Navigant Research Blog

Facing Power Shortage, United Kingdom Looks to Demand Response

— July 10, 2014

Outside the United States, the United Kingdom represents the largest (and arguably most dynamic) market for demand response, as described in Navigant Research’s Demand Response report.  In some ways, though, the United Kingdom has surpassed the United States on the demand response front.  One of these is a proposed mechanism known as the Electricity Demand Reduction (EDR) program that would create financial incentives for customers to pledge permanent electricity reductions.

In contrast with traditional demand response programs, which pay customers to reduce power demand during peak periods and shift it to other times, EDR creates incentives for customers to invest in energy efficiency measures that result in lower overall peak demand.  The U.K. government launched a 2-year pilot in June and will continue to examine the viability and impact such a program would have on the country’s electricity system.

Crisis Ahead

Much of the impetus for demand response programs in the United Kingdom is due to the rise of intermittent renewable energy sources such as offshore wind energy.  However, with the country aiming for broader decarbonization of its energy system, demand response is being considered alternatively as a platform for deeper investment in energy efficiency measures that reduce energy consumption in terms of not only kilowatt-hours, but also kilowatts of power demand.

The United Kingdom is headed toward a potential crisis in its energy supply, with a severe shortage of new plants slated for construction to replace those being decommissioned.  The country is expecting to shut down more than a dozen baseload power plants by 2025 with a combined capacity of over 20 GW.  To put that into perspective, the United Kingdom’s peak demand usually hits 55 GW to 60 GW in the winter, so more than one-third of the country’s current baseload power generation is going offline in the next 11 years.  As a result, the government is looking into a wide range of options such as EDR that would make permanent reductions in peak demand to help close the gap with the decline in supply.

In its 2012 Energy Efficiency Strategy, the U.K. government concluded that, “through socially cost-effective investment in energy efficiency we could be saving 196 terawatt-hours in 2020, equivalent to 22 power stations.”  The EDR pilot will address the lingering questions about the program’s practicality and cost effectiveness.  If it succeeds, it will represent an attractive approach for meeting the country’s long-term decarbonization targets.

 

Ecova Buy Builds GDF Suez’s Demand-Side Business

— June 6, 2014

On May 30, French energy giant GDF Suez acquired energy management company Ecova for $335 million through its energy services unit, Cofely. Founded in 1995 as WWP Energy Solutions, Ecova started out as a utility bill management company that helped customers better understand their energy bills.  Over time, the company expanded into adjacent businesses such as energy procurement, waste management, and telecom.

As demand for energy management and sustainability tools grew in the late 2000s, the company acquired other specialist firms, such as Ecos Consulting, The Loyalton Group, and Prenova, a building energy management systems (BEMS) company.  This organic growth enabled Ecova to get an early lead in terms of acquiring Fortune 500 customers focused on energy management, such as Shell and Starwood Hotels.

GDF Suez, though perhaps known best as a power supplier with operations primarily in France, Belgium, and the Netherlands, has diversified its portfolio over time and, through its suite of subsidiaries, is now a major energy services provider.  Of its €17 billion ($23.2 billion) in total annual revenue, 6% – or €1.0 billion, is in energy services, including facility construction, operations & maintenance, and energy efficiency retrofit services.  The company is also more international today than in the past, with 25% of its revenue coming from outside Europe.

Blurred Lines

The Ecova acquisition propels GDF Suez forward in its pursuit of broad energy efficiency services.  In addition, Ecova’s intelligent, software-based platform complements Cofely’s more traditional approach to energy efficiency via HVAC, lighting, and building automation system (BAS) retrofits, allowing it to provide enterprise-level energy management for GDF Suez’s global customers.

From a geographical point of view, the acquisition provides GDF Suez a platform for engaging a broader set of energy service customers in North America while accomplishing largely the same for Ecova, as it aims to expand beyond North America.  It also brings GDF Suez in closer competition with French rivals such as Schneider Electric, which acquired a close Ecova competitor, Summit Energy, in 2011.

By bringing more intelligent building capabilities in-house, GDF Suez is positioning itself as a broad energy services provider for buildings, and this acquisition symbolizes the continuing blurring of the lines between the energy and buildings industries.

 

Energy Systems Group Acquires Chevron’s Federal ESCO Unit

— April 8, 2014

On April 1, Energy Systems Group (ESG), a major U.S. energy service company (ESCO) based in Newburgh, Indiana and a subsidiary of utility holding company Vectren Corp., announced that it had acquired the federal sector energy services unit of Chevron Energy Solutions, a subsidiary of Chevron USA. The unit, which consists of 48 employees, will not only expand ESG’s projects and footprint, but more importantly, will also allow ESG to play in the U.S. federal government’s indefinite-delivery, indefinite-quantity (IDIQ) ESCO market.

