S3E20: Octopus Energy's Michael Lee speaks to his company's consumer-centric vision of 'Retail 2.0' for energy supply

UK-based Octopus Energy has seen extraordinary growth since launched in 2015 by fund-management firm Octopus Group. It's heavily invested in renewable energy in the UK and elsewhere, and it has retail energy supply operations in Australia, Germany, Italy, Japan and New Zealand, with its U.S. arm headquartered in Houston. As its name would suggest, Octopus has its tentacles everywhere all at once in competitive energy supply, it would seem. And that reach promises to extend even further with the company's Kraken software platform, which it doesn't keep to itself but licenses to other retail energy providers.

The fact that the company chose Texas as the first energy market in the U.S. to invest in serves as a strong counterpoint to baseless criticisms of the ERCOT market in the wake of the deadly Winter Storm Uri outage. It's simple: Texas, with its wholesale power market unencumbered by the price caps hobbling competitive eletricity markets in the Northeast, provides the price signals Octopus needs to actively engage its residential customers in aggregating demand response and distributed solar energy resources, and shares the proceeds the company earns in the wholesale market with its participating retail customers. Its recent pilot during the month of August saw participants earning, on average, 20 cents per kilowatt-hour on their self-produced renewable energy they, through Octopus, sold back into the grid rather than consume during critical events in ERCOT, or roughly twice what might have been available via net metering.  Some customers made nearly $1,000 that month for arbitraging their energy use and "exporting" their clean energy to the grid, says Octopus Energy US CEO Michael Lee.

"What we're really doing is really aligning customers to say, yes, you want to produce your power and you want to sell it back," he says. "Let's move on beyond this product called net metering, and let's align the financial outcomes to the customers." It's an example of what Lee describes as moving beyond the "Retail 1.0" offered by most energy suppliers today to a much more consumer-centric "Retail 2.0."

"Usually, net metering is a one-for-one credit. But because we were able to find financial incentives they were getting more than one-for-one and some people were getting a 20-to-one credit because they were getting $1 or $2 a kilowatt-hour for their exports for the entire month of August," Lee says of the recently concluded pilot. "My personal opinion is that Retail 1.0 has quite underserved the market. There's a huge opportunity to completely rethink what retail energy is going forward and what it looks like for customers and how that benefits all the players, the grid, the utilities – everyone."

Transcript

EMP S3E21: Michael Lee on Octopus Energy’s consumer-centric vision of "Retail 2.0"
(transcript edited for clarity) 

EMP: Welcome to the Energy Markets Podcast. I'm Bryan Lee, and our guest today is Michael Lee – no relation – CEO with Octopus Energy US, a subsidiary of UK-based Octopus energy. Michael, thank you for coming on the podcast.

ML: Excited to be here. Longtime listener, first time caller.

EMP: Well, thanks. You know, I'm fascinated by this company. So it's unusual name stems from its start in 2015 by a fund management firm, Octopus Group, which invested in renewables and entered the UK competitive retail energy markets. Now with operations in France, Germany, Italy, Spain, Australia, Japan, New Zealand, and with a U.S. arm headquartered in Houston. That list includes just about every country with competition at retail in energy markets. So that explains the unusual name, but it's definitely appropriate as y’all seem to have your tentacles reaching out everywhere at once. Now, your U.S. operating arm is not public. But the UK renewables group has a share price over $90 while the fund management firm that started at all trades for under $10. There's an acquisition of Shell Energy Retail pending, which I guess will be completed by the end of the year, which will give Octopus Shell’s retail business in UK and Germany. And it's just phenomenal growth over, over – what is that, eight years?

ML: Eight years. Magic number.

EMP: So tell us about the U.S. arm that you are the CEO of.

ML: Yeah, so here at Octopus we're most known in the U.S. for our retail brand. We're a retail energy provider. We have commercial operations here in Texas. We are licensed but not yet commercially active in pretty much every other state that has retail choice, but we also have a wider group that supports us as part of the Octopus Energy Group. Yes, we’re a retailer. But we also have a software stack that makes our retail operations best in class and really quite transformative. That entity is called Kraken. And then we also have a series of other companies within the Octopus Energy Group including an electric vehicle leasing company, as well as a generation business and subsequently a heat pump company. So quite a lot of different business units. But we see all of these as quite related as we think about customers and what they need to be successful in the energy transition.

EMP: In terms of the retail business, are you operating anywhere other than Texas right now?

ML: Besides the countries that you listed at the beginning of this podcast, no, we're not active in any other markets yet in the U.S. But Texas is our home. What we get really excited about in Texas is there's a lot of really great (price) signals to really rethink retail as a product. Historically, a lot of retailers have been what I call Retail 1.0, which quite frankly quite underserved the market. It feels like a marketing game and marketing product. Maybe it's a little bit cheaper. Maybe it's not, but it's really hard to tell. And I think as we rethink the world of retail energy in what I call Retail 2.0, there's a lot of opportunity to transform that offering and that relationship with the customer, to really have them be at the center of everything that we do as a company, to drive cost out of the equation for them, including timing how and when they use power through a very changing energy system and changing grid, where, quite frankly, the cheapest customers will no longer be the large industrials. The cheapest customers on the grid will be those who have the most flexibility. And we can help customers optimally flex their usage to absorb the cheapest and the lowest-carbon electrons and create a lot of flexibility on the demand side for the grid.

