DR Auctions Squeezing Margins

Demand response has proven to be a very cost effective strategy for both energy resource suppliers and customers.  Strategies to encourage demand response have given rise to specialists targeting commercial and industrial customers.  These specialists include well known players like EnerNOC, Comverge and C-Power.  The business model for these firms is to provide their energy management services on a fee for service basis including taking a portion of the savings realized from their efforts.  In the early days of demand response this was attractive to C&I customers who save real and material reductions in their energy costs.

Now we’re hearing that the market is squeezing the margins from these demand response providers by using DR auctions to force competition between DR suppliers to offer the customers a bigger piece of the savings action. The auctioneer is yet another middleman in the demand response process but customers, typically utilities, governments or even C&I firms are using them to eek out the best deals.

One auctioneer, World Energy Solutions, began using the demand response auction process in early 2010 in PJM and found quick takers among customers eager to squeeze the margins of the DR firms. The auctioneer reported that firms like EnerNOC and Comverge disclosed margins of 45% and 32%, respectively, from their DR contracts in 2009 but the auction process saw them concede about 10% of the contract revenues to get the deal.  World Energy Solutions said its auction fee was 5% of the contract value effectively carving up the traditional 80/20 revenue share between the customer and demand response provider to an 85/10/5% share between the customer, C&I demand response provider the auctioneer.

You can imagine this squeezing of margins does not thrill EnerNOC, Comverge and other demand response providers which is one reason we have seen them broaden their offerings to include constant energy management and other services.

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2 thoughts on “DR Auctions Squeezing Margins

  1. Good piece, but one quick correction. The World Energy demand response auctions don’t help utilities put the squeeze on demand response provider margins. The auctions help the end participant in demand response programs, i.e. the government and commercial & industrial customers that are shedding load, put the squeeze on the demand response providers.

    The competitive process driven by the auctions incents the demand response providers to up the amount of the DR proceeds they are willing to give the customer.

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