March 19, 2008
The American economy may be in or near recession. But certain elements of the energy economy are poised to take off. Demand response technologies that allow grid operators to curtail electricity use during peak periods is one of those segments.
The sector is now in its early stages. But with the overall emphasis on energy conservation and air quality, the market for demand response is developing at a fast pace and a lot of players want to participate in that expected growth. The jockeying for position is well underway, with smaller privately-held enterprises trying to occupy market share along with better-established businesses such as General Electric, Comverge and EnerNOC.
Like other industries, those in the demand response space will evolve and go through the various business cycles. Now, investors smell opportunity and companies want to get their slice and are vowing to either become national enterprises or one of the sophisticated niche players that carefully guard their venture. Time and experience, however, will alter the landscape. Convergence is already occurring and will continue to do so. As different programs prove their value, those best practices will be picked up and standardized by others around the country.
"Demand response markets are now in early phases and it is hard to get assessments right now," says Gary Fromer, CEO of New York City-based ConsumerPowerline. "It is not a mature market whereby companies are buying up others to win market share. It is a brand new market where acquisitions are occurring because they are complementary. Most of the sales in the demand response market are in this category and are an extension of service offerings or territory. It's a high growth market and you will see that kind of behavior -- a lot of hiring, investment and some acquisition."
ConsumerPowerline, which is privately-held, just wrapped up its buy-out of Xtend -- a deal which enables the company to get into 10-minute rapid response. The merger also positions the firm to become increasingly bigger, he adds, explaining that it will take about three years for the landscape to become more distinguished.
At present, Fromer says that the demand response sector earns annual revenues of $2 billion to $4 billion with each of the 10 vendors accounting for only a couple hundred million.The total pie, though, will get increasingly larger as state regulators place more emphasis on demand response and energy conservation and as vendors bring new products and services to the fore. "The current regulatory environment favors demand response and other demand-side resources, and there has been a rapid emergence of new technology solutions and business models to address the challenges of energy management," adds Gary Healy, CEO of Boston-based EnerNOC. "Given these developments, I would expect that the market as a whole will continue to see some merger and acquisition activity."
Rich Resource
In an era of supply shortages, environmental pressures and community activism demand response tools give consumers an opportunity to curtail their energy usage during high demand in exchange for presumably lower prices. Such technologies center on "smart meters" to collect energy usage data and price it accordingly. By making industrial, commercial and residential users more price sensitive, they will shift their usage patterns.
That's why some utilities and regional transmission organizations are paying companies that specialize in providing demand response technologies to enlist customers willing to participate. EnerNOC, which recently bought MD Energy, has two four-year contracts with ISO New England to supply demand response capacity in Southwest Connecticut that equate to a couple hundred megawatts of power.
Similarly, Comverge is working with Con Edison to reduce the base-load energy requirements of customers in Lower Manhattan. The program will get underway later this year and will continue through 2012. If the contract is performed as contemplated, Comverge is expected to recognize revenues of approximately $67 million over the build out phase as customers sign up and equipment is installed.
Both EnerNOC and Comverge have entered into several long-term arrangements whereby they get paid to reduce peak energy consumption. The set-ups allow each to earn more predictable revenue streams, all part of their success as each has recently held initial public offerings. The companies say that they are using those funds that have been raised in the capital markets to expand. It's all about enhancing their national statures and earning the respect of utilities that want to see providers with solid financials.
But the market to provide demand response is becoming increasingly competitive. A diversity of players now exists and each one seeks to build their own relationships with utilities and grid operators. The industry is helped along by regulatory pressures and savvy investors who sense a trend. Many businesses, meanwhile, are buying into the technology as a way to not only reduce their energy bills but also a method to sell themselves to the public as environmental pioneers.
"We are seeing some merger and acquisition activity across the industry," says Steve Smith, marketing director for Honeywell Utility Solutions, which is working with Baltimore Gas & Electric to manage a demand response program. "However, partnerships are playing a more significant role at present. This seems to be the preferred means of delivering a comprehensive demand response program, which includes services, technology and marketing to a utility."
This once nascent industry has grown and is now considered to provide a rich natural resource. Indeed, the prospects of continued expansion are encouraging an array of participants with varied offerings. To compete, companies will partner and converge. Once the thicket clears, the standard-bearers will emerge and define the market.
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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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