In the last two weeks Kathryn Porter, who writes at Watt-Logic (www.watt-logic.com), has published two detailed, and extremely useful, analyses of the financial state of Octopus and Ovo. For readers not familiar with the UK retail energy market these are the two “challenger” energy suppliers that have taken a significant share of the energy supply market from what were known as the Big Six suppliers. They have grown partly by innovative and aggressive marketing, and partly by taking over energy suppliers which failed or wanted to exit from the market.
Thank you, Gordon. Another thought-provoking analysis.
What struck me from the Octopus accounts is: 'Administrative expenses went from around 5.9% of revenue in 2023 to around 11.0% in 2025'
I would have assumed that marginal admin costs would be decreasing, but clearly the opposite is the case. For a 'disruptor' new firm in the energy market in the 'Age of AI', one would imagine admin will be the first channel through which costs can be cut.
Where do you think the admin cost increase comes from?
I think the assumption of preference for smooth consumption is a reasonable one. What is less reasonable is assuming this preference is stronger than a preference for a significantly lower energy bill... In an economy reliant on importing electricity, the cost of smoothing is high. Conversely, the potential savings from accepting price variability could be substantial. Indeed, it would be great to have greater transparency of the price breakdowns so consumers and policymakers have the necessary information to assess the cost of hedging.
This reminded me of one of the tutorials you gave in NREE about the North Sea exploration rights, where certain politicians decided it would be better for people not to know the opportunity cost of not extracting oil/gas from these reserves. I guess this pattern is a lot more common than I initially recognised.
I think that this is partly a matter of timing in the UK and partly European expansion. Octopus took over a large chunk of Bulb customers from Ofgem in 2022 and then acquired Shell Energy Retail in 2023. I think that it is likely that the integration costs were much higher than anticipated and lasted into 2024-25 - the 2025 accounts cover May 2024 to April 2025. The Bulb takeover was subsidised initially by Ofgem but after 12-18 months fell fully on Octopus. In addition, Octopus has been expanding aggressively in Western Europe from Germany & France to Italy & Spain.
Regulators - and even more politicians - are very reluctant to tell customers that they might make significant average savings by accepting price risk. The problem is that there will always be occasional periods of very high prices - and this is what attracts media attention and political flak. Any online discussion of the Agile dynamic tariff always focuses on the possibility that prices might, for brief periods, reach £1 per kWh. What is ignored are the longer periods when prices are £0.05 to £0.10 per kWh.
In IT and market terms, it should not be too difficult to offer a market-linked tariff within bands - i.e. you won't pay more than 50p per kWh but you won't pay less than 5p per kWh.
I am very concerned about tariffs that are tied to smart meters unless there is some form of universal service obligation pertaining to the installation of a smart meters, with real consequences to back it.
Drawing a parallel with telecoms. Years ago in the days before ADSL I wanted an ISDN line installed in my home. This was done by BT (pre-Open Reach) because provision of ISDN was a universal service and despite it requiring routing a circuit from an exchange some 15 miles away (as the crow flies) from my local exchange, tracing faults in the old copper PSTN lines and finally pulling a kilometre or so of new cable to fix the problems.
Compare that to fibre broadband. Still waiting despite the R100 promise and despite it being in the local exchange. Not enough demand to justify installing a new cabinet and pulling 5km of new fibre cable.
I have had an engineer out to fit a smart meter. No radio signal, 4G blackspot and no broadband, so no go, no smart meter.
If power prices are to be tied to smart metering, edge cases like rural Scotland need to be catered for from the outset. My suggestion is that there has to be a universal service obligation with the back up that if a meter is not fitted within, say, three months of a request to do so the standing charge is waived and all power is charged at the minimum rate until one is. It then becomes a very simple economic calculation for the network operator and suppliers; is it more expensive for them to do the work necessary to provide a smart meter or “subsidise” the electricity used?
I think that this is a valid point but I would like to think a bit further about and write a post about the issue. Energy suppliers do have an obligation to installing a smart meter for anyone who requests one and they have strong incentives to install even when the customer does not request one.
The problem lies with the utterly stupid decision to rely on wireless technology for communication between meters and suppliers. Even if you had broadband - say Starlink - at the moment there is no way of bypassing the wireless monitoring/reporting infrastructure. The difficulty with imposing an unprofitable tariff for customers without a functioning smart meter is that this will encourage suppliers either to refuse to supply such customers or to devise tariffs that prompt to go elsewhere.
