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Founded in 2009, Smart Grid Billing is testing its combination of energy-monitoring wireless-connected plugs and software that collect and crunch energy consumption data. The service stores the data in a central server and can determine which appliance or equipment has the potential to reduce or cut its electricity use in real time.

This block of unused power can be sold to a local grid operator. Smart Grid Billing shares the revenue from that sale to its customers, and the plugs are programmed to restore the electricity flow back to the equipment at a later time.

The practice of dialing down or cutting energy use to reduce demand during peak hours of electricity use isn’t new. It’s called demand response, or energy time-shifting, and it’s more common place for commercial and industrial building owners.

But Smart Grid Billing is emerging to take advantage of a year-old ruling by the Federal Energy Regulatory Commission that requires grid operators to pay wholesale market prices for energy captured through demand-response programs. The idea of the ruling is to minimize the need for generating more power when grid operators and utilities could use demand-response programs to reduce consumption and maintain a balance of supply and demand in the process.

A utility’s demand-response program typically allows it to restrict electricity use to homes and businesses whenever it deems necessary, often during hot summer days, so that it can avoid blackouts or the need to buy expensive power to meet the high demand. Home and business owners get rebates or credits for participating in the programs, but they don’t usually know right away the amount of reduction that will be needed or have control over whether the restriction will cause them discomfort (for example, they can’t cool the house as much as they want).

Some large commercial or industrial operations have their own energy management programs to monitor and reduce energy use. In some cases, building managers or demand-response service providers have to decide a day ahead whether to shut down equipment in order to meet energy consumption goals because they don’t have two-way communication and good data crunching tools to make supply and demand decisions quickly.

But Smart Grid Billing’s service provides that live connection. “In real time, we know how many kilowatt hours will be used and electric prices, and we make a decision for all the devices we control and figure out how many megawatts we can move around and shift in real time,” said Henrik Westergaard, CEO of Smart Grid Billing.

To take full advantage of the demand-response market, automating data analysis, communication and decision-making processes will be critical. Making sure customers won’t experience discomfort or find their routines disrupted by time-shifting their energy use is important. Demand-response companies that also tout their real-time data analysis and speedy communication prowess include Comverge and EnerNOC.

Smart Grid Billing, which recently graduated from the San Francisco-based Greenstart incubator program, wants to sell its services to businesses first, and it’s starting a field trial at a golf course in Massachusetts this month.

The startup will be using its hardware and software to run a fleet of electric golf carts – it will delay charging them during the hours when wholesale electricity prices are high. Golf courses make for good customers because controlling their energy use is easier than controlling, say, a residential customer’s energy consumption. Controlling air conditioning and other appliances in a home is trickier because the curtailment could be noticeable and make the home uncomfortable for its inhabitants. One way to deal with that is to dial back energy use for a short period of time, say 10 minutes, and to do that every so often until a desirable, aggregated amount is achieved, Westergaard said.

Smart Grid Billing, which has been largely self-funded, is looking t raise $500,000 to prove its technology and service in field trials.

Image courtesy of LHOON via Flickr

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Arnold, who previously was the CEO of carbon offset startup TerraPass and led EnerNOC’s move into energy efficiency, tells me in an exclusive interview that Gridium has recently raised a $1 million Series A round of funding from investors including Navitas Capital and private individuals like Cleantech Group’s CEO Sheeraz Haji. Gridium will use the new funds to ramp up sales of its first product and build out its engineering team.

Gridium is opting for a sort of low-tech product initially: email. Gridium’s SnapMeter product crunches smart meter data, as well as available weather data, and sends an email alert to industrial and commercial building owner customers when they are about to get hit with high charges, like a high monthly “demand charge.” Large users of electricity have to pay a demand charge to have the right to have energy capacity available — it’s essentially paying the utility for part of the infrastructure — and it’s calculated by the maximum demand during the month.

SnapMeter can send an email alert to the building owner so that they can tweak their energy consumption to stay below a certain demand charge level. Arnold says that SnapMeter can reduce a building owner’s energy bill by three to five percent.

Gridium gets the energy data from the utilities’ online site, so there isn’t hardware that needs to be installed. It’s a capital efficient model, says Arnold. Gridium is offering SnapMeter for $50 per meter per month, as well as a free one-month trial. Because of the per monthly rate, Gridium says the first report can often pay back on the investment.

