The growth of Octopus Energy

At a time of climbing prices, crashing competitors and demands for green energy, Octopus Energy is welcoming new customers and investors, and is set to make a profit, says Jason Sinclair

It’s an ill wind that blows nobody any good. The surge in gas prices that has done for several UK energy suppliers has seen Octopus Energy gain more than half a million domestic customers from Avro Energy, when the latter stopped trading at the end of September 2021. Will soaring gas prices for consumers enable the six-year-old company to make its first profit? Al Gore’s investment fund clearly thinks so – in September 2021, it invested $600m for a 13% stake, valuing the business at $4.6bn.

Established in 2015, with a vision of “using technology to make the green energy revolution affordable”, Octopus Energy has grown into a rival to the UK’s Big Six – amassing 3.1 million domestic and business customers.

A KPMG Energy M&A team led by Gavin Quantock, with Sarah Strachan (who featured in ‘Career Paths’ in October’s Corporate Financier), has acted as strategy and lead M&A adviser to Octopus for three transactions now, which have raised more than $1bn of capital.

Different partners came in at each round. “At every stage, we have transacted with a party that brought something special and unique,” says Quantock. “Whether it was the technology licensing and equity deal with Origin, the joint venture with Tokyo Gas to enter Japan, or bringing in Al Gore’s investment fund to enhance the global transition story – it has always been a carefully thought-out strategy to deliver on these partners.”

Always keen to push its green credentials and permanently near the top of Which? magazine’s recommended providers list, Octopus has swiftly achieved unicorn status, with Australian electricity and gas supplier Origin Energy buying a 20% stake in the firm for US$327m in May 2020. By December of that year, Octopus’s book value had jumped again, with a $200m investment netting a 9.7% stake for Tokyo Gas.

Acquisitions have fuelled growth, within the UK and overseas, including the recent deal to acquire Spanish green energy start-up Umeme.

Originally a reseller, Octopus has developed into an investor in energy generation, particularly solar farms, while a chunk of company income also comes from licensing its customer management system Kraken to other utilities companies. This software is quite possibly the business’s real USP.

Despite posting a £61m loss as it ploughed cash into expansion in the year to April 2020, Octopus’s revenues jumped to £1.2bn, and the company’s valuation puts it not far behind British Gas owner Centrica, with its 6.6 million customers, North Sea oil and gas fields, and stakes in nuclear plants.

Octopus’s aim is to make the UK ‘the Silicon Valley of energy’, and double its 1,000-plus workforce by the end of 2021 at sites in London, Brighton, Warwick, Leicester and Manchester.

Co-founders Greg Jackson (CEO) and Stuart Jackson (CFO) aren’t related to each other, but the two Cambridge economics graduates have shared Octopus’s six-year journey, building on their previous finance and investment careers.

Of course, such a business needs capital – a lot of capital – and backing came from Octopus Investments, which had been founded by Guy Myles, Simon Rogerson and Chris Hulatt in 2000. The trio came out of the Mercury Asset Management global equity team. The three of them, together with the employees, own 75% of the business, which had £10.6bn of assets under management as of 2020.

Highlighting the difference

Greg Jackson, who joined Greenpeace at 16, is the public face of Octopus – a regular in TV studios, prolific (and responsive) on Twitter, and publishing his own business advice blog on Octopus’s website.

He has been outspoken during the recent energy supply ‘situation’: “Make no mistake,” he tweeted, “there are real issues in energy caused by global gas and shortfalls in UK nukes – but the idea of ‘crisis’ is being pumped up by the former Big Six in order to try to bounce government and regulators into restoring the cosy oligopoly they used to enjoy. Undoubtedly, there are idiot companies out there who offered bonkers low prices when the market was low, and seek bailout now it’s high. They don’t deserve a place in a critical market. And the Big Six habitually overcharged for their bloated operations through opaque prices.”

Well, he would say that. But, in differentiating Octopus from the Big Six – (British Gas, EDF, E.ON, npower, Scottish Power and SSE) – and from struggling resellers, Jackson has also argued for a greater push towards renewables in the UK market.

His background as a serial founder and angel investor in tech businesses dovetails with his CFO’s institutional experience at Barclays, but it also means that many of Octopus’s key staff come from tech rather than energy backgrounds.

And tech is at the heart of the business: “Through Kraken, our cloud-based energy platform, we’re revolutionising the energy industry in the same way [as Apple did with its App store], creating jobs not just through increased demand for affordable renewables, but by facilitating the development of new and emerging industries like electric vehicles, electric heating and vertical farming.”

Gains in translation

The December 2020 deal with leading Japanese utility company Tokyo Gas had the dual benefit of giving Octopus access to the Asian market, while bringing in a $200m investment for a 9.7% stake.

The Octopus Energy brand will be launched in Japan as a 30:70 joint venture, backed by Tokyo Gas’s working capital and funding, as Octopus brings its expertise to a market where renewables account for less than half the percentage of electricity generation they do in the UK.

Jackson said the deal “will turbocharge our mission to revolutionise energy globally”, after launches in Germany, New Zealand and the US.

Tokyo Gas’s president, Takashi Uchida, pointed to the diversified tariffs using digital technology that Octopus achieves in the UK as a reason for it being an ‘appropriate partner’ for his company.

Ryoji Etsuki, strategic planning manager of the new joint-venture company TG Octopus Energy, said Octopus had “already proved in the UK what a disruptive impact it can have in a liberalised market” and with market liberalisation “in its infancy” in Japan, its model has significant opportunities for growth, with the joint-venture offering a “springboard to change the Japanese energy market and Japanese people’s attitudes toward energy and lifestyle”.

Full pipeline?

Octopus entered the US market in 2020, with the acquisition of Silicon Valley-based start-up Evolve Energy, with the $5m deal heralded as the ‘pivotal element’ in a $100m investment into the US sector. ‘Octopus Energy US’ aims to acquire 25 million US energy accounts by 2027 – a quarter of the firm’s global target of 100 million accounts.

Some of those customers will be in Germany, where the 2019 purchase of Munich-based start-up 4hundred morphed into the formation of Octopus Energy Germany. The latest European deal, in August 2021, was in Spain, where the acquisition of Umeme is part of a £60m investment in targeting a million Spanish electricity accounts.

Octopus Energy Spain joins a market where almost half of the electricity is generated by renewables, but it believes that its Kraken technology and customer service can provide differentiation points.

“Our targets for Spain may be high, but I have no doubt that we will see a similar growth trajectory in Spain as we did in our other locations,” Jackson said of the Spanish transaction. “Since the beginning of the year, our German customer base doubled, and in the US we increased customer numbers by a factor of five. There’s no reason why we can’t deliver the same outstanding results in Spain.”

About the article

This article originates from the Corporate Financier November 2021 edition. The magazine is exclusively available to ICAEW Corporate Finance Faculty members.