We are a clean energy company providing technologically advanced demand management solutions and load capacity which improve the evolving Smart Grid. We provide our solutions to electric utilities, grid operators and associated electricity markets. As an alternative to the traditional method of providing capacity by building a new power plant, we deliver our solutions through demand management products, services and systems that decrease energy consumption. Our demand management solutions utilize state-of-the-art advancements in hardware, software, and services—the solutions are designed, built and operated for the benefit of our customers, which serve residential, commercial and industrial consumers. We provide capacity to our customers either through long-term contracts or through open markets where we actively manage electrical demand or by selling demand management solutions to utilities that operate such solutions. The capacity we deliver is more environmentally friendly and less expensive than conventional alternatives and has the benefit of increasing overall system reliability.
We believe we are the largest demand management service provider servicing all classes of energy consumers: residential, commercial and industrial. As of the date of this filing, we had 1,015 megawatts under long-term capacity contracts which we expect to contribute to contracted future revenues of $498 million. Of these amounts, 117 megawatts of capacity under long-term contracts representing an expected $32 million in contracted future revenues, are still awaiting regulatory approval. Furthermore, we have been awarded 683 megawatts of capacity in the 2012- 2013 PJM Economic Load Response Program, or ELRP. If we receive all necessary regulatory approvals and we secure enough load to fully meet our obligations under the 2012-2013 PJM ELRP, our total megawatts managed will exceed 3,300.
We provide our clean energy solutions through our three reporting segments: the Utility Products & Services segment, the Residential Business segment, and the Commercial & Industrial, or C&I, Business segment. The Utility Products & Services segment sells solutions comprising hardware, our Apollo® software and services, such as installation, marketing, IT integration and project management, to utilities that elect to own and operate demand management networks for their own benefit. The Residential Business segment sells electric capacity to utilities under long-term contracts, either through demand response or energy efficiency, primarily through marketing and installing our devices on residential and small commercial end-use participants. The Residential Business segment also provides marketing services. The C&I Business segment provides demand response and energy management services to utilities and associated electricity markets that enable commercial and industrial customers to reduce energy consumption and total costs, improve energy infrastructure reliability and make informed decisions on energy and renewable energy purchases and programs.
The Comverge Solution
Our clean energy solutions enable our electric utility industry customers and open market operators to address issues they confront on a daily basis, such as rising demand, decreasing supply, fluctuating commodity prices, reducing greenhouse gases and emerging mandates to use energy efficiency solutions to address these issues. Our solutions consist of energy efficiency and demand response offerings. Our energy efficiency offerings allow utilities to reduce base load capacity which helps to improve system reliability. Our demand response offerings enable our customers to reduce demand for electricity during peak hours, when strain on the system is greatest.
More specifically, our solutions yield the following benefits to our commercial and industrial customers, electric utility industry customers and open market operators:
Improve the Developing Smart Grid through Advanced, Multi-functioning Solution Sets. We offer our customers demand management solutions to match their needs for improving and advancing a smarter electrical grid. Our state-of-the-art Apollo software system provides demand management functionality, enabling control of various end-use devices and systems, integration into the utilities back office operational systems, and interoperability with Advanced Metering Infrastructure, or AMI. In conjunction with our software, our solution set includes multiple service offerings, including engineering and energy audits, project management, installation, marketing, measurement and verification, among others. These services allow our utility customers to tailor their programs to achieve better marketing penetration rates, lower installation costs, and real time verification of the functionality of their system. Our hardware products complete our solution set through offering technologically advanced functionality for various residential and C&I demand management devices. Through providing a solution to our customers’ issues, we are able to offer our own individual products and services, or integrate other companies’ products into our solution – ultimately improving the developing Smart Grid.
Provide an Alternative to Building Expensive New Plants and Associated Transmission and Distribution Infrastructure. We reduce our customers’ capital expenditures and costs for electric transmission and distribution. Our solutions can be directly substituted for new power generation facilities that would otherwise be built to satisfy either peak periods of electricity demand or the expected increase in base load demand. Our demand management systems require significantly lower short-term capital expenditures than a natural gas-fired power plant, and our pay-for-performance capacity solutions require no capital expenditures on the part of electric utilities. By avoiding the build-out of new generation, utilities can also avoid building the incremental new transmission and distribution assets needed to bring power from the location where it is generated to where it is consumed, thereby further reducing required capital expenditures.
Improve System Reliability and Operational Flexibility. Our clean energy solutions enhance the reliability of the electric grid by providing the ability to reduce power consumption in specific distribution areas during times of peak energy demand and emergency conditions, thereby relieving strain on the aging grid infrastructure. With our demand management systems, our customers gain the benefit of more reliable infrastructure and lower operating costs associated with fewer emergency maintenance and customer care issues. In addition to improving system reliability, our targeted approach focuses on specific distribution areas which may also reduce or delay the need for new capital investment in transmission and distribution infrastructure. For example, once deployed, our Virtual Peaking Capacity®, or VPC, and our turnkey programs become operational, or ramp up, much more rapidly than natural gas-fired power plants. Our clean energy solutions typically require less than five minutes to reduce and to shift the amount of energy consumption. In addition, our technology enables devices to be controlled both individually and in clusters, thereby allowing those devices to be operated at the time and location (i.e. at a substation, circuit or feeder) required to manage localized constraints and/or emergency conditions. We are also a curtailment service provider in demand capacity markets in certain service territories across the United States. Several major grid operators, including PJM Interconnection, New York Independent System Operator, New England Power Pool and Electric Reliability Council of Texas, have active demand capacity markets in which our commercial and industrial consumers participate through our demand response solutions. We first identify available demand response capacity and then register and facilitate the sale of that capacity in the open market on behalf of our commercial and industrial participants.
