Octopus Energy: built to last
6th December 2018
This year has seen a number of newer energy suppliers going bust, prompting some of our customers to ask whether we’ll go the same way. Here's why you can be confident we're here for the long haul.
Eight energy suppliers have ceased trading this year. Ofgem asked us to take on the customers of Iresa and Gen4U. The other prominent ones include Extra Energy, Spark Energy, Usio Energy, and Future Energy.
Why are these companies going under?
Small energy suppliers often enter the market and pick up customers by offering dirt-cheap energy tariffs. Consumers paying extortionate rates with major Big 6 suppliers are then swayed into switching, because – it’s all the same energy coming out down the wires, right?
Unfortunately, these tariffs are often too good to be true.
These suppliers are selling energy to customers for less than they paid for it on the wholesale market. While this can mean they’re able to offer cheap energy in the short term, in the long term, they won’t be able to cover the costs of running a successful, honest business.
One of two things will happen:
- Customer service will suffer, because there simply aren’t enough resources to ensure everyone is looked after. Iresa Energy is a good example of this – they had 800 open Ombudsman complaints when they closed their doors in August 2018. (They averaged 9,000 complaints to every 100,000 customers in their last quarter. By comparison, our average was 39 for every 100,000). Or...
- There won’t be enough money left to cover business costs. Spark Energy, one of the most recent companies to go under, is a good example of this.
Ofgem ask for a contribution to something called the Renewable Obligation Scheme every year. Suppliers who don’t source a certain proportion of their energy from renewables have to pay, and the deadline for this payment is October 31st.
Spark Energy, along with a few other suppliers, weren’t able to meet their obligations, leaving millions unpaid. Ultimately, this led to them making the decision to cease trading.
Ofgem have now proposed a series of financial rules to ensure new suppliers entering the market are in a more sound financial position.
So, what’s to say Octopus Energy won’t go the same way?
Our business model
We insist upon fair and sustainable pricing. We charge our customers based on the wholesale price of energy, with a target 5% margin on top to cover the costs of running a successful business.
What does that mean?
The wholesale cost of the energy you use makes up a little under half of your energy costs. The rest is made up of transmission and distribution costs, environmental and social obligations and VAT. It breaks down a little like this:
The prices these newer energy suppliers offer simply can’t cover all of these costs. The blue sections are the bare minimum needed to run a business – and that’s not even including the cost of paying staff.
That pink sliver at the top is how we ensure our customers are getting the best service possible, our staff are happy, and we can innovate with tech to push our industry forward.
And we’re transparent about that. You might recognise the image above from one of our emails earlier in the year, explaining the reasons behind a slight tariff increase. In another email earlier this year, our CFO, Stuart, actually asked for customers’ input as to how much of a margin they’d expect us to make on our tariffs. (The overwhelming majority of responses recommended a 7.5% margin on the cost of supplying your energy, so currently, we’re actually operating with even slimmer margins.)
Read a bit of that email here:
“Independent research firm Lazarus Research, in their analysis of Big 6 profits, found they charge an average of 22.6% on top of the cost of supply...
This is obviously excessive, demonstrating both greed and inefficiency. And because that number is spread between loss-leading cheap deals and overpriced standard variable tariffs, a lot of people end up paying far more to subsidise the cheap deals of the few.
So I'd like to know - what do you think is fair and reasonable amount for us to charge for managing your energy supply? Simply click an option below to let me know.
- 20% of the cost of supply
- 15% of the cost of supply
- 10% of the cost of supply (This is what I'm aiming for when we have 1 million customers)
- 5% of the cost of supply
- A fixed amount each year
We’ve also put our transparency into practice: like our innovative Octopus Tracker tariff, offering fair daily rates based on the wholesale price of energy, with a precise breakdown of exactly where your money is going.
This kind of honesty is rare in the energy industry. Our company was founded to demand transparency of the Big 6, whose track record on that is pretty atrocious.
Here's our CEO Greg presenting evidence in favour of capping energy tariff prices before the bill committee in Parliament (it later passed and became the Domestic Gas and Electricity (Tariff Cap) Act 2018.) Watch him fighting for the cap here.
This means that we insist upon transparency in our own pricing, too. We won’t promise to always offer the cheapest tariff on the market, because we know that the costs of running a good business can’t be compromised on. We differ from these smaller companies because we won’t sacrifice our business, or our staff or customers’ happiness, to offer dirt-cheap prices. They will. With eight energy companies having ceased trading in 2018 alone, it’s pretty well-documented that this model is unsustainable.
Long story, short: if a deal looks too good to be true, it probably is.
Backed by the big guys, so we’re free to keep thinking like a little guy
Octopus Energy has the best of both worlds – on one hand, the tech, and vision, of a startup; on the other, the security of being backed by a major UK technology investor.
Ever wondered how we got the cute name? Well, that’s the slightly less cute origin.
The majority of Octopus Energy is owned by Octopus Capital. The rest is owned by our team! (Really. Every Octopus Energy employee is a shareholder).
Octopus Capital runs a number of investment funds, including £2.5bn in renewable energy generation. Their incredible solar investment actually makes them the UK’s largest investor in onshore solar (meaning, panels that aren’t on roofs, or on the sea). In July, they were the biggest solar generator in the UK – generating the equivalent energy to power 50,000 homes for a year.
Over £2 billion has already been invested in Octopus Group’s energy mission so far, and our crucial relationship with them remains a really strong one.
The combination of long-term, good value pricing, and the sound backing of a major technology investor means Octopus Energy is here for the long haul – and we’re just getting started.
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