The company plans to offer other products down the road. The email-first approach I think is interesting because I’ve seen so many companies try to provide overly-detailed energy dashboards and analytics to building managers, with the idea that more is always better. In many cases it’s not — the data overload needs more and better filters.

Arnold says Gridium is already managing data from 100 smart meters from industrial and commercial building owners — generally there’s one to two meters per large building. Commercial real estate is a big sector for SnapMeter, says Arnold.

Gridium is an example of essentially an app that is being built on top of smart meter data. Once the smart meter data is being used as a platform (think Green Button) then the real innovation can occur in the analytics and services. Other companies building businesses around managing energy data include Opower, Tendril, Simple Energy, EcoFactor, EnergyHub and many more.

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The buyout offer would deliver Comverge shareholders $1.75 a share, which is a 6.9 percent discount to its closing price on Friday reports the Wall Street Journal. The move would take the company private, and Comverge says it will “solicit alternative acquisition proposals from third parties for a period of 30 days.”

Comverge is a demand response aggregator, which means it turns down power-using equipment in commercial and industrial sites to help utilities manage peak energy consumption on the power grid. The company started a rebranding effort back in 2010, but Comverge’s shares have plummeted over the past couple of years.

Recently Comverge’s independent auditor found that there was substantial doubt about Comverge’s ability to continue as a going concern. In addition Comverge says its primary and secondary lienholders have issued amortization and default notices.

The affiliate of H.I.G. Capital, Peak Merger Corp, says it will provide $12 million in debt financing to Comverge.

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• Green IT Q1: Cleantech Breaking Out — and Bracing for Hard Times
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Most cleantech start-ups require a lot of capital. The average VC-backed company that goes public in this sector raises about $120 million through five rounds of financing along the way.

Every time a CEO seeks new investment, she walks a tightrope. On one hand, she wants to raise capital at a high valuation to minimize dilution. On the other hand, she doesn’t want the valuation to be too high, because if the company loses steam it risks a “down round” ahead – i.e., raising the next round of capital a lower share price than before.

Down rounds dilute the ownership of common shareholders (the founders and employees) quite substantially unless they’re explicitly protected. This is because of anti-dilution provisions designed to protect the existing investors, who hold preferred shares; these terms are part of nearly every institutional financing and are too complex to discuss here. Down rounds can dilute those investors as well, but as long as they can pony up their share of the incoming cash, they can maintain their level of ownership. Common shareholders don’t have this luxury.

Conventional wisdom holds that CEOs should strive for the highest possible share price every time they raise money, because their number one job is to prevent dilution, and down rounds are rare events that only happen in mediocre companies.

A while back, I decided to test whether this actually holds true in cleantech. It’s particularly germane in this sector because of the large amounts of money that must be raised and the many rounds of financing required to reach the finish line.

To perform this analysis, we need time-series data on the share prices of privately-held, VC-backed cleantech start-ups. “But Matthew,” you protest, “private companies rarely publicize their valuations, and they certainly make sure to keep down rounds a secret!” In nearly every case, you’re right, but there’s one instance in which companies are legally required to publish a historical record of their private share prices: When they file to go public.

In a happy coincidence, we can presume that companies angling for an IPO have also had some measure of business success. So by examining the SEC filings of public and aspiring-to-be-public cleantech start-ups, we can determine whether successful companies always raise money at ever-higher prices, or whether they tend to stumble along the way.

From trawls through SEC filings, I’ve been able to identify 24 such VC-backed cleantech companies for which private share price histories can be reconstructed – 15 that have gone public since 2000, and nine more that have filed an outstanding S-1. (A handful of additional companies didn’t make the cut because they went public on a foreign exchange with different reporting requirements, they raised only one round of private financing, or they had a really complicated history that I couldn’t untangle.) Here they are:

You can chart the share price trajectory of each of these companies on a line chart. The x-axis of the chart is time in months, and the y-axis is share price. Each inflection point on the chart represents a fundraising round (Series A, Series B, etc.) at which capital was raised. The lines between the inflection points represent the intervals of time between fundraising events. For the companies that have filed an S-1 but have not yet gone public, the last point on the chart represents the share price at the most recent private financing. For the public companies, the last point is the share price at the IPO.

