European data centre capital, but you can't build anymore there for 10 years now because there's a lack of power. If we had zonal pricing, regional pricing, locational, nodal, whatever, the data centres that currently might be going to other countries or not setting up at all or waiting in queues or paying too much for electricity and therefore not able to expand and create employment, would be able to move to cheaper places, or locate in cheaper places where those vast power demands can be met cheaply and quickly.

Because that FTI Consulting analysis on behalf of the government showed that Scotland would have some of the cheapest electricity in Europe. So you would get this sort of economic boom, you could almost call it levelling up.

An interesting feature in the UK is that standing charges, the fixed cost of electricity, is highest in Scotland. So Scottish people pay high standing charges, high fixed charges, twice as high as London, and then they don't get any benefit at all from the fact they've got enormous amounts of local power.

So my favourite example... I have two favourite examples. One is we pay people £7,500 to install a heat pump in the south. But then when it's really windy, we pay the generators, the wind farms in Scotland, to shut down because we don't have enough capacity to bring that electricity to the south. So we actually, instead of just dumping that power in the north and then letting people buy their own heat pumps. We're subsidising something that is then being powered by gas. The other example is what happens when you get a very windy forecast: the national price drops, and the French buy lots of power for the interconnector to France, which we can't deliver, so we end up then meeting that by having to run gas-fired power stations to meet demand from France. It's completely bonkers.

It's bonkers and we've seen it before. The Common Agricultural Policy, right, some of the old wine lakes and butter mountains were the result of basically trying to prevent price signals from reaching producers, and as a result, you end up with phenomenal amounts of waste and shortage at different times. Here, we solve both waste and shortage.

Waste and shortage. Now, how do you deal, though, with the criticism that this uncertainty, changing all the regulations, number one will take an incredibly long time, because, remember, the new government's target is 2030 for zero-carbon electricity across the country. So how do you avoid it taking six years to implement a new system, and how do you deal with the criticism that it will drive up the cost of capital such that nothing will get built.

So first of all, on the speed. National grid in the UK introduced something called the demand flexibility service that was essentially paying customers to use less electricity at peak times, rather than paying generators who deliver that power to be on standby. They did that, I think, in three months, it went from being a proposal to live. You don't need to do enormous amounts of complex, big bang reform, immediately. You can actually introduce parallel markets which operate alongside existing ones, and over time, become the new one, right? And there are a lot of ways of doing it. So you can actually act very, very quickly whilst you're preparing for a bigger change. The other benefit of that is very often when you do big bang reform, you get unintended consequences, or you discover design issues and it's too late to do anything about them. So testing stuff in parallel and growing those tests from small to big derisks and delivers faster. It's very much like we talked about, the approach of the technology sector for creating new products and services. I think we could get on with that right now. In terms of cost of capital, every market where location pricing has been introduced, the incumbent generators have said that's going to be an issue. Every single time they've said it will damage investment, damage confidence, every single time they've carried on investing afterwards, just as they did before. I'm not sure there'll be any increase in cost of capital, but at the end of the day, sometimes it's worth a very small increase in your cost of capital if you're getting a very big increase in efficiency, and that's what we'd be getting. And there's no point having cheap capital deployed in the wrong places for assets that are literally throwing away what they produce. It's far better to have the assets where they're needed to be producing the stuff we need, rather than throwing it away in the wrong place. I mean, you used the word earlier, bonkers. It is mad not to do this.

Yeah, certainly, in the 20 years that I've been doing this, I have heard repeatedly that any change to the regulatory environment will lead to an investor strike. And you do get a hiatus while there's regulatory uncertainty, where people will hold back, but after that, as long as a system is well designed, the investment just flows.

First of all, the system has got to be there to serve the users: consumers, households and businesses, who are currently paying record, near record levels for their energy bills. That's not acceptable. It is not here for the producers. Secondly, the biggest barriers to investment have been the fact you couldn't build anything due to our planning laws and our issues with grid connections. Unblocking those, there will be a tidal wave of capital. The third thing is that 12 years ago, when the CFD system was introduced, they used the exact same language to say how terrible that would be for investment that they're now using to defend the CFD system.

And it's the same people, not just the same language, but these are actually the same people. How do you deal with… The alternative, in a sense, is to just build more transmission. I look at it as bookends, we've got one bookend we talked about, which is locational pricing, using price signals. And obviously, that's my camp, and I believe in that. The other bookend, though, is a kind of centrally planned version of, 'we will build more transmission, we will increase the capacity and get rid of the problem by building transmission.' Would that be a viable alternative? Would that work?

There's no doubt we need some more transmission, but it costs money and it takes time, and it creates opposition. The fastest, cheapest route to clean power is first of all to make the most of the system we've already got whilst we're building out the no regrets that we'll need in any scenario, rather than to waste time building stuff just to make up for the fact we don't have price signals.

Okay, on the question of speed, incoming government, incoming minister, Secretary of State for energy, Ed Miliband — 2030 for a decarbonised electricity system in the UK. The previous government's target was 2035, and I didn't see any way that they were going to hit it. Can the new government hit that target of 2030 realistically?

