If I was a C&I salesperson for an Energy Service company (ESCO), I would be very nervous about the recent acquisitions of demand response providers by my competitors. The combination of revenue that can be earned from participation in Demand Response programs along with the installation of energy efficiency equipment/controls is a potent one that, to date, many ESCOs have either overlooked or have yet to understand. This will give forward-thinking ESCOs a head start and competitive edge that could leave the rest of the field scratching their heads wondering why they are losing multiple multi-million dollar energy service contracts.

Let me explain. Demand Response (DR) is a service that compensates end users for reducing load in response to grid system needs. In many markets there are multiple DR programs available, the most popular of which are Emergency, Ancillary Services (Reserves) and Economic Demand Response. Historically, niche companies specialized in providing Demand Response services to customers. Yet recent acquisitions of demand response companies by large ESCOs are a signal to the market that DR will no longer be considered a stand-alone product, but instead will be one of multiple energy management tools that large ESCOs will use to compete for Energy Service contracts.

But how powerful a tool will DR become in the proverbial ESCO tool kit? I think we’ll come to see it as a very powerful tool indeed. Consider the following example:

Situation: A $4-5 Million dollar Energy Efficiency project for a School in PA (PPL utility area):

• Installation of $1.5M building management system (BMS) for the schools
• Lighting retrofit of existing T12 lighting system to Super T8 system — $1M
• Replacement of old inefficient boilers — $800K
• Installation of variable frequency drives (VFDs) and new energy efficient motors on circulation pumps — $600K
• Installation of Demand Control Ventilation system in gymnasiums, auditoriums, and cafeterias — $300K

• 7 ESCOs respond to the RFP
• Each has similar product offerings
• ESCO #1 integrates a DR product suite which provides a $470,000 revenue stream most of which is earned over a 3 year period.

Initially, ESCO#1 builds their usual RFP response but NOW sends it to their in-house DR experts. Their DR team determines that, for minimal additional work/cost, the district can use the controls they already want installed to:

• Reduce 1.5 MW’s of load for Emergency DR = $266k over 3 year contract (typical)
• 1 MW for Spinning Reserves = $120k over 3 year contract
• 300kW for Economic DR = $40k over 3 year contract
• Permanent efficiency can also be bid into PJM’s Permanent Efficiency forward capacity market and return an avg. of $50/kw/Year * 220kW * 4 years = $44k

All of this will be provided “turnkey,” and ESCO#1 can even offer the option to dispatch the loads when they are needed. That way the district does not have to worry about any additional work but can instead focus on running its facilities while still receiving these ongoing annual revenue streams. By integrating DR into its service offering this way, ESCO#1 not only has a competitive edge but can also relieve the district of trying to figure out on their own how to participate in these complex Demand Response markets.

Now here’s where it gets really interesting. In this example, even if other ESCOs have a Demand Response expert on staff, in all likelihood they do not have the rights to sell capacity in the PJM market (capacity is acquired 3 years in advance to registered Curtailment Service Providers). Thus, even if they know how these demand response markets work, they still cannot replicate the savings ESCO#1 can deliver.

What’s the alternative then? ESCOs can either team up with a Demand Response company – a risky propositions because the ESCOs may not want to charge a premium for their services – or they can try to offer Demand Response services themselves. The problem here, however, is that, as mentioned above, in the Mid-Atlantic they will either have to acquire the capacity through a bi-lateral contract or purchase capacity 3 years in advance and wait until they can offer this to customers.

ESCOs could also purchase niche DR providers (something I expect to see more of over the next 36 months), but this also can be risky – and expensive. A last alternative, and the most practical and actionable one is for ESCOs to monetize a customer’s DR capacity through an open and competitive DR marketplace, such as the World DR Exchange, where Demand Response providers bid in an online forward auction for a customer’s capacity.

Now, let’s get back to our example. Because of its proficiency in Demand Response, ESCO#1 has an additional $470,000 it can play with to offset costs, add additional products, or do whatever it deems necessary to win the business. How can another ESCO compete with this if they cannot offer a similar solution that will drive Demand Response revenue to their customers? Additionally, this is only a $4-$5 million dollar example. The DR figures increase dramatically if the client is bigger and has, let’s say, a $30-$35 million dollar Energy Service Contract which they are bidding out.

And this is just the beginning of an inextricable tie between DR and energy automation. According to Pike Research, “The automated demand response market is poised to grow at 500 percent over the next 10 years. This period of dramatic growth will begin in 2013 and will increase from a $1.4 billion annual market in 2010 to $8.2 billion by 2020 under moderate circumstances.”

At the end of the day, DR is an energy management product that is becoming ubiquitous in the energy management space. Another area of the Energy Management industry that is embracing Demand Response services can be seen in the USGBC’s pilot project surrounding LEED certification. Basically, they have set up a system where participants can earn 1 LEED point for enrollment in a Demand Response program with the intent to roll out this program nationally if it is successful. And, as if all this was not enough, FERC recently issued Executive Order 745 which mandates that ISOs compensate customers for full Locational Marginal Price (LMP) if they enroll in an economic Demand Response program.

Bottom line: If you are an ESCO intending to compete for large energy service contracts, it’s time for you to raise your game in Demand Response.