Navigant Research Blog

Demand Response Prepares for the 2016 Summer Season

— June 24, 2016

??????????????????June has been a much less newsworthy month than May was for the demand-side management industry. But it does represent the traditional start of the summer demand response (DR) season, so we’ll see what Mother Nature has in store for the weather. Will it be a busy DR season or a light one, as the last few years have been?

Drivers of DR Growth

Meanwhile, macro-level factors continue to act as both drivers and barriers for the global growth of DR. California, for example, continues to offer new opportunities for DR participation. The most recent case is the California Public Utilities Commission approving a decision that allows Southern California Edison to spend an additional $8.7 million on DR programs this summer to mitigate potential natural gas shortages stemming from the Aliso Canyon natural gas leak.

Outside of the United States, there are a number of examples of markets becoming more open and attractive for DR resources. From Canada to Europe to Asia, market structures are being reformed to allow DR to compete against generators for revenue. In Ontario, the Independent Electricity System Operator plans to launch a capacity market where DR will be able to compete with generation and other resources. Two of Europe’s largest electricity markets—France and the United Kingdom—plan to open capacity markets by 2017 that would allow DR participation. South Korea now allows DR to compete equally with generators in the electricity market.

And Barriers …

However, specific barriers to DR development still exist due to environmental and reliability concerns. The amount of DR capacity available for this summer was reduced due to the expiration of the U.S. Environmental Protection Agency’s (EPA’s) rules for emergency generators (EGs) for DR purposes. Last year, the U.S. Court of Appeals overturned an EPA rule that allowed 100 hours of EG use for emergency DR programs. It granted the EPA a 1-year stay, which expired on May 1, 2016. The EPA has no plans to make changes to the rule, meaning that the court’s ruling will remain intact, affecting upward of 20% of DR resources in some markets.

The recent PJM capacity auction cleared less DR capacity than the previous year, mostly due to lower prices. But in the longer term, PJM is phasing out its summer DR categories in favor of annual participation requirements. Industrial customers may have fairly flat load profiles throughout the year, but many commercial customers rely on air conditioning (AC) measures to respond to DR events. On a portfolio level, it will come down to a risk/reward calculation. Residential DR that gets bid into the PJM market by utilities running their own DR programs are almost exclusively focused on summer-focused loads like AC and pool pumps. These programs offer virtually no winter DR capability and would not be eligible under the new rules unless they could combine a bid with a winter-type of resource.

All of these dynamics and more are covered in the Navigant Research report, Market Data: Demand Response. I look forward to seeing anyone who will be attending the National Town Meeting on DR in Washington, D.C. in July.

 

May Ends as It Began for Demand-Side Management: With a Bang

— June 3, 2016

AnalyticsAs I wrote a few weeks ago, May came in like a lion in the demand-side management (DSM) space with some key acquisitions and regulatory happenings. It appears that the month ended with a similar bang, with the PJM auction, EnerNOC’s divestment announcement, and AutoGrid’s investments all stealing headlines.

The annual breath-holding for the PJM Base Residual Auction (BRA) results ended with many sighs, as prices for the 2019/2020 delivery year came in lower than most analysts predicted. At a high level, the PJM load forecast was lower than before, and more generation entered the market than expected, so basic supply and demand ruled the day. Digging into the demand response (DR) and energy efficiency (EE) results, there are a few findings that bear notice. There were actually more DR megawatts offered into this auction than last year, but fewer megawatts cleared, likely due to the reduced price. Only about 6% of DR megawatts cleared as Capacity Performance (CP), with the vast majority clearing as Base Capacity product. The relatively small spread ($20) between the two products may explain this result, but with the Base product set to be abolished for the next auction, there is a big question as to how much DR will clear in a CP-only environment next year.

Meanwhile, about 66% of EE cleared as CP, showing a more-certain future for EE. There is still an open question regarding summer-based DR and EE (and renewable) resources, which PJM is undertaking a stakeholder process to address. Finally, in a quirk in the auction mechanics, the price for DR and EE in the Pepco zone cleared at $0.01 due to a constraint on the amount of DR and EE that can be procured in a given zone. This likely means that the DR megawatts that cleared in that zone were mostly utility program megawatts bid in as price-takers.

Investments and Divestments

In other news, EnerNOC announced that it was ready to divest its acquisition of Pulse Energy’s utility customer engagement business from a couple of years ago, essentially laying off 5% of its North American workforce. The company still feels that the business has value and growth potential, but it doesn’t fit EnerNOC’s focus on enterprise software rather than utility services. Furthermore, the long sales and decision cycles for utilities may not be a good fit for a growth-focused company, as witnessed by the recent Oracle-Opower deal.

Finally, AutoGrid, a DR management system and data analytics vendor, announced a new $20 million investment led by Energy Impact Partners (EIP). EIP is a consortium of utilities Southern Company, Xcel Energy, Oncor, and National Grid. These companies aren’t necessarily utilizing AutoGrid’s software at this point, but this commitment signals that utilities see the need to be in front of the transformative nature of data and analytics for their business models.

It will be hard for June to top this whirlwind of activity, but we’ll stay on the lookout for more news and developments from the DSM world.

