Demand response company EnerNOC (s ENOC) has seen its COO retire and its shares drop to 18-month lows in the wake of complaints by grid operator PJM that unnamed demand response companies have been practicing the so-called “double counting” of customer’s power assets. While PJM didn’t name EnerNOC, the grid operator said (PDF) double counting is “market manipulation,” explaining it enables demand response providers to cover up under-performing customers while reaping an unfair financial reward, and “may ultimately jeopardize reliability.”
EnerNOC revealed late last week that Chief Operating Officer Darren Brady had agreed to resign, without citing a reason. That news from PJM came about a week before that.
EnerNOC said in a Monday statement that it’s in full compliance with PJM rules. The company declined to comment Monday, citing its inability to speak on the matter before its fourth-quarter 2010 earnings report set for Wednesday. Shares of EnerNOC, the largest demand response aggregator in the country, had fallen more than 15 percent from $20 to $17.38 in early Monday trading.
As the country’s biggest demand response market, PJM works with all the big companies in the field, including EnerNOC, Comverge (s COMV) and CPower, the company bought by Constellation Energy (s ceg) last year. Comverge’s stock is up slightly to $5.86 in morning trading.
PJM accounts for about 60 percent of EnerNOC’s revenue, making the question of its potential involvement in double counting a pressing issue. In a research note last week, Deutsche Bank analyst Carter Shoop noted that EnerNOC’s earnings could be hurt if it was indeed involved in “double counting,” but that the company could benefit if it was not involved. Shoop also wrote that anecdotal evidence suggests that double-counting may make up 15 to 40 percent of overall demand response revenues at PJM — a serious chunk of the market.
Analysts have also noted that PJM has been aware of this practice for months, but has deferred any action to revise its rules to forbid it until May 2011. That may make the issue more about a disagreement over the meaning of various market rules, rather than a clear-cut case of PJM accusing companies of breaking existing rules.
PJM’s statement noted that double counting hasn’t reduced the actual amount of megawatts that were powered down to help meet peak demand. Rather, double-counting appears to be a way in which curtailment services providers (CSPs) can cover up for the failure of some customers to meet their contractually obligated demand response reductions by over-counting the participation of other customers. Along the way, “the CSP is paid twice for a single load reduction, thus double counting the value of the compliance,” PJM wrote.
The problem of double-counting is rooted in two different ways PJM measures demand response capacity. The first is called peak load contribution (PLC) and is set by counting a customers’ consumption during its five peak hours in the year before. Reducing that rate can earn customers benefits not directly linked to demand response. The PLC also sets an upper limit on how much power a customer can bid into PJM’s Load Management (LM) demand response program. However, that program doesn’t allow the counting of reductions made under the PLC plan.
There’s a snag, however. One of PJM’s demand response measurement and verification options, called the Guaranteed Load Drop (GLD) option, measures how much demand response reduction comes from a customer against consumption figures that include the PLC-based reductions. That means that the GLD option may overstate the amount of demand reduction coming from a particular customer.
While the customer doesn’t get any benefit from this GLD vs. PLC double-counting, the aggregator can not only be paid twice for the same reduction, it can also count the extra “performance” to counterbalance under-performing customers elsewhere in its portfolio.
The offending company can also use the knowledge that it has that extra performance in hand to bring on new customers in the same region, confident that those customers may never have to actually deliver the reductions they’ve promised as long as they’re covered by that extra performance, PJM explained.
The Complex Market of Demand Response
The situation underscores the complications involved in managing and verifying power reductions as a commodity. In its February report on U.S. smart meter and demand response activity (PDF), the Federal Energy Regulatory Commission pointed out that demand response occurs under a bewildering array of program names and classes, making it hard for utilities and their overseeing grid operators (ISOs and RTOs) to correctly count demand response assets.
At the same time, the number of megawatts available to be turned down under demand response doesn’t equal the actual reductions that come in any particular year. For example, 2010 saw U.S. demand response capacity grow to 58,000 megawatts, or about 7.6 percent of U.S. peak demand, up from 41,000 megawatts in 2008.
But last year’s economic downturn and milder summer weather led to only 15,980 megawatts of demand response capacity being called upon last year, FERC found. That was only 30 percent of the available capacity, and not much higher than the 13,398 megawatts of demand response called upon in 2008, which tapped 36 percent of the available capacity at that time.
EnerNOC has been aggressively expanding its core demand response business over the past several years, most recently stating it has about 5,100 megawatts under management, or nearly 10 percent of the nation’s total capacity. In November, it reported third-quarter 2010 revenues of $162.80 million and net income of $43.87 million, almost double the net income from the same period the year before.
At the same time, it’s also been expanding into multiple lines of business to expand its demand response markets and add new services such as energy efficiency, wireless building sensors and power procurement. Recent acquisitions include agricultural demand response technology provider M2M Communications last month and West Coast demand response and energy efficiency technology provider Global Energy Partners in December.
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