Today's Buy Opportunity: EnerNOC

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"Smart grid technology is almost a no-brainer [investment]; utilities want it, need it, might depend on it. What happened to the telecom industry over the last 20 years in terms of efficiency gains, connectivity and bandwidth will happen to the utility industry over the next 10 years. Management and control of energy assets is a fundamental priority."

So said a major investor at a venture capital presentation I attended in New York late last year just before he revealed a few of his top ideas in smart grid technology. One of them caught my attention, and I've been following its remarkable story ever since. It's the clear leader in a fast-growing marketplace that I expect will be worth billions in the very near future. It's my "11 O'Clock Stock" pick: EnerNOC (Nasdaq: ENOC).  

EnerNOC fast facts

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

A wide-open market opportunity
The U.S. currently has 1,075,000 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're experiencing right now in the Northeast that has 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 around the country, costing U.S. consumers and businesses an estimated $80 billion per year in lost productivity.

And it's only going to get worse. Electricity demand in the United States is projected to climb by 19% over the next 10 years, but generation capacity is expected to increase by only 12%. In fact, North America will need to add almost 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 a mere $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.

EnerNOC to the rescue!
EnerNOC is the leader in the emerging field of demand response. Here's how it works. EnerNOC has a network of more than 7,000 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 customer's site 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 MWs.

For instance, supermarket chain SUPERVALU (NYSE: SVU), 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 company's network servers.  

Just a few of EnerNOC's customers

• Adobe Systems (Nasdaq: ADBE)
• Albertsons (SUPERVALU)
• AT&T (NYSE: T)
• Beacon Properties
• City of Boston
• General Electric
• Pfizer (NYSE: PFE)
• State of Vermont
• Stop & Shop
• University of San Diego

The key part of this equation is that utility companies and grid operators pay both EnerNOC and its customers for that power. 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.

Source: Company filings.

EnerNOC ended the first quarter of 2010 managing 4,350 megawatts across more than 7,200 sites. It added about 800 megawatts during the quarter, which represents a huge 23% sequential gain in business. That tells me that EnerNOC's services are gaining rapid adoption. And 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 without EnerNOC's demand-response capabilities.

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 get imposed on commercial and industrial buildings, particularly in urban areas.

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 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. The company recently became cash flow positive, and analysts predict EnerNOC will earn its first profit this year and $0.82 per share in 2011. At $34 a share, the stock looks expensive, but I think the company will grow faster than analysts predict and sustain that growth for an extraordinary period. We need a smarter grid, and EnerNOC's substantial head start in a crucial new field makes it, well, almost a no-brainer.

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