EMP: When you said cheapest customers, did you mean customers with the lowest-cost energy?

ML: Exactly. Yeah, the lowest-cost electricity, which means the lowest cost to serve and thus the lowest cost we can offer a customer. So we here in Texas have effectively just two products – a very simple vanilla-based standard offer product that's 12 months. Priced very similarly, like everyone else serves. And then we have what's the cheapest product in the market on Power to Choose, which is connect your thermostat or your EV into our system and you'll get 20%, maybe 25% off, for each asset that you interconnect into our product. So we really start thinking about creating value for customers, not just by buying larger volumes. That was the grid of the past when we had effectively a bulk power system. But as we go through a very renewable energy grid, especially a distributed grid, with a lot of solar and batteries all throughout the system, there's a lot of value for optimally timing how and when those customer-use loads interact with the grid to absorb those cheapest electrons and reward customers financially to go do that.

EMP: You're offering a lot of interesting and, for lack of a better term, cutting-edge type of product offerings. So you've got Intelligent Octopus, tell us about that.

ML: Yeah, so that's effectively that product that I was talking about that interacts with the grid and absorbs those really cheap, abundant, low-carbon electrons. You know, here in Texas, we've had a heck of a summer, right? This past summer was one of the hottest on records and probably going forward may actually be one of the coolest. And so as we think about a dynamically changing grid, where we have – there's two types of queues in Texas, we have an interconnection queue for new loads, or usage. And that's about 100 gigawatts of more usage that wants to come onto the grid, as well as 100 gigawatts of batteries and 100 gigawatts of solar that wants to come onto the grid. This thing is changing and the pricing signals that ERCOT allows for retailers to go manage for, allow for us to create retail energy products like Intelligent Octopus to absorb that everchanging grid. There's no definition going forward of on- and off-peak that can be predictable. Every day will have its own different dynamic within the wholesale power market. And so intelligently using the right electrons at the right time will create the lowest cost to serve and thus the lowest products for customers in the market. And so that's what Intelligent Octopus has really focused on. That is the opportunity that retailers can play is, not just buying commodities and reselling them, but actually providing value-added services. The challenge is that a lot of retailers don't have a great customer relationship with their customers. And so we can over index on that. We can have our customers love us and that sounds odd, but you know what? When you buy toilet paper on Amazon, you kind of enjoy that experience. It's easy to do. You push a button and two days later, whatever you need shows up. Why can't your energy feel that easy? And so that's the concept. The software stack, Kraken, is the element that allows us to go do that. We also license it to other third parties, other retailers, other load-serving entities who want to get this incredible innovation and bring it to their customers. We're happy to do that. But we will always be the tip of the spear when it comes to innovation on our side.

EMP: Yeah, I saw a press release that Tenaska bought the Kraken platform from you.

ML: Yeah, we’re actively engaged in a lot of conversations. Not just here in ERCOT, but all throughout the U.S. Because quite frankly, Texas just happens to be the most volatile markets because you know, we're on an island – I like to say an electrical island – and so we have to balance everything every single hour every single minute. But the reality is we have load growth and a lot of other ISOs the value for Kraken and the value for doing demand response will be highly amplified as other utilities and other ISOs will look to manage their grids as well. 

EMP: Okay, and you also have a solar buyback program, Sunny Money, is that what it's called?

ML: Yeah, this was a fun thing that we launched last month. So, you know, as we think about what are scalable products in the grid of the future, you know, I've been part of the renewable industry for the past dozen years and I get it. I think net metering is a great concept to kickstart an industry. But as we think about scalable concepts, and especially wholesale power markets and how consumers can leverage the signals of the wholesale power markets to really be in partnership with that power market. And so what we did is that we created a program where we allowed customers to opt in and have a little competition with all the other customers in our portfolio to see who could export the most power, not just all throughout the day, but more importantly, during the very specific times when the grid actually need it.

EMP: These are these are customers with solar panels?

ML: Yes, exactly. These are customers who have solar panels, some of them have batteries. But the reality is, is that we helped enable them to think about, you’re little mini power plant and you generate power and you have the choice of either consuming that power or doing flexibility and demand response at your own house during those critical hours and maximizing your exports back to the grid when the grid is signaling it’s fairly valuable. And let's pass through that value to you when you do that. And so we had some customers that made nearly $1,000 in a month for timing their exports. And it wasn't because they just had a big solar system. In fact, some of them had on average $1 or $2 a kilowatt-hour for the exports that they exported in the entire month. And so what we're really doing is really aligning customers to say, yes, you want to produce your power and you want to sell it back. But let's move on beyond this product called net metering, and let's align the financial outcomes to the customers to what the market is saying is, let's actually export as much as we can when the grid actually needs it.

