Navigant Research Blog

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.

 

Multi-Family Market: An Opportunity for Smart Home Devices?

— May 12, 2017

Smart home devices are catching on in homes around the world. Nest has claimed installations of its Learning Thermostat in 190 countries, Google announced the availability of its Home in the United Kingdom, Amazon expanded Echo’s US sales to the United Kingdom and Germany, LIFX connected bulbs are selling in more than 80 countries, and Smappee is selling in 85 countries. However, most sales are occurring among consumers in single-family homes. The multi-family market is largely untapped, leaving opportunities for vendors to gain traction and market share.

Possibilities Abound

There are a number of reasons for this untapped market. First, ownership of devices in multi-family dwellings can get complicated. Should landlords or consumers install and own the hardware? Landlords and building managers have little incentive to purchase such devices because they do not enjoy the benefits of energy savings or remote access, though they do have the option of charging higher rent for the added luxury. For occupants, it may not make sense to own these devices if the property is a rental, especially since renters in the United Kingdom are moving 8 times more than homeowners and since surveys show that 56% of US tenants plan to move within the next year. When devices are installed in multi-family units, some are not used to their full potential. For example, smart thermostats often cannot participate in demand response programs due to the complexities of directly controlling load in multi-family dwellings, where each unit often does not have its own central HVAC system. In fact, many pilot programs that utilize smart thermostats are unavailable to renters or apartment dwellers. On top of this, it can be far more expensive for utilities to implement demand-side management programs in multi-family dwellings than in commercial or single-family residential buildings.

Despite the complexities associated with this market, renters are interested in smart home devices. According to a recent study conducted by Wink, 36% of renters would pay more in rent to have smart home products or amenities in their homes. Given that 37% of Americans are renters, this means the multi-family dwelling market has a lot of potential.

Some companies are beginning to tap into the opportunities available in this market. IOTAS is a company approaching the market with a business model focused on selling landlords and building managers hardware packages that are installed across from apartment complexes. The solution includes tenant accounts that store personal device preferences and follow tenants between apartments as they relocate. This reduces issues surrounding device ownership and creates an opportunity for landlords to charge more in rent for the devices as well as a monthly fee for ongoing services—like monitoring and controlling. While these types of solutions are just emerging, the trend shows hope for Internet of Things and smart home solutions in the multi-family sector.

 

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.

 

IoT Cybersecurity Clouds

— May 4, 2017

The dark Internet of Things (IoT) cybersecurity clouds keep hanging around with the latest news about malware that can wipe data from infected devices. Researchers from Palo Alto Networks discovered malicious software called Amnesia that can infect digital video recorders. If Amnesia senses it is running in a virtual environment, it can wipe critical directories from the file system. The researchers say this is a new capability in malware aimed at Linux-based embedded devices—which include smart TVs, wireless routers, switches, set-top boxes, in-vehicle entertainment systems, navigation hardware, industrial automation equipment, and medical instruments. This potential threat goes beyond consumer devices and could affect the electrical grid. Several other threats against IoT devices have surfaced as well:

  • University of Michigan researchers demonstrated they could hack into sensors on smartphones, automobiles, and IoT devices using a $5 speaker. They targeted microelectromechanical systems, or MEMS accelerometers, which measure speed changes in three dimensions. Using acoustic tones, they deceived 15 different accelerometer models into registering movements that never happened.
  • Engineers at Israeli firm Argus Cyber Security remotely shut down a car engine using a smartphone app, a Bluetooth connection, and a $75 dongle, which insurance companies install frequently to monitor driving. The engineers triggered a signal that disabled a car’s fuel pump, something that would only happen after a collision, according to a Wall Street Journal report.
  • A doll named Cayla was investigated by regulators in Germany for being a security threat. The doll does not link directly to the Internet, but can be accessed via Bluetooth to any mobile device that has the doll’s dedicated app. Researchers found the dolls recorded voices and sent data to a third party specializing in voice recognition.

Security Is Top Concern for Developers

Among developers who write software for IoT devices, security concerns remain high. Nearly 47% of developers who responded say security is their top concern and has remained number one for 3 years, according to an annual survey (see slide 16) by the Eclipse Foundation. The situation does not seem to be getting much better in terms of the potential threats posed by IoT devices. However, beyond the negative headlines, there is some positive work taking place:

  • The prpl Foundation is making progress on efforts to reduce threats to IoT devices. Members of this open source and community-driven foundation are focused on enhancing the security and interoperability of embedded devices.
  • Two industry groups joined forces to improve Internet security. The Online Trust Alliance (OTA) has partnered with the Internet Society to improve security and data privacy. For several months, the OTA has promoted a new framework for securing the IoT, supporting multiple built-in security measures for devices from the beginning, and advocating strong security through the entire IoT product lifecycle.
  • The National Institute of Standards and Technology (NIST) continues to push a broad set of initiatives to create a safer marketplace through its Cybersecurity for IoT program.

Will the Clouds Part?

So where do we stand in this process to create a more secure IoT world? In short, there is progress taking place. One thing to keep in mind: the IoT security threat is not going away anytime soon. That said, key stakeholders need to stay focused on providing stronger security measures for IoT devices and services. Otherwise, IoT market opportunities (see Navigant Research’s Emerging IoT Business Models report) will be lost or needlessly delayed. We are in for cloudy skies for the next several years, so get used to a blend of bad news about breaches coupled with positive steps to thwart them.

 

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