 

May Comes in Like a Lion for Demand-Side Management

— May 11, 2016

multimeterLast week was a busy one in the demand-side management (DSM) industry, with M&A activity and regulatory news both making headlines. It started first thing on the morning of May 2 with the announcement that Opower was being bought by Oracle for over $500 million. This move shouldn’t be so surprising since it was just over a year ago that the two companies announced a partnership to enable utilities to integrate Opower’s tools into Oracle’s systems and vice versa.

EnerNOC is now the only publicly traded pure-play DSM provider left standing. Could it be that dealing with the regulatory risk and long timeframes for deal making in the utility industry is a mismatch with Wall Street’s pressure for quarterly earnings? Opower appeared to have a good pipeline of projects, but the market did not seem to value it enough to provide attractive returns for investors. Furthermore, the energy software business requires extensive R&D spending, so the prospects for an annual profit were too long for the NASDAQ set. As part of a larger organization, the long project runways could be blended in with other quicker turnaround products, and R&D expenditures could be swallowed among the much larger expenses at Oracle. The only question is how committed Oracle is to Opower’s legacy DSM products versus focusing on solutions more directly in line with its business.

CPower on the Move

Later that same day, word spread that CPower acquired rival Johnson Control’s Integrated Demand Resources business. This move thins the already-small commercial and industrial demand response (DR) aggregation sector. It also continues the trend of larger organizations getting out of the DR business, which started when Constellation sold off CPower in 2014. For CPower, the acquisition is the latest move to expand following the purchase of Demand Response Partners in 2015. CPower and Johnson Controls still intend to retain a commercial relationship that would allow CPower to offer DR services to Johnson’s customers, and CPower customers could gain access to Johnson’s building management technologies for their facilities.

These cases appear to show some contradictory trends between acquisitions and divestitures of DSM businesses by larger entities. However, they both seem to agree on the point that DSM may survive either as part of a bigger firm or as an independent private company, but as a standalone public entity, the road ahead is hard. Look at Comverge, which went public in 2007 but went back private a few years later and has seemed to steadily grow under the radar since then, or Nest, which is able to keep its finances out of public view as part of the Google empire.

Emergency Generators

The final piece of noteworthy news relates to the U.S. Environmental Protection Agency’s (EPA’s) rules for emergency generators (EGs) for DR purposes. Last year, the U.S. Court of Appeals overturned an EPA rule that allowed 100 hours of EG use for emergency DR programs. It granted the EPA a 1-year stay, which expired on May 1, 2016. The EPA has no plans to make changes to the rule, meaning that the court’s ruling will remain intact, affecting upward of 20% of DR resources in some markets.  However, there is still some ambiguity in the remaining EPA rule language, so the fight will continue to allow EGs to participate to some extent.

If the first week of May was any indication, it could be an interesting summer for DSM, but these recent developments may have been just some early fireworks before a regular course of business settles in.

 

Bridging the BYOT Gap

— January 6, 2016

As 2016 begins, we are thinking about improving utility business models, including new ways to engage customers and take advantage of the developing trends in energy usage and resource transformations. To that end, Navigant Research is unveiling a new research service called the Utility Technology Disruption Report series. The intent of this new service is to look at emerging concepts that provide both threats and opportunities for utility executives to be aware of and to address either from a defensive posture or from an aggressive position.

The first installment in the series focuses on Bring Your Own Thermostat (BYOT) demand response (DR) programs. The residential DR program model of offering one thermostat model to customers is not sustainable due to ongoing technology advancements and the integration of more software with the hardware. Today’s consumers want more choice in how they participate in DR programs and what devices they use to participate with the features that they desire.

BYOT can be less expensive than traditional direct install DR programs by lowering customer acquisition and device incentive costs. It can also increase energy efficiency program participation, enable dynamic pricing adoption, and engender greater customer engagement and satisfaction. However, BYOT gives less operational control of DR resources to the utility, so control room operators must get comfortable with dispatching it. Furthermore, new DR program management processes and systems will be required in order to optimize new program designs and minimize customer complaints, avoiding the disruption of existing program offerings and any negative repercussions.

Pilots Underway

BYOT projects are in the pilot phase right now at utilities like Con Edison and Austin Energy and are expected to be ready for larger deployments in the near future after initial evaluation results are known. Approximately 50,000 U.S. customers are presently engaged in BYOT programs, representing an estimated $12.5 million market. However, BYOT customers present a potential target market of about $1.4 billion and could reach 10% of the residential DR market over the next several years.

In order to promote the release of this new report series and to dive deeper into the BYOT concept, Navigant Research will host a free webinar on January 19 at 2:00 EST. I will be joined by two other Navigant experts on DR and consumer trends: Stuart Schare, Managing Director, will discuss how BYOT fits into a utility’s DR program portfolio; and Neil Strother, Principal Research Analyst, will explain how the expansion of the Internet of Things (IoT) plays into electricity customer engagement.

Navigant Research is excited to announce this new service offering and looks forward to providing more value to utilities as they explore new growth opportunities in 2016 and beyond.

 

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