Girding the Grid: How EnerNOC Sold Utilities and Big Electricity Users on Demand Reduction

2/6/08Follow @wroush

Apparently, our economy is still so wedded to fossil fuels—and we are so firmly on a path toward turning the atmosphere into an oven—that even a small drop in the price of oil is enough to dampen investors’ enthusiasm about green technology.

That’s one of the trends that seems to be hammering share prices lately at Boston’s EnerNOC (NASDAQ: ENOC), which is focused on using information technology to increase energy efficiency. The company went public last year and became an instant Wall Street darling, gaining 88 percent in 2007. But as an excellent Reuters feature pointed out last week, retreating oil prices (which have dropped from historic highs near $100 a barrel around the new year to under $90 this week) have been bad news, not just for EnerNOC, which is down 32 percent this year, but for New Jersey’s Comverge, another so-called “demand response” firm that went public last year.

The irony in all this, of course, is that EnerNOC, which installs Internet-connected control devices that dial back electricity consumption at commercial and industrial sites during times of peak demand, is advancing exactly the kind of technology that could decrease U.S. dependence on foreign oil and other fossil fuels and make our economy less sensitive, in the long run, to fluctuations in oil prices.

But the folks at EnerNOC, at least, aren’t letting the market’s ups and downs bother them too much. When I visited the company’s downtown Boston headquarters in late January, I saw many enthusiastic (and surprisingly young) faces, all clearly focused on the company’s mission of helping more companies participate in the demand-response market—in effect, monetizing their ability and willingness to ratchet down their energy consumption at critical times when electric power utilities are running short on capacity.

David Brewster, co-founder and president of EnerNOCAt 36, David Brewster, EnerNOC’s president, still has one of the young faces, though the seven years since he co-founded the company with CEO Timothy Healy in 2001 have been full of challenges just as nerve-wracking as the recent stock slide. Perhaps the biggest, as Brewster related to me during an hour-long interview, has been the difficulty of convincing utilities—the companies that pay EnerNOC for its ability to dial down electrical usage on short notice at hundreds of customer sites—that EnerNOC’s original concept of building a demand-reduction network would be different from, and more effective than, the utilities’ old system of “interruptible rate” plans.

In the not-so-distant past, the only ways for a utility to deal with a power shortage—say, on a hot summer day—were either to bring on more capacity in the form of so-called “peaking plants” that are kept idling until needed, or to ask major power consumers such as factories to shut down until the crisis passed. “The largest industrial customers in a utility’s service area would be signed up for these ‘interruptible’ programs, and in return for the ability to shut them off during emergencies, the utilities would give them cheaper power all year long,” explains Brewster. “But the way these programs were used, a lot of the time it was just a political chip—a way for the utilities to give favorable rates to their largest customers. And then they’d go five years without actually interrupting the power, and when they did call, maybe the person who signed the agreement didn’t even work there anymore.”

Furthermore, says Brewster, “this was all prior to the advent of the Internet, so it would literally be the utility picking up the phone and trying to track down Steve the facilities manager to ask if he could manually take action. And Steve might or might not be at his desk. He might be at the golf course. Or if he’s there, he might say ‘Absolutely not, we’re in the middle of a production run and there’s no way … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • Ned Tyler

    The closing statement sums-up the long term concern with the viability of EnerNOC — “while still somehow managing to keep the lights on” The central story includes an appropriate description of your visit to EnerNOC, wondering how many times the employees (negative connotation) have to endure demonstrations for visitors. I don’t believe that curtailment solutions that pay for discomfort are sustainable. The peak demand problem on the grid is triggered by multiple day heat wave events (3 or more days). The central risk to the business will be proven over time–How many of these events per year will business endure? Also, I think you should dig deeper I believe there are a significant number of “Steves” in EnerNOC’s customer base.

  • Jim C

    Jim Cramer recommended ENOC last week.

    CAVEAT EMPTOR :)

  • USMG

    The business model makes sense. They provide a service that is significantly less expensive than the alternative (building even more peak capacity). They take advantage of technology. And… their revenue model is almost all annuity based.

    They may continue to attract distractors (good for people who want to slowly accumulate) until they turn cash positive or get profitable because people don’t fully appreciate that they have to spend today on sales and orgaizational growth for contracts which generate revenue over time.

    Salesforce.com (CRM) suffered many of the same negative comments at the exact point in their public life.

    Long term keys will be: Renewal rates and gross margins.

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