EnerNOC

Intelligent Energy Management: Why? How?

EnerNOC has a vision statement: “We will create a world in which energy management is as integral as accounting to the operation of every organization.” This is a “bold vision,” said Senior Vice President of Marketing and Sales Gregg Dixon, but it “has incredible value if we can accomplish it.”

Founded in 2001 by Tim Healy and David Brewster, classmates at Dartmouth’s Tuck School of Business at the time, Boston-based EnerNOC (NYSE: ENOC) offers industrial and commercial facilities a variety of energy management services. Each of these services is designed to provide customers with more precise measurement, analysis and control of their energy use.

Measurement and management of its energy use can allow a company to reduce energy demand when the utility network is overburdened (EnerNOC’s DemandSMART product), a service called demand response, for which utilities pay energy users. Energy management also allows companies to save money by using less energy overall and using energy when it is cheaper, a service EnerNOC sells under the name EfficiencySMART. EnerNOC also helps customers in its SupplySMART program devise favorable energy procurement arrangements by using its detailed knowledge of their energy use. For customers in its CarbonSMART program, EnerNOC tracks greenhouse gas emissions and determines the cheapest options for abatement. To do all this, EnerNOC provides customers with the software, and when necessary the hardware, to measure, analyze and control energy consumption. The result: EnerNOC estimates that it has put $383 million “back into the hands of its customers.”¹

Maintaining Grid Reliability with Demand Response

To date, demand response has been EnerNOC’s biggest business, providing 86% of revenue in the first half of 2011.² Here is how demand response works: Utilities pay EnerNOC to reduce loads on the electric grid when demand threatens to exceed supply and cause power quality problems or even a blackout. Blackouts are surprisingly disruptive; they cost an estimated $80 billion in the United States in 2005.³ EnerNOC then passes some of these payments on to its DemandSMART customers. Payments range widely depending on customer size and the location, but they are significant (e.g., EnerNOC sends $20,000 per year to Ybor City District Cooling and $170,000 per year to Sacramento’s Red Hawk Casino).^4,5

EnerNOC controls more energy demand than any other company working with commercial or industrial clients: 6,650 MW of capacity worldwide across more than 10,700 sites as of June 30, 2011.⁶ Since threats to grid stability can happen at any time, EnerNOC maintains a fully-staffed Network Operations Center (NOC) 24-7, 365 days a year. When a utility signals that it needs a temporary reduction in demand, the NOC springs into action. NOC operators reduce energy use at the local DemandSMART companies, in some cases remotely and in some cases by sending the facility manager a message to turn down energy-intensive equipment. Such grid events are commonplace; on average the NOC receives a demand response signal from a utility almost once a day.⁷

When turning down energy use, EnerNOC focuses on measures that affect businesses and their patrons the least: delaying hotel pool heating, dimming supermarket lights, raising the temperature at which the air conditioning engages or shifting when manufacturing lines that are not on tight deadlines, such as those used for vinyl extrusion in window factories, run.⁸ “Since we’re only shut down for a few minutes, these [changes] don’t have an impact on our operation,” says Randy Groff, facilities manager at EnerNOC customer Four Seasons Produce. “Beyond our facilities staff, no one even knows it is happening."⁹

While nearly unnoticeable at the DemandSMART sites, these reductions provide a lot of value to utilities. Without EnerNOC’s demand response services, utilities would need to build more power plants to make sure generation could consistently meet peak demand. Furthermore, demand response will improve the integration of more intermittent power sources like wind and solar as they become more prominent.

The Many Gifts of Energy Management

While demand response has been EnerNOC’s main business to date, the company’s leadership expects its energy efficiency business, EfficiencySMART, to become a major part of its revenue mix. “The demand response business is going to grow,” said Mr. Dixon. “Energy efficiency for us, though, is a huge, huge growth area. It’s roughly twice the size of the demand response market opportunity.”

