Navigant Research Blog

CPower Reemerges as a Demand Response Player

— December 15, 2014

In October, I wrote about the announcement that Comverge and Constellation would combine their commercial and industrial demand response (DR) businesses into a standalone entity.  The question was: What would the new company be called?  Would they take one of the existing names?  Combine the two names?  Come up with something new?  Instead, they brought back a familiar brand: CPower, the name of the DR provider that Constellation bought 4 years ago.

But this is not your mother’s CPower, according to Chris Cantone,  the company’s senior vice president of sales and marketing.  The C in CPower carries multiple meanings aside from the lingering brand recognition: the combination of Comverge and Constellation, customer engagement, and curtailment services.  “The market has been excited about the announcement, and our channel partners have been waiting for an independent DR provider,” Cantone told me in a phone interview.  The company is still in a little bit of stealth mode as the behind-the-scenes business combination unfurls, but expect a media splash in the near future.

Divide and Succeed

What value does this new structure bring to the parties involved? Cantone says that the future of DR will entail greater technical requirements, which were hard to fulfill under a larger organization like Constellation.  CPower can be more strategic and proactive on its own, while maintaining a preferred provider relationship with Constellation for its customers.  From Comverge’s perspective, there was a lack of synergy between its utility-focused residential business and its market-focused commercial and industrial business, so it made sense to split them up and allow them to build to their own strengths.

So was Constellation’s purchase of the original CPower 4 years ago a mistake?  No, asserts Cantone.  It was an invaluable experience for the old CPower DR experts to get immersed in the energy markets and learn how DR fits into the bigger picture on the wholesale side with generation and the retail side with customers’ energy procurement strategies.   Additionally, the 2011 deal was the move that set in motion the trend of larger energy entities investing in the DR realm, as Johnson Controls bought Energy Connect, Siemens bought Site Controls, Schneider bought Energy Pool (in Europe), and NRG bought Energy Curtailment Specialists.  Will those combinations survive?  Cantone thinks they will have to deal with the same issues that Constellation did, and we will have to see who can find internal solutions and who sets the DR free.

The Real Threat

Regarding business strategy, the initial intent is to focus on the existing markets in the United States, like PJM, ERCOT, NYISO, ISO-NE, and California.  An expansion into utility programs could be the next growth step, followed by selective entry into the burgeoning international arena.

I contacted executives at EnerNOC to get their take on what looks to be their strongest competition, but they declined to comment .  In the meantime, EnerNOC and CPower may find common ground to combat the potential disruption from the court drama over FERC 745 to remove DR from the wholesale markets, which could affect them more than any amount of friendly competition could.

 

Eastern Approaches to Smart Grid Development

— November 20, 2014

Japan and South Korea have emerged as leaders in smart grid technology development and deployments.  On a recent trip to East Asia, I noted some similarities and some marked differences between the two countries’ approaches and styles.

At Korean Smart Grid Week in Seoul, I spoke about global demand response (DR) trends.  The Expo hall for the conference was as big as any I’ve seen, including large players like Korean Electric Company (KEPCO), Samsung, and LG exhibiting enormous booths and showing off cutting-edge technologies.  There were also a plethora of smaller companies and startups displaying their innovations to challenge the status quo and create the next-generation electric grid.

Next, I traveled to Jeju Island, the so-called “Hawaii of Korea.”  I got to enjoy the palm trees and volcanic landscape only by bus as we traveled to the Smart Grid Information Center, where KEPCO laid out its vision of the grid of the (not too distant) future.

Then we caught a quick ferry ride to tiny Gapa Island, which is only about 1 square mile in size but has an immense amount of solar, wind, and energy storage packed into a microgrid test bed, complete with a state-of-the-art operation center.

All of the Above

Next I embarked for Tokyo.  Japan is undertaking an “all of the above” energy strategy after the Fukushima Daiichi nuclear accident in 2011.  Restarting the country’s nuclear plants is still on the table, but Japanese companies and government agencies are also deregulating the retail electricity market and designing opportunities for renewables, energy efficiency, DR, and energy storage.

Both countries, and the companies within them, have a laser focus on energy storage as a key solution, which is not surprising given their level of technological advancement.  Grid-scale energy storage is still a few years away in the United States, but Japanese and South Korean vendors are intent on leapfrogging Western suppliers and exporting their expertise.

Hare and Tortoise

The two countries’ business cultures, however, are quite divergent.  South Korean companies tend to take an aggressive, American-style approach to forming a plan, executing on it, and tweaking it along the way.  For instance, the country opened its DR market in November after a relatively short design phase, and U.S. provider EnerNOC has already entered the fray.

Japan, on the other hand, has been studying DR for a few years and it will take a couple more years of pilot programs until the market is ready.  Japanese firms tend to take a much more measured approach to development, trying to perfect the model before setting it free.  In the long term, both methods may work; but in the short term, the real action is in South Korea.

These developments are outlined in the new Navigant Research report, Demand Response for Commercial & Industrial Markets.  The report was actually published while I was abroad, so it includes updates from the trip.

