That's, increasingly, the question all smart grid companies need to be asking themselves.
I had the opportunity to visit with Tim Healy at EnerNOC last week, toured their demo center, had a fun lunch talking shop. As longtime readers might be able to guess, I am pretty keen on the energy efficiency industry as an investment area. What they might not know is that I missed out on investing in EnerNOC years ago as part of a Series B round -- the company had approached my firm for an investment, but then Foundation Capital invested quickly and at a price we wouldn't match, so we missed out. And it ended up being a very good investment for Foundation... So it's always been one of "the ones that got away" for me. No big deal, in venture capital you worry about the deals you do, not the deals you don't. Bygones. But I've enjoyed keeping up with Tim over the years.
What I saw this time reaffirmed for me that EnerNOC is going to be important in smart grid markets, but somewhat surprisingly, mostly inside the meter.
I've seen and heard EnerNOC being somewhat criticized on Wall Street and among investors for being focused on demand response, which is seen as being a smallish market that is going to be low-margin over time. And I think that the criticism of demand response is correct. EnerNOC has a strong early mover position, and is deploying technology to try to maintain their advantage, but at the end of the day demand response is a market where the service providers (note: as separate from the equipment providers) are to date basically calling up building facility managers and asking them to reduce their energy consumption on demand. Phone calls, pages, and emails. Not rocket science. So as the various geographic markets for demand response get saturated, we will see margin compression over time. Heck, back in 2006 I passed on a demand response investment because I called up one of their biggest customers and asked them why they selected that service provider, and they said that it basically came down to which vendor was most willing to cut their profit margin to win the deal.
But what I think a lot of people involved in energy efficiency investments don't quite realize is that EnerNOC is making a serious effort to use their early mover advantage in demand response, to develop a similar early mover advantage in inside-the-meter energy efficiency services.
Think of it this way -- EnerNOC is going around signing up office buildings and factories and getting them to participate in demand response programs. But as long as they're there and getting involved in the energy consumption patterns of those buildings, they might as well sign up those same buildings for other energy services: Procurement, Optimization, etc. Demand response becomes a customer acquisition tool.
I and lots of other cleantech investors have been reviewing numerous inside-the-meter efficiency plays over the past few years. As office buildings generally become more "intelligent" (due to the adoption of building automation systems and building energy management systems), we're seeing more efforts to take advantage of the information coming from those systems to optimize energy savings for the buildings.
Thus far most of what has been done has been pretty basic services: Information and alerts. Information in terms of a presentation of energy consumption information across all the various information producing equipment in a building with an existing energy management system. And alerts in terms of being able to quickly notify a building manager if something is going haywire and something's using a lot more energy than it should.
What was interesting for me to see is that EnerNOC is getting into these services. They're taking the information and company relationships that they have access to through their DR activities, and launching business that are more about optimizing the energy spend of the buildings.
Which means that as all the various inside-the-meter "building energy intelligence" startups that I've seen go out there and try to establish a presence in the market, they need to be asking themselves, "What is EnerNOC up to?" Because EnerNOC has pretty much made it clear: They want to own the inside-the-meter energy spend for all commercial and industrial buildings. Will they succeed? The jury's still very much out, they're just getting started. But it's a big mover in the space that entrepreneurs and investors now need to be aware of.
[Note: I should note I own a few EnerNOC shares in my personal public equity portfolio... So, you know, there you go.]