Yeah, I mean, I think it's doable, but it requires absolutely unbelievably rapid action, and already the clock's ticking, so it needs action now. But I've just come back from China. Fascinating conversation, Michael, we were with one of the biggest producers of wind turbines, and, you know, we said to them, what's the lead time if you want to order 150 megawatts of wind turbines, just as a sort of for instance. And he said, 'China speed, or Britain speed,' alright? And we said, 'What's the difference?' He said, 'Well, China speed, we can deliver them in three months, and they'll be operating within six. At Britain speed: three years, six years.' That's the challenge. The physics and the engineering of this are very, very doable. But do we have the policy framework and the political drive to enable us to deliver at the speed you can do the engineering?

Even on the engineering, though, there is a question. Were we to get to a zero-carbon electricity system? What do you do — we talked about this in episode 32 three years ago — what do you do when there's a wind lull that lasts a couple of weeks? And they do.

Yeah, I mean, it's interesting, right? My own personal view on that is that it's okay to burn gas right. Like build out a renewable system, you burn gas to fill the gaps. Of course, for a zero-carbon electricity system, you'd have to do that either using CCUS or some other road.

Which we're not going to build in six years. No way we're going to be building enough CCUS or hydrogen salt caverns, storage and long duration. So what you're really saying is, you're not going to get to a net-zero, zero-carbon electricity system, aren't you?

Yeah. And I think there are many complexities of this. For example, if we generate more wind power than we're using and we're exporting, is that a negative carbon electricity credit?

My own view is that if you say that we're going to have a zero-carbon electricity system, then at no point must it be generating emissions. And it doesn't matter what else you've done that's good elsewhere in the year, because you are still generating emissions, which is not the rules, or maybe the rules are a bit fluid?

I was going to say, and that's why I'm glad I'm not a politician. But as an economist and as a technologist and as someone driven by electrification, I can say that in any scenario, what you want to be doing is building the cheapest renewable infrastructure we can and providing price signals to enable consumers to benefit from that and to enable us to invest in the places we need it, for example, batteries and areas of constrained demand. Now, against this backdrop, by the way, stuff we're not talking about that really matters — and again, you see this when you travel to other countries — is tThe price of batteries is absolutely plummeting right now. Does that mean we can meet a two week hiatus in wind? Probably not. But combined with demand response, enormous amounts of flexibility, lots of electric vehicles, the rate of change of price is quite remarkable.

Two weeks per year is about 4% of the time. And if we could get to the point, we're currently in the UK 60% zero carbon electricity — renewables and nuclear. If we could get to 96% by 2030, do you know what I will give Ed Miliband and the government a free pass? Do I think we'll get there? Probably not, but that's certainly how I see it.

Well Michael, honestly, wouldn't 96% be amazing?

It would be absolutely extraordinary. And then, of course, you know, since you are a global business, we need to ripple it out around the world.

One thing that does strike me is we don't understand this. But exports are not just about stuff you can kick. It's not just about hardware. When you travel, you'll see that they have Pret and Mark & Spencer, and loads of things Britain's really good at, in many other countries. And I think it can be the same here, which is if we're really good at the technology, the understanding of how you use markets, the way to make flexibility appealing to consumers. We haven't even touched on the fact that more than half of Octopus customers, without an electric vehicle, have participated in various flexibility products and services we've offered to save money. Because earlier on, you talked about gamifying, and the way I think about is it's actually when you go to a supermarket, you don't think it was gamified. You just see special offers. And it's the same with electricity. In this world, we provide special offers to people to reflect times when we've got loads of spare electricity, or when it's a bit tight. All of them save people money and they act on it. It doesn't need everybody to act on it. If half our customers don't, it doesn't matter, because the half that do benefit themselves and everybody else by making the system more efficient. And if the UK can be good at innovating, for example, these products and services, we've got a massive export industry.

So you're talking to a former member of the UK Board of Trade, and I agree entirely. Although the funny thing is, in the political world, the 15% of our economy that makes stuff just enormously trumps — when it comes to exports — it enormously trumps anything we can do on services. That's a sad reality. But if anybody can change it, Greg, it will be you.

Thanks. Michael.

Thank you so much for joining us here today on Cleaning Up. It's been a huge pleasure talking to you.

And you too, Michael, thank you very much indeed.

Very good.

So that was Greg Jackson, founder and CEO of Octopus Energy, one of the members of our new Leadership Circle. And as always, we’ll put links in the show notes to resources that we mentioned during our conversation. So that is Greg’s previous appearance on Cleaning Up, Episode 32, titled ‘Building the Billion-Customer Energy Company”. Episode 154 with Kensa CEO Tamsin Lishman, “Green Heat (and Cooling) Under Our Feet.” My Imperial College Energy Futures Lab annual lecture on hydrogen, and the panel just after it on which Greg Jackson appeared. And also information on how demand response has been deployed to make up for supply outages in the UK. As always many thanks to the growing team behind the scenes. And make sure you join us, same time next week, for another episode of Cleaning Up.

Cleaning Up is brought to you by members of our new Leadership Circle. So that is Actis, EcoPragma Capital, Eurelectric, Gilardini Foundation, KKR, National Grid, Octopus Energy and Wärtsilä.. For more information on the Leadership Circle and to find out how to become a member, please visit cleaningup.live, that’s cleaningup.live

⁠The Kraken Wakes: Creating the Utility of the Future | Ep175: Greg Jackson

Greg Jackson

Michael Liebreich

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