Save Costs for Electricity Consumers. Certain of our solutions enable residential, commercial and industrial consumers to receive time-of-use electricity price signals, thereby allowing them to match electricity use with the costs to purchase such electricity. Consumers who deploy our solutions can realize cost savings on their electric bills by using less energy, particularly during peak periods when prices are the highest, or shifting their usage to times when electricity is less expensive.
Conserve and Create a Positive Environmental Impact. Our demand management solutions allow electric utilities to reduce both peak and permanent load through our demand response and energy efficiency programs, respectively. Our demand response programs provide electric utilities with similar functionality to the peaking capacity typically provided by natural gas-fired power plants while also providing clean alternative energy. By reducing electricity demand during peak times, our demand response programs also have the potential to displace older, inefficient peaking power plants and can reduce the operating time of intermediate plants. By substituting our programs for new natural gas-fired power generation facilities, utilities are able to conserve electricity and reduce greenhouse gases and pollutants.
Enable Electric Utilities to Meet Regulatory Mandates. Federal and state legislation over the past five years has stimulated the developing Smart Grid and has mandated that the Federal Energy Regulatory Commission and the Department of Energy provide detailed assessments and recommendations for demand response initiatives. We work closely with federal and state regulators and electric utilities to formulate and coordinate effective demand response solutions in light of these regulatory developments/mandates. This legislation also calls for advanced technologies for demand response, energy efficiency, smart metering, and distributed generation, including digital information capabilities to implement these technologies. This includes a Smart Grid policy using a national task-force, modernization through deployment of “smart” technologies, a new communications and an inter-operability framework, research and development, and removal of the barriers to Smart Grid roll-out. Federal grants and matching funds are being deployed to spur Smart Grid investments.
We intend to continue to grow and expand our position in the clean energy sector by pursuing the following strategic objectives: Increase Market Penetration. We intend to further penetrate the clean energy sector by:identifying the needs of and providing additional solutions to new and existing customers; securing additional long-term contracts as a growing proportion of our revenues; effectively matching product innovations with the future needs of our customers, including AMI rollouts designed to migrate North America to a smart electricity grid; and
expanding both our sales force and the scope of our commercial and industrial demand response offerings, conservation, energy efficiency solutions and other clean energy alternatives throughout North America.
Expand the Market for our Clean Energy Solutions. We intend to continue demonstrating the effectiveness of our capacity programs in order to secure additional long-term contracts with existing and future customers by:marketing to and educating existing and prospective customers, consumer advocates, consultants and industry experts about the benefits of demand response, energy efficiency and capacity programs; and working with utilities, state regulators and local, state and federal governmental agencies, such as the Department of Energy, the Environmental Protection Agency and the Federal Energy Regulatory Commission, to explain the benefits of demand management and obtain rate treatment similar to supply-side resources, such that electric utilities are allowed to earn a rate of return on the capital invested in demand response resources.
Develop New Distribution Channels Through Strategic Alliances. We are focused on expanding our current strategic alliances and identifying new strategic relationships. We intend to leverage these relationships to achieve greater adoption of our products and services by, and bring new offerings to market for, our electric utility customers through bundled offerings.
Continue to be an Innovative Leader in our Markets. From 2006 to 2009, we invested approximately $7.8 million in research and development alone. We intend to continue such activity, in addition to capturing operational and technical knowledge gained from the AMI, Smart Grid offerings. This will enable us to develop new and innovative solutions to better serve our existing electric utility customer base, large C&I customers, and to appeal to new customers. We believe that this investment will allow us to realize new revenue opportunities and decrease our operating costs, thereby enabling us to remain competitive and to maintain our leading market position.
Pursue Targeted Strategic Opportunities. We intend to pursue strategic relationships and opportunities to strengthen our competitive position in the clean energy sector. This sector is comprised of a number of companies with niche offerings or customer relationships, which provide attractive opportunities, whether through acquisition, partnering, or joint alliances. In addition, we will continue to evaluate international opportunities as they present themselves.
As of December 31, 2009, we reported our results of operations in three operating segments: our Utility Products & Services segment, our Residential Business segment and our Commercial & Industrial Business segment. We evaluate the megawatts of capacity that we own, manage or provide to the electric utility industry according to operating segment. Megawatts owned or managed generate recurring revenue while megawatts provided through product sales generate revenue at the point of sale. The following table summarizes megawatts owned, managed or provided through product sales as of December 31, 2009.