The energy efficiency market is indeed large; in 2004, an estimated $43 billion was spent on energy efficiency improvements.¹⁰ Furthermore, it appears to have growth potential; a 2010 study found that energy efficiency programs saved energy at an average cost of just 2.5¢ per kWh, cheaper than any source of generation.¹¹ Due in part to the cost advantage, many utilities fund efficiency programs to take pressure off the grid and generation infrastructure. In 2009, U.S. utilities funded these programs to the tune of $4.4 billion.¹²

EnerNOC’s EfficiencySMART program helps customers save money on electricity, natural gas and other forms of energy. The company tracks how and when a customer uses energy, and offers an efficiency analyst to recommend energy saving opportunities that can be implemented through existing energy management systems. EnerNOC details these savings for its customers in monthly report cards. Ultimately, “what will provide the most value, is if we teach you how to fish,” said Mr. Dixon, describing how customers use less analyst time over the life of the program, and eventually become capable of running their own efficiency program using EnerNOC’s software after approximately three years.

For example, in 2010, EnerNOC signed a $10 million deal with the state of Massachusetts to implement an enterprise energy management system containing its EfficiencySMART product across 470 sites representing 17 million ft² of state-owned office buildings. The project integrated hardware and software solutions, providing customized online reports for managers at the facility level, across facilities in the same business unit, and across all facilities in the project. The project represented an investment in the then latest generation of energy management technology, while also serving as the first large-scale commercialization of an early stage product. EnerNOC has since had successful deployment of this product across a number of enterprise customers.

In the case of Stop & Shop, a Northeast supermarket chain, EnerNOC worked in 2011 to reduce energy use across 630 of its stores, many of which had already installed monitoring software under EnerNOC’s DemandSMART program.¹³ Among other savings, the company determined that on any given night, in 30% of stores, restocking crews working late turned supermarket lights back on after a timed program had shut them down for the night, causing them to stay on all night. Shutting these lights back off saved around $100 per hour every night, across all the stores.

EnerNOC’s demand response customers are a natural market for EfficiencySMART; Implementing a program is easier and cheaper at their sites, as software is already in place and energy data collected. Both of these products, in turn, have synergies with EnerNOC’s SupplySMART and CarbonSMART programs. When it comes to negotiating energy purchase agreements (the substance of SupplySMART) for long-time customers, EnerNOC knows the company’s average load shape, which can help establish lower rates with the local utility. In the case of the CarbonSMART program, data collection from demand response can help measure a company’s carbon footprint.

Towards a Smarter Grid

Going forward, EnerNOC will continue building its suite of products and services that are making the grid smarter. The company has expanded quickly since going public in 2007, growing from $60 million of revenue in 2007 to $280 million in 2010.¹⁴ The company now operates in five countries – the United States, Canada, The UK, Australia and New Zealand – and made nearly 10 acquisitions between 2009 and 2011. However, quickly scaling up its organization and acquiring new customers has come at a cost; despite high gross profit margins in its first three years as a public company, 2010 was the first year EnerNOC had positive net income.¹⁵ It is expanding so quickly that management has trouble finding enough talented new employees. “I have, at a minimum, two meals a week with candidates,” said Mr. Dixon, “we have something like 100 job openings today, and it’s a constant effort to fill those.” In this regard, Mr. Dixon is glad to be located in Boston, which he sees as “the richest source of talent in the world.”

Going forward, Mr. Dixon is optimistic that the company has plenty of room to grow: “We haven’t even penetrated 10% of the market.” His definition of “the market,” of course, includes all commercial and industrial facilities that use electricity, most of which currently do not use sophisticated energy management. For Mr. Dixon, success is not just defined by EnerNOC’s growth, but by the expansion of the energy management industry to these new customers. In his words, “If there is not a broad set of winners in this industry, we will be less successful. Our success can be elevated and strengthened by having other people in this market succeed.”

Oct 2011

Endnotes