That market was created in February 2009 when the U.S. Department of Energy (DOE) awarded 16 ESCOs with DOE energy savings performance contracts (ESPCs).  These 16 contracts allow the selected ESCOs to provide federal agencies with up to $5 billion of performance contracts each.  The program effectively prequalified the 16 ESCOs to perform energy efficiency services for many of the federal government’s largest facilities.

Narrowing the Competitive Field

Although ESG had been an active player in the federal ESCO market through other avenues prior to the acquisition, such as utility energy service contracts (UESCs – a twist on the traditional ESPC in which federal agencies procure performance contracts through their local utilities), the acquisition allows it to narrow the competitive field for large contracts offered only to ESCOs.  Given that the federal market represents one of the most promising segments in the challenging ESCO market, as Navigant Research wrote in its report, The U.S. Energy Service Company Market, the acquisition positions ESG to benefit from the full scale of the federal ESCO market. “The federal sector is one of our primary targets for growth in the coming years,” said Greg Collins, president of ESG, when I spoke with him.  “This acquisition strengthens our position in delivering on a wider range of federal opportunities.”

Note that other ESCOs have entered the federal market through acquisition.  For example, in 2007, SAIC (now Leidos) acquired BENHAM Companies to gain access to a broader swath of federal building customers (though this was before the establishment of the IDIQ market).

The federal sector has been a key focus for ESCOs in the United States over the last few years.  While the municipalities, universities, schools, and hospitals (MUSH) market remains a challenge due to the winding down of stimulus funding for municipal performance contracts and concerns about municipal debt, ESCOs have patiently awaited the boost to the market that was initiated by the Better Buildings Initiative, the $2 billion federal performance contracting program announced by President Obama in December 2011.

So far, the program has fallen short of its goal of achieving the $2 billion in contracts by the end of 2013. However, initial signs in 2014 are promising.  Many of the ESCOs I work with are reporting a strong flow of federal requests for proposals (RFPs) and, in the first quarter of 2014, over $230 million of federal IDIQ ESPCs had been awarded. By contrast, in all of 2013, only $362 million was awarded.  In addition, the CEO of Ameresco, George Sakellaris, announced in his company’s 2013 fourth quarter earnings call in early March that federal government ESCO activity was high.  Therefore, 2014 is looking strong for the ESCO market and ESG will be in a much better position to address it in the wake of this acquisition.

 

EnerNOC Drives Demand Response in Europe

— February 25, 2014

EnerNOC, one of the largest demand response (DR) integrators and service providers in the world, made two big acquisitions last week that deepen its strategy for expansion into new markets.  The first was the acquisition of Entelios, the main DR integrator in the nascent DR market in Germany.  The second was the purchase of Activation Energy, the leading provider of DR software and services in Ireland.  Although financial terms were not disclosed, EnerNOC CEO Tim Healy stated on the company’s most recent earnings call that the company spent $30 million on business development-related activities.  With these additions, EnerNOC establishes itself as the main player in these respective country markets, thereby dramatically altering the competitive landscape for DR in Europe.

The European market for DR lags far behind the United States in terms of capacity and revenue.  The main reason is a regulatory landscape that lacks the scope and diversity of the market in the United States, where independent system operators (ISOs) have created robust DR markets.  However, the need for new resources to help manage the grid are just as pressing as countries like Germany continue to add renewable energy and the intermittency created by solar and wind creates more demand for balancing resources.  As a result, there remains significant untapped potential, which EnerNOC and other players in Europe are working to unlock.

Barriers Broken

However, the European electricity grid contrasts dramatically with that of the United States, making it difficult to export some practices and technologies across the pond.  Whereas much of the DR market in the United States is focused on reducing summer peaks created by air conditioning demand, one of the drivers for demand response in Europe – particularly the large markets in Northern Europe, where air conditioning capacity is limited – is winter peaks due to high heating demand.  And, long-term projects such as the European supergrid would further open up a diversity of opportunities for flexible assets to provide benefits to the electricity system overall.  These differences make it all the more critical for a player like EnerNOC to enter the market via acquisition of players that have sifted through the technological and regulatory barriers to create viable DR markets, rather than trying to build a business from scratch.

EnerNOC already maintained a presence in the European DR sector, primarily in the United Kingdom, Europe’s most advanced DR market.  Other firms, such as London-based KiWi Power, are already active in that market, whereas other country markets are still in the more tumultuous early stages, allowing outside players such as EnerNOC to enter.  As DR becomes a higher-demand grid service in Europe, we expect to see the competitive landscape heat up with further merger and acquisition activity.

 

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