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?
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.
Tags: Demand Response, Finance & Investing, Mergers & Acquisitions, Smart Utilities Program
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