This blog has been discontinued

This blog has been discontinued.  Thank you for all the interest in previous years. I've started one on SaaS/Big Data here.

New Role for Paul. Blog and Email to Continue.

I've accepted a new position as VP of Products at FirstFuel Software.  FirstFuel Software is a venture-backed energy data analytics company that works with utilities and government institutions to identify energy savings (using remote audits and other techniques), to engage building owners and operators (through traditional and web-based programs), and to track projects and savings.  Customers include Pacific Gas & Electric, Department of Defense, U.S. General Service Administration, and others.  I'm delighted to join such a talented team.  My role as VP, Products is to lead the product planning and product management efforts.

This move was attractive for several reasons. Careerwise, it's a move back to a technology products company (my career experience before Groom Energy) instead of a services company.  It also fits with two common themes we saw at Groom Energy: the importance of utilities working as a partner with energy and facility managers through incentives, rebates, financing, and advice and the criticality of a cost-effective source of energy cost and use (monthly and interval) data.   

Groom Energy continues to do very well (it had a fantastic growth year in 2013), and I value my time and friendships there.  Groom Energy is an implementation partner at FirstFuel, so I look forward to continuing to work with the team. 

There are several transition items. In terms of the market and vendor research (Enterprise Smart Grid, Enterprise Energy Management Software, Enterprise Carbon Accounting), it is not yet clear if this will continue. There remains much interest and value in this research, and it may continue at Groom Energy or another firm depending on staffing.

The email and blog will continue from my new role at FirstFuel Software. It has been a fascinating experiment from the first email sent December 9, 2008, to 24 people to this email, the 168th, sent to 5,123 people in 2014. While the utility of Twitter for business remains elusive (at least for me), the value and cost-effectiveness of relevant emails and blogs remain high.  I'm proud of the small community we have created through the sharing of hundreds of emails and many email introductions, and I plan on continuing this practice.

Going forward, the vision for this email and the blog changes only slightly.  It will continue to focus on trends and best practices for energy efficiency for commercial, industrial, and government organizations, but more emphasis will be on the motivation of organizations and teams actually implementing projects (I call it the "propensity to act," which is an important dimension to the "savings potential" for each facility).  I believe these topics will continue to be important to corporate energy, facility, and sustainability leaders.  Discussion of the differences among vendor solutions will no longer be covered (and while I am very proud of the technology at FirstFuel, the email and blog are not intended to be a vendor promotion vehicle).  

I hope you continue to be a reader of the blog and the email as we learn together.

Manage Energy Like Quality

Corporate energy managers should apply lessons from the Quality Movement to drive organization-wide energy efficiency improvements.   Tools like Plan-Do-Check-Act and others are integral to continuous improvements in quality and are aptly applied to energy management.

Dr. Edward Deming, the Toyota Production Systems (TPS) and others sparked a radical change in thinking and approach for manufacturing in the early 1970s.  These approaches like Plan-Do-Check-Act that has been incorporated in the ENERGY STAR Guidelines for Energy Management and ISO 50001.

The Quality Movement emphasizes senior management commitment, broad employee involvement, performance metrics, and continuous improvement.   Here are some points from Deming's famous 14-point philosophy that are directly applicable to energy management:

• Create constant purpose toward improvement
• Adopt new philosophy [energy as a variable and not a fixed cost] and embrace throughout the organization
• Stop depending on inspections
• Improve constantly and forever
• Use training on the job
• Implement leadership
• Break down barriers between departments [especially operations, maintenance, energy, sustainability, and finance]
• Get rid of unclear objectives
• Remove barriers to pride of ownership

Early in the Quality movement, some companies established large Quality Departments lead by a VP. This approach has been widely abandoned for a more inclusive and integrated approach that emphasizes that quality is the responsibility of all employees not just the quality team.  A quality leader (often a director-level role) acts as a coach and educator in concert with the CEO to drive quality awareness and ownership throughout the organization.  Corporate energy managers should adopt a similar approach.

Corporate energy leaders can also emulate how quality teams successfully presented a business case to senior management to justify a company-wide quality effort.  Like energy management today, quality programs were initially greeted with skepticism by senior management.

While the corporate energy management is a nascent but growing process in many organizations, there is no reason to have to invent tactics for success.   Learning from your quality peers will improve the success of your energy management program.

U.S. Utility Efficiency Budgets Continue to Grow

Customer or end-user incentives from utilities for energy efficiency (rebates, incentives and information that lower the cost of using electricity and gas) is an important part of any corporate energy management program and are forecast to continue to grow from $4.8B in 2012 to $9.5B in 2025.    While new and existing programs are not always communicated well to companies (and the paper work can be frustrating), these programs represent "free" money for organizations and can be the tipping point for an acceptable financial payback for a project.

