Tag Archives: Silver Spring Networks

Demand response auctioning tightens the belt on pure-play providers

We recently talked with World Energy Solutions, an energy management services company that assists with auctioning of electricity and gas supplies, carbon and renewable energy credits. Notably, the company also conducts auctions in which demand response (DR) providers submit bids for government, commercial, and industrial contracts.

While DR providers profit by retaining a share of the revenues from these contracts, World Energy Solutions’ auctioning process motivates them to increase the share of revenue passed on to the customer in order to win the contract.

World Energy Solutions began its DR auctioning program in February of 2010, and it currently has a contract with Alban Engine, a PJM-based Caterpillar dealer, to auction off 1,500 MW of capacity to a number of DR providers. While its service remains in an early stage, increased competition like this can threaten the margins of DR providers that have a narrow market focus. More specifically, it gives the upper hand to utilities that would rather offer DR services directly than work with a third-party DR provider.

Providers with a primary focus on DR currently enjoy healthy gross margins, with EnerNOC and Comverge reporting 45% and 32%, respectively, from DR contracts for fiscal year 2009. However, when competing on price, a DR provider would need to forfeit at least 10% of the contract revenues, given that World Energy Solution’s share of the transaction amounts to roughly 5% of the contract value. This could signify moving from an 80:20 revenue share between customer and provider to a 85:5:10 share between the customer, the auction coordinator, and the provider.

Apply that shift to all contracts, and EnerNOC’s gross margins could drop to about -10%, and Comverge’s to approximately -36%. Meanwhile, more diversified competitors such as Honeywell and Silver Spring Networks, as well as utilities including Constellation Energy and Pacific Gas and Electric, are significantly less dependent on the rates of DR contracts and more capable of undercutting their competition – a concern that EnerNOC has expressed previously (see the September 29, 2010 LRPJ – client registration required). If pricing pressure persists, DR providers without a diversified source of revenues will get edged out. This lesson can be applied to the greater smart-grid industry, where innovative companies once enjoyed the benefits of an early-mover advantage. But as larger competitors enter the maturing smart-grid industry, scale and competitive pricing will determine the victor.

Smart grid and automotive deals dominate recent VC deals in alternative power and energy storage

Graphic of the WeekThe market for alternative power and energy storage started gaining momentum around the turn of the century thanks largely to venture capital (VC) funding for far-reaching and high-risk technologies. That hasn’t changed: Today, technology developers are leaning even more heavily on VC funding to finance demonstration pilots and manufacturing scale-up. What appears to be changing, however, is VC attitudes toward the space.

As this week’s graphic shows, a sharp increase in funding in H1 2009 was followed by a precipitous decline in H2 2009 and a record-breaking high in H1 2010. Along with this roller-coaster-like funding pattern, there’s been an indisputable shift in the size and stage of financing rounds. At the very least, such behavior indicates that VCs are reconsidering their position and strategy in the alternative power and energy storage field. A closer look shows that VC’s are doubling-down on their bets on maturing smart grid and automotive companies.

During the first half of 2009, alternative power and energy storage companies raised $1.14 billion through venture capital, suggesting that 2009 would be the best funding year the sector has seen since we began tracking it in 1999. However, purse strings tightened in the latter half of 2009, bringing the annual total to $1.43 billion, a relatively disappointing sum despite that fact that it represented a 20.5% gain over 2008. In 2010, the money once again came pouring in. The first half of 2010 goes on record as the strongest six-month period for financing, with a total of $1.14 billion in VC funding. However, there’s been flat growth in the number of deals.

Smart grid and automotive companies were the big winners, accounting for more than 77% of all investments. Further, this percentage was dominated by uncharacteristically large financing deals from a select number of high-profile companies. Fisker Automotive, Better Place, and Silver Spring Networks completed a total of four rounds, each more than $100 million, to account for 50% of all financing in the graph’s final 12-month period. As a result of these large bets, the average deal size grew to $29.6 million – the highest average value since our coverage began in 1999, and a 47.2% increase over the average deal size in 2009.

Source: Lux Research report “Alternative Power and Energy Storage Financing: How to Play a Buyer’s Market.