Wall Street analyst and smart grid insider Andrew Weisel covers utilities and smart grid for Macquarie Group Limited, where he has become one of the sector's most influential voices. He recently warned clients that demand response in general and sector leader EnerNOC in particular may soon face serious hurdles. As far back as December 2010, I was talking about the assault on EnerNOC. When I read Andrew's remarks, I asked him to share his reasoning with you. – Jesse Berst

By Andrew Weisel

First, we note filings from the California Public Utility Commission, Cal-ISO and the Edison Electric Institute all pushing back against the FERC Order 745, which determines DR compensation in organized power markets. Though the issues are not entirely new, we worry that the bad economy and waning regulatory support may result in decelerating growth for the DR market.

Second, last month in Maryland, EnerNOC and other DR providers reduced contracts with utilities. The DR companies were unable to contract with enough customers to secure the previously agreed-upon megawatt targets. Specifically, EnerNOC cited "substantial competition," among other issues. Yes, Maryland has among the highest penetrations of DR in the country. Yes, there are plenty of other opportunities in other states, even just those states within PJM's territory. Even so, we worry that this may be the first warning sign of market saturation, not for reliability concerns, but rather for a lack of demand from end users who could be profitable DR participants.

Third, several parties oppose a recent settlement between the EPA and a consortium of demand response providers (including EnerNOC) about the use of backup diesel generators. Under the settlement, users could operate diesel generators and other reciprocating combustion engines for up to 60 hours per annum. (Up from 15 previously.) However opponents -- most notably Monitoring Analytics (the PJM market monitor) and Calpine -- contest the settlement. They claim that DR providers using such generators don't actually cut energy consumption. What's more, they increase emissions since those backup generators rarely have environmental controls.

Moreover, the need for DR may lessen in some parts of the country. The ongoing economic weakness, the mild winter, the EPA rules that were less stringent than expected and the recent uptick in plans to build new physical generation should alleviate market tightness in certain regions.

What do you think? Is DR in for tough times ahead? Use the TalkBack comment form below to share your thoughts.

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