GE Digital Energy on why it invested in Raleigh startup PoGens:

“Lately, we have seen a growing trend within the utility industry–a shift to grid management software implementation to improve efficiency and resiliency of distribution grids. Our cloud-based SaaS platform improves the functionality of a utility’s grid and helps enable the company to address long-term energy challenges and meet growing customer needs. Our relationship with PoGens will help to strengthen our current Grid IQ SaaS offering and will allow us to provide additional value to customers who are looking for power predictability and reliability without incurring the high costs associated with buying emergency power during extreme weather events.” -Todd Jackson, product line leader-software solutions, GE Digital Energy

RALEIGH, N.C. – Losing power during a natural disaster strikes fear in the hearts of business owners. But Jim Szyperski sees outages as opportunities.

Because losing power can mean losing money, many businesses keep back-up generators that kick in when the lights go out. During those infrequent but untimely events, generators represent a good investment. But the vast majority of the time those generators do nothing, said Szyperski, CEO of Raleigh company Power Generation Services Inc., or PoGens.

Large companies participate in energy programs that pay them to cut their power use at times of high demand and run on their own back-up generation instead. But smaller businesses don’t have the scale to participate in such programs. For most businesses, generators are a temporary measure to keep operations running until the main power grid returns. Szyperski estimates a typical business might use its generator less than 20 hours per year. PoGens operates on the idea that small businesses can run back-up power more often and make money doing it.

“If I could show you how you could use that (back-up power) more frequently, you could participate in these markets,” Szyperski said. “It would provide a way to pay for that asset but it also becomes a revenue generator for you.”

In North Carolina’s regulated electricity market, power customers don’t have a choice of providers. Duke Energy (NYSE: DUK) controls most of the electricity generation and transmission in the state. Like North Carolina, most of the Southeast’s electricity markets are noncompetitive and thus, regulated.

But 29 of the 50 states have deregulated markets that allow customers to choose among providers, Szyperski explained. These are the states where PoGens prospects for business.

PoGens’ technology

PoGens’ technology is a combination of hardware and software; the company’s proprietary software determines when it’s advantageous to turn use backup power and a device at the site of the customer turns the generator on or off. The decision whether to use power is based on a profile that the customer sets up with PoGens. A customer that operates a chain of stores, for example, could set in its profile which sites would divert to back up power and which ones would not.

Circumstances that spike power prices trigger “demand response” programs, programs designed to reduce power load borne by the grid at times of high demand. These circumstances could include hurricane or an ice storm. Regional organizations set up by the Federal Energy Regulatory Commission that manage and monitor the electrical system run the demand response programs.

PoGens’ technology enables small power customers to participate in demand response. A power customer called upon to run on its own power instead of taking power from the grid will be paid for whatever the price of electricity is for the duration of the high demand, as long as the customer can measure and verify its power generation. PoGens’ technology does that. A small business on its own wouldn’t be big enough to participate in these demand response programs. But PoGens aggregates disparate power assets to achieve enough energy capacity and the company manages it for these smaller program participants. In exchange, these companies split with PoGens whatever they’re paid for operating their generators during the demand response. Depending on the duration of the outage and the number of sites participating, payments could reach the tens of millions of dollars.

“If all you do is turn on a generator because there’s no power, you’ll get paid for it now,” Szyperski said. “It’s very significant and all you’re doing is what you’d be doing anyway.”

Back up generation is a big deal for industrial users, which represent the most intensive users of electricity. Wake Forest-based PowerSecure (NYSE:POWR) plays in this space. PowerSecure supports the backup generation needs of industrial users and other large business customers. The company installs backup generation and helps businesses manage this power use, including participation in demand response programs. But unlike PowerSecure, PoGens doesn’t install generation. And Szyperski said that PowerSecure is going after larger customers than those targeted by PoGens. PoGens’ roster of clients includes big box stores with multiple sites, cell tower operators and other businesses that routinely keep generators on site to provide back-up power.

GE invests in PoGens

PoGens technology was developed right here in the Triangle. But Szyperski said that PoGens has kept a low profile, even after launching its offering a year ago. The company has spent much of the last four years securing its intellectual property.

Raleigh investment firm Cherokee was an early PoGens investor. The company is also a portfolio company of Atