By Rich Heidorn Jr.
With its market-leading status in demand response, blue chip clients and international expansion plans, EnerNOC Inc. may be a good long-term investment play on the Smart Grid. But as the last week demonstrated, it’s not for the faint of heart.
EnerNOC’s stock is down 25% — a loss of nearly $134 million in market capitalization — since PJM announced the results of its 2016/17 capacity market auction May 24. The auction saw a 56% drop in RTO-wide capacity prices and a 16% drop in the volume of DR clearing as new natural gas-fired plants and imports increased their market shares.
Stocks of PJM-based utilities also have fallen since the auction, with Exelon Corp. and FirstEnergy Corp. each down 9%.
The auction also may scramble New Jersey’s efforts to subsidize new capacity after a 660-MW natural gas generator planned by NRG Energy failed to clear the auction for the second time despite the state incentives.
No one felt the impact of the auction results more than EnerNOC. Demand response was responsible for 88% of the company’s $278 million in 2012 revenues, with PJM representing 40% of sales for the year (see PJM, FERC Rules Buffet EnerNOC).
Analyst Reaction
EnerNOC’s stock dropped Tuesday after Credit Suisse, one of the underwriters of its 2007 initial public offering, downgraded it from outperform to neutral. Needham & Company cut its price target on EnerNOC shares to $18 two days later while maintaining its buy rating.
Raymond James saw it differently, upgrading the company Wednesday from an outperform rating to a strong-buy rating with a $20.00 price target. And Pacific Crest, which had raised its price target from $22 to $24 on May 8, reversed course Wednesday, dropping the company’s rating from outperform to sector perform.
Motley Fool columnist Travis Hoium wrote Tuesday that the market had overreacted. “Is the company really worth nearly $100 million less today than it was yesterday? Not to a long-term investor, so I don’t think today’s move changes the investment thesis, and if you’re bullish (which I’m not) this should be viewed as a discount more than a reason to panic today.”
EnerNOC did not respond to a request for comment yesterday.
In a press release last week, the company said it cleared 4,400 MW of capacity, a small drop from the 2015/2016 auction, and increased its DR market share in PJM to more than 35%.
“Although we are obviously disappointed with the clearing prices in this auction, it is important to put Friday’s outcome into a broader perspective,” Chairman and CEO Tim Healy said in the statement. “Our results are reflective of our ongoing strategy to strike the right balance between growth and profitability and to not simply be a price-taker where we would be managing demand response resources at a loss.”
The company said it will continue its efforts to increase its revenues from non-DR products and from regions outside PJM.
History
Founded in 2001, EnerNOC has grown by focusing on seven categories of commercial and industrial customers: technology, education, food sales and storage, government, healthcare, manufacturing/industrial and commercial real estate. Its customers include AT&T, General Electric, Pfizer, Sears, Shop Rite and Whole Foods Markets.
The company went public in 2007, with shares ending its first trading day at $31. Those who bought at that price had lost about half of their investment through yesterday. The company has had only one year of profitability (2010) as it has acquired five companies and expanded to Australia, New Zealand and the United Kingdom.
Competition
The company said in its 2012 10-K that it was seeing “increasingly aggressive pricing” on DR from its competitors, and that it might be forced to increase the amount it pays to C&I customers to participate.
Those competitors include privately held Comverge, Inc., whose revenues are about half that of EnerNOC, and Energy Curtailment Specialists. ECS, which operates only in North America, has about 2,000 MW of DR under contract, less than a quarter of that claimed by EnerNOC.
The company also cites competition from natural gas peaking plants, which have benefited from the increased supplies and low price of shale gas.
Nearing the Import Limit
PJM said increases in new gas-fired generation and imports were the biggest contributors to the drop in capacity prices. Most of the nearly 90% increase in imports clearing came from west of PJM.
At the Markets and Reliability Committee meeting Thursday, Andy Ott, PJM’s senior vice president for markets, said the almost 7,500 MW of capacity that cleared from outside the RTO “is pretty close to the limit” on PJM’s import capability.
Ott said almost two-thirds of the imports has firm transmission into PJM and another 20% has firm transmission on part of its path. “It [imports] does have some risk, but we don’t view it as a large risk,” Ott said.
Impact on Utility Stocks
Transmission constraints caused prices to separate within the RTO: Prices in the MAAC region cleared at $119/MW-day, double the RTO’s $59, while the Public Service zone in New Jersey cleared at $219, more than three times as high.
There also was a separation in the response to utility stocks following the auction.
Prices dropped 68% in ATSI, home to FirstEnergy in northern Ohio and PennPower in western Pennsylvania. FirstEnergy’s stock is down 9% through yesterday.
Prices in MAAC dropped 29% and utilities in the region (Pepco Holdings, including Atlantic City Electric and Delmarva Power; Exelon’s PECO and Baltimore Gas and Electric, PPL, ConEdison’s Rockland Electric Co.) fell from 3% to 9%.
New Jersey Impact
Prices in the Public Service region increased 31% while PSE&G’s stock dropped 3%.
New Jersey has agreed to provide almost $3 billion in subsidies to three proposed natural gas plants in the state, but one of them, NRG Energy’s proposed plant in Old Bridge, N.J. failed to clear the capacity auction for the second year in a row.
NRG spokesman David Gaier declined to say yesterday whether the company would proceed with the project. “We’re gong to look at our options over the next several weeks,” he said.