This year, Lawrence Berkeley National Laboratory (Berkeley Lab) and Innovation Electricity Efficiency (IEE) issued reports detailing current and projected energy efficiency budgets for utilities.  Berkeley Lab projects that total spending on electricity and gas energy efficiency programs will increase from $4.8B in 2010 to $9.5B by 2025 (in the "medium case" scenario).  This is a 4% yearly growth rate (CAGR), but the most significant growth is in the upcoming years.

Not surprisingly, spending in California is by far the largest, followed by New York, Massachusetts, and Florida.  Future growth is expected primarily in the Midwest and the South, as the West and Northeast maintain their large spending programs.  The Midwest has already seen three states (Indiana, Ohio, and Pennsylvania) more than doubled their electricity program spending in 2011 from 2010 levels.

The persistent growth in these energy efficiency programs are due to higher interest in energy efficiency by regulators, state efficiency goals and targets that increase over time, and a reduction in coal-generated electricity in some states, according to the reports.

Some see a scenario where spending will increase beyond $9.5B in 2025.  The "high case" scenario for spending is $14.3B in 2025, and, given that the energy efficiency standards are only established in half of all U.S. states, IEE believes that expenditures could even top $14.3B in 2025. 

In short, U.S. utilities have and will continue to be valuable partner to help you meet your energy reduction goals.  Be sure to check sites from DOE and DSIRE for utility incentives in your state and obviously ask your utility reps. If you have not already, consider ensuring that your CFO is aware of these programs and she has a summary of incentives received the last several years for all facilities.  We facilities and energy management teams strengthen the support of Finance when finance understand the wealth of utility incentives available.

EnerNOC Formally Expands Beyond DR to Enterprise Energy Management Software

Last week I attended EnerNOC's Analyst Day, a gathering of financial and industry analysts, for an update by its senior management team on EnerNOC's strategy.  The event was attended by around fifty people in person with more on the phone (I attended in person). To summarize, EnerNOC has positioned its offerings, team, and capabilities to expand beyond Demand Response (DR) programs into a software product company, and this meeting provided an update of this plan, especially for the financial community.  With a profitable core business, more than $100M cash on hand, and an infusion of enterprise software talent from the board through sales and engineering, EnerNOC has a real chance to become a leader in the emerging Enterprise Energy Management software space.  

Below are my notes and thoughts from the event.   All the presentations are online here. 

Notes from the Event

• Market opportunity: EnerNOC sees a $1.5B US market for DR with a 3X larger global DR market.   It estimates the market for energy management software (which it calls Energy Intelligence Software [EIS]) to be $5B.
• EnerNOC believes it is poised and ready to be a leader in the Energy Intelligence Software segment, just as it became a leader in the DR space against numerous competitors.
• EnerNOC has added software experience throughout the company, including at the board level, management team (new CFO and new VP of Enterprise sales), product management, product marketing, and engineering.
• In DR, the biggest market opportunity for growth is in Texas (ERCOT) and international.   Its DR strategy is to diversify away from PJM, expand sales to traditional utilities, and grow internationally.
• For the Energy Intelligence Software market, the strategy is to focus on the top 100,000 C&I customers in the U.S. and increasingly selling them their main products: SupplySMART (procurement and utility bill management), EfficiencySMART (energy use monitoring), and DemandSMART (demand response and time of use monitoring).
• Sales strategy is to close 50 large C&I customers, which have an average $200M yearly energy spend, on software deals of $1M annually in three years.  EnerNOC states they already have four customers at this level and proposals with another ten.
• According to company executives, top competitors for software sales are Schneider Electric, Siemens, Constellation, Ecova, Comverge, and IBM.
• From a business model standpoint, EnerNOC aims to diversify away from its hugely seasonal business (100% of EBITDA and 70% of revenue come in Q3) with increased software sales and non-Q3 DR revenue.
• Growth strategy has three elements: 1) grow US DR business, 2) drive DR internationally, and 3) drive adoption sales of its energy management software.  This strategy will add $200M in top-line growth with the following breakdown: $40M DR, mostly driven by Texas; international DR $90M, expand to four new countries; and $70M in EIS software, driven by $1M yearly contracts with large C&I customers.
• Gross margins are expected to dip from 50% to 45% next year and then grow toward 50% afterward.

Groom Energy Analysis

Regarding the software business, with the addition of many people with software experience, the company looks very different from what it did three years ago.   We were pleased to hear that the company is investing more in a utility bill management (monthly bill) solution for customers rather than just real-time interval data, as this development matches the broader customer need we see in the marketplace.  