EMP: I saw in your press release – it was headlined, “Octopus helps Texans with solar panels export more than 180,000 kilowatt-hours throughout August.” This was this past August – last month?

ML: That's correct, yeah.

EMP: And so 180,000 kilowatt hours through August, and those customers earned nearly $36,000. So if I'm doing my math right, that's an average of 20 cents per kilowatt-hour that was paid back to the customers.

ML: Yeah, and the most incredible part is that our average import rate is about half of that. So that means they were getting about two times the credit on average for what they actually consume back to the grid. Usually, net metering is a one-for-one credit. But because we were able to find financial incentives they were getting more than one-for-one and some people were getting a 20-to-one credit because they were getting $1 or $2 a kilowatt hour for their exports for the entire month of August.

EMP: Yeah, well when you've got the market structure right, you can go beyond net metering and actually provide a better value to customers, it would seem.

ML: You know, that's one of the reasons why our first market is here in Texas. There are really bright signals to maximize your exports during very specific times. There's also really bright signals to reduce your consumption at very specific times. Sure, we would love extra demand response markets, but they're not needed. They're absolutely not needed. The wholesale power market structure here in Texas, already rewards load-serving entities to go figure this out. Why load-serving entities haven't done it yet? You'll have to ask them, but the market structure is absolutely there. I think a big piece of it is the technology is finally there. You know, historically, a lot of retailers and load-serving entities, they haven't really thought of technology as an enabler. And so these antiquated on-prem systems, quite frankly, that look like they're still from the ‘90s and act like they're still from the ‘90s, are not configured in a way to easily enable a retailer to go launch these types of programs. That's why we built our own and we realized how great it was and our competitors realized how great it was and that's why a lot of them licensed that software. And so that allows for entities to rethink what they offer and how they offer their products to customers and really start changing the way the energy ecosystem looks.

EMP: Then you have an EV calculator which from my quick look at it, it seems like a customer can compare different providers like Progressive Insurance operates its website, is that right?

ML: That's right. Yep.

EMP: So tell me how that works. I’m an EV owner.

ML: You know, what we see is that here in Texas, we have actually about 200,000 EVs already on the road, and it's growing. It's growing rapidly. And so a lot of customers are wondering what is the right energy product? What's the right rate structure for them? And the reality is that no matter what a generic product looks like, it will always be incomplete because they'll still not be able to perfectly time how and when they charge from the grid. Our smart product that looks every single minute on what's happening on the grid, and if the grid is congested, or if it's not, will reflect that really low-cost smart charging rate because it may delay that charge later in the evening to make sure that it's when is the windiest and at the lowest cost really absorb all those electrons. And so that calculator really reflects and helps customers understand some of the other marketing products that other retailers may offer like a fixed time-of-use rate or a unlimited charging – call it $25 a month – and actually realize that that's a pretty expensive proposition versus just picking our 20% to 30% cheaper smart product and just optimally timing when and how that vehicle is pulling from the grid to make sure it's getting the lowest electrons because you know, quite frankly, even the craziest days here are really expensive for some hours. And then actually just a few hours later, it's practically free. So when we have 200,000 vehicles getting home at 5:30, 6 o'clock on a hot August evening. Yeah, they should definitely plug in but they shouldn't charge right away. They should delay that charge to when the grid actually says it is a great time to charge and they'll still have exactly the right capacity on that battery or charge on that battery when they wake up at six or seven or eight in the morning and they need to get back to work.

EMP: So in sum, it's a product that allows EV owners to optimize their charging dollars.

ML: Totally, and we do all that optimization for them. They just expressed their preferences, how much of a stated charge do they want, and at what time? And as a retailer that's our job to look at the energy markets to look at the grid and to intelligently manage how and when those giant batteries are pulling from the grid and they can be a huge resource. And, and the beauty is, is that, as you know, so my background is within wind and solar. And we got to a point in the world of wind and solar where PPA prices were really, really low. And the reason is that there's no additional demand for those hours. And so there was not a strong signal to keep building more wind and solar. And the best thing that we can do is think about usage and shift that usage as much as possible on an hour-by-hour basis to when it's really windy and when it's really sunny. Because those are effectively free electrons for us and for our project developers that's a signal to say hey, there's even more usage coming during these hours. You should probably build more wind and solar because it will be absorbed through these intelligent control systems.

EMP: So then, I guess recently you've brought the UK Fan Club product to the United States. I guess in Germany as well, but explain that to our listeners.