Looking across these 24 companies, three patterns emerge:

The first pattern is the build, where a company raises successive rounds of financing at steadily higher prices with no single round standing out. This is a good situation for the entrepreneur because it minimizes dilution. A venture investor with 20/20 hindsight would want to play this scenario by investing early and having sufficient follow-on capital to maintain the position, because the earliest investors tend to make the highest returns (both on a cash-on-cash basis and an IRR basis). Biofuels/chemicals company Gevo is a good example of a build:

The second pattern is the pop. In this case, a company raises capital at a modest uptick each time, except for one round where some extraordinary event sends the share price soaring. Entrepreneurs love this situation – particularly if the pop comes late, because it mitigates dilution right when big money is required! A venture investor, in hindsight, would want to get in just before the pop. Demand response pioneer EnerNOC is a great example: Its share price spiked 5.5x from its Series B-1 round to its Series C round, owing (as far as I can tell) to a really hot 2006 summer that broke demand response records.

The third pattern is the stumble. This is the position that no start-up CEO wants to be in, where something goes wrong – unexpected technology hurdle? cancelled deal? management shakeup? – and new financing gets raised at a lower price than before. Theoretically a venture investor with perfect judgment would recognize the dip as a buying opportunity, but in times like these it’s exceedingly difficult to discern a hiccup from free-fall.

A123Systems is a good case study: The company attracted more than $100 million at a big uptick in May 2008 in anticipation of an IPO, but had to raise another $100 million at a lower price the next year when the IPO got delayed.

So, of these 24 companies, how often did each pattern occur?

• Builds happened a third of the time.
• Pops occurred one-sixth of the time.
• Half of the companies stumbled. This is the most common pattern. And these are the successful companies that ultimately filed to go public; just imagine the others!

The conclusion for cleantech entrepreneurs: Watch what you wish for – you just might get it.

Every time you raise financing there will be a chorus of voices in the boardroom encouraging you to raise the biggest round possible at the highest valuation. Sometimes this will indeed be the right decision, and if you’re certain that it is, you should shoot for the stars. But often – according to this data, at least half the time – it won’t be.

Should you get over your ski tips in valuation, you’ll set yourself and your team up for disproportionate dilution in the future, where your only defense is the mercy of your board. These are the cases where it’s in your personal self-interest to raise the appropriate amount of money at a sustainable valuation from people that you trust – not the largest amount of money at the highest possible price from whoever’s willing to pay it.

Remember, the share price that really matters is the one at the very end.

Tune in tomorrow for some parting thoughts.

Matthew Nordan (@matthewnordan) is an energy VC investor at Venrock, one of the oldest and best-performing VC firms. Earlier, he co-founded and led the energy tech analyst firm Lux Research and forecasted technology futures at Forrester. There’s more where this came from at mnordan.com.

Images courtesy of Amyris and GigaOM.

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1). What is new? The new rule requires grid operators — called independent system operators or regional transmission organizations — to pay more to companies that can provide the fastest and most accurate frequency regulation services. The rule reflects the emerging use of non-traditional power plants to regulate the frequency of the grid, which runs smoothly when power flows through it at 60 hertz frequency. But electricity pours into the grid from different power plants at various locations, and it doesn’t neatly correspond with energy consumption all the time.

2). Why do we need a new rule? Historically, power generators would dial up and down the production of their power plants to help grid operators even out the fluctuations. The price they paid for frequency regulation is different than what they get for the steady supply of power. That’s because frequency regulation requires short bursts of power to respond to fluctuations that change in minutes or even seconds. It makes sense to price the power differently because it fulfills different roles. But there was no mandate to pay for frequency regulations based on the speed and accuracy of providing the amount of  power requested by a grid operator. Some grid operators take into consideration speed and accuracy in setting prices while others don’t.

The emergence of renewable energy generation has also brought more attention to energy storage. Renewable energy sources such as solar and wind don’t produce power consistently through the day or night, and their production doesn’t always coincide with peak demand for power. One way to maximize revenues is to bank the renewable energy and deliver it only when demand, along with electricity prices, rises – such as during hot summer days or when people return home in the early evening and turn on lights and appliances. Another way to make money is to sell power for frequency regulation.

Energy storage farm operators have lobbied for higher rates for their power and services because newer technologies can respond to frequency fluctuations more quickly than fossil fuel power plants can. Batteries are holding tanks for energy that are ready to dispatch power whenever there is a need. In comparison, fossil fuel power plants can spend more time and energy ramping up and down its production. This means that the power from fossil fuel plants may not meet the changing demand of the grid as accurately in real time.