Further, the core of the problem isn't in remote areas of Scotland. It is large multi-occupancy buildings with steel reinforced concrete that function as a Faraday cage to block or degrade wireless signals. A separate problem is that wireless technology simply does not have the 30-year expected life of a traditional meter - at best 10 years. So you have to deal with replacing meters much more frequently than the industry is used to dealing with.
The other thing I didn’t comment on — one rant at a time suffices — is that special rates are bound to distort the daily demand curve. If we think about moving primary energy consumption for transport and space heating (petrol/ diesel and natural gas) to electricity, yes there are energy efficiencies to be had but there will still be considerable additional electricity demand. Even a relatively cursory analysis shows the likelihood that the present dromedary camel curve will change, with additional demand occurring overnight.
There is no reason to think that EV owners will recharge anywhere but at home, overnight. Why would they when the cost per kWh at public chargers is so much greater than the domestic rate?
Similarly space heating. If people are forced off gas, they’re not going to install heat pumps unless there is a return on the total cost of installation. The total cost includes, over and above the capital cost of the pump itself, the insulation (because heat pumps can’t deliver heat as fast as gas boilers), replumbing (no microbore allowed because heat pump output temperatures are lower) and general making good required in anything but a new build. Heat pumps may be efficient, but so are gas boilers; looking at total cost heat pumps struggle to breakeven when electricity is 27p/kWh but gas c. 8p. Either the price of pose needs to fall, the price of gas to rise dramatically or heat pumps need to achieve CoEs of well over 4 in winter cold.
If people do install heat pumps I strongly suspect they’ll end up being run near continuously, dribbling heat into properties at the rate it is lost rather than trying to warn a house in morning and evening. If people can’t afford heat pumps, it will be back to the old days of storage heaters.
Either way, the combination of space heating and EV charging is going to flatten the daily demand curve. Cheap rates are cheap because supply exceeds demand. If demand becomes more constant, that see me to me to be a significant change in how we deliver power (generation mix) but how it is charged for.
Our house in Italy, built in the 1930s following a classic Italian design, has a tower built of steel-reinforced concrete. It functions as an effective Faraday cage for both 2.4 and 5 GHz WiFi as well as 3G/4G/5G frequencies from 800 Mhz to 3.5 GHz. The only way to get decent direct reception from nearby towers is by being close to a window. So to distribute broadband within the house we have to rely on either powerline transmission (not great) or running ethernet cables. Our house in Scotland, built in the late 1980s with a timber-frame is completely different, so we are in a mobile phone blackspot but can rely on VoIP/VoLTE over WiFi instead.
Smart meters rely primarily on 2.4 GHz radio but dual band home hubs can also use 868 MHz which is used for LoRa (long range) wireless protocols with a range of up to 20 km. However, this requires an external antenna and higher transmit power, neither of which are used for smart meters, so the basic problems of serving remote locations and dealing with stone or concrete buildings remain.
Thank you Gordon. Based on the work of Kathryn Porter and David Turver, it appears that the opaqueness of customer bills is allowing the costs of net zero to be hidden from the electorate, which is perhaps why we shouldn't hold our breath for reform, while the current administration holds power.
True. With Ofgem thoroughly compromised I wouldn't expect any change soon, but this is going to be a problem for a long time. Hence, a future administration may change regulations to highlight a new approach.
It’s dreadful how poorly ToU tariffs are being introduced, as in a renewables dominated grid mix (perhaps any grid mix?) they are just so logical, and have such benefits to the grid operation
Obviously smart meters are a must, but the degree of suspicion around these is simply shocking, with socials filled will conspiracy theories about big brother having control
We are Octopus customers and have had the Agile tariff and now the EV tariff. Our heat pump is controlled by a Homely thermostat which uses forward tariff data, weather forecasts and learns how the house heats and cools to “pre heat” using the cheapest time periods ahead of heat demand (obs currently this is at night on the EV tariff, but could be anytime on Agile)
I agree that conspiracy theories about smart meters and, thus, ToU tariffs are absurd. The difficulty is that the speculations of both academics and regulators reinforce the belief that something undesirable is planned.
I don't know much about Homely Energy but they are competing with what a company that I have set up with colleagues is doing so I am fully in favour of what they are doing. The market will be (eventually) big enough to support multiple players. However, the problem is technically quite difficult and the Agile tariff is very much a niche tariff, so this approach will only take off when ToU tariffs are more widely adopted.
