Exclusive Q&A: Octopus Energy Stresses Intelligent Demand as Temps Rise

Hot days mean lots of electrons and opportunity for the grid to soak in the sun.

“We are overwhelming the grid with these beautiful and free electrons,” Octopus Energy US CEO Michael Lee told Hart Energy. “What we really need to do is follow that pricing signal to absorb as much of them as possible.”

As Texas and other parts of the U.S. brace for some of the hottest temperatures of the year, all eyes are on the power grids and whether the electricity industry can reliably and efficiently meet demand as temperatures rise and air conditioners are cranked up.

Customer-centric Octopus Energy is on a mission to bring cheap renewable power to everyone, sparking joy with low electricity bills and updating grids with technology to optimize supply and demand. Its technologies include energy usage automation, pausing smart thermostats for grid stability and an advanced data and machine learning platform that helps energy companies electrify heating systems and transport through smart tariffs.

Lee, who heads the U.S. division of the U.K.-based Octopus Energy, spoke with Hart Energy about the grid of the future, electric retail and the company’s role in the transition.

Backed by investors including Origin Energy, Tokyo Gas, CPP Investments and the Al Gore co-chaired Generation, Octopus formed in 2016 and has since grown to serve more than 5.3 million customers globally, moving into the U.S. market in 2020.

“While we may be in the tens of thousands of customers now in the U.S., there’s an enormous opportunity to reshape the way consumers procure and pay for power and what that experience is like,” Lee said. “We’ve been really focused on decarbonization and changing the grid at the wholesale side, the power plant side. But the reality is that there’s so much opportunity for innovation and support at the retail side because the grid of the future is going to be very different than the grid of the past.”

This interview was edited for length and clarity.

Velda Addison, senior energy transition editor, Hart Energy: Renewables use continues to increase in the United States and abroad, and it is gaining ground in the electricity sector. How would you describe the state of the electric retail industry today?

Michael Lee, CEO, Octopus Energy: It hasn’t changed in the past 20 years. We restructured the markets and there’s been pretty much no innovation since. That was maybe OK in the grid of the past where getting low cost was all about buying high volume. That’s why industrials tend to historically get the cheapest prices. But the grid of the future is going to be rapidly different. We're going to be bringing on massive amounts of wind and solar onto the grid, and we’re going to need demand to be much more flexible. The way to get flexible demand is to 1. financially reward it and 2. automate it. Both of those point towards effectively the consumerization of electricity and thinking about the customer first in order to do those two things.

VA: What do you believe are the must-have building blocks for a decarbonized resilient energy system? Does long duration energy storage have a role in that?

ML: At the risk of being cliché, it’s a lot of all of the above because we’re going to rapidly electrify a lot of things that are molecule based. We’re going to electrify transportation. We’re going to electrify heating. We’re going to electrify hot water. We’re even going to electrify cooking. All of these things are going to happen because it’s just going to be cheaper. I like to say here in Texas, if you’re paying more than $10 to fill up your gas tank, you’re paying too much because that’s how much it costs me to smart charge an EV. A lot of people, regardless of their view of the broader energy transition, will actually be part of the energy transition because it’s just going to be a cheaper and better experience than what they currently have today.

At that point, [with a] 300%-400% increase in electricity usage, especially at the residential consumer level, we’re going to bring in a lot of megawatt-hours in order to serve that. Now, to me, step one for ensuring supply equals demand at any given time is ensuring that you have smart demand. That’s what we’re really focused on at Octopus, because that will always be a cheaper solution than just building gigawatts and gigawatts of batteries on the grid. Although we should build a lot of batteries, if you can do things via other means and software, that will always be a cheaper solution. You need to maximize your flexibility at the end-use level first and secondly, you need to start thinking about these more medium- and longer-term ways of storing energy. Transmission is a piece of that because it can shift where resources are abundant from one geography to the next. But like you said, long duration storage is another one. As a retailer, as a load-serving entity, that’s where we get really excited. We have to think through all of these different probabilistic outcomes and procure the right type of insurance products in order to protect ourselves. Those insurance products can be working with customers on flexibility for short term stuff, or it could be working with batteries.

VA: Attention turned this week to grid stability with ERCOT issuing a weather watch due to the high forecasted temperatures and an expected high electrical demand. What operational tools are needed to not only meet energy needs effectively, but efficiently today?

ML: We’re in the middle of thinking about a grid that is very supply centric and very bulk power centric. The reality is show me a day where we have scarcity, and I’ll show you within that exact same 24-hour period nearly free power on the grid. We really need to soak up as much of these low-cost electrons by doing things like pre-cooling our house, or if we can intelligently manage hot water heaters or intelligently manage EVs. So that during the biggest peaks we’re reducing that discretionary consumption that frankly can happen during other hours. With the pre-cooling a house, if you think about it more from a systems level, the challenge that we have here in Texas is that our building codes are so weak and that people have very leaky houses. But if we paired really great energy efficiency with demand response, we can get multi-hour demand response capabilities without customers even knowing.

