Navigant Research Blog

EnerNOC Loses Its Crown as the Last of the Pure-Play Public Demand Response Companies

— June 23, 2017

And then there were none. All the pure-play energy efficiency and demand response (DR) public companies have now been gobbled up by large industry players. First, Comverge went private in 2011 and was recently acquired by Itron. Then Opower was bought by Oracle in 2016. Now EnerNOC has been acquired by Enel Green Power North America (EGP-NA) for $300 million. It was no secret that this was going to happen, as EnerNOC had essentially put itself on the auction block earlier this year. The only suspense was who the buyer would be. I don’t know anyone that had EGP-NA in their betting pool. I saw EnerNOC’s CEO Tim Healy at the Edison Electric Institute’s annual conference in Boston last week, and he did a great job keeping his poker face on.

The likely scenarios seemed to include either being taken private by a private equity company, like what happened with Comverge, or being bought by a large vendor like General Electric (GE) or Schneider Electric. It was not probable that a US utility would be in the mix. But European utilities like ENGIE have been active in getting footholds in the US distributed energy resources (DER) market with more customer-facing solutions. EGP-NA had been one of the quieter ones. By adding the EnerNOC deal to its recent acquisition of energy storage software/project developer Demand Energy, EGP-NA has pushed itself toward the forefront of this market.

A Lot of Opportunity

EGP-NA has no existing DR infrastructure, so there should not be a lot of overlap in terms of personnel or resources. The move should help EnerNOC expand more quickly in the European markets. The press release on the deal quoted Healy as saying, “we look forward to accelerating the growth of our core businesses and to delivering ever more value to our customers as we lead the transition to a more sustainable, distributed energy future.” So it seems like there is a lot of opportunity for EnerNOC to pursue, but it will likely face integration risks as the deal gets consummated.

I am glad that it appears that EnerNOC’s main business and position in the DR industry will continue. I was worried that a private equity firm might pick it apart and sell the pieces. I look forward to seeing the company expand DR further around the globe.

On the downside, I won’t have any more exciting transactions to write about. I guess we’ll have to wait and see if all of these recent deals pan out in a few years or if the next wave of news will be the large players selling the smaller DER players after unsuccessful integration attempts.

 

Non-Wires Alternatives Give NWA a New Meaning

— June 22, 2017

There is a growing trend among utilities and grid operators to forgo traditional transmission and distribution upgrades in favor of alternative methods to meet system needs. In mid-June, it was reported that Massachusetts lawmakers are considering a bill that would require the consideration of non-wires alternatives (NWAs) before utilities make investments in grid upgrades. In May, Bonneville Power Authority (BPA) announced that it had chosen to take “a new approach to managing congestion on our transmission grid,” according to CEO Elliot Mainzer, rather than build a new $1 billion, 80-mile transmission line along highway I-5 in Oregon. Such examples show a move from tradition toward creative innovation.

Past to Present

Traditionally, when a transmission or distribution system operator had a need to upgrade or replace infrastructure due to aging equipment or increased load demand, it would simply conduct poles and wires projects with which it could earn a regulated rate of return. No thought was given to alternatives in addressing the issue; it was simply seen as replacing a part in the electric grid machine. However, more creative solutions are being explored to address infrastructure needs at a lower cost with higher customer and environmental benefits as grid management and distributed energy resource technology has improved. Utilities now look to increase customer engagement and provide more value-added services, and policy concerns related to cost and the environment have grown.

The Massachusetts bill would require utilities to competitively seek non-wires projects for necessary grid upgrades. It would require utilities, when proposing new infrastructure, to provide a “description of the alternatives to the facility,” including other methods of transmitting or storing energy, other site locations, other sources of electrical power or gas, load management, or local energy resource alternatives.

The BPA decision “reflects a shift for BPA—from the traditional approach of primarily relying on new construction to meet changing transmission needs, to embracing a more flexible, scalable, and economically and operationally efficient approach to managing our transmission system,” according to Mainzer. The preferred solution includes resources like battery storage, flow control devices, and demand response.

No One Solution Is Yet in Play

Several utilities in different state jurisdictions have undertaken NWAs with diverse program design and procurement models. At this early stage in development, there is no standard business model and procurement process for utilities to implement NWAs. Currently, there are four models being considered and tried by utilities. The first is request for proposal, a typical utility procurement model. Auctions are another; borrowed from wholesale market models to drive the lowest cost solutions. Also being considered is procurement with current implementation contractors to keep things simple and quick. The last possibility is internal utility resource deployment if the utility has the required capabilities. There is no one right answer for all situations; each case will depend on the utility’s internal structure and capabilities along with the regulatory construct in which it operates.

NWAs are likely to become more common in US utility capital planning processes and regulatory requirements in many US state jurisdictions. It is an exciting yet anxiety inducing opportunity to change the way utilities address system and customer needs simultaneously. The sooner the industry faces this new reality, the better prepared all parties can be to ensure it succeeds. Navigant Research’s recently published report, Non-Wires Alternatives, discusses the drivers, barriers, business models, and future growth of the market.

