Summary:

One of the oldest smart grid technologies out there is also one of the most ripe for M&A: demand response. And that’s not a coincidence. On Friday power company Constellation Energy announced that it plans to acquire demand response and energy management provider CPower.

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One of the oldest smart grid technologies out there is also one of the most ripe for M&A. And that’s not a coincidence. Demand response, where third parties help utilities avoid outages by reducing energy users’ electricity demand at critical times, has been one of the most active areas for acquisitions and on Friday power company Constellation Energy announced that it plans to acquire demand response and energy management provider CPower. Terms of the deal were undisclosed.

Constellation says it will add CPower’s energy management contracts to its demand response portfolio that already includes 1.5 gigawatts under management, which is basically the collective amount of energy that commercial and industrial buildings owners have agreed to reduce at a certain time. (Utilities pay for the unused megawatts, and energy customers get a cut of the cash.)

CPower has roughly 850 megawatts worth of contracts with large commercial, industrial and institutional power users, as well as some residential clients, in New England, New York, the mid-Atlantic region, Texas, California and Ontario, Canada. CPower is also backed by venture capitalists Mayfield Fund, Bessemer Venture Partners, Expansion Capital Partners, Schneider Electric Ventures, New York City Investment Fund and Consensus Business Group.

Demand response was one of the first greentech sectors to go public — with EnerNOC, and Comverge in 2007 — and is a first-generation smart grid technology. While early demand response services were largely manual, where building managers would get alerts and simultaneously turn down their buildings’ power consumption, more recent demand response tech is increasingly dependent on IT and networking technology.

To win utility and building owner contracts, the name of the game for demand response players is scale. And that means consolidation. Constellation and CPower’s combined contracts give it a bigger reach and make it more attractive to utility deals. As John Quealy, managing director at investment bank Canaccord Adams, put it to us last year: “I would expect larger [demand response] companies would give utilities that comfort, and a lower price point.”

To remain competitive, these large, older demand response players are also looking for innovation by buying up smaller startups. EnerNOC has purchased at least five startups over the past three years, including Cogent Energy, SmallFoot, eQuilibrium Solutions, MDEnergy, and South River Consulting.

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