While the supply side of green energy gets all the attention, those companies focusing on energy efficiency may be the slam dunk. Former Wall Street darlings like Broadwind Energy (Nasdaq:BWEN) sank nearly 71% in 2010 as the smart money in green technology investing shifted from the supply side of the equation to the demand side. Electricity generation capacity is expected to increase by 12% over the next decade in the United States. However, estimates by The North American Reliability Corporation show that demand is set to rise by about 19% in the same time frame. This supply/demand imbalance will be a boon for those companies that manage energy or promote conservation techniques.

TUTORIAL: Brokers and Online Trading

Smoothing-Out Supply and Demand
One component to the smart grid and smoothing out the supply/demand imbalance is the technique of demand response (DR). At its core, demand resp­onse programs allow residential, commercial and industrial users the abi­lity to voluntarily trim electricity usage at specific times. This can be during peak hours with high electricity prices, or during various emergencies including preventing blackout conditions. New advances in smart grid applications and technology will improve the ability of producers and consumers to communicate with each other and make decisions about when and how to produce and consume electricity. The next step in DR would be to add systems automation to the mix. In exchange for various incentives, consumers would allow the utility to automatically turn down or off certain appliances or change the degree settings on HVAC (Heating, Ventilating, and Air Conditioning) units.

A recent study by the Federal Energy Regulatory Commission (FERC) estimated that various demand response services and technologies could reduce peak energy use by 20% by 2019. The technology is already being used as an auxiliary service in some utility markets as a backup service. When a drop in production occurs due to the wind dying down or a transmission line snaps in a storm, DR kicks in. But due to regulatory concerns and payment structures, demand response has not yet reached its full potential. However, that could change with a recent ruling.

The Demand Response sector recently received a favorable ruling by FERC that could potentially change the future landscape of wholesale energy generation. The new rule requires organized wholesale energy market operators to pay demand response resources the market price for energy. This new policy helps put negawatts on the same footing as generating assets and helps give prominence to DR as a piece of the nation's energy mix.

Adding Those Negawatts
With the recent FERC ruling and the increase in worldwide energy requirements, demand response will continue to gain in popularity with utilities and consumers. With the field in its infancy, investors have the opportunity to get in on the ground floor. Funds like the First Trust Nasdaq Clean Edge Smart Grid Infrastructure (Nasdaq:GRID) or smart meter makers like Itron (Nasdaq:ITRI) allow long term investors to tap into the growth of the new electrical grid required to bring DR into the mainstream. However, despite being in its first phases, there are plenty of demand response companies to choose from.

As the major sector leader, EnerNOC (Nasdaq:ENOC) provides demand response and energy management services to a variety of grid operators, utilities, and commercial power consumers. The company recently made its tenth acquisition, purchasing M2M Communications, allowing it to enter the automated demand response market in the agricultural sector. Given the favorable FERC ruling, now may be a good time to buy EnerNOC's shares. Smaller rival Comverge (Nasdaq:COMV) can also be used as play.

Will the market for demand response growing, some major conglomerates are seeing the profit potential. Energy efficiency leader Johnson Controls (NYSE:JCI) recently acquired demand response software company Energy Connect (OTCBB:ECNG), and Honeywell (NYSE:HON) was selected by China's State Grid authority to oversee the feasibility of DR in China. Even Mr. Softy is getting in on the act. Microsoft (Nasdaq:MSFT) has announced plans to get into the demand response software game with its Hohm platform.

Bottom Line
While the supply side of alternative energy gets all the attention from the press, the smart money has been quietly moving into energy efficiency measures. With the recent FERC ruling on pricing and payments, demand response is poised to grow even more in the United States and abroad. Investors with long enough timelines should consider companies in the sector like Digi International (NYSE:DGII). (As investors become more environmentally conscious, the exchange-traded fund market is following. Check out Going Green With Exchange-Traded Funds.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  6. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  7. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  8. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  9. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  10. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center