3). Who benefits? Different types of cleantech business stand to benefit. As I mentioned, energy storage businesses, from technology developers to energy storage farm operators, particularly those using flywheels and batteries — that means companies such as Beacon Power (flywheel), A123 Systems (battery technology) and AES Energy Storage (battery farm developer). Beacon Power recently filed for Chapter 11 bankruptcy and seeks to re-organize and continue its operations. AES just inaugurated the world’s largest lithium-ion battery farm, located in West Virginia, that uses 32 MW of A123’s batteries.

Companies in the demand-response space also could be winners. Demand-response service providers sign up large energy users, such as businesses, and pay them to reduce energy use to help utilities or grid operators balance power supply and demand. So they could do the same in the frequency regulation market by adjusting the energy use of their customers’ heating and cooling systems and other equipment. These adjustments are made for short durations, so their customers aren’t likely to notice a difference. Frequency regulation has been a tiny opportunity for demand-response service providers, according to FERC. But the new rule could make it more attractive for demand-response service providers such as EnerNOC.

If electric cars become popular, they could become a means of regulating the grid’s frequency as well, but who will benefit financially isn’t clear. Electric cars are essentially mobile batteries. When they are plugged into the grid for recharging, there could be programs to draw power from them to deal with frequency fluctuations. How much power can be taken out from the car battery and when are big issues because you don’t want to surprise car owners with lower-than-expected charged levels. There is also no standard, industry-wide practice for whether to pay the owners of the cars or the charging stations for sending power to the grid for frequency regulation.

4). What’s next? Grid operators will have to come up with rules and pricing for frequency regulation. The FERC rule mandates two compensations: one is a “capacity payment” for being ready and setting aside power to provide the service anytime. The second payment will be based on how fast and accurate they can deliver the service.

PJM Interconnect, the largest grid operator in North America, is ahead of others and drafted its plan while FERC was considering the new rule. It expects to implement the plan starting next year. Its territories, which include 13 state and Washington, D.C., is home to that new, 32MW lithium-ion battery project by AES.

Photo courtesy of AES  Energy Storage

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A few of the stocks I covered yesterday are still down — like EnerNOC, but that’s due to company-specific issues. Most are slightly up, though many didn’t return to the trading levels pre-market sell-off. Here’s a run down on where the stocks I covered yesterday are at this morning:

Solar

• Solar panel maker SunPower up 3.06 percent.
• Chinese solar panel maker Suntech rises 4.13 percent.
• Thin-film solar maker First Solar is still down .40 percent.

Biofuels

• Biofuel maker Gevo is back up 10.87 percent.
• Algae oil company Solazyme is up 3.07 percent.
• Biofuel maker KiOR is down even more: 3.50 percent.
• Biofuel maker Amyris is up 0.75 percent.

Electric car and batteries

• Lithium ion battery maker A123 Systems is up 11.70 percent.
• Electric car maker Tesla Motors is up 5.67 percent.
• Battery maker Ener1 is up 6.75 percent.

Smart grid

• Smart meter and network maker Itron is up 5.14 percent.
• Demand response company Comverge is down even more, by 1.38 percent.
• Demand response leader EnerNOC crashed even more, by 36.98 percent . (Yesterday’s market crash is combined with EnerNOC’s own weak earnings statement and a downgraded position to hold by a prominent analyst).
• Smart meter and network maker Echelon is back up by 5.51 percent.

Random:

• Car sharing company Zipcar is up 2.75 percent. It hasn’t fully recovered from yesterday.
• Clean Energy Fuels, which makes natural gas infrastructure for gas-powered cars, is still down by 5.80 percent.

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The deal enables EnerNOC to add 240 MW of demand response capacity. According to a filing, EnerNOC paid $27.9 million for the company.

Australian utilities have been working on building out smart grid networks to help integrate clean power and reduce the country’s carbon emissions, and the Australian government has dedicated $100 million AUD ($107.63 million USD) to develop a smart grid demonstration project. Australia actually has one of the highest per-capita carbon emission rates in the world, due to both the electricity sector and transportation.

EnerNOC has actively been trying to move beyond its core business of providing demand response services to utility, though this latest acquisition falls squarely into expanding its demand response business. Previously, EnerNOC has acquired startups in building energy efficiency, carbon accounting services, demand response for agriculture systems, energy procurement, and risk management.

