There's a giant sucking sound right now in the U.S. And -- with all due respect to former presidential candidate Ross Perot -- it has nothing to do with jobs being exported to Mexico. It's about our nation's fragile and decrepit electricity grid and the power that is being sucked out of it every day and with ever-greater ferocity.
Fortunately, there's a company that's putting a sock in it. It's the clear leader in a fast-growing marketplace that I expect will be worth billions in the very near future. Best of all, it's cheap, unloved, and growing sales at a tremendous clip. It's EnerNOC (Nasdaq: ENOC ) , a stock with energizing potential.
A huge market opportunity
The U.S. has roughly 1.1 million megawatts (MW) of electric generation capacity. That sounds like a big number, but it's barely enough to keep up with demand under normal conditions. Under abnormal conditions, like say the heat wave we experienced in the Northeast this past summer, which had everyone and their best friend's cousin cranking up the A/C, it's woefully insufficient. In fact, frequent brownouts have become a fact of life in certain places, costing U.S. consumers and businesses an estimated $80 billion per year in lost productivity.
It's only going to get worse. Electricity demand in North America is projected to climb by 19% over the next 10 years, but generation capacity is expected to increase by only 12%. The U.S. will need to add more than 700,000 MW by 2030 just to meet expected demand. We're talking new power plants, transmission lines, and grid infrastructure at a cost of $2.4 trillion.
Regulators and utilities therefore have two choices. Invest tens of billions per year to build new capacity. Or spend a small fraction of that to make the grid more efficient, or smarter.
Here's where EnerNOC comes in
EnerNOC is the leader in the emerging field of demand response. Here's how it works. EnerNOC has a network of more than 8,000 customer sites -- places like commercial buildings, supermarkets, industrial sites, and universities -- that have hooked up to EnerNOC's metering and control technology. EnerNOC monitors the energy use at the customers' sites in near-real time. When a utility company or grid operator experiences a sudden surge in demand, it notifies EnerNOC, which signals its customers to cut back on energy use, freeing up valuable wattage.
For instance, supermarket chain Albertsons, an EnerNOC customer, may switch over to its generator and cut selected lighting, or reduce power to refrigeration units that were recently destocked. Or an IT manager might know the best time of day to reduce power to his or her company's network servers.
EnerNOC's customers include Adobe Systems (Nasdaq: ADBE ) , Albertsons, AT&T (NYSE: T ) , Beacon Properties, the city of Boston, General Electric (NYSE: GE ) , Pfizer (NYSE: PFE ) , the state of Vermont, Level 3 Communications (Nasdaq: LVLT ) , and the University of San Diego.
The utility companies and grid operators pay EnerNOC for the freed up power. EnerNOC then turns around and pays a portion of those revenues to its customers. So not only do EnerNOC's customers save money on their energy costs, they actually get money back from the power companies for freeing up power through EnerNOC's network. With that kind of win-win situation, it's no wonder EnerNOC's growth has been through the roof.
|TTM Revenue ($m)||$224.5||$190.7||$106.1||$60.8|
|Demand response capacity (MW)||4,800 MW||3,550 MW||2,050 MW||1,112 MW|
|Reach||31 states, Canada, U.K.||31 states, Canada, U.K.||22 states, Ontario||20 states|
TTM = trailing 12 months.
EnerNOC ended the second quarter of 2010 managing 4,800 megawatts across more than 8,000 sites. It's added about 1,250 megawatts since the start of the year, a 35% gain in capacity. That tells me that EnerNOC's services are gaining rapid adoption.
As EnerNOC continuously expands its network and demand response capacity, utility companies and grid operators are happy to keep renewing long-term service contracts. After all, they're saving potentially billions in capital investments they would otherwise have to make.
But EnerNOC's growth opportunity doesn't begin and end with demand response (although the growth from that alone could be huge). With its foot in the door at its customers' sites, EnerNOC has a number of additional services to offer. By analyzing clients' power consumption, its PowerTrak software can offer savings opportunities, and even be used to automate processes to decrease power usage. Its SupplySmart system combines software and consulting to help power companies buy energy efficiently and manage price risk. Other solutions include tracking and managing carbon emissions, something that becomes ever more crucial as new "green" regulations are imposed on commercial and industrial buildings.
Bottom line and risks
There are other companies in the demand response business, including the smaller Comverge, but they have a much larger focus on the residential market. There are many companies that make metering equipment that could be capable of demand response, including giants like Honeywell (NYSE: HON ) and Johnson Controls (NYSE: JCI ) . But I think EnerNOC's first-mover advantage gives it a solid moat, since each new client increases the company's ability to reduce loads on utilities.
Still, despite its rapid growth, EnerNOC has yet to report a full year of profitability since its IPO in 2007. It is cash flow positive and analysts predict EnerNOC will earn its first profit this year and $0.85 per share in 2011. At around $30 a share, I think the stock is a huge bargain when you consider its cash-rich balance sheet and extraordinary growth potential. We need a smarter grid and EnerNOC's substantial head start in a crucial new field makes it a compelling proposition for investors looking to power up the return in their portfolio.