 

PJM’s Latest Capacity Auction Shows Drop in Demand Response, but Not Catastrophic

— May 25, 2017

The holding of breath for PJM’s annual capacity auction results ended on May 23, with the results indicating mixed feelings. The price for most of the market was down from $100/MW/day for the 2019-2020 auction last year to $76.53/MW/day for 2020-2021. However, certain subzones cleared at nearly twice that price or more, so bidders in Chicago, Philadelphia, New Jersey, and Cincinnati came out smiling.

For demand response (DR), there was a lot of speculation going into the auction about the effect that the first 100% Capacity Performance procurement would have. Some analysts predicted 50% or greater reductions in DR participation, assuming most DR providers and customers would not want to take on annual performance risk. In my Market Data: Demand Response report for Navigant Research last year, I estimated a 25%-30% reduction, feeling that large commercial and industrial (C&I) customers would continue to participate; DR providers would continue to aggregate midsize C&I customers with more conservative megawatt values; and residential DR would take the biggest hit since it is almost all summer based.

Pricing, Aggregation Rules Influence Auction

The actual reduction was 24% from the last auction, dropping from 10,348 MW to 7,820 MW. Nothing to sneeze at, but far from a total market abandonment. Last year, only 614 MW of DR cleared as an annual product, so there was a large portion that was willing to convert. Pricing may have influenced DR quantities as well. While all zones decreased year-over-year, the zones with the lowest prices showed the biggest drops and those with higher than expected prices shed fewer megawatts.

This was also the first auction in which PJM instituted new aggregation rules, where summer and winter resources could match up with each other to meet the annual obligation. While 2,000 MW of summer resources (mostly DR, energy efficiency, and solar PV) submitted aggregation bids, only 485 MW of winter resources bid (mostly wind), limiting the effects of the new mechanism.

Silver Linings

Historically, EnerNOC has happily proclaimed its percent procurement of PJM DR in the auctions, but has been quiet the last couple of years. However, this year EnerNOC tweeted: “@EnerNOC captures 34% of the DR market in #PJM BRA.”

On the residential DR side, it appears that the Exelon utilities—which have been the biggest bidders in that sector—largely pulled out of the auction from the supply side. The utilities had put out an RFP in March looking for 700 MW of winter resources with which to aggregate, but apparently did not find enough partners. However, this does not mean that they exited the capacity market entirely. PJM reported that, for the first time, price-responsive demand resources cleared in the auction to the tune of 558 MW, mostly in the Baltimore Gas and Electric and Pepco regions—likely from those host utilities. If those megawatts get added to the DR megawatts that cleared in the auction, the drop is only 19% from last year.

All in all, I’d consider this a positive outcome for DR compared to some of the draconian forecasts. Now we’ll have to see how well the market performs once the annual requirement kicks in.

 

Itron Steals the Demand Response Spotlight by Acquiring Comverge

— May 9, 2017

Just when all parties in the demand response (DR) industry were waiting for EnerNOC’s quarterly earnings call on Tuesday morning to see if there is an update on its corporate structure, Itron came in and stole the show. The company announced its acquisition of Comverge on Monday for $100 million. Another independent DR/energy efficiency company gets swallowed up by an industry giant.

New Opportunities

From a pure technology product perspective, the move appears to make sense. Itron is a leader in advanced metering infrastructure (AMI) hardware and software for utilities, but it has not succeeded in breaking into the DR space on its own over the last several years. Moving further down the DR and customer value chain does not necessarily play into its strengths of meters, backend systems, and data management. For a company of Itron’s size, it is much easier and quicker to buy the capabilities that Comverge offers as opposed to trying to develop them organically.

Comverge has been operating successfully for the past several years since becoming a privately held company. It obtains long-term contracts from utilities at healthy margins, an attractive combination for a prospective buyer. The DR market as its own target is limited in growth potential, but Itron’s hope is that the combination of AMI and DR solutions will open up new opportunities that don’t exist in each separate market.

Questions and Risks

That’s where the questions and risks come in. Integrating different technology platforms is always easier said than done. AMI has not been successfully implemented for DR purposes at scale to date. If the combination with Comverge’s systems can overcome that obstacle, a huge barrier in the industry will be removed. But will that limit Comverge’s business opportunities to utilities that use Itron’s AMI system, or will it still be able to implement independent DR programs regardless of the meter provider?

In an interview, Comverge’s Senior Vice President of Sales Steve Hambric said, “we are not turning our backs on our core business in any way,” and that existing clients will not be jeopardized. Having Itron’s resources will help the company move into more markets more quickly than before.

You don’t have to look too far back in history to find a similar case. Oracle bought Opower just about a year ago, and there is no evidence of great successes to date. They are probably still in the integration phase, but the internal focus seems to have slowed Opower’s market momentum to some degree. Will Comverge find a similar path of distraction, or will the combined team be able to hit the ground running and get some early wins?

In any case, I look forward to EnerNOC’s earnings call on Tuesday morning for the next dose of excitement in the ever changing DR industry.

 

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