Here at my house, that’s quite energy efficient, I can turn my thermostat off. I did it yesterday for about 6 hours and it only changed about two degrees in temperature. So, it’s not a function of we need more supply, although we do over time as we electrify things more. What we really need is better demand. Unfortunately, the No. 1 thing that causes demand spikes in hot weather is air conditioning. The reason why we’re using so much air conditioning is that we have very leaky buildings, and that’s all invisible. If you had a leaky pipe, you would go fix it, because nobody wants a pool of water hanging around their house and pay for that bill. But that’s what we’re doing with air conditioning; we’re effectively cooling our house and it’s just escaping almost instantaneously into outdoor environments. We should have a full court press on how to tighten the energy efficiency standards of as many buildings as possible so that way we’re not unnecessarily using electricity to cool them any more than what's required.

VA: You recently tweeted that “renewables and intelligent demand are like peanut butter and jelly, so good together.” Can you tell me more about that and the role digital technology and artificial intelligence are playing?

ML: You can have renewables, but if you have intelligent demand that actually soaks it up, that’s the grid of the future that we’re looking for. Here in Texas, just getting back to the example that you mentioned. Right now, if you look at ERCOT’s power crisis, they’re effectively free. Why? It’s because solar is super abundant and just cranking onto the grid. We got nearly 14 gigawatts of solar just ripping on to the grid, and that doesn’t include the 1-2 gigawatts of behind the meter solar that are also injecting into the grid behind customers’ meters. We are overwhelming the grid with these beautiful and free electrons. What we really need to do is follow that pricing signal to absorb as much of them as possible. Supercool a house during the late morning and early afternoon while these prices are really, really cheap and because the grid is highly abundant. That way we’re curtailing usage later.

But that requires a retailer like Octopus that can automate that for a customer and really think about that consumer experience such as communication, the minute-by-minute communication protocol that their customer needs to feel. I said feel on purpose because it is a feeling that customers go through. Joy is experienced by anyone who uses Amazon or Apple and they should feel the same thing with Octopus. And then really thinking about working with that customer: which ones have leaky houses and which ones don’t, how do we align them to state level and Inflation Reduction Act incentives. When you do that complete picture, we can lower rates.

VA: Octopus Energy uses renewable energy sources mainly from wind, solar and hydro. So, what about geothermal?

ML: We actually share a building with Fervo Energy… Look, we’re excited about any low carbon technology. We have so many gigawatts we need to get onto this grid as fast as possible. I‘m excited about geothermal. It works really well in the areas of the country that allow it to work really well. For example, in California and Nevada, they have great geothermal resources, high heat geothermal resources. We should continue to find ways to grow those resources. Here in Texas, it’s a little bit lower temperature. But there are new technologies that are allowing geothermal to find a pathway forward here in Texas. Those are more emerging technologies. We’re very excited about the development of those and as those come online, we’d be very excited to work with them.

VA: How do you see Octopus Energy US evolving through 2035? 2050?

ML: We first have to start with our core and what we’re really good at—thinking about end-use customers, treating them well and loving them, as well as best-in-class technology. That combination today is very focused around retail and there’s a huge opportunity to transform that retail experience. Amazon can ship millions of SKUs in two days, and we can barely read a meter in this industry in 24 hours. Sometimes you only read a meter once every 30 days in this industry. So having those two elements at our core means that while we can disrupt retail and really transform it, we can also bring utilities on to this journey who may not be the early adopters of this stuff but will see the innovation that we’re doing in retail and realize we actually have a lot of similar things in common. They’re also a load-serving entity, and they can transform their business to be the enablers of the energy transition.

Then, finally, there’s opportunity for us to even work with ISOs and other states that control, say, RECs or other products to bring a technological transformation into their operations. I get that a lot of these things are system critical. Apple has billions of iPhones out in the world and they still continue to iterate on their operating software. Once every 6 to 12 months, there’s a new version of the firmware and of the core iOS. There’s no reason that the energy grid can’t also go through that type of frequent updating. That way the App store of energies can go flourish in energy and the electricity markets.

VA: Is there anything else you would like to add or speak on?

ML:  The energy transition is not just a technological and engineering challenge. It’s a culture challenge because in order to thrive in a decentralized energy market, you probably also need a much more decentralized and modern business and organization. A lot of organizations that I’m talking to, whether they’re large retail competitors or vertical integrated utilities, they’re realizing these two things are related and it’s hard to do a technological and business transformation without a culture transformation, too.