Navigant Research Blog

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.

 

Innovators Wanted for DER Solutions

— April 18, 2017

Coauthored by Ken Horne and Laura Vogel 

Distributed energy resources (DER) are a hot topic in the energy industry these days. Some industry players take it as gospel that there will be an inevitable transition from centralized electricity generation to dispersed sources of both producing and reducing power to manage the bulk of grid supply—including Navigant Research.

The Energy Cloud and Changing Relationships

The Energy Cloud will most likely be the result of a fundamental shift in the way electricity is generated and distributed. It will signify an evolution in the traditional relationship between stakeholders across the electrical grid, particularly between utilities and their customers.

The Energy Cloud

(Navigant Consulting, Inc.)

Such a change may occur in the long term, but there are plenty of challenges that need to be overcome that invite numerous opportunities for innovation from current and new players in the energy industry. The issues range from technical to economic, regulatory, and consumer-based.

Energy Cloud Issues: Opportunities for Innovation

(Navigant Consulting, Inc.)

Technical Issues Facing the Energy Cloud

On the technical side, many hardware and software questions need to be answered. It is not so simple as to throw DER onto the existing grid—which was designed for one-way power flow. If clusters of DER on one feeder or substation occur, which is more likely than perfectly dispersed resources, voltage and reverse power flow issues must be dealt with. Visibility to DER on the grid will be key, along with real-time state estimation for behavior of the grid under near-term changes—for example, a switching operation. Communication standards (such as OpenADR) for different vendors, devices, and resource types will be necessary so that the grid operators do not need to rely on each DER vendor’s proprietary system. Big data management will be paramount for optimizing transactions, telemetry, prices, and controls on the grid.

Capturing Value Streams in the Energy Cloud

Assuming all the technical hurdles can be met, policy and economics will determine the types of business models that will succeed in a DER environment. No two countries in the world or even states in the US have identical regulatory structures. Thus, in order to scale up efficiently, flexible business models that can capture multiple value streams will be required. In some markets, the regulated utility may be allowed to own and finance projects, while in others the utility may be prohibited from such activity. Measuring the value of DER will vary by market as well, so creative financing mechanisms will be necessary. Finally, a new type of transactional platform will be imperative to accurately enact deals between suppliers and consumers—or even from consumer to consumer—in a timely manner.

 

Natural Gas Demand Response – Not Just for Electricity Any More: Part 1

— March 31, 2017

Coauthored by Jay Paidipati

Demand response (DR) in the electricity sector has been a common practice for decades for utilities and grid operators. When there are emergency situations or high prices, some residential customers and commercial and industrial (C&I) businesses are willing to reduce their electrical load or turn on distributed generation in return for financial compensation or the knowledge they are helping to maintain the grid. Historically, DR is less prevalent in the natural gas industry, but changing market factors have increased interest in the practice.

Similar to the electric side, some utilities offer large C&I natural gas users interruptible rates (IR). IR is an optional program between customers and the utility company that gives the utility company the right to shut off gas service to facilities in return for a reduced rate. It is a blunt instrument compared to customers shutting down parts of their operations to reduce gas usage. Some customers maintain backup gas storage onsite so they can switch to in case of interruption.

A more fine-tuned type of natural gas DR starts by putting communication devices at a customer’s site, then dispatching the device during critical times. The current implementation uses smart thermostats to control residential furnaces and slightly reduce temperature settings during peak heating times.

Why Natural Gas DR Now?

There is an indirect need for natural gas DR because of how it affects the electricity grid. In the past 5 years, natural gas has become the predominant fuel source for generation in many areas of the United States, often replacing coal and nuclear plants as they retire. However, the gas pipeline system was mainly designed to accommodate gas usage for end uses like cooking, heating, and cooling. The pipeline capacity did not anticipate large volumes flowing to power plants—especially in the winter when heating demand is highest.

The limited pipeline capacity was most evident during the polar vortex in January 2014, when pipelines were full but some gas generators could not get fuel, leading to electricity supply concerns and high energy prices. Since the polar vortex, other natural gas constraints and storage leaks have led to other fuel shortages. Some utilities and grid operators have instituted winter electric DR programs to address this concern, but curtailing natural gas usage is another.

The investigation into natural gas DR continues. Part 2 of this blog series will explore barriers to natural gas DR and which companies have successfully implemented it. Part 3 will explore what new concepts could develop in the future.

 

No Days Off for the Patriots and EnerNOC

— March 14, 2017

Just like Bill Belichick famously stated after winning Super Bowl LI last month, EnerNOC appears to be taking “no days off” lately. There has been a series of project wins and partnerships announced in various parts of its business since the beginning of the year. However, the biggest bombshell came during its 2016 annual results earnings call on March 14. CEO Tim Healy revealed that the company has hired advisors and is already in the process of exploring new potential corporate structures such as divestiture of business lines or a full sale of the company.

Let’s start with the most recent positive project news that the company signed a 2-year contract with Taiwan Power Company to provide 200 MW of demand response (DR) as the exclusive provider. Taiwan has experienced very low electricity capacity reserve margins lately, and since it is a densely populated island with an abundance of mountains and rainforest, there is not a lot of land to build new power plants. EnerNOC entered into a joint venture with a local Taiwanese energy services company, Cheng Long Intelligent Engineering, to get quick access to a number of large commercial and industrial customers that are good candidates for DR. When I spoke with EnerNOC President David Brewster, he said that the program compares to other markets in North America and Asia in terms of capacity-based DR, baseline rules, dispatch requirements, and payment rates.

Bigger Picture

Looking at the bigger picture, the company has come to the realization that its corporate structure may not be optimally arranged to maximize shareholder value. On the earnings call, CEO Healy mentioned multiple times that EnerNOC’s business is complex, hard for investors to understand, and prone to market forces outside of its control. The software business had already been restructured last year, but it now appears that a more holistic review is in play.

I would not necessarily say that this news comes as a surprise. I wrote multiple blogs last year about Oracle’s acquisition of Opower and EnerNOC’s restructuring of its software business in which I pondered the ideal business model for DR companies in general, and EnerNOC specifically. Now the truth is out in the open. The possible options include selling off part of the business and remaining a smaller independent entity, being bought out and going private, or being bought by a larger corporation. CEO Healy made it clear on the earnings call that the wheels are already in motion and he expects a quick resolution soon.

Whatever the outcome, I hope the resulting organization is able to maintain its leading position in the DR industry and continue to push for the global expansion of this important grid resource.

 

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