Thank you, Gordon. Another thought-provoking analysis.
What struck me from the Octopus accounts is: 'Administrative expenses went from around 5.9% of revenue in 2023 to around 11.0% in 2025'
I would have assumed that marginal admin costs would be decreasing, but clearly the opposite is the case. For a 'disruptor' new firm in the energy market in the 'Age of AI', one would imagine admin will be the first channel through which costs can be cut.
Where do you think the admin cost increase comes from?
I think the assumption of preference for smooth consumption is a reasonable one. What is less reasonable is assuming this preference is stronger than a preference for a significantly lower energy bill... In an economy reliant on importing electricity, the cost of smoothing is high. Conversely, the potential savings from accepting price variability could be substantial. Indeed, it would be great to have greater transparency of the price breakdowns so consumers and policymakers have the necessary information to assess the cost of hedging.
This reminded me of one of the tutorials you gave in NREE about the North Sea exploration rights, where certain politicians decided it would be better for people not to know the opportunity cost of not extracting oil/gas from these reserves. I guess this pattern is a lot more common than I initially recognised.
I think that this is partly a matter of timing in the UK and partly European expansion. Octopus took over a large chunk of Bulb customers from Ofgem in 2022 and then acquired Shell Energy Retail in 2023. I think that it is likely that the integration costs were much higher than anticipated and lasted into 2024-25 - the 2025 accounts cover May 2024 to April 2025. The Bulb takeover was subsidised initially by Ofgem but after 12-18 months fell fully on Octopus. In addition, Octopus has been expanding aggressively in Western Europe from Germany & France to Italy & Spain.
Regulators - and even more politicians - are very reluctant to tell customers that they might make significant average savings by accepting price risk. The problem is that there will always be occasional periods of very high prices - and this is what attracts media attention and political flak. Any online discussion of the Agile dynamic tariff always focuses on the possibility that prices might, for brief periods, reach £1 per kWh. What is ignored are the longer periods when prices are £0.05 to £0.10 per kWh.
In IT and market terms, it should not be too difficult to offer a market-linked tariff within bands - i.e. you won't pay more than 50p per kWh but you won't pay less than 5p per kWh.
I am very concerned about tariffs that are tied to smart meters unless there is some form of universal service obligation pertaining to the installation of a smart meters, with real consequences to back it.
Drawing a parallel with telecoms. Years ago in the days before ADSL I wanted an ISDN line installed in my home. This was done by BT (pre-Open Reach) because provision of ISDN was a universal service and despite it requiring routing a circuit from an exchange some 15 miles away (as the crow flies) from my local exchange, tracing faults in the old copper PSTN lines and finally pulling a kilometre or so of new cable to fix the problems.
Compare that to fibre broadband. Still waiting despite the R100 promise and despite it being in the local exchange. Not enough demand to justify installing a new cabinet and pulling 5km of new fibre cable.
I have had an engineer out to fit a smart meter. No radio signal, 4G blackspot and no broadband, so no go, no smart meter.
If power prices are to be tied to smart metering, edge cases like rural Scotland need to be catered for from the outset. My suggestion is that there has to be a universal service obligation with the back up that if a meter is not fitted within, say, three months of a request to do so the standing charge is waived and all power is charged at the minimum rate until one is. It then becomes a very simple economic calculation for the network operator and suppliers; is it more expensive for them to do the work necessary to provide a smart meter or “subsidise” the electricity used?
I think that this is a valid point but I would like to think a bit further about and write a post about the issue. Energy suppliers do have an obligation to installing a smart meter for anyone who requests one and they have strong incentives to install even when the customer does not request one.
The problem lies with the utterly stupid decision to rely on wireless technology for communication between meters and suppliers. Even if you had broadband - say Starlink - at the moment there is no way of bypassing the wireless monitoring/reporting infrastructure. The difficulty with imposing an unprofitable tariff for customers without a functioning smart meter is that this will encourage suppliers either to refuse to supply such customers or to devise tariffs that prompt to go elsewhere.
Further, the core of the problem isn't in remote areas of Scotland. It is large multi-occupancy buildings with steel reinforced concrete that function as a Faraday cage to block or degrade wireless signals. A separate problem is that wireless technology simply does not have the 30-year expected life of a traditional meter - at best 10 years. So you have to deal with replacing meters much more frequently than the industry is used to dealing with.
