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Ben Coyne

Avinash Gandhi

ENOC AT A GLANCE

P/E ► -25.7   EV/EBITDA ► -44.0   ROA ► -13.9% AVG ROE ► -21.6% AVG Debt to Equity ► 0.496 LOW Current Ratio ► 2.12 AVG Interest Coverage Ratio ► -7.98 LOW

 

 

 

 

 

 

EnerNOC, Inc. develops and provides demand response and energy management services as an alternative to building building power plants to meet spikes in demand. EnerNOC has the ability to reduce electricity use during peak periods through its network of partnerships with large industrial users. As of December 31, 2007, the company had approximately 2,189 partner sites and 1,112 megawatts of electric capacity under management. ^[1]

The rising cost of fuel for electricity generation ^{[2] [3]} has made alternative solutions like demand response increasingly attractive for those looking to purchase power. On the management side of the business, EnerNOC allows large industrial customers to have a detailed view of their power consumption and provides ways to reduce electricity use.

Business and Financials

EnerNOC's core business is acting as an intermediary between the utilities that manage local grids and the large consumers in the area. Most of the company's operating revenue comes from contracts with utilities to have EnerNOC on-call and able to reduce demand when necessary. EnerNOC does not have any generation capacity; it reduces consumption at its partner sites, so the grid has enough electricity to meet demand.

Industry Background

The Classic Model

The classic model for providing electricity to consumers is by an electric utility which has a monopoly over a certain area and is regulated by a government agency. Theoretically this model is efficient because the electricity business requires a huge infrastructure investment and companies should be able to offer better prices because of their scale. However, this model has been reconsidered in a number of states, most notably California and parts of the Northeast seaboard. These areas now permit electric utilities, which sell the power, to compete for customers. Some laws also forced companies to separate their utility, or customer facing side of the business, from their generation capabilities. This change in regulation, coupled with rapidly growing demand in these same areas, has strained generation and transmission infrastructure to its limits. ^[4]

The Changing Environment

Electricity demand is forecasted to rise 18% over the next decade in the US, while generation capacity is only expected to rise 8%. ^[4] The combination of strained resources and competitive electricity production and delivery creates situations where spikes in demand cannot be met, creating brownouts or blackouts. EnerNOC estimates that 10% of the electric generation capacity in North America is built for demand spikes that occur less than 1% of the time. ^[4] Peak demand facilities are also becoming more expensive to construct and operate, especially since 2007, given the rise in oil prices and the decreased availability of credit. These factors have increased both the operating and construction costs of peak demand generation facilities.

EnerNOC's Business: Power Management Services

ENOCs Energy Management Services^[1]

EnerNOC's business centers around its network operations center (NOC). The core service it sells, the reliability based demand response, involves a series of steps:

1. ENOC receives an automatic signal from a customer utility indicating a spike in demand
2. Send out notifications to staff at large factories and other high demand locations managed by EnerNOC that power consumption will need to be reduced.
3. Operators at the NOC then remotely reduce demand from the NOC, or monitor the large customers as they reduce demand from their own control center. This is done by dimming lights, scaling down AC or other non-essential equipment. These factories have an incentive to tone down power usage because electricity rates during peak demand hours go through the roof.

Most of EnerNOC's revenue comes utilities through reliability-based contracts while associated costs are payed out to utilities.

• Utilities give EnerNOC capacity payments for being there to reduce demand when necessary.
• EnerNOC pays its partners (factories and other large electricity users) for being on-call to reduce demand.
• When a spike in demand occurs, ENOC pays its partners for the actual reduction in demand, and the customer utility pays ENOC for organizing the demand reduction.

Under price based contracts, large customers (now the factories, not the grid operators) pay EnerNOC to monitor market prices and warn the company of electricity price spikes that increase costs. The Demand Response contracts section below summarizes all of EnerNOC's reliability contracts and also describes the additional contracts they have and what they are for.

Financial Data

The increase in EnerNOC's revenue to $59 million in 2007 is due to an increase in large customers signing up for the program (increase in MW under management). MW under management has almost tripled since 2006 with an increase to 1,112MW from 464MW. There was also an increase in customers using using the price based services, which notify customers of market price spikes.

Demand Response Contracts

Management Contracts with Large Customers

EnerNOC generates its revenue by contracting with institutions that use large amounts of electricity, such as factories. There are three types of contracts, but all center around EnerNOC being able to manage the electricity use of large partners. The majority are reliability-based demand response contracts, which require a large scale partner to agree to scale back electricity use when a grid operator needs additional wattage. Price-based demand response is focused completely on the usage of a partner (now a customer) and doesn't involve the grid. Under these contracts EnerNOC tracks real-time market price data for large users and alerts them when prices are spiking so they can reduce their consumption and lower costs. Ancillary services are short-term solutions for utilities to meet short-term needs in the event of a brief power loss. EnerNOC also differentiates between longer term contracts (contracts) and open market programs (OMPs)

• Contracts have longer terms, from 3 to 10 years, and have more rigid capacity requirements and fixed prices
• OMPs are shorter-term contracts with more flexible commitments and pricing that is based on market levels.

Trends/Forces

Increased Costs of Alternatives

The US generates most of its power from coal.^[5]

Coal and Gas Prices are on a steady upward trend.^{[6] [7]}

Rising fossil fuel prices has made energy alternatives more financially sensible than before. The classic way for grids to meet spikes in demand is to build and operate (or purchase power from) peaking power plants that only operate when the "business as usual" base-load generators can't meet demand. Most of the peaking power plants in the US are natural gas fired plants. Gas plants are popular for this use because their construction cost is relatively low even though operating costs are higher due to high fuel costs.^{[8] [9]} Since the plant is not in continuous operation the low construction cost has justified the price of fuel. However, the rapid rise in the price of natural gas makes this option more costly than before. Grid operators are now taking a step back and examining their options more carefully before they decide to build peaking power plants. EnerNOC's business model is designed with this problem in mind.

