World Energy Unveils “Demand Response” Auctions, Disrupting a Market Dominated by Boston’s EnerNOC

2/24/10Follow @wroush

It’s so costly and complicated to build new generating plants these days that utilities would rather prepare for periods of peak demand, such as hot summer days, by buying “negawatts”—that is, by agreeing to pay big customers like factories, stores, and municipalities to dial back their electricity use when called upon. EnerNOC (NASDAQ: ENOC), a sweetheart of the Boston technology community since its 2007 IPO, has built a big business around pooling customers who want to participate in these so-called “demand response” programs and remotely managing their electricity use when the call comes in from grid operators. EnerNOC profits by keeping a percentage of the operators’ per-megawatt payments.

But while EnerNOC is the largest and most successful of the so-called “curtailment service providers” (CSPs), there is growing competition in its industry—and now the company is getting some very unwelcome news. World Energy (NASDAQ: XWES), a Worcester, MA-based company known for operating online reverse auctions in which energy suppliers compete to win contracts with big customers, announced today that it’s getting into the demand response market. This means that for the first time, customers in deregulated electricity markets who want to be paid for their curtailable load will be able to solicit bids online from competing curtailment service providers, then choose the provider offering the highest price (meaning the most attractive percentage split).

EnerNOC, in other words, is gradually losing its first-mover advantage. It may soon have to cope with a market in which it’s no longer the first and only curtailment service provider to approach new customers, but instead must compete with dozens of other providers in electronic auctions specifically designed to drive bidders’ profit margins down.

The irony is that EnerNOC, which built its business on smoothing out inefficiencies in electrical supply and demand, is now seeing that business disrupted by another young, technology-based company that sees the demand response market itself as inefficient.

From World Energy’s point of view, customers thinking about joining demand response pools have had no way, up to now, to determine the fair market value of their curtailable load. Indeed, it sees its auction service as providing both competition and transparency. It’s portraying the service, which it has already tested in the “PJM” grid region covering 13 Midwest and Middle Atlantic states, as … Next Page »

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

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