EnerNOC bought so many companies that the Boston-based energy firm both increased revenues and losses for its most recent quarter back in May. EnerNOC recorded revenues of $31.76 million, up from $28.12 million for the same quarter in 2010, and lost $19.27 million, down from $14.20 million for the quarter the previous year.

Here are EnerNOC’s acquisitions to date, now including Energy Response (and my apologies to anyone from Australia for the generic kangaroo pic to represent your country):

Image courtesy of Flying Cloud.

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Simply put, CPUC’s proposed ruling would require the state’s big three utilities — Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric — to impose tariffs on third parties that want to get at utility customer energy data. It would also require the utilities to add conditions to those tariffs that impose CPUC’s privacy guidelines on the third parties that sign up for them.

That authority, however, would apply specifically to so-called “locked devices” — any system that’s limited to a single provider’s network or technology. The ruling also singles out systems that keep collecting and using data without any active role on the customers’ part, once the customer has given permission to access it.

Companies that run services that fit this bill will have to enroll in the utilities’ tariff programs, CPUC’s ruling states, and the CPUC has given the state’s three big utilities six months to come up with their tariff plans. I’m curious to hear how the smart grid companies that have argued against the commission having authority to tell them what to do will react to that.

Home energy devices that aren’t “locked” and don’t automatically transfer information to a third party fall under a different category. CPUC puts the onus on utilities in that case, saying they’ll have to provide customers with such systems “information concerning the potential uses and abuses of usage data should the customer forward or otherwise provide the data to another entity” — for example, if they switch from one services provider to another.

CPUC’s proposed ruling comes after years of discussion and argument about just how smart meter data should be managed. Because of California’s position as a market trend-setter and early-adopter of smart meters, it could help set guides for how other state commissions and federal regulators approach the subject.

Don’t expect the new ruling to end the arguments between privacy advocates and the startups, telcos and IT giants that want to use that data to deliver in-home energy services, however. That’s because some of the ruling’s new suggestions are likely to displease both sides on the issue — one of them being the idea that tariffs can give the CPUC the right to tell third parties what to do.

Early moves to link customers to their smart meter data via third parties haven’t yet had to face this issue. San Diego Gas & Electric, for one, has given about 11,000 smart meter-enabled customers next-day smart meter data via PowerMeter, Google home energy platform. All of those customers using Google’s platform have actively authorized the company to handle their data, and Google has pledged to keep it private and erase it as soon as the customer asks it to.

But privacy advocates, such as the Electronic Frontier Foundation and the Center for Democracy and Technology (PDF), have asked the CPUC to force third parties like Google and others to follow more stringent privacy rules. Those rules, in some cases, go beyond those set by authorities like the Federal Trade Commission or state privacy laws, like California’s SB1746.

Indeed, companies from Verizon and AT&T (PDF) on the telecom side to Tendril, Control4 and EnerNOC (PDF) on the smart grid industry side have filed briefs with the commission saying that it lacks the legal authority to tell them what to do. The idea is that the CPUC is a utility commission — not a Verizon, AT&T, Tendril, Control4 or EnerNOC commission.

CPUC doesn’t lay claim to authority over data from devices that lie within customers’ homes and are owned directly by them, by the way, because they don’t depend on utility data. That’s an important subset in the field of home energy management, including everything from energy-specific devices like The Energy Detective and the PowerCost Monitor, home security-plus-energy monitoring systems like iControl and AlertMe, or home broadband and automation systems from telcos like Verizon and AT&T.

Still, with the cost of home-installed energy devices still in the multiple hundreds of dollars, many companies tackling the home energy space are looking to work with smart meter data that’s already been collected by the utility. That should lower the costs of installing in-home energy systems, and thus make them more affordable and more popular.

What about when the smart meter data is considered to belong to the customer, rather than the utility? Indeed, the CPUC has asked the state’s big three utilities to come up with plans to give their customers data available from smart meters in the coming years, and Friday’s ruling set a six-month deadline for all three to come up with pilot projects to test it out.

Home energy management companies argue that the CPUC can’t legally stop those customers from freely sharing their own data — after all, the CPUC doesn’t have authority over homeowners, any more than it has authority over Google. Once again, there’s room for confusion and argument here.

Image courtesy of Christian Haugen via Creative Commons license.

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