Why ENOC Popped on EPA Rule Change
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EnerNOC (NASDAQ: ENOC) popped 25% on January 15, 2013, on news that EPA has relaxed its rules on stationary generators -- including generators utilized during emergency demand response, the core of EnerNOC's provided service. From the EPA rule change published that day:
The EPA is also finalizing limits on the hours that stationary emergency engines may be used for emergency demand response and establishing fuel and reporting requirements for certain emergency engines used for emergency demand response.
The EPA document provides details on how these rules tie directly to what PJM requires from emergency generators in EnerNOC's reduction program:
Soon after the 2010 rule was final, the EPA received petitions for reconsideration of the 15-hour limitation for emergency demand response that was finalized in the 2010 rule. According to one petition, the 15-hour limit, while usually adequate to cover the limited hours in which these engines are expected to be called upon, would not be sufficient to allow these emergency engines to participate in emergency demand response programs since some regional transmission organizations and independent system operators require engines be available for more than 15 hours in order to meet emergency demand response situations. For example, PJM’s Emergency Load Response Program requires that emergency engines guarantee that they will be available for 60 hours per year.
ENOC sued the EPA to relax their stringent rules on diesel & natural-gas generators used in emergency demand response. EPA agreed to re-review their regulations, and has subsequently relaxed the rules based on EnerNOC's petition. Instead of capping generator use at a highly limited 15 hours a year, they instead allow for up to 100 hours a year, with fewer environmental restrictions & reporting necessary.
How does this benefit EnerNOC? From ENOC's PJM FAQ:
Is Economic Demand Response right for me?
Ideal participants in the program have large (>= 1 MW) processes that can be reduced frequently or shifted to off-peak hours. End-users with permitted natural gas generation are also ideal participants.
If a customer has an onsite generator, they can use it during demand reduction periods in order to feed energy back into the grid. This provides the customer the same credit for their energy that a triggered demand reduction would.
So this isn't the demand reduction side of ENOC's demand response business - it's the supply side, which allows customer's to use on-site generators to provide extra supply during demand reduction periods. EnerNOC's customers get full credit from either or both actions (lowering demand and/or increasing supply). It appears PJM requires that EnerNOC's customers with "on-demand" generators must commit to providing a particular amount of use (60 hours per year). EPA was threatening heavy limits & regulations against this use - a major impact to EnerNOC's demand reduction capabilities by curtailing any extra supply it could provide through its customers in addition to lowering demand.
Both Credit Suisse and JPM upgraded price targets in response to the EPA announcement, both stating the ruling "removes an overhang" on EnerNOC.
Not everyone is happy with the EPA ruling. Power-plant supply-side operators like FirstEnergy and Exelon stand to lose, if PJM doesn't need to buy surplus energy in high load periods. Industry analysts continue to expect the regulations around standalone generators to shift - including potential end-runs around the EPA's national regulations with more restrictive state and local regulations.
Matthew Eash owns shares of EnerNOC. The Motley Fool recommends EnerNOC. The Motley Fool owns shares of EnerNOC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!