UK’s Octopus Energy plans to ramp up Texas presence with new investment

Octopus Energy has surged to the top of the U.K. electricity market with its plucky brand of clean, flexible, customer-centric energy. Now it’s loading up on new investment to make a broader push into North America.

The sprawling clean energy startup pulled in two new investments in recent weeks. On May 7, it announced a re-up from existing investors, including Al Gore’s Generation Investment Management and the Canada Pension Plan. Last week, it added a new round from the $1 billion Innovation and Expansion Fund at Tom Steyer’s Galvanize Climate Solutions. The parties did not disclose the size of the new infusions but said that they lift Octopus’ private valuation to $9 billion. Previously, Octopus raised an $800 million round in December, putting its valuation at $7.8 billion.

Thus, eight-year-old Octopus enters the summer of 2024 as one of the most valuable privately held startups in the world, but one whose impact is felt far more in Europe than in the U.S. The new influx of cash will help fund expansion in North America, both by growing its retail foothold in Texas and by ramping up sales of the company’s marquee Kraken software to other utilities. The company has its work cut out if it wants to reproduce its U.K. market dominance across the pond.

“It is a Cambrian explosion of exciting growth in almost every direction,” Octopus Energy U.S. CEO Michael Lee told Canary Media last week.

In the U.K., Octopus has gobbled its way up the leaderboard of electricity retailers, consuming competitors large and small until it reached the No. 1 slot this year. It supplies British customers in part with clean power from a multibillion-dollar portfolio of renewables plants that it owns. The company lowers costs to customers by using smart devices or behavioral nudges to shift their usage to times when the renewables are producing the most cheap electricity. Octopus also began making its own heat pumps, to help households break out of dependence on fossil gas at a volatile time.

In the U.S., land of free markets and capitalist competition, market design largely blocks Octopus from rolling out its innovations, and instead protects the monopoly power of century-old incumbent utilities. There is no national electricity market to take over, but a state-by-state hodgepodge of fiefdoms that obey differing rules. So Octopus made its first stand in Texas, whose competitive power market most closely resembles the U.K.’s system. It now sources power for tens of thousands of retail customers in the state.

“It is absolutely clear to me that the energy transition is happening first in Texas,” Lee said. ​“This is a fantastic market to be in if you know how to work with customers and help them be a central focus in providing that energy transition to the grid.”

Such an assertion might have elicited derisive snorts from Californians or New Yorkers a few years ago, but facts on the ground now support Lee’s thesis. 

Texas has long produced more wind power than any other state; last year it caught up with California on large-scale solar installations, and this year, its battery market could outpace California’s too. On the consumer side, retailers are free to experiment and make their own clean energy offerings (or dirty energy offerings, if they feel like it). Regulators recently fast-tracked a pathbreaking virtual-power-plant pilot that harnesses household energy devices to relieve stress on the grid, and pays participants for the help, actualizing a long-held dream of grid futurists.

That freedom to experiment lets Octopus respond in real time to grid conditions, Lee said. That’s a sharp contrast to rate design in other states, where even innovative, time-varying electricity schemes have to go through years of regulatory vetting and piloting, such that the grid may be in an entirely different place by the time they eventually get rolled out. 

“We get to launch, within 24 hours, a new rate based on a new hypothesis,” Lee said. ​“If there’s a cost shift, we have to pay for that cost shift.” 

The term ​“cost shift” reverberates with fearsome significance in distributed-energy discussions, because utilities frequently raise the specter of shifting costs from one group of customers to others to eliminate subsidies for rooftop solar. Octopus offers discounted electricity to customers who adopt clean energy tech and agree to shift flexible consumption. But the company needs to make sure the clean energy devices actually save more money than Octopus gives away in consumer incentives, otherwise it would ​“pay that cost shift” and lose money.

Some Octopus offerings seem hard to square with a strict profit motive. The company opened an electric-vehicle leasing business in Texas alongside its retail service; customers who lease an EV get to ​“drive free,” meaning Octopus comps all the kilowatt-hours pumped into the vehicle at home, as long as Octopus gets to optimize the charging schedule against movements in the wholesale market managed by the Electric Reliability Council of Texas.

But Octopus isn’t doing this as a pro-EV charity: It offers the discounts by lowering the costs to serve the customer. By using Octopus’ software to automatically shift consumption toward times when lots of cheap wind and solar power is flooding the wires, ​“we can get a lower-cost grid, a deeper decarbonized grid, and a more reliable grid all at the same time,” Lee said. This assertion tracks with other research, like the Department of Energy’s study on how to scale up virtual power plants and a 2023 study on the efficacy of consumer demand reductions to help Texas deal with heat waves. 

Moreover, lowering customers’ electricity costs will be crucial to the long-term success of the movement to electrify vehicles and buildings as a way to decarbonize society, Lee said.

With new funding in the bank, Octopus will keep growing its Texas business, including its position in the emerging virtual-power-plant program. Simultaneously, Octopus is staking out new U.S. markets to enter. It already has licenses squared away for the northeastern states that have competitive retail markets, but Lee is ​“waiting for signs that flexibility is valued,” and that Octopus could manage the customer billing relationship the way it does elsewhere.

Once it reaches those states, Octopus will have to win over a public that has been burned by retailers whose promises of big savings turned out to be deceptive if not fraudulent. Octopus took market share in Britain by convincing customers it was more trustworthy than the incumbents — it will need to repeat that in the U.S.

In short, regulatory barriers are still holding back Octopus’ expansion into U.S. electricity retail. But Texas is the biggest state power market in the U.S., so winning big there would be a feat in its own right.