The other thing I didn’t comment on — one rant at a time suffices — is that special rates are bound to distort the daily demand curve. If we think about moving primary energy consumption for transport and space heating (petrol/ diesel and natural gas) to electricity, yes there are energy efficiencies to be had but there will still be considerable additional electricity demand. Even a relatively cursory analysis shows the likelihood that the present dromedary camel curve will change, with additional demand occurring overnight.
There is no reason to think that EV owners will recharge anywhere but at home, overnight. Why would they when the cost per kWh at public chargers is so much greater than the domestic rate?
Similarly space heating. If people are forced off gas, they’re not going to install heat pumps unless there is a return on the total cost of installation. The total cost includes, over and above the capital cost of the pump itself, the insulation (because heat pumps can’t deliver heat as fast as gas boilers), replumbing (no microbore allowed because heat pump output temperatures are lower) and general making good required in anything but a new build. Heat pumps may be efficient, but so are gas boilers; looking at total cost heat pumps struggle to breakeven when electricity is 27p/kWh but gas c. 8p. Either the price of pose needs to fall, the price of gas to rise dramatically or heat pumps need to achieve CoEs of well over 4 in winter cold.
If people do install heat pumps I strongly suspect they’ll end up being run near continuously, dribbling heat into properties at the rate it is lost rather than trying to warn a house in morning and evening. If people can’t afford heat pumps, it will be back to the old days of storage heaters.
Either way, the combination of space heating and EV charging is going to flatten the daily demand curve. Cheap rates are cheap because supply exceeds demand. If demand becomes more constant, that see me to me to be a significant change in how we deliver power (generation mix) but how it is charged for.
I had’t thought of steel framed buildings as Faraday cages, but I guess for certain radio frequencies they are.
Our house in Italy, built in the 1930s following a classic Italian design, has a tower built of steel-reinforced concrete. It functions as an effective Faraday cage for both 2.4 and 5 GHz WiFi as well as 3G/4G/5G frequencies from 800 Mhz to 3.5 GHz. The only way to get decent direct reception from nearby towers is by being close to a window. So to distribute broadband within the house we have to rely on either powerline transmission (not great) or running ethernet cables. Our house in Scotland, built in the late 1980s with a timber-frame is completely different, so we are in a mobile phone blackspot but can rely on VoIP/VoLTE over WiFi instead.
Smart meters rely primarily on 2.4 GHz radio but dual band home hubs can also use 868 MHz which is used for LoRa (long range) wireless protocols with a range of up to 20 km. However, this requires an external antenna and higher transmit power, neither of which are used for smart meters, so the basic problems of serving remote locations and dealing with stone or concrete buildings remain.
Thank you Gordon. Based on the work of Kathryn Porter and David Turver, it appears that the opaqueness of customer bills is allowing the costs of net zero to be hidden from the electorate, which is perhaps why we shouldn't hold our breath for reform, while the current administration holds power.
True. With Ofgem thoroughly compromised I wouldn't expect any change soon, but this is going to be a problem for a long time. Hence, a future administration may change regulations to highlight a new approach.
It’s dreadful how poorly ToU tariffs are being introduced, as in a renewables dominated grid mix (perhaps any grid mix?) they are just so logical, and have such benefits to the grid operation
Obviously smart meters are a must, but the degree of suspicion around these is simply shocking, with socials filled will conspiracy theories about big brother having control
We are Octopus customers and have had the Agile tariff and now the EV tariff. Our heat pump is controlled by a Homely thermostat which uses forward tariff data, weather forecasts and learns how the house heats and cools to “pre heat” using the cheapest time periods ahead of heat demand (obs currently this is at night on the EV tariff, but could be anytime on Agile)
I agree that conspiracy theories about smart meters and, thus, ToU tariffs are absurd. The difficulty is that the speculations of both academics and regulators reinforce the belief that something undesirable is planned.
I don't know much about Homely Energy but they are competing with what a company that I have set up with colleagues is doing so I am fully in favour of what they are doing. The market will be (eventually) big enough to support multiple players. However, the problem is technically quite difficult and the Agile tariff is very much a niche tariff, so this approach will only take off when ToU tariffs are more widely adopted.
Very interesting, especially other countries energy markets.
Thank you.
Excellent as ever. Clear exposition of the mess we've got ourselves into, and some simple suggestions as to how to move to a better situation
Thank you.