Octopus Energy: jamming tentacles throughout the energy value chain

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To paraphrase a well-known quote, Octopus Energy resembles a giant cephalopod wrapped around the changing energy landscape, relentlessly jamming its tentacles into anything that smells like a way to whizz up margins.

By way of example, the privately held UK group launched a £3bn wind energy fund on Friday. This comes soon after its acquisition of Shell’s UK retail business in September, making it the country’s second-largest UK supplier behind British Gas.

Octopus’s valuation has recently come under the spotlight, as shareholder Origin Energy prepares a vote on a $12.5bn bid from Brookfield. Independent experts value Octopus at £5.7bn to £6.2bn. Not bad going for a 2016 start-up, which lost money in 2022. Headline numbers made public by Origin say Octopus made $1.2bn of underlying ebitda in 2023.

Perhaps the best way to think about Octopus is to divide it up into three bits. The first is its technology platform. Octopus uses its own Kraken operating system, and licenses it to other utilities. It has more than 50mn accounts worldwide, and aims to get to 100mn by 2027.

The second part of Octopus is the retail business. This was lossmaking until 2022. In a steady state, it might make a 2 to 3 per cent margin on energy bills of, say, £1,500 per household.

The third chunk of Octopus’s value comes via its chance to change the way the energy system works. In this basket, put the group’s power generation funds. These use third-party money to buy or build renewables that Octopus then operates, plus its nascent heat pump and electrical vehicle businesses.

The long-term bet here is that stop-start renewables make electricity prices volatile. By controlling when customers charge their cars or heat their homes, Octopus could charge lower prices and make fat margins along the way.

All this is yet but a twinkle in the cephalopod’s eye. But even a small chance of transformation still offers a nice way to juice up valuations.

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