EnerNOC: Revenues Up, Profit Up, Denies PJM Claim

Updated: Demand response leader EnerNOC (s ENOC) on Wednesday reported 2010 revenues up nearly 50 percent from 2009, although while the company recorded a 2010 annual profit up from a net loss fell slightly from the previous year. At the same time, company officials sought to set straight a conflict with grid operator PJM over how it accounts for “negawatts” in one of its biggest markets.

EnerNOC reported 2010 net income of $9.5822.7 million, down up from a net loss of $6.8326.7 million in 2009, despite along with 2010 revenues that rose to $280.2 million from 2009 revenues of $190.7 million. The company made several acquisitions in the year and expanded its portfolio 49 percent over the year to reach 5,300 MW under management. (Update: We corrected the net income, we regret the error.)

Beyond the financials, EnerNOC officials spent much of the conference call fighting back against what they termed unfair intimations of “market manipulation” raised in a Feb. 4 statement from grid operator PJM. The statement accused unnamed demand response companies of “double counting” participation in the market (PDF), by including power reductions achieved via a separate program.

Shares of EnerNOC fell more than 15 percent from $20 to $17.38 on Monday after analyst reports on the PJM statement surfaced, but have since come back to close at $19.30 at the end of Wednesday trading.

“EnerNOC does not double-count demand response resources, or inflate the amount of capacity it delivers to the grid,” Brewster said Wednesday. The company insists it’s in full compliance with PJM rules and deserves all the payments it’s received.

FERC Rules

Indeed, the conflict seems not to be so much about existing rules as it is about setting future ground rules for demand response. PJM first brought up the subject in a November meeting, but postponed any action, and would have to get approval from the Federal Energy Regulatory Commission to finalize any changes it may vote for at that time, Brewster said.

While the conflict is rooted in complex differences in how PJM accounts for power reductions, the gist of it lies in a misunderstanding of EnerNOC’s role as an aggregator of demand response customers, Brewster said. PJM, in simple terms, says that each single customer’s allowable demand response payment should be capped at a level called its peak load contribution (PLC), which is a figure set by counting a customers’ consumption during PJM’s five peak hours in the year before.

But because EnerNOC aggregates multiple customers in blocks of power reduction, it’s possible that some customers will deliver more reductions than their PLC and others will under-deliver on their maximum loads, he said. No matter what, however, EnerNOC delivers the aggregated demand reduction that it has promised, he said.

PJM’s argument, on the other hand, amounts to a suggestion that EnerNOC de-aggregate its loads and account for each customer as an individual under the PLC cap, Brewster said — something he said would equate to PJM underpaying the company. EnerNOC believes that its total aggregated load from multiple customers should be allowable, even if some individual customers surpass their PLC cap, he said.

“PJM’s statement is nothing more than an opinion – one we do not agree with,” he said. FERC — the federal agency with authority over PJM and other grid operators — has expressed support for the kind of demand response aggregation that EnerNOC and competitors such as Comverge (s COMV) and CPower/Constellation Energy provide, Brewster noted.

Indeed, FERC is set to rule tomorrow morning on a proposal that “negawatts” of power reduced in demand response get the same price as megawatts generated and sold on wholesale power markets. How that decision would affect the PJM-EnerNOC dispute isn’t clear, but it does indicate that FERC has generally been supportive of policies that help demand response.

How the PJM rules conflict may play into EnerNOC’s future revenues is less clear. Analysts covering the dispute have noted that the company gets about 60 percent of its revenues from PJM. In a Monday research note, Deutsche Bank analyst Carter Shoop said that he’d heard reports that double-counting may make up 15 to 40 percent of overall demand response revenues at PJM.

EnerNOC CEO Tim Healy insisted Wednesday that the dispute with PJM isn’t expected to lower the company’s margins or revenues in 2011 compared to last year. EnerNOC expects to add at least as many megawatts to its portfolio this year as it did in 2010, if not more, he said. EnerNOC officials also said that last week’s surprise resignation of Chief Operating Officer Darren Brady had nothing to do with the PJM dispute.

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