As utilities and companies jockey for a piece of $4.5 billion in federal stimulus grants aimed at "smart grid" projects, there's a question they're raising – are homes or businesses better targets for reducing energy use?

Not surprisingly, the answer depends on which side of the "demand response" business you're in. That's the business of helping customers take part in utility or grid operator programs that pay for the promise to cut energy use when they're facing peak loads.

Right now, it's mostly a commercial and industrial business, one that demand response aggregators like EnerNOC (NSDQ: ENOC), CPower, EnergyConnect and Constellation NewEnergy have built up into hundreds of customers and megawatts under management (see EnerNOC Harvests Power in Maryland and In New England, a Demand Response Company Gets Utility-Sized).

But a few demand response aggregators – Comverge (NSDQ: COMV) and Cooper Power Systems among them – have been helping utilities press into the field of residential demand response.

The Electric Power Research Institute found in a January research paper that the potential for demand response over the coming decades is likely to be evenly split between the residential, commercial and industrial sectors.

Residential demand response is a different kind of business, though – one involving millions, not hundreds, of clients, each using far less power individually than big commercial and industrial facilities.

And that has led some backers of so-called "C&I" demand response to question whether the residential market is ready to deliver.

"Residential demand response has yet to prove that it works," said Bob Dolin, CTO of Echelon Corp. (NSDQ: ELON).

Echelon has a big presence in commercial building automation technology as well as experience in the world's largest "smart meter" deployment to 30 million homes served by Italian utility Enel (see Notes From a National Smart Grid Experiment and Echelon Beefs Up LonWorks).

And as far as he's concerned, going after millions of homes where the residents may not be at home during the 4 p.m. to 6 p.m. peak load times most utilities face is far less cost-effective than extending demand response to fewer, bigger power users.

Gary Fromer, CEO of CPower, agreed with that assessment. He sees the plethora of in-home energy saving devices like smart thermostats and "smart appliances" to come as "great things for us to look forward to over the long-term."

Still, "society will have to spend quite a bit of money to install smart meters, controls and intelligent appliances in homes," he added. That may be worthwhile as a longer-term project, he said.

But "the biggest bang for the buck that we can get immediately is large energy users learning to better mange systems that are in many cases already in place," he said.

Bud Vos, Comverge's chief technology officer, pointed out that residential customers also carry benefits, such as longer-term contracts compared to those for commercial and industrial customers.

That means that "if you do it effectively, you get hundreds of megawatts that you don't lose," he said. Comverge does business in all three sectors, "We don't push a single model," he added.

As for how stimulus dollars should be focused, "I'm not going to pick a side on this one," he said. Rather, utilities and grid operators should design their programs based on where they see the greatest potential for peak demand reduction.

"We need to focus on the goal – keeping [electricity] rates low for people," he said.

Certainly commercial and industrial demand response represents "the easy stuff," said Rick Nicholson, vice president of research for IDC company Energy Insights.

"But doing it at the mass market residential level, I don't think that's a waste of time," he added. "There are plenty of studies that show that if you get a significant number of customers, you can get a significant benefit."

And as more and more "smart meters" allowing two-way communications between homes and utilities are deployed, the prospects for new ways to curb peak demand will emerge, he said. Various trials have shown that people who can track their daily energy use can find simple ways to wring about 20 percent out of their monthly electric bills (see Smart Grid: Test Customers Give Thumbs Up).

And that means that residential demand response programs may be a better candidate for government backing, said Will West, CEO of home automation system maker Control4, which is developing a suite of home energy management services.

"Corporate economic interests are already driving conservation in C&I markets," he said. "Stimulus dollars should be spent where private investment isn't already taking place."

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