BANGALORE/LONDON (Reuters) - U.S. demand-response companies are expected to aggressively expand into UK, where rising power prices and increasing demand offer them the perfect opportunity to diversify from a saturated domestic market and cut overdependence on their main customer, PJM.
Companies such as EnerNOC (ENOC.O) and Comverge Inc COMV.O work with grid operators, utilities and consumers to lower demand during peak hours when rates are highest. They pay customers who save power and provide grids with the extra capacity to avoid blackouts.
Analysts and investors are critical of the companies' overdependence on one big customer, PJM, which runs the power grid and energy market serving 51 million consumers from New Jersey to Illinois.
PJM wants to cap payments made by utilities to demand-response vendors when customers save power beyond a set threshold to avoid a practice called "double counting."
Apart from PJM's stranglehold on the sector, saturating domestic markets is also forcing these companies to consider opportunities elsewhere.
And the UK's role as a "beachhead into Europe" makes it the best bet to diversify, according to brokerage Raymond James.
"You can see us sort of entering the UK and potentially that serves as a stepping stone into Continental Europe, where we can use that base and that experience as a hub," an EnerNOC executive said at the company's analyst day last month.
EnerNOC stepped outside of North America for the first time in 2009, when it started operations in the UK by offering megawatts with Britain's biggest energy distributor National Grid's (NG.L) Short-Term Operating Reserve program.
According to industry regulator Ofgem, the six biggest utilities in the UK supply over 99 percent of all electricity, with rate hikes looming on the horizon.
British wholesale gas prices are currently around one quarter higher than levels in January, pushed up by a tightening in the global LNG market -- key to Britain's gas supply -- due to unrest in gas-producing countries such as Libya and Yemen and the nuclear crisis in Japan.
In response, utilities Centrica (CNA.L) and Iberdrola's (IBE.MC) Scottish Power have already hiked tariffs. Analysts say the remaining, including Scottish and Southern Energy (SSE.L) and RWE's (RWEG.DE) npower, are also likely to hike prices soon.
IMS Research analyst Donald Henschel said peak energy management through demand response and sourcing energy from outside the home grid was compelling in the face of relatively high electricity costs in the UK compared to the U.S.
"Longer term, UK's aggressive renewable energy goals, fairly large size, and deregulated market structure make it one of the best potential regions for demand response," Pacific Crest Securities analyst Ben Schuman said.
With a quarter of the UK's generating capacity shutting down over the next 10 years as old coal and nuclear power stations close, more than 110 billion pounds of investment is needed to build the equivalent of 20 large power stations and upgrade the grid, the country's government said on Tuesday.
"The government will need to make sure that the broader policy framework supports the development of appropriate consumer offers and incentives to participate in demand response," according to a white paper presented by the UK's energy secretary.
The mass roll-out of smart and advanced meters, which the government expects to complete in 2019, is seen as an important first step for demand-response services in the domestic and commercial sectors.
A joint report by Capgemini, VaasaETT and Enerdata shows that demand response alone could achieve between 25-50 percent of the European Union's 2020 targets for energy savings and CO2 emission cuts -- avoiding investments to the tune of 50 billion euros for peak-generation capacity.
While IMS Research's Henschel said it could be challenging for multi-national service providers to get a footing in the UK, he maintains an opportunity exists.
"While there is opportunity for them (demand-response companies) to go elsewhere, the specific model they built in the United States will take significant rethinking to be successful elsewhere," he said.
Investors, however, prefer to see the companies expanding overseas, evident from the rise in Boston-based EnerNOC shares following its acquisition of the top energy demand-response provider in Australia and New Zealand, Energy Response.
"EnerNOC is well positioned to get 100 MW-plus contracts in the United Kingdom, South Africa, the Middle East and elsewhere. Further M&A is likely, as the cash balance should remain steady at $100 million throughout the rest of 2011," Pacific Crest's Schuman said.
Smaller rival Comverge, too, is keen to carve out a niche for itself, and recently created the position of international business head.
"We made that decision very deliberately," Comverge CEO Blake Young said.
"It was based on a lot of confidence in the potential pipeline that we are evaluating for international projects."
(Reporting by Krishna N Das in BANGALORE and Adveith Nair in LONDON; Editing by Sriraj Kalluvila)