Beware of the Bundle! The Whole Can Be Less than the Sum of Its Parts
NRG’s 2013 acquisition of ECS is the latest in a series of purchases of pure-play Demand Response providers that is helping retail energy providers (REPs) shore up their demand side management offerings. NRG is following in the footsteps of competitors Constellation Energy Group, which bought CPower; Honeywell International, which purchased Akuacom; and Johnson Controls, which acquired EnergyConnect back in 2011.
Why are these acquisitions important? One big reason is that the Demand Response market is growing. According to Navigant Research, “The industrial peak load reduction will grow from 26.8 GW in 2013 to reach 62 GW by 2019… and about $1.8 billion will be paid to these customers globally in 2013, increasing to about $4.3 billion in 2019.” Further, Navigant projects Automated Demand Response (ADR) programs may be an additional $1.7 billion dollar industry by 2018.
Given the dollars involved, large REPs, whose primary business is providing power to customers, are now also looking to provide Demand Response programs and automation (ADR) services in order to:
- Attract prospective customers with a differentiated, bundled product offering; and
- Increase revenue and margin by offering multiple products to existing customers.
While this strategy may be beneficial to the vendor and be a convenient “one-stop shopping” experience that delivers incremental value to the customer, it may come at a steep premium. Often the whole can be less than the sum of the parts, particularly if a customer is unaware of current market trends or does not have access to objective energy experts.
Below are details from a deal World Energy Solutions recently brokered, where the customer could have left over half a million dollars on the table with the bundled offer. The customer in the PPL service territory (Mid-Atlantic) uses 20 million kWh annually with a 2,000kW peak.
Offer from REP
The current REP offered the customer a supply price of $0.068 per kWh for their electricity load on a 3-year agreement. In turn, the REP would provide Emergency Demand Response services and give the customer 100% of what is earned through participation (the REP normally keeps about 25-30% for managing these programs). So, to the customer, it looks like the demand response piece is a real value.
- 20,000,000 kWh * $0.068 per kWh = $4,080,000 million in energy cost over 3 years
- 2MWs of demand response in PPL = $335,594 in earnings over 3 years
Total cost over 3 years = $3,744,406 ($4,080,000 commodity cost – $335,594 DR benefit)
The customer decided to seek a second opinion, and, by pricing the components separately, improved its deal dramatically. Through a competitive pricing mechanism, the customer received offers of $0.58 for supply, and we helped them retain 85% share for DR.
- 20,000,000 kWh * $0.058 = $3,480,000 in energy cost over 3 years
- 2MWs of demand response in PPL * .85 = $285,254 in earnings over 3 years
Total cost over 3 years = $3,194,746 ($3,480,000 commodity cost – $285,254 DR benefit)
The resulting difference in cost is $549,660 over a 3 year period.
In this case, the whole was less beneficial than the sum of the parts, a conclusion that would have been difficult for an end-user to tease out on their own.
While we see REPs offering more sophisticated products and services with the acquisition of Demand Response providers, this trend may not benefit customers. It is becoming more important than ever for large energy users to work with expert, objective third-party energy management firms to tease out the underlying value from bundled offers. Going through a competitive procurement process can help assure your next energy buy is really the best one for your organization.
Phil Adams is Chief Executive Officer of World Energy Solutions, Inc. (www.worldenergy.com; NASDAQ: XWES), a leading energy management services firm headquartered in Worcester, Mass. He can be reached at email@example.com 508-459-8100.
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