Navigant Research Blog

As Markets Soften, EnerNOC Diversifies

— August 28, 2013

In early August, EnerNOC announced second-quarter revenue of about $36.2 million, up 8.7% from the same period last year.  The provider of demand response (DR) expects to generate between $360 million and $400 million in revenue for the full year of 2013, reaffirming its earlier guidance.  However, the company reported a net loss of $34.4 million, higher than the $29.3 million net loss in the same quarter in 2012.

Even though EnerNOC ended the quarter with $102 million in cash and anticipates that this will be its fourth consecutive year of positive cash flow, the expanding losses do not bode well for this major provider of curtailment services.  Are these losses a sign that EnerNOC is facing weakening business prospects?  Because of the company’s significant involvement as an aggregator in PJM’s capacity market, its revenues have been seriously affected by the sharp drop in prices in PJM’s capacity auction, held in May for the 2016/2017 delivery year.  Flat demand growth for electricity, new generation from natural gas, and substantially increased imports of power, primarily from MISO, resulted in lower capacity prices across most of PJM’s territory.  For example, in one region, the price decreased from $357 per megawatt-day (MW-day) in the 2015/2016 delivery year to $114.23/MW-day in the 2016/2017 delivery year.  According to EnerNOC, the company’s revenue opportunity from PJM declined as much as 55% this year compared to revenues cleared in PJM’s 2015/2016 auction in 2012.

On the Beach

Realizing the potential for continued profitability losses and sluggish revenue growth opportunities, EnerNOC has made a wise move to adopt a strategy to further diversify its business.   While the company is actively pursuing new DR opportunities in the United States and Canada, it has also been actively expanding its business internationally, more specifically in the United Kingdom, Australia, and New Zealand, to capitalize on these emerging and fast-growing DR markets.  To this end, EnerNOC has developed several new product features, such as the internationalization of its technology platform for non-English-speaking countries.  Navigant Research’s report, Market Data: Demand Response, estimates, for example, that Asia Pacific will have nearly 294,000 sites (residential and commercial and industrial) participating in DR in 2013 and will enjoy the fastest growth rate of any region with a 2013-2020 CAGR of 21%. Undoubtedly, EnerNOC will use its presence in Australia and New Zealand as a beachhead to penetrate other major countries in this region, such as China and Japan, which are actively pushing deployment of DR in their commercial and industrial sectors.


Distributed Generation Poses Existential Threat to Utilities

— August 24, 2013

To the list of industries at risk of complete obsolescence – which at the moment includes daily newspapers, government postal services, and men-only barbershops, among others – you can add U.S. power utilities.  The creeping sense of impending peril that has enveloped the power sector was made explicit earlier this year in a widely distributed, and remarkably candid, report from the Edison Electric Institute entitled “Disruptive Challenges.”

Warning of “irreparable damages to revenues and growth prospects” of utilities due to the spread of distributed power generation from renewable energy sources, the report foresees “a day when battery storage technology or micro turbines could allow customers to be electric grid independent.”  The result: a “cycle of decline [that] has been previously witnessed in technology-disrupted sectors (such as telecommunications) and other deregulated industries (airlines).”

A Bloomberg BusinessWeek story last week put an even finer point on it: “In about the time it has taken cell phones to supplant land lines in most U.S. homes, the grid will become increasingly irrelevant as customers move toward decentralized homegrown green energy.”  NRG Energy CEO David Crane told the magazine that microgrids, small wind and solar, and net metering constitute “a mortal threat to the existing utility system.”

In the Kubler-Ross end-of-life model, U.S. utilities are still mostly in the denial stage.  Utility executives spend a lot of time these days decrying government subsidies, particularly for rooftop solar.  To be sure, several big utilities have at least hedged their bets by investing in alternative forms of power generation; Duke Energy, for example, entered the renewables business in 2007 and has built some 1700 megawatts of renewable capacity since then.

Sabotage in the Suburbs

Gloomy prediction aside, it’s worth remembering that this transition is sure to be prolonged, that the utilities, in their respective regions, often enjoy quasi-monopolies, and that they have ample resources, both financial and political, to draw on to protect their positions.  Power from wind and solar still accounts for less than 1% of the electricity generated in this country.  Southern Company has a market cap of $37 billion.  This is not a sector that is going to meekly fold its tents and retreat.

Think of Big Oil.  The “End of Oil” has been forecast now for decades, and oil consumption in many developed countries peaked in 2007 and has not yet reached those heights again.  It may never.  Nevertheless, the shale gas boom has given petroleum companies an unforeseen boost and many major oil producers are enjoying record profits.  The forces at work in the utility sector are very different (for one thing, technology advances, which are fueling the current oil and gas boom, are likely to work against utilities, not for them), but in times of upheaval and transformation, incumbents tend to do well, at least for a time.

What’s more, the recent glowing news in the renewables business, which has seen prices for solar power approach grid parity as adoption by consumers, encouraged by no-money-down leasing arrangements, accelerates, is not guaranteed to last.  In fact, there are indications that solar markets in key states are slowing, as prices drop to levels unsustainable for providers.  “It is getting difficult to deliver a good product and still be profitable,” an executive with REC Solar told Greentech Media last week.

At the same time, the industry is fighting a delaying action on the policy front.  “The future of net metering in Arizona is under attack,” reported last week, “with the state’s largest electric utility Arizona Public Service (APS) proposing changes that undermine cost benefits for residential solar installations.”