ML: So in the UK, we built this product called the Fan Club. And in that market, there's a lot of nimbyism to building new wind projects. It's an island, quite space constrained. We don't necessarily have those exact same dynamics here in Texas. We have a lot of space. But the thing that we do have is a lot of wind. In fact, we got about 35 gigawatts worth of wind that could produce at any given time. And so while this flexibility journey of Intelligent Octopus is one that I get really excited about, we consider this U.S. version of the Fan Club to be a stepping stone into flexibility, where when we see a grid here in Texas that has – call it 30%, 40%, 50% electricity generated by wind – generally power prices are zero. And so there's a great opportunity to give customers somewhere between 20% and 50% off their energy rates to actually be absorbing those times. And so we give customers the digital tools to understand when that happens. And then it's effectively it's a real-time time-of-use discount. Of course, they always get their flat rate. But we'll run a special every day that we see a 20% to 50% energy generated by wind on the grid and then discount their rate from that fixed rate if they're able to shift their discretionary usage. So that could be manually, you know, charging your EV during those specific hours. Of course, we'd love to automate that instead. It could be running the dishes or doing your laundry. And the reality is that most people don't have the ability to save money on their electricity, right? A flat rate structure means that the only way to save money on your electricity is, yes, shop around, you can save a little bit or just do less of the things you want to do. In this type of world we're allowing people to do everything they want to go do. They're just more intelligently timing how and when to use that discretionary large loads like the dishwasher and the washing machine.

EMP: So is this a win-win for both the supplier and the customer in that you get the customer to take the power when it's least valuable and the customer wins and the producer wins by upping demand during the calm periods.

ML: Absolutely. I'd say there's even a triple win. That, plus the grid becomes more stable, right? Here in Texas, we're constantly talking about reliability. How do you get reliability? Well, everyone's talking about supply. And we need to start talking about demand because it's a supply and demand issue. So how do we find ways to take discretionary usage away from those critical hours and into the abundant hours? And most importantly, reward customers for it. I think that's where all of us has the biggest opportunity for improvement. Over the past 20 years. We've given customers choices in certain markets and other markets. We’ve just given them a bill and that's okay too. But what we could do is actually just love our customers and say, what are all the ways that we could just possibly save customers money? And by doing those, they come along on a journey with us and they save money and the grid becomes much more resilient because power is being used during the right times throughout the day.

EMP: There's the whole issue of virtual power plants which has gotten a bit of a profile here in Texas after this summer. Are all of these products somehow a virtual power plant or what is it you're doing in the VPP area?

ML: Man, it feels like acronym soup, DERs and DPPs (deferred payment plans) and all kinds of fun stuff. You know, we're we are very excited. To be a key stakeholder in the ADER process here in Texas – that is the Aggregated Distributed Energy Resource pilot. One of our partners for that is Enphase where we're managing their batteries. We're also managing loads and we're bidding those products into ancillary services like non-spin. We think that there's an opportunity for that to add a lot of value to the grid. There's other services like Reg, especially Reg Down, where we’ve seen, sometimes solar overproduced and we’d love to absorb some of that solar in real time to help support the grid. And I think these types of pilots – effectively this one is a very exciting opportunity to show that individual customers can be at the heart of adding value to the grid. You know, historically a lot of this stuff is all at the bulk power system. As we electrify so much stuff, including adding generation behind the meter, such as solar and batteries, there is a huge opportunity to rethink value on the grid, and who gets value, and how value is allocated. Right now, customers are not part of that. But they could actually be a huge participant in getting paid to support the grid in a lot of different ways. This ADER pilot is an incredible opportunity also because it was a fast-paced opportunity. We went from idea to execution in less than a year. And it is effectively Texas's version of (FERC Order No.) 2222. And yes, there were stakeholder meetings. But everyone who was part of it was told at the beginning by the PUC: You're here not just to raise problems and concerns but to help find solutions and to take action. And I thought that leadership by the PUC and the commissioners was such strong leadership that we actually got to a commercially operating product much faster than pretty much any other market has so far.

EMP: That's interesting. So you're in ERCOT, which is not FERC-regulated. But yet, you're saying that you've already been able to put together the type of system that FERC wants to promote outside of Texas with Order No. 2222.

ML: You know, when Texas wants to do something, we can do it pretty fast. Look at the CREZ lines, right? Like we built some major transmission lines on a very fast basis. When we want to do DERs we're going to do it pretty fast. Unfortunately, it kind of took a situation like Uri to get everyone to say, wow, okay, we need a bit more resiliency than we have. What are all the different ways we can get resiliency? And this is one of them. But whatever the reason is, it's a great opportunity for us to say this is not just an opportunity for resiliency, but also just to rethink how consumers can be at the heart of this massively changing grid. 

EMP: So you're only in Texas right now. You're not operating in the 13 or so other states that have competitive markets – supposedly have competitive markets.

