Information technology revolutionized the way we buy things (think Amazon.com and eBay), how we get information (Google, Wikipedia, the decline of newspapers), and how we interact with our peers (Facebook, Twitter, LinkedIn.) Yet so far, it has had little, if any, transformative impact on energy. Tim Healy, CEO of EnerNOC (Nasdaq: ENOC), the world's largest third-party provider of demand response to utilities and grid operators, thinks that's about to change.

Demand response (DR) began decades ago with interruptible loads and rates: Utilities give large customers favorable electricity prices in return for an agreement that the utility can turn off certain parts of their equipment (interruptible loads) or their entire power supply (interruptible rates) for a few hours per year in the event there is not enough spare generation capacity to meet demand. It was a concept driven by simple economics: It's much cheaper to pay users to temporarily curtail usage during peak periods than it is to build new capacity.

My first encounter with DR came as far back as the late 1980s, when I was an undergraduate at Harvey Mudd College in Southern California. At the time, the college was on an interruptible-rate plan. I don't recall any power outages because of the interruptible rate, but that was most likely because I was not on campus at the time. For an institution where most students and faculty are away during the hottest months of the year, when Southern California energy demand peaks, an interruptible rate must have made a lot of financial sense.

But interruptible rates are limited in their application. Most businesses and institutions are less able to compromise on power reliability. That's where information technology comes in. By selectively controlling machinery, lighting, and HVAC equipment, modern DR providers such as EnerNOC can wring better-coordinated and more targeted power reductions from facilities without disrupting mission-critical operations.

Because types of energy use are so varied across institutional, commercial, industrial, and government sectors, there are few cross-cutting DR measures that apply everywhere. Instead, EnerNOC works with each facility or business owner individually to identify the energy services they can do without for short periods of time, and it connects those devices to monitor-controllers that feed into a central network operations center -- the NOC in EnerNOC -- where aggregate load can be controlled as easily as at any power plant.

One way to look at DR is as a virtual power plant that can substitute for new supply-side resources, such as gas turbines. Such virtual power plants can not only shave peak loads but improve grid stability in other ways as well.

Despite DR's long history, energy consulting firm KEMA estimated in 2007 that only 21% of the economic DR market was then operational, with the market potential growing along with overall load growth. Different definitions of market sizing lead to different market penetrations, but all put market penetration at well below half, a low figure that arises from the idiosyncratic nature of different industries: DR at a supermarket chain looks a lot different from DR for agricultural irrigation. Speaking of which, EnerNOC recently purchased M2M Communications specifically because M2M's technology allowed EnerNOC entry into a novel and mostly unpenetrated market: agricultural irrigation operations.

Data-driven energy efficiency
Although EnerNOC sees DR as its core product, DR also forms a strong platform to sell other energy services to clients. Using IT to crunch the same data necessary for automated DR can help pinpoint opportunities for cost-effective energy efficiency improvements. That data can also be used to understand normal energy usage and negotiate the most favorable deal with energy providers, or it can help evaluate a company's carbon footprint. These data-driven efficiency services help broaden margins, since they do not require that EnerNOC share the revenue it gets from utilities with the facility owners. According to Healy, pure-play DR providers usually have gross margins in the mid-20s, while EnerNOC's are in the mid-40s.

The world scene
In sharp contrast to the vast majority of clean-energy technologies, the United States has by far the most developed DR market, and EnerNOC is the leading player in that market. While both Europe and Japan have been aggressive in promoting solar and wind power, they have much less demand response capacity, and now they are waking up to its advantages. My colleague John Petersen recently returned from the Grid-Scale Energy Storage Conference in Brussels and told me by email that the utility representatives "made it clear that the only economic grid storage in their view [is] pumped hydro" and that they spoke "casually as you please about 'load shedding' as a solution for variability."

"Load shedding" is utility-speak for temporarily cutting off power to certain lines. If they are seriously considering load shedding just to cope with variability, they will want to sign up as many customers as possible for interruptible rates. From there, it is only a small step to pursue full scale DR, and since European utilities have little experience with this, it makes sense to call in a third-party vendor such as EnerNOC.

Indeed, EnerNOC is beginning to expand internationally already. In the first quarter of 2011, international revenues were 15% of total revenues, compared with less than 1% the previous year. The majority of these revenues came from Canada, but other revenue outside North America grew from only $13,000 in Q1 2010 to almost $5 million in Q1 2011.

To cope with the loss of power from nuclear generators shut down after the Japanese earthquake and tsunami, Japanese citizens have shown a remarkable willingness to do without some electric services for the greater good. While TEPCO has managed to bring more new supply online than initially anticipated, that still leaves the anticipated summer shortfall at between 3 and 4.3 GW. Most of this need will be met by conservation from Japanese residential and commercial users, and I expect that the experience of manually turning down power consumption for the greater good will help prime the technophilic Japanese for more automated ways to control energy use, such as DR and other smart-grid technologies.

Leading vendor
Although many utilities pursue their own DR programs, those that choose (or are asked by regulators) to consider third-party solutions seem likely to prefer a one-stop shop from a well-established vendor to a collection of specific solutions from smaller vendors. EnerNOC's current leading position and strategy of acquiring new technologies by acquisition as they become available seem likely to continue to be a source of strength going forward. The company's strong balance sheet, with no net debt and positive cash flow and earnings, not only gives it the resources to continue to acquire new technologies to supplement its existing capabilities, but it also give utilities confidence that they will be able to fulfill their obligations as a DR vendor.

Conclusion
As Germany and Japan come to grips with the reality of trying to quickly phase out nuclear power and replace it with variable resources such as wind and solar, they will also have a rapidly growing need for dispatchable resources to manage the variability of the new resources. The application of IT to energy allows DR and other IT-enabled smart-grid technologies to deploy more quickly and cheaply than even natural-gas turbines. I expect EnerNOC to be among the leaders in this last wave of the IT revolution.

DISCLOSURE: Long ENOC.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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