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A Look at EnerNOC's Retooled Business Model
by Matthew Rose, Director EMI Consulting and Enerdynamics Instructor
As the electric industry evolves to a more distributed model where end-use customers are directly involved in energy markets, new products will be required so that distribution and transmission system operators can effectively use distributed resources and give consumers the ability to manage their market participation. It is likely such products will be developed by entrepreneurial companies able to respond quickly to market needs. EnerNOC is one such company worth observing.
The Early Years
Boston-based energy software firm EnerNOC has successfully built a business around facilitating end-use customers’ participation in demand response (DR) programs. The company built its business by targeting customers able to manage their electric consumption and, in doing so, reap financial rewards offered by utilities and organized wholesale market organizations. The firm was started in 2001 and focused on advancing demand response in domestic and, more recently, international markets.
The business plan made sense during the last decade as demand response markets, especially those run by the FERC-regulated Regional Transmission Operators (RTOs), continued to grow. Additionally, volatility with market prices offered significant financial reward. Over the course of the last decade, it was not unusual for market prices to exceed $200 or more per megawatt-hour at times of system peak or constraint. This allowed EnerNOC to capture a substantial payment for customer reductions. The firm became a major player in demand response markets, allowing EnerNOC to attract investors so that it could continue to grow.
Changes in the Demand Response Industry
Over the past few years, changes within the demand response industry have impacted the extent and predictability of the financial rewards for demand reductions. Examples include:
- The demand response business tends to be concentrated in the hotter summer months with limited activity and revenue in other months.
- Regulatory issues affect the DR business including challenges to the calculations for determining incentives for reductions, customer baseline definitions, and rules for program participation.
- Electricity demand has continued to decline across the U.S. (recognizing there are some regions seeing demand growth), resulting in greater access to capacity and reduced energy prices. These signals have prompted EnerNOC to rethink its offerings, expand its business reach, and offer a suite of more expansive products and services.
EnerNOC’s New Business Plan
EnerNOC has diversified from being a singularly focused demand response firm to a company offering broader energy intelligence software (EIS) that helps customers make sense of the new choices. Using its cash position, EnerNOC acquired several companies to advance offerings around facility enterprise management and thus facilitate customers' energy-use optimization. This includes EnerNOC’s purchase of:
- EnTech, which offered utility bill management software;
- World Energy Solutions, an energy procurement software provider;
- and Pulse Energy, a software solutions firm providing intelligence to commercial building customers to optimize consumption.
The integration of these pieces allows EnerNOC to approach customers with software solutions grounded on energy intelligence and actual building data.
The company also is advancing its offerings of emerging technologies primarily through strategic partnerships. For example:
- EnerNOC announced a partnership with Tesla to promote and deploy energy storage projects.
- EnerNOC negotiated partnership agreements with SunPower, a global provider of solar solutions and GridPoint, a data-driven energy management systems company.
EnerNOC’s plan is to assemble solutions supporting the full value chain of energy supply and consumption requirements for its customers. According to EnerNOC’s CEO, the decision to expand into energy intelligence software is based on the belief that “customers are looking for an energy platform to help them make sense of all the new choices they have.”
Is the Retooled EnerNOC Plan Working?
The path for success for EnerNOC is still being paved as some believe the transition to an integrated software firm will be more challenging. The company traditionally has made money through its demand response business, requiring little to no customer capital. EnerNOC is now asking customers to spend capital to purchase its software, resulting in a more complex transaction. As evidence of the challenge, company’s stock prices have dropped over the past year, from a high of approximately $20 a share to a recent share price of approximately $9.
Part of the stock price trouble may reflect regulatory uncertainties with the legal battle over compensation for demand response at play. This issue is in the hands of the U.S. Supreme Court, which is slated to decide a case regarding FERC jurisdictional issues over setting rules for incentive payments.
EnerNOC may also be feeling the impact of stricter demand response rules for transmission market auctions. The rule change makes it difficult to offer and bid demand resources.
EnerNOC has a lot invested in its new direction. EnerNOC is depending on commercial and industrial users' willingness to pay for integrated energy management or on utilities utilizing EnerNOC’s services to offer programs for these customers. The regulatory issues to be decided over the next year will go a long way in determining the viability of EnerNOC’s traditional demand response business, but it is likely that elements associated with helping customers better understand and take advantage of EnerNOC's energy assets will continue.
Footnotes and references:
 See for instance EnerNOC’s recent announcement that Walgreens is standardizing on the EnerNOC platform: http://investor.enernoc.com/releasedetail.cfm?ReleaseID=928753
 As reported by the Nasdaq for EnerNOC (ENOC), September 21, 2015.
 Lisa Cohn, EnergyEfficiencyMarkets.Com, Are PJM’s Auction Results for Efficiency and Demand Response a Trend? August 25, 2015.
 To date, EnerNOC has focused only on non-residential markets.