ML: Not yet. Not yet. We are licensed and in the process of doing, you know, at this point of the recording, doing the EDI flight testing in a lot of these markets. You know, each market has its own dynamic, right? I think that's the challenge and opportunity of the U.S. is that it's quite fragmented and balkanized. Every state makes their own rules yet still operate within the ISO that they sit underneath. And so when we're talking about what we like to do, like we, we want to manage customers’ devices for power (price) signals. That's quite complicated. So it depends on what those (price) signals are in ISO that allow us to do that. We want a branded relationship with customers. We think that Retail 2.0 is all about customer service and customer love. And so for us to be able to send a branded bill, which, by the way, happens in every other restructured market globally. When we see competitive markets, the U.S. system of still having a default supplier is quite unique. That's not a normal attribute.

EMP: Let's get into the difference between Texas and the other states. You know, as a listener to this podcast, we hammer down on that quite a bit. Texas is unique because both the retail and the wholesale market are regulated by one entity, and that's the Texas Commission. In the other states you've got FERC at wholesale, and the state commissions at retail. And as I've said on this podcast many times, that to me creates an artificial disconnect between the wholesale market and the retail market. And outside of Texas customers don't see price signals necessarily, unless they're a large customer and sophisticated and operate on their own not necessarily as a utility customer. So what is it about the Texas market versus these other markets that's allowing all of this innovation? I mean, you guys are on the cutting edge of the innovative bubble in Texas. So what's different between Texas and these other markets?

ML: You know, I think Texas is fully restructured, right? So we went through to have a competitive wholesale market, to a retail choice, to having no default (provider) selection. Those are the three phases of restructuring and Texas went through all three of those. Most of those other you know, the other 49 states, some of them didn't even go through the first phase. There's no competitive wholesale market. Some of them went through that phase, but there's no competitive retail and all the other ones that does have retail still has a default supplier. It does add a different dynamic than what we do in Texas. You know, in Texas, of course, we have a branded presence with customers because as a retailer in Texas, we send a bill, which if you live in Texas, that's quite normal. For those listeners in the other 49 states, you can say like, wait a minute, you get a bill other than the utility. And so what we would do is instead of being a line item on utility bill, in Texas, the utility charge that is, you know the ratebase-approved charges are on our bill, and we take receivable risk and credit risk on whether or not our customers pay so we're on the hook for figuring that out. Which means we have to go figure out how to get customers to engage with us.

EMP: The only state outside of Texas that's even moved in that direction is Maryland, and of course they're, from what I hear, in a somewhat of a morass, dealing with the utilities and trying to get beyond and try to actually implement the supplier consolidated billing.

ML: Yeah, Maryland has a pilot that they're looking to launch and we're happy to be a part of that to show them what supplier consolidated billing could look like in that market. You know, Commissioner Stanek, the former commissioner of Maryland, was a great champion to figure out what a new world of retail could look like, including supplier consolidated billing. So I would say having that piece where we have a branded bill, it's great. It's nice, I wouldn't say it’s absolutely critical, although it's really nice when it does happen. I'll say the first thing that's actually now this is getting a little wonky, but it's fine. It's an interesting show to begin with. The thing that is actually needed in each individual state is to have a smart meter that settles its loads on as frequent of an interval basis with that ISO. The challenge is that in many states outside of Texas, I don't get to settle my residential loads on their actual consumption usage. So that means, in those states, they bill me on a generic usage. They have a, hey, here's the generic profile for what we think a standard customer uses. That may have made sense in the past. But if I want to go shift those hours to different hours, because in that particular day, there were different prices all throughout the day in the wholesale power market. I can get rewarded for that from PJM or the various ISOs if the settlements of those meters actually occur based on actual usage interval data. So that is like the thing that we care most about in these new markets is, one, is there smart meters, two, can we actually settle on actual interval data? And if we can do that we can unlock so much value for demand response that doesn't require any secondary state funding. It just requires a state-level kind of decision and, and commercial industrial customers they settle that way. That's why everyone gets a custom quote in that industry based on how they use power. We think that residentials could use that. And for many states, they spent all this money on smart meters and they're really wondering what's the value of smart meters? That is the value of smart meters, allow us to reduce usage during critical hours and settle that actual difference in volume with the ISO because we're a load-serving entity. That would be that would more than pay for smart meters ten times over.

EMP: Yeah, well, we spent all this money to implement smart meters and we only use them to allow utilities to capture remotely usage data. There's all this capacity, all this ability of the smart meter we're not utilizing.

ML: I think it just takes an entity who wants to care about it, such as us, and settle on that real actual usage data and create real end-use consumer value for doing that. I don't think many regulators are going to get excited about changing rules if there’s no end-use consumer value. So that's why everything that we do and in our orientation is, is it better for the customer, and how is it better for the customer and this is definitely one of those things.

EMP: So what changes would you like to see in these other states that would help you better bring your platform to customers outside of Texas? 