The existing relationship it has with thousands of customers through its DR offering (DR clearly has been a "killer app") and its strong balance sheet position it well to execute on its product roadmap.   EnerNOC's offerings and roadmap include a number of capabilities that will be attractive in the market, including enhanced understanding of tariffs for customers, using DR fees to fund energy management software (most vendors can't do this), one-stop shopping, peak rate analysis with action at the facility level (e.g., time of  changes, etc.), and Energy Analysts to analyze energy data for time-starved facility and energy engineers.

A higher mix of recurring and high margin software revenue will help increase company valuation (the company is currently valued at 1X revenue (enterprise value / revenue).

The transition will not be easy, however.  EnerNOC made a large, successful DR business by basically giving money to companies to shut things off or to run local generators.   Asking companies to pay for software, in a highly competitive software field, is a larger challenge.  We have seen a few $1M yearly software deals for energy management software, so we believe EnerNOC's average deal size estimates are too high, but they may make up for this on a larger volume of smaller deals. The company's roadmap does not include any products for asset management, so companies that wish to have a single solution for asset management and energy management will need to consider to other vendors.

Overall, however, EnerNOC is well positioned to be a market leader. Only a handful of other companies have the product breadth and financial resources to challenge them.

Some Utilities Provide EMS Software to C&I Customers

Utilities traditionally have paid (and continue to provide) financial incentives for the modernization of equipment (upgrades or retrofits for lighting, drives, etc.) to improve energy efficiency.   In the last several years, utilities have also compensated companies to curtail load during critical peak hours through demand response and other programs.  

With the increased availability and affordability of meters and software, it would make sense for utilities to provide energy management software as well to drive efficiency. At the end of the day, the utility should be indifferent to the program details if the program provides guaranteed savings.   The use of, say, LED lighting or the deployment of energy management software that drives energy savings via behavioral changes should be equally valuable to the utility as long as savings are verified.

We have seen few examples of custom utility incentives for energy management software, but no programs.  This appears to be a changing.  While this trend is still very early, here are several examples:

• NV Energy offers cloud-based software from Building IQ to its large commercial customers, like Vegas hotels, in exchange for participating in demand response programs
• PG&E is working with C3 Energy to provide energy analytics to its largest customers
• Canadian-based FortisBC, as part of its EnerTracker program, gives qualifying gas customers the choice of using energy management software from Pulse Energy or Energent for up to three years at no cost

On the residential side, utilities have been using software to find energy savings for a while.   Opower, C3 Energy (through its Efficiency2.0 acquisition) and others are supporting innovative residential utility programs to drive energy savings.

For companies, this is a promising trend in utility commercial and industrial programs.   Let us know you're your thoughts or if you know of similar C&I utility programs.
  

A Facility and Load-Centric View of Energy Management is Essential

We have the opportunity of working with many companies in a variety of maturity stages of their corporate energy management program. One recurring observation is the absolute importance of taking a facility and load-centric view when expanding any program.

 While carbon footprint calculation and other sustainability metrics are common across industry and facility types, effective energy management is facility-, load-, and equipment-specific.  Underlying energy loads differ by facility type and purpose.  Lighting is a critical load of big box retailers.  Refrigeration and lighting are top loads for grocery and cold storage firms.  HVAC is the largest load for large commercial buildings.   For energy-intensive manufacturers, the energy load of manufacturing equipment and processes, such as furnaces or smelters, dwarf the lighting and heating loads of the related physical buildings.  

Different facility types and energy loads require their own tools and technology to drive efficiency.   One sized does not fit all.  While visibility into utility bills provides an essential, energy cost and use "source of truth" baseline for managers, bill visibility is only the very basic starting point to identifying energy use anomalies.  While the industry discussion of utility "smart meters" is pervasive, utility smart meters only provide information about the main meter at a building, not underlying energy loads or equipment.  
 For an organization just starting the journey to improve its corporate energy management, developing an understanding and sizing of energy consuming loads is essential when prioritizing investments.  The highest return investment may be focusing first on lighting at distribution centers before investing in an corporate energy management software for all building types (stores, offices, etc.) or upgrading BMS systems.   For large commercial buildings, HVAC optimization could be a more prudent initial step, with investments in plug load and lighting improvements planned for future phases.   For a hotel chain, a focus on hotels in very hot climates such as Florida and Caribbean may offer a quicker return than focusing on all hotels in all geographies.

In short, when refining your energy management program, push beyond basic, main meter utility data and develop a prioritized list of facility and energy loads to guide your investment decisions.