 

Contrary to Trends, Constellation Spins Off Its Demand Response Unit

— October 7, 2014

The recent action in the demand response (DR) industry has been in the direction of consolidation.  Constellation (a unit of Exelon) bought CPower; Johnson Controls bought Energy Connect; NRG bought Energy Curtailment Specialists; and in Europe, Schneider Electric bought Energy Pool.  Only EnerNOC and Comverge are left as major independent DR providers.  The acquiring companies in these cases are large corporations that own generation, electric supply business, and/or energy management systems, intent on diversifying their product offerings and capturing more of the financial and customer value chain that DR provides.  These companies are also expanding into tools like distributed generation, solar, and energy storage to act as a one-stop energy shop for commercial and industrial customers.

Comverge’s just announced merger with Constellation’s Commercial and Industrial DR business is an exception to that trend.  The new entity will be an independent company, owned by Comverge’s parent company HIG Capital, with Constellation holding a minority stake.  In effect, Constellation is spinning off its DR business.  Is this just an anomaly, or is it a signal of a strategy shift across the industry?

Priority: Generation

I think that the Comverge-Constellation deal is a standalone case, due to circumstances specific to these companies.  Exelon values its large generation portfolio.  Services like energy efficiency and distributed generation, which mainly play on the retail side of the market, are not direct threats to the company’s wholesale generation revenues.  They can be incorporated into the retail supply business as value adders without negatively affecting the corporation’s main assets – its large generation facilities.

But DR for the commercial and industrial market is primarily a wholesale market product in the territories where Exelon has generation, such as PJM, ERCOT, ISO-New England, and NYISO.  In these environments, DR competes directly against generation: every megawatt that DR gets takes away from generation, and every cent the price of energy goes down thanks to DR comes out of generation’s coffers as well.  For Exelon, being a major operator of power plants while also running one of the largest national DR portfolios may have become too much of a conflict.  So, perhaps the company decided to break off the DR business and unify its wholesale market strategy.

Progress and Profits

Exelon’s distribution utilities run some of the most progressive DR programs in the country.  Baltimore Gas and Electric has the first default peak time rebate program in the country.  Commonwealth Edison recently announced a similar initiative.  PECO is piloting a dynamic pricing program.  Ironically, if Federal Energy Regulatory Commission (FERC) Order 745 on DR compensation gets overturned by the court system and DR becomes a purely retail product, Exelon may rethink its strategy and get back in the commercial and industrial DR game.  Then it might just be another customer product offering with less direct impact on wholesale markets.  From Comverge’s perspective, it saw an opportunity to substantially add to its commercial and industrial DR book.  The wholesale DR markets are all about scale these days, with players that can afford the credit requirements and aggregate large portfolios together to manage risk.  There are not big incremental costs to operate a bigger DR business – so the move should improve the company’s profitability.

 

Utility Customers Respond to Variable Pricing

— September 7, 2014

On July 23, Baltimore Gas and Electric (BGE) customers earned more than $2.5 million by reducing their electricity usage during peak summer heat hours.  Over 640,000 residences voluntarily participated – nearly an 80% participation rate among those who were notified – amounting to an average bill credit of $6.80, enough to buy an ice cream cone while turning down the air conditioning a few degrees.

BGE is the first utility in the country to put all of its customers with smart meters on a default Peak Time Rebate program.

It works like this: BGE customers with a smart meter can participate in the BGE Smart Energy Rewards program by voluntarily reducing their electricity usage to earn a bill credit of $1.25/kWh saved from 1 p.m. to 7 p.m. on designated energy savings days.  Eligible customers will be notified, usually the evening before, by an automated phone call, e-mail, or text message.  BGE anticipates that there will be 5 to 10 energy savings days in a summer season.

Smarter Grids, Smarter Customers

BGE has had a traditional direct load control (DLC) residential DR program for many years, and it has been successful within its own parameters.  However, the company has been installing advanced metering infrastructure (AMI), as covered in Navigant Research’s Smart Meters report, over the last few years, and with that network comes new capabilities (and regulatory requirements to meet cost-benefit thresholds).  AMI provides the utility and potentially customers with near-real-time interval meter data, so the utility can send time-based price signals and get almost immediate feedback on customer performance.  Couple these abilities with new end-user device and thermostat technologies that enable fast response and remote control by the customer, and you have more customer-centric, flexible demand response (DR) programs than were possible before; this can increase customer penetration rates dramatically.

Right on Time

Other innovative companies are trying different variations of programs and pricing offerings.  The Sacramento Municipal Utility District (SMUD) is looking to become the first utility to have a default time-of-use (TOU) rate after running a successful pilot that showed that customers preferred TOU structures to their standard flat rate.  The guiding principles of Oklahoma Gas and Electric (OG&E) for DR include voluntary participation for customers and no DLC by the utility, relying completely on customer empowerment.  OG&E believes that pairing dynamic pricing with technological devices will achieve these goals.  The province of Ontario, Canada has instituted default TOU pricing for customers with smart meters since 2005, the only area in North America to do so.  A traditional DLC program already existed in the province, and now the plan is to combine the control ability of the DLC with TOU pricing to help customers respond to price variations.  Massachusetts is set to become the first U.S. state to mandate default critical peak pricing (CPP) based on a recent order by the Department of Public Utilities.

All of these developments and other innovative programs are covered in Navigant Research’s new report, Residential Demand Response.  The report discusses industry trends around the world and provides 10-year forecasts of sites, capacity, and revenue, including breakouts between DLC and dynamic pricing.  Over time, all these different pilot projects will blossom into full-blown programs and expand into other jurisdictions, creating a truly responsive demand side of the energy equation.

 

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