ML: Yeah, so as far as on the retail side, you know, we're not necessarily advocating for any new changes on deregulation. You know, there's a lot of, I would say, kind of historical norms now that we've kind of set-in which states have chosen which ones don't. So we're really just looking at those who have choice and saying, how can our intelligent products both, again, just like what we talked about earlier, create lower costs for customers, create lower costs for us and create a more resilient grid for that operator. So places that have more wholesale pricing market volatility, actually, is a great signal for us to go do a lot of demand response in that market. Places like – actually ISO New England – that's the at the end of a gas line, the winters are really challenging. The system operator and the states are constantly thinking, rightfully, how do we keep the lights on? And those can be places where demand response-centric products could actually help figure out day-by-day, hour-by-hour, what's valuable and what's not, in ways that a strict time-of-use product may not account for ever changing grid and an ever changing reality. So you know that that could be an element of places that could really use an Intelligent Octopus product, whether it's from us or from another entity, you know, TBD. But I think that those are the markets where already in the status quo there's uncertainty. Now the reality is that in the energy transition, we should be, as we convert molecules to electrons, we're going to use a lot more electricity. We already see it here in Texas, we just have to – I like to say the energy transition will first be in Texas, right? We have a significant load growth. We have to balance everything and we have a ton of renewables coming online. Those are the three key themes I think you're going to see in almost any different ISO going forward. And so the opportunity for any load-serving entity, especially a retailer, but really any load-serving entity that wants to transform their business and how they think about a customer relationship, can really be a central actor to both reducing costs and increasing grid reliability at the same time.

EMP: Yeah, we had Frank Lacey on the podcast in our first season and he's expert in the problems that retail suppliers have outside of Texas. And one of the points he made on the podcast was that all of the sort of consumer-centric changes that we'd like to see in the electricity industry are happening in Texas, that – and as your company demonstrates – and I guess to you're going to try to bring it out to the other states, it seems, over time. But you know, here we have all of this innovation happening in Texas, all of this battery storage investment, all of this renewable energy resource investment, all happening at spec in the market. There's no regulator saying, thou shalt build this or that, you know, we will give you all all of this sweet money for to do this. It's happening organically. And yet, the market seems to be pilloried all the time. And I guess you have to look at the motivations of those who are pillorying the market but, you know, you mentioned Uri. Let's talk about what happened in Uri because we had FERC Commissioner Mark Christie on the podcast a short while back, and he blamed the Winter Storm Uri outage on the market. Do you want to respond to that?

ML: Yeah, I won't respond to him particularly, but I will – I've heard the episode and I've heard very similar comments from a lot of people. And while I appreciate the comments, I think the reality at least here in Texas is that, two things: Uri was not an ERCOT problem specifically. I think ERCOT – look, at the end of the day, a lot of people lost electricity. So of course everyone pointed the finger at ERCOT. But the reality is that there are some amazing people that work at ERCOT. And they were working as hard as possible to keep the lights on with the tools that they had available to them. In the FERC report that was issued in November of ‘21, it even specifically says the core of the problem was a natural gas fuel problem. And we had a lot of wellheads in West Texas that froze over as well as pipelines that froze over. And so it wasn't a capacity issue in that we had a lot of power plants ready and willing to generate electricity. What they didn't have was fuel – high-pressure fuel – going into those. A big reason why we didn't have that high-pressure fuel is not just the freeze-overs, but unfortunately the cascading issue is that a lot of people turned on, on the low pressure network, their fireplaces and all kinds of things at the household level that has a priority within the pressure network that took even more pressure off the natural gas lines and required even more power plants to turn off as a result of individuals using even more gas on the low-pressure network. We just simply didn't have enough fuel to go around to all the power plants and all the households at the exact same time of the deep freeze. So I think what we really need is weatherization if we're going to depend on natural gas as a fuel type for generation here in Texas. We actually saw some of the same characteristics this past Christmas in PJM, in the Northeast, when we saw Elliott come through and a lot of other power plants really struggled in a deep-freeze scenario. So blaming that just on the market design here in Texas I don't think is really the right answer. I think the other piece of the problem again, everyone always talks about supply because that's what we're all very interested in. But it's also a demand issue. We saw demand go through the roof on an electricity basis for those hours. And it's because we have electric resistance heat here in Texas. Had we have had heat pumps – which are way more effective even in the deep cold. They're about 30% to 50% more effective even in those extreme temperatures – we could have probably had a lot less reliability issues had we moved to a heat pump-based network. Again, and have demand response. We could cycle some of these assets and intelligent ways to make sure that everyone has exactly what they need instead of overburdening the system at any one hour.

EMP: I'm glad you brought up the resistance heating aspect of the problem because that's virtually ignored, I think, in all the discussion around this because you know when you had a constrained system, you had hundreds of thousands of customers all at once turning on this very inefficient heating and putting demand on the system all at once that aggravated the problem. 

ML: You know, Bryan, but then again this is the challenge is that there's no one issue going forward. What we really need is agility. We need systems that have agility baked into it to react to whatever the next challenge is. And so that is less demand, the heat pumps and energy efficiency. That is smart demand via demand response. And it's batteries and markets and things that allow for participation of all these things to fluidly manage through whatever is the next challenge that we're going to be hit with.

