Power In Numbers
Genscape's data is bringing the $300 billion electricity market out of its information dark age.
(Business 2.0) – Imagine trading stocks with no data about other people's transactions and no news about the companies whose shares you're buying—no Dow Jones, no Bloomberg, no Maria Bartiromo. That's what it was like, until recently, to buy and sell energy in the $300 billion U.S. power market. Electricity is the only commodity in the world that's traded every hour of the day, and in the absence of timely information, prices often fluctuated wildly. Even guesses about supply and demand were hard to come by: In its heyday, Enron hired students to camp next to power plants and phone in reports of active smokestacks.
Now two entrepreneurs from Louisville, Ky., are shedding light on the power market—and making millions in the process. They've figured out how to collect data, literally out of thin air, on how much electricity companies are making and selling. Their service is so valuable that virtually every major utility is a subscriber. Think of their firm, Genscape, as the Bloomberg of power: Without Genscape's feeds, producers and traders alike are crippled against competitors.
Genscape is what new-economy pundits call an infomediary—an aggregator of raw information that interprets data and then sells it to others. Other examples include IMS Health, which collects pharmaceutical sales figures that drug manufacturers use to calculate their market shares, and mortgage aggregator Lending Tree, which gathers information about interest rates and loan terms for homebuyers. There's also Nielsen Media Research, whose "People Meter" set-top boxes measure television viewership for networks and advertisers.
But unlike the couch-potato volunteers who allow Nielsen to record their TV-watching, utilities want their behavior kept secret. Governmental bodies such as the Environmental Protection Agency and the Nuclear Regulatory Commission collect and disseminate data on power generation, but their reports—spotty and as much as six months out of date—do little to make markets transparent. As a result, during the late-1990s boom, power prices often soared, from $50 per megawatt-hour to as high as $10,000—especially when, say, a big Pennsylvania coal plant went offline. In the era before Genscape, such an outage might have remained secret forever. But now other utilities can immediately step in to replenish supply—and turn a profit. "You can quickly call a plant that's tripped offline and offer to sell them power for a bit more than you otherwise would," says John Swez, manager of generation at Ohio-based producer Cinergy. Consumers also benefit because the information stabilizes prices: These days it's increasingly rare for power rates to top $1,000 per megawatt-hour.
The Network Effect
In 1999, Genscape founders Sean O'Leary and Sterling Lapinski were themselves frustrated energy traders when they came up with a cheap, effective way to monitor how much power is flowing in and out of plants by adapting the testing gear used by utilities when laying transmission lines. With $200,000 in seed money, they quit their jobs and began building a network of 1,300 sensors—each of which measures the electromagnetic fields near a power line—to essentially spy on utilities. Of course, no plant would ever cooperate to tell competitors how much energy it's producing. (Would CEOs report stock sales if they weren't required to by law?) But O'Leary found that farmers within a few miles of plants were happy to host sensors in their fields for nominal rent. Today, more than 50 of Genscape's 80 customers are the very utilities on which it's snooping. "You're more or less forced to buy Genscape's data to know what everyone is doing," Swez says. "But our plants are on there too, and we don't like that."
Utilities pay Genscape hundreds of thousands of dollars a year—Genscape won't disclose exact pricing but says 2003 subscription revenue totaled $6.5 million—for power-production data that can be worth many times that amount. For example, above Cinergy's trading floor, an 8-foot-wide screen displays Genscape's color-coded map of power plants; when a competitor trips, Cinergy traders buy long positions in power (because a reduction in supply usually means prices will rise). Genscape also keeps utilities honest when they do deals with each other for backup power during outages. Aquila, a Kansas City, Mo., utility, had such an arrangement with a Texas plant, in which Aquila would provide emergency power at just $50 per megawatt-hour. During a cold snap in January 2003, spot prices soared to $999 and the Texas plant called to say it was down and wanted Aquila to make good on the contract. But an Aquila employee learned the truth through Genscape's data. "They were generating 125 megawatts," recalls the employee, who requested anonymity. Aquila saved about $250,000 in two weeks by not delivering power.
Natural Gas Next?
Genscape has spent $10 million so far building its sensor network, which currently monitors half of the largest U.S. power plants. The company's founders are now setting their sights on another large sector: the $250 billion natural-gas industry. Like the power market four years ago, it's plagued by volatile prices, and the primary source of information for traders is a weekly Department of Energy report that's often two weeks stale when it's released. Genscape is already installing a pilot network to monitor gas stocks at the nation's big depots in real time.
O'Leary and Lapinski are mum on how the gas sensors work, at least until their patent application is accepted. Of course, to transplant their model to gas, they'll have to prove the accuracy of their data, just as they did with electricity. Genscape salesman Mike McAuliffe still recalls doing a phone demonstration for a North Dakota coal-fired plant when its manager questioned Genscape's reliability. During the call, McAuliffe noticed a Genscape monitor showing the man's facility suddenly going down. "I told him, 'Sir, I think your plant just tripped,'" McAuliffe recounts. There was a long pause, followed by an abrupt hang-up. Two weeks later, Genscape had a new subscriber.