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Megawatts or Negawatts? Capitalizing on Wasted Electricity

Whether accomplished through reduced consumption, increased efficiency, or some other creative way, saved, unused, and wasted electricity is measured in negawatts. Demand response (DR) is the process by which negawatts are accounted for and distributed, generating a cash flow for DR aggregators.

Electricity's only free lunch?
A slide from EnerNOC's (NASDAQ: ENOC  ) investor presentation says the commercial and industrial sectors spend $2.25 trillion each year on energy.

Granted, 100% of the expenditures wouldn't link directly back to electricity, but the budgets are meaningful. Try this statistic on for size: reducing Adidas' energy expenditures by 20% would be equivalent to selling 15 million pairs of shoes. With limited upfront cost (install monitoring device and software), relatively low risk and large reward potential, utility companies and large corporations have embraced energy intelligence products over the past decade.

From nothing to something
Presently, the demand response (DR) market is worth more than $3 billion. Back in the 1990's, the DR industry didn't even exist. Negawatt was merely a misspelling of megawatt, only to be coined by Amory Levins of the Rocky Mountain Institute shortly thereafter. Silver Spring Networks (NYSE: SSNI  ) , Itron (NASDAQ: ITRI  ) , and Ventyx are a few of EnerNOC's key competitors in the DR industry.

According to the Institute for Electric Efficiency (IEE), 46 million smart meters were installed in the U.S. as of July 2013, implying a penetration rate of approximately 30%. Worldwide, approximately 1.5 billion meters are connected to the electricity grid. All of them would like to be smarter someday.

"Smart" is insulting the grid's intelligence
Automation, computers, consultants, sensors, and software all contribute toward making the electricity grid intelligent. Consumers of electricity are also smartening up to how they use and think about it. When using energy intelligence software (EIS) electricity is no longer just a rent to be paid, but a resource that can be managed opportunistically. Jon Wellinghoff, former chairman of the Federal Energy Regulatory Commission (FERC), has said peak loads in America can be reduced by 20% using demand response: "it's happening and it's coming very quickly."

20 nuclear power plants' worth of negawatts
According to the FERC's latest report, DR aggregators have 28,303 MW of potential resource contribution available to use during times of peak demand. Essentially, these negawatts are used in lieu of more costly and less environmentally friendly "peaker" power plants. Energy intelligence software and DR gives utilities the information they need to better match electricity generation with consumption.

Killer app
Demand response (DR) is arguably the smart-grid's most killer application. According to EnerNOC, good candidates for DR have 100 kilowatts or more of electricity that can be reduced without negatively impacting operations. For instance, a hotel that turns off its laundry facilities or adjusts the thermostat generates negawatts. During times of peak electricity demand, the extra power can be redistributed (dispatched), generating income for the hotel. Beforehand, the customer would have installed an energy monitoring device on site. DemandSMART, voted smart-grid product of the year, is EnerNOC's automated demand response offering. Silver Spring's DR program is bundled into its UtilityIQ Demand Optimizer application.

Going rates to capitalize on demand response
(NYSE: ABB  ) acquired Ventyx for $1 billion cash back in 2009. Ventyx generated $250 million in revenue that year, valuing the company at four times sales. Ventyx was a private company, so the financial statistics available were limited.

Shockingly, it was the only acquisition over $1 billion that ABB made over a 10-year period. To me, that indicates a patient buyer willing to pay a premium (P/S of 4) to capitalize on the DR industry. Price-to-sales ratios can be useful for comparing growth stocks in the same industry. Would you agree that energy saved (not wasted) is greener than any renewable?

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