Regulatory and Business Acceptance

In the late 1990s and early 2000s there was a wave of experimentation by multiple states with either full or partial energy-market deregulation based on the principle that competition could lower prices for consumers. As noted earlier, the nature of electricity production often favors large scale operations and the deregulation programs caused huge price increases in many states ^[10]. Some of these states have returned to regulation, but a few areas have continued with deregulation, where increased competition has made the model work for both utilities and consumers. EnerNOC can contract in either type of market, but the company has far greater opportunities in a deregulated market, where electric utilities don't produce their own power, but rather purchase from generating companies. Continued interest in deregulation from lawmakers ^[11] would allow EnerNOC more opportunities to manage the supply/demand discrepancies that occur more often in a deregulated market and provide utilities an alternative to buying expensive peaking power electricity.

Political and Business Support for Energy Management and Conservations

Running alongside this regulatory trend is growing support for energy conservation measures. ^[12] This changing perception of coal power means that constructing a coal power plants is harder than it used to be ^[13] Public awareness and concern about the environmental impacts of burning fossil fuels (particulate emissions, climate change, etc.) means that "Going Green" adds significant value to a company's product from the customer's perspective and business recognize that ^[14] The modern consumer demands responsible practices and values actions by companies to conserve and proposals for new power plants now take this into account^[15] This trend puts pressure on companies and lawmakers to demonstrate their concern for sustainable environmental practices, and EnerNOC's energy management is a much simpler way to become sustainable than, say, building a wind farm. The pressure on lawmakers can be seen in the changing standards for where electricity comes from. The portfolio standards that states enforce (see Resource Adequacy Requirements section below) include demand response as an alternative to building new power plants.

Resource Adequacy Requirements

Resource adequacy filings are not required by all electric utilities, but formal requirements for these plans are becoming increasingly common.^[16]. This means that utilities must file formal reports detailing how they plan to meet regular demand and also predicted and unforeseen spikes in demand. Demand response is now a common element of these plans. Based on the amount of power under control by companies like ENOC and competitors, governments can forecast electricity demand and the reserve margin that is available to meet spikes in demand. Many utilities have plans that detail their plans for power procurement, but the California energy crisis made adequacy requirements a prominent concern. These more stringent guidelines will recognize demand response as an important part of managing and supplying electricity. Also, instead of evaluating demand response a direct to competitor to any other energy source a new framework has emerged that looks for the optimal combination of sources. Integrated Resource Plans (IRPs) consider Demand Response as an important element for providing energy but also to reduce load in certain grids that are constrained. Connecticut has an over stressed grid with high prices that have risen dramatically since 2002.^[17] This has resulted in a new framework which considers demand response as an important part of the solution. ^[16]

Competition

EnerNOC faces competition from two directions; similar services and peaking power plants. However neither of these two alternatives have the same scope as EnerNOC's business. ENOC's market share and success against competitors depends on different factors depending on whether the company is competing to a manager for the grid or a manager for a large customer's consumption.Capacity and past performance is essential when selling to the grid, and technological/managerial competence and sophistication is demanded by potential industrial and commercial customers. The price at which load is bought or sold is important in both cases.

Similar Services

Some utilities offer services with the same target market, including load management and demand response. There are also companies that offer services similar to ENOC that operate on a more local scale. These companies include Controls, Kinaxis , and Energy Curtailment Specialists. These demand response programs have all the same technical specifications as ENOC's model but they operate on a local basis and don't provide the same degree of control and information to the demand side consumer. EnerNOC's highly automated system makes their process more streamlined and cost effective.

Peak Power Plants

EnerNOC's benefits from situations in which there are spikes in demand and over stressed grids. Peaking power plants are designed to address the former of these two situations. Peak power plants are typically gas or coal powered and are only used when demand can't be met by standard supply. In a deregulated market ENOC would be competing against these plants to assist the grid in meeting the demand requirements of the customers. These facilities have an advantage over ENOC since they are actually creating power instead of redistributing it. However, these plants can't respond as quickly as demand response can to a rapidly developing situation. They also don't have any capability to assist grids that are overstressed since power plants create power. In situations where a grid needs additional wattage and the grid is already near capacity (there is about as much electricity flowing through the wires as the wires will allow), EnerNOC has a clear advantage since they reduce demand instead of adding more power.

References

1. ↑ ^{1.0 1.1} ENOC 10k, 12/31/2007
2. ↑ EIA US Power Generation
3. ↑ BP Statistical Data - Natural Gas
4. ↑ ^{4.0 4.1 4.2 4.3 4.4}
5. ↑ EIA US Power Generation
6. ↑ BP Statistical Data - Coal
7. ↑ BP Statistical Data - Natural Gas
8. ↑ BP Statistical Data - Natural Gas
9. ↑ Costs of Building Power Plants - World Nuclear Association
10. ↑ | "Shocking Electricity Prices Follow Deregulation " USA Today
11. ↑ | NY Public Service Comission
12. ↑ | "Energy is Top Economic Issue for Voters" WSJ, July 24th 2008
13. ↑ | "Coal-fired plants' foes power up" Denver Post
14. ↑ | "Green is Good for Business" Corporate Responsibility Officer.
15. ↑ | State Energy Alternatives, U.S Department of Energy
16. ↑ ^{16.0 16.1} | " New Trends Shaping Demand Response Programs " Electric Power and Light
17. ↑ | "Shocking Electricity Prices Follow Deregulation " USA Today