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.

 

Ericsson Resurges in Smart Grid Market

— October 7, 2014

Swedish telecom giant Ericsson was fairly active in the smart grid communications market a number of years ago; in particular, the company was involved in a number of WiMAX- and LTE-based smart meter deployments in Australia.  More recently, Ericsson has been notably absent from the space, especially in North America.  It looks like that hiatus may be ending.

On October 1, Ericsson closed on its buy of Newton, Massachusetts-based Ambient Corp. for $7.5 million.  Ambient will be integrated into Ericsson’s Global Services division.

Ericsson has reportedly also hired a former DNV EMA utility expert and acquired a grid management company in recent months; competitors say they are starting to see more of Ericsson in the North American market.  The company is a major supplier of LTE infrastructure to the wireless industry; it appears likely that the Ambient buy will support additional efforts to promote the use of the 4G wireless technology for smart grid networks.

Lost Luster

Ambient made a splash in the smart grid comms arena a few years back when it was awarded a product award at the Utilities Telecom Council (UTC) 2011 Telecom Forum. The UTC Product Awards is an annual competition highlighting the best in critical infrastructure industry technology.

Ambient’s smart grid communications solution combines multiple communications technologies – including RF mesh, cellular, power line communications (PLC), and Wi-Fi – into a single node, providing flexibility to utilities needing a variety of solutions due to topology or coverage issues.  In 2013, Ambient announced its nodes had been certified for the Verizon LTE network, and by the middle of that year Duke Energy had deployed nearly 200,000 of those nodes.  In mid-2013, Ambient also announced a contract with Con Ed for commercial and industrial (C&I) metering.

Ambient proved unable, however, to leverage the early hype around its solution and its Duke relationship for sales growth.  The company, which was publicly traded prior to its July bankruptcy filing, reported less than $600,000 in revenue in the March 2014 quarter, down from nearly $5 million in the prior year period.  The company lost nearly $18 million in 2013 on sales of $11 million.

Future-Proof?

Ericsson’s interest in promoting LTE’s place in the smart grid communications market isn’t surprising.  While LTE is generally considered an expensive solution for smart grid applications, utilities are increasingly worried about the longevity and flexibility of their communications networks – and LTE provides low latency, security, and signal prioritization features that should ensure its ability to handle just about any smart grid application that’s deployed in the next 20 years.

Both AT&T Wireless and Verizon Wireless are aggressively courting the utility vertical with their cellular solutions, including LTE, and one meter vendor representative recently told me that it sees LTE as the future of smart grid communications.  If that’s the case, it seems Ericsson will be joining the competitive fray.  And with the backing of Ericsson, Ambient could be able to get some much needed traction in the marketplace as well.

 

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.

 

In Slowing Market, Echelon Exits Smart Grids

— September 16, 2014

The market for smart grid technology is still growing — in fact, Navigant Research expects it to grow from $44 billion this year to more than $70 billion in 2023 — but that doesn’t mean it offers easy money for vendors.  In fact, among smart meter vendors in particular, the recent slowdown in demand following the boom years under American Recovery and Reinvestment Act (ARRA) stimulus funding in the United States and several large European deployments is prompting consolidation along with speculation that there is more to come.

San Jose, California-based Echelon announced on August 21 that it is exiting the smart grid market to focus on its Industrial Internet of Things (IIoT) division.  Linz, Austria-based S&T AG will acquire Echelon’s smart grid division for modest consideration — according to SEC filings from Echelon, it will receive in the neighborhood of $5 million before expenses related to the deal; debts associated with the division will also be assumed by S&T.

From S&T’s point of view, the deal is attractive in both financial and strategic terms.  S&T will form a new company, along with unnamed financial investors, and spend approximately $3.3 million (€2.5 million) for 40% of the company, implying an enterprise value of just more than $8 million, or about 0.3 times run-rate revenue for the division.  That low multiple reflects the 52.7% decline in smart grid revenue that Echelon suffered in 2013 versus 2012 and its reliance upon a small number of customers.

In contrast, publicly traded Itron, which has also been the subject of recent deal speculation, is valued by the market at 1 times run-rate revenue.  Considering typical acquisition premiums for technology businesses (typically 25%-50%), one could argue that Itron’s value in a sale would be north of $2.5 billion, or between 1.3 and 1.5 times run-rate revenue.

Head East  

A large IT solutions and services company, S&T has recently expanded its offerings in the smart grid space.  It has a solid presence in Central and Eastern European markets where Echelon’s power line carrier technology is likely to be dominant for smart meter deployments.  Whereas many Western European meter projects are well into the deployment process (or at least in the request for proposal stage), several Central and Eastern European governments have committed to Europe’s 20-20-20 initiative and smart meter deployments, but major utilities have not yet made significant commitments to vendors.

At least one Wall Street analyst expects additional consolidation among smart grid technology vendors.  Louis Basenese of Wall Street Daily reported on August 18 that more than $30 billion in smart grid deals have occurred over the past 2 years.  Of course, GE’s $17 billion buy of Alstom Grid will add substantially to that sum, but Basenese believes both Itron and Silver Spring Networks are presently attractive, largely because of their patent portfolios.

Unfortunately, Echelon appears to have been forced to sell at what may be a nadir in the market for smart meter business — but considering the growth ahead for smart grid technology deployments, I would agree with Basenese that more deals are likely to emerge.

 

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