EMP: So it seems to me like the state has not really responded to the core problem. Now there was some efforts by the commission to promote better weatherization but the core problem with the natural gas supply system has not been addressed by the Railroad Commission. And certainly there are no efforts underway to promote customers adopting more efficient heating systems. And so instead what we saw was the Texas Legislature earlier this year promote what I call a weird pseudo capacity market solution. It sounds to me like you're not a fan of that.

ML: On your first point. You know, I think there are incredible things that have been moved forward by ERCOT and the PUC to try to do what they can with the tools that they have. So I think on the electrical side, we're working and we're working really hard. On the natural gas infrastructure side, I think that's a whole different dynamic. I think that's really hard. You said the Railroad Commission. Not many people realize that the Railroad Commission regulates intrastate pipelines. It's kind of obscure for a reason. And so I would also suggest that there were billions of dollars made on the back of Uri and that was those who had spot gas available. So regulating that may not be in the financial interest for a lot of companies that made billions of dollars off of Uri. So we may kind of be in a situation that we're supposed to be in based on who makes money and what their business model is. As far as the electricity side, yeah, there's been a whole bunch of phases. We’ve gone through phase one of ERCOT and PUC’s reform. Phase two now is the PCM. This, I call it the pseudo capacity market. But it's the Performance Credit Mechanism is really what it stands for. I think that the challenge here is that it weights different types of fuel differently for reasons that feel quite arbitrary. And those who have the biggest influence in how this regulation was written tend to have had the right fuel types within this regulation. So it doesn't necessarily feel like it's something that is destined to keep the lights on more. It kind of feels like it's a regulation to financially reward those who were part of that writing of the product. I think there's ways to enhance it if this is you know, since this is the rules that we have to ensure that, at the end of the day, what I care about is a resilient system. We need to keep the lights on and that's the number one priority. Number two is we want to keep it low-cost. And there's ways to do that through demand response, energy efficiency, solar and batteries, and putting the customer first that allow for a much different variety of products to participate in an ecosystem and respond to pricing signals. And so, is the PCM the right thing to keep the lights on? I don't think so, but time will tell. And, you know, look at the Northeast. Did the capacity market keep the lights on in Elliott? Not really. And I think that really what we need is a an agile system and not necessarily a system that's so prescriptive that doesn't actually handle every new possible new scenario that comes out.

EMP: The main purpose of this podcast is to try and explore policies in a greenhouse world. Climate change is real. It's happening right now. Certainly ERCOT suffered through that not only with Uri but through this past summer, which we haven't even discussed that much. I think it's phenomenal that Texas kept the lights on despite month after month of serious stress on the system. So climate change is real. We have to respond to it yesterday. So what are the best policies to enable a clean-energy economy at least cost to consumers?

ML: Hmm. I think one of them is we need just more power plants. And we see in Texas we have one of the fastest interconnection queues. It's about 18 months to go from application to IA (Interconnection Agreement). And so that may take several years in a lot of other states. One of the unique parts of ERCOT is effectively dual tracking transmission and interconnection. So you get to come online, and then as the merit order that gets to describe whether or not you get to generate power. Then there's, secondarily, where is there congestion and how do we relieve that through either transmission or even better some dynamic management of the grid and how all the power flows work? So I think Texas has a very world class and leading way of bringing on new generation. And we've seen that we built almost 10 gigawatts of solar in the past two years. I wouldn't be surprised if that velocity increases. A lot of that's going to happen at the front of the meter side. A lot of it's also going to happen behind the meter. It's about four weeks, three to four weeks, to go get the utility to give you the approval to bring on rooftop solar here in Texas and it's so much faster than any other place. So I think we're going to have – we need to have more generation. The challenge is that we need more controllable loads if we're going to have more solar. So having flexibility is the really big piece that at the end of the day that just comes down to an individual customer. So here in Texas, the (price) signals are bright, the rules are there. We can bring on more generation and you can rapidly increase flexible loads. I think in a lot of other markets, kind of the opposite, right? We have slow interconnection queues. Maybe the clustering process will relieve some of that. Maybe actually it'll bring more uncertainty because as soon as you're in a cluster and you get assessed a fee, other projects drop out, your fee will increase. And so maybe that brings on new waves of uncertainty in ways that we weren't expecting. And so I think time will tell if interconnection can move faster in some of these other states. I'd love for them to see if there's anything in Texas that – or that ERCOT does – that they could bring to other markets to speed up new supply. You know, we talk about barriers to entry. The biggest barrier to entry is just getting on the system. And then with regards to customers look, it could be retailers. Some states have IOUs, some states is very muni and co-op centric, at the end of the day, whichever is the load-serving entity. Those grids need to transform and they need to start becoming more consumer-centric. That is the future of every energy company is to really understand a customer of one, not just a ratepayer, but a customer of one. What does that one individual customer where is that pocket of flexibility for that one individual customer. Of course you aggregate that up to create a lot of volume and a lot of impact. But you have to have the right tools to understand what does that one individual customer really want.