Pushing back on net metering, investing in renewable capacity, and building new fossil-fuel plants are likely to buy the utilities some time.  And they may just figure out how to thrive in the new era of distributed generation.  But the threats they face are not going away – and they’re not just economic.  The FBI said last week it is investigating an act of industrial sabotage in Arkansas, in which an unknown monkeywrencher climbed a 100-foot transmission tower, cut a supporting cable, and brought down a 500-kilovolt power line.  That’s at least the second instance of destruction of utility transmission infrastructure this year.  When suburbanites putting solar panels on their roofs are joined by nighttime saboteurs, it might be time to rethink your business model.


Among Executives, Fears of Cyber Crime Rise

— August 23, 2013

According to Vito Corleone, “A lawyer with his briefcase can steal more than a hundred men with guns.”  That was 1972.  One can only wonder what he would make of today’s cyber thieves.

The recent Lloyd’s 2013 Risk Index makes it likely that Don Corleone would be right in the middle of the action.  To quote the introduction to this third biennial edition, “The findings are based on a global survey of 588 C-suite and board level executives conducted by Ipsos MORI for Lloyd’s during April and May 2013.”  The report summarizes priority and preparedness within each respondent company for a number of business risks.

Strikingly, cyber risk has risen from #20 in the original 2009 risk index, to #12 in the 2011 report, to #3 in the current report.  If this were the Billboard Hot 100, cyber risk would have a bullet.  The only corporate risks given higher priority than cyber risk are high taxation and loss of customers.  Respondents view cyber risk as more pressing than inflation, cost of credit, excessive regulation, and far more pressing than risks such as fraud, protectionism, or strikes.

The Lloyds study appeared in the same week that The Economist cover story was “The Curious Case of the Fall in Crime”.  As an example, The Economist reported that during 2012 there were only 69 armed robberies of banks, building societies and post offices in all England and Wales.  That amounts to one armed robbery every 5 days, over a population of 56 million.

From this evidence it seems there are fewer criminals, and those that remain have gone online.  Rob a bank?  That’s so last millennium.  Maybe the dearth of traditional criminals is another victim of aging Baby Boomers.  Or is it a predictable outcome of a generation raised on technology?  Regardless, the new criminal is savvy:  Why risk injury or death when you can steal millions from your balcony overlooking the Neva River?

Infrastructure? We Got This

Oddly, in the Lloyd’s survey, critical infrastructure failure comes in at #22 on the executives’ priority list, essentially unchanged from 2011.  Yes, #22 – behind failed investment, reputational risk, and internal oversight failure.  Even worse, the C-suiters rate their preparedness for infrastructure failure much higher than they rate its priority.  In other words, “It’s no big deal; we got this covered.”

Cyber security for utility infrastructure remains weak.  As this blog has often repeated, control systems security has yet to solve some key problems.  Yet in a 2010 presentation, Scott Borg, CEO of the U.S. Cyber Consequences Unit, pointed out that 72% of the U.S. gross domestic product (GDP) is directly dependent upon electric power.  Surely three-fourths of the GDP should rate higher than #22 on our hit list?

I could be an optimist here and be thrilled to see cyber risk at #3 priority.  Or I could be a pessimist and despair to see critical infrastructure failure at #22.  But instead I’ll take Door Number Three:  realist.  Cyber security is a critical element of critical infrastructure protection, so raising the profile of cyber risk is likely raise the profile of infrastructure cyber security over the long run as well.

One huge question remains:  How long is too long?


Fuel Cells and the Cost Curve

— August 23, 2013

In my last blog I argued that volume, not R&D, is needed to bring down the costs of proton exchange membrane (PEM) fuel cells.  In this blog I will outline the two phases in which this process will unfold.

Phase 1: 1997-2017

The chart below, mined from Navigant Research’s database, shows that, in terms of adoption, we are still clearly in the first phase of ramp up with very low volumes, and associated high costs.  This forecast data comes from our Fuel Cells Annual Report 2013.  Even though the volumes grow slowly, each step-up produces a steep cost-drop.  This mirrors the cost out that was shown by the solar PV sector in the 1970s and early 1980s.

The majority of adoption during this period is from the stationary sector, predominantly small PEM systems of 5 kilowatts (kW) or less.  Applications including residential combined heat and power and both backup and primary power for telecom base stations are already starting to see volume shipments.

A new generation of PEM technology, forecast by Navigant Research to reach the market around 2017, should be less expensive, with producers nearing a profit on each system sold.

Historical and Projected PEM Fuel Cell Adoption and Cost Curve


(Source: Navigant Research)

Compare this to the solar PV market at a similar point in its evolution: at 13 GW cumulative shipped as of 2008, the cost of solar PV was approximately $3/watt.  From the chart, it can be seen that Navigant forecasts the PEM fuel cell cost will be at around $5/watt by 2017.  Higher, but not by that much.  It should be noted that this is also higher than the study on PEM fuel cell costs, sponsored by the U.S. Department of Energy, which used best-in-class components to build a theoretical model of cost reductions at different volumes of manufacturing.

Phase 2: 2017-2030

The period 2017–2030 will see a much steeper cost curve than the solar PV industry, as synergies across sectors kick in and PEM fuel cells for cars and stationary applications begin to be shipped at large volumes.  The current Navigant Research forecast for 2030 sees an impressive 300 GW annually by 2030, a level that the solar PV sector is not close to reaching.

A number of factors could completely derail this adoption, or even speed it up.  The table below shows our matrix of events that could influence these forecasts.  Navigant Research fuel cell forecasts are built around the first two of these: predictable events and predictable events with uncertain timing.  The biggest impacts would come from the not predictable and the “black swan” events.  New IP, a natural disaster, or even a change in government direction could all change the market’s direction.

Event Types That Influence Fuel Cell Forecasts


(Source: Navigant Research)

The bottom line: costs are coming down, but it will be a prolonged process.  We expect low-temperature PEM costs to reach a level enabling mass adoption by the second half of the 2020s.


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