Some companies deserve admiration just for the novelty and cleverness of their business. Like Groupon.
Groupon is a pioneer of mass deal-of-the-day coupon. To local subscribers Groupon emails its offer of 50+% off some product or service; if enough subscribers accept the offer, the deal goes forward. Buyers of groupons get unusually deep discounts; vendors get a guaranteed dose of new customers, albeit at low or negative margins for these initial exposures. Groupon keeps a full 50% of a coupon price. Simple. Compelling all around. And now worth billions.
Another clever company, in the energy sector? EnerNOC.
EnerNOC is a pioneer in electricity "demand response." Like Groupon, EnerNOC is a marketing middleman. It signs up thousands of mid-size commercial and industrial entities. These outfits agree to reduce their electricity usage by a set amount a few times a year, during periods of extreme peak demand. EnerNOC then bundles and sells these promises of "negative megawatts" to electric utilities and grid operators.
As with Groupon, everyone wins. Utilities essentially buy insurance against extreme peaks, for which its alternatives are very expensive: building and using "peaker" generator plants, or forcing brown-outs and black outs. Suppliers to EnerNOC receive payments which many have to regard as "free money," getting paid to do almost nothing but agreeing to a few short periods of inconvenience per year. And EnerNOC? Also like Groupon, it pockets about half the dough.
The majority of EnerNOC's response events take place in the summer, but last month it experienced a less-common winter occurrence. Unusually cold and wet weather in Texas coincided with a large reduction of power plant output available to the grid. EnerNOC experienced a "demand response event" to reduce the burden on the network. During this particularly sever event, spot electricity prices climbed to $3,000 per megawatt --100x its normal price.
EnerNOC is one of those operations one instinctually must ask, "really, that's a business?" Because what is essentially going on is that utilities are paying EnerNOC to organize utilities' own customers in order to...use less of thier product. About 90% of the payment structure is actually a guaranteed fixed figure per year, and 10% is variable with each event. Total number of DR events and their duration are both capped, typically at 10 events per year, 6 hours per.
In round numbers, you can think of it like this: businesses buy electricity for 10 cents per kWh from the utility, but the utility will then pay $2.00 per base kWh not used, during crunch time.
EnerNOC currently manages over 5 million megawatts of potential electricity demand response, and generated $280 million of revenue in 2010.
EnerNOC has a lot of advantages at this stage of its development:
- The company is the clear leader in "demand response."
- Demand response is now an understood and accepted element of the electricity generation sector.
- The company is still led by its two founders, who before EnerNOC started in 2001 earned valuable experience in energy markets and other entrepreneurial ventures.
- EnerNOC has network connections to each of its suppliers and to most major utilities and system operators, centered through its network operation center. These physical connections, along with its business relationships, places it in a strong position to leverage these assets into related energy services in the future, such as energy efficiency management services.
- It's primary competitors for DR should be utilities themselves, but these have generally shown themselves to lack the drive or incentives to do the work that EnerNOC has done.
- The price that EnerNOC can get for its DR insurance is strongly influenced by utilities' basic alternative: the high cost of building (or paying someone else to build and run) a "peaker" natural gas generation plant that will only be used a handful of days per year.
- In 2009 the company started generating positive cash flow and, in 2010, profits too.
The EnerNOC story is not free of concerns.
- Its average price received per megawatt of DR is expected to fall during 2011 and 2012 due to relatively slack demand in the electricity sector arising primarily from the recession (the narrower the gap between production capacity and demand, the higher the value of DR insurance); prices from its largest customers, often set by auction or long term contract, are expected to be higher in 2013.
- Some speculate that the overall market potential for DR, while now proven, may not grow far from its current installed base.
- The potential for "add-on" services using its infrastructure and expertise are currently more theoretical than proven.
- It's not clear how easily EnerNOC will be able to maintain its market share vs. other third party players, or vs. utilities using emerging "smart grids" technologies.
- The company recently reduced its long term revenue and profit guidance, and revealed an argument with its biggest customer related to quantifying demand response reductions, sending its stock price down a significant leg.
EnerNOC's stock appears to have found a new base around $19, after spending much of 2010 in the $30's. The company generated about $1.00 in net cash per share in 2010, and its February 2011 outlook suggests about the same in 2011 and 2012, with a 60% boost +/- in 2013. So net of its $5+ of cash balance per share, ENOC is trading at less than 14x its '10 and '11 cash earnings. While the top line is not expected to grow for two years due to pricing declines (which should reverse somewhat) its core megawatts under management are projected to increase ~20% each year. In other words the company's outlook over three years indicates a CAGR of just under 20% in revenues and implies at least that growth level in megawatts managed. If one buys the company's outlook, the current multiple looks reasonable, although the flatness expected in the near-in periods may suggest that there is little hurry to jump aboard the stock, either.
Stock machinations aside, EnerNOC is a terrific story of invention and innovation. A service that others did not know was useful or even possible became a win-win for everyone. And that includes electricity consumers, for whom the entire network becomes a bit more reliable and efficient.
Innovation. Productivity. 450 Jobs. All that, and not DOE-subsidized.