EMP: There’s been a lot of headlines here about the headwinds for offshore wind here domestically. Octopus is heavily invested in offshore wind in the UK. Is the company at all looking into investing in offshore wind here in North America?

ML: Yeah, I know here in the U.S. we have quite a lot of challenges to keep offshore wind cost affordable with regards to the St. John's Act requirements and boats and all the intricate rules that just may be good intentions but really just start adding more and more cost into the equation. The simple answer is we're not yet looking at investing in offshore wind here although generally I'm supportive of the idea in that offshore wind tends to be a winter-peaking resource. And so it's really great to have those abundant electrons in times when the grid needs it during a winter peak. Are there other ways to get that? I'm sure there are. But in general, low carbon or no carbon, winter-peaking electrons are a great thing and we should figure out how to just make it more cost-affordable. In the interim, you know, onshore wind is still interesting to us. Solar is still interesting to us. And of course demand flexibility is a big thing that we're excited about as a supplement while we still try to figure out offshore wind.

EMP: Other than the Jones Act impediment, is there something about the UK market that's more conducive to offshore wind development than the morass that we have here in the U.S.?

ML: You know, we're trying to jumpstart an industry in the U.S. that doesn't exist. So we don't have the technical engineering capacity. We don't have as much of the financial markets capacity. You know, the production of a lot of this stuff is not yet built. And so we're kind of going – no matter what industry, any company is in, the first couple of projects will always be the most expensive, right? And we're trying to get from zero to 100 in the U.S. and they're all quite expensive at the beginning. And so it's a challenge of figuring out, how do we build the right momentum and scale to bring down incremental execution costs here in the U.S.? And I think that's a big challenge because whichever market goes first will kind of pay a premium to do that.

EMP: Well, Michael, you've been very generous with your time here. I want to be cognizant of your schedule and not go much longer than this, but I did overlook one important feature that y’all offer in Texas, and that's the turn down happy hour, where you get a free drink for turning down your thermostat.

ML: Yeah, you know, as a retailer and as a load-serving entity, it can't just be about the electrons, right? It's got to be about the consumer engagement. And so if we're going to be bringing customers on a flexibility journey, we have to reward them. We have to get them excited. And sometimes that means talking about this wonky thing called demand response. Other times, it just means how else can you get load flexibility? Well, if somebody says they're uncomfortable at the house, which, frankly, I don't think they should be, based on how we do our demand response, but if they think that's a mental barrier to doing their first event, then let's get them out of the house. So what we did in August, when we had a critical event on the grid, we rented out a bar down the street. And we said, no matter who you are, whether or not you're an Octopus customer, you can show up and we'll buy you a drink – actually buy you a couple drinks – if you just show us that you turned your air conditioning that your house to 80 degrees. And so you're not home to worry about what it feels like at home. Let's crank it as high as we can. And then let's come out to the bar and have a couple of drinks on us during this critical event because that bar is going to have its air conditioning on regardless. So let's get you out of the house and have you just enjoy a beer and not even think about what's happening on the grid.

EMP: Well, Michael, as I do with all of our guests, I'll turn it over to you if there's anything we haven't brought up so far that you think we should discuss before we turn off the recording.

ML: My background is not retail energy. I came into this industry from the world of wind and solar project finance and realized, if we're going to build all the stuff on the grid, we’ve got to fundamentally rethink how consumers interact with the grid. So I built a retailer kind of crazy as it was because I had no background in retail. But I did learn a lot. And a piece of that was, while I appreciate the work of deregulation and restructuring, my personal opinion is that Retail 1.0 has quite underserved the market. There's a huge opportunity to completely rethink what retail energy is going forward and what it looks like for customers and how that benefits all the players, the grid, the utilities – everyone. And so as we look at the horizon, yes, Texas will always be a great example of the cool things we can do. There are markets where, quite reasonably, attorneys general are wondering, do we really want retail in our states? If I was in their position, and I looked at some of the historical retailers, I’d probably be asking the same questions. But I don't think those are going to be the right retailers going forward. In fact, what we've seen in a very volatile grid like Texas, a lot of the Retail 1.0 companies are leaving the market. And it's those who are doing interesting things like demand response because we can balance our own book in unique ways, those are going to be the retailers of the future. And those are going to be the parts of the market where we can go experiment and try some really innovative stuff that are aligned to great outcomes, customer outcomes, and our outcomes can be the same thing. It doesn't have to be a zero-sum world when you have technology. And so I think there's a huge opportunity for retailers to rethink what they look like in the future, what IOUs rethink what they look like in their customer relationships in the future, CCAs. And it's not what it looked like in the past. It's about all of those entities really getting to engage with their customers. But that all relies on having the right technology stack to go rethink what that engagement looks like. And we're happy to do that whether it's a retailer or with Kraken.

EMP: Michael Lee, CEO with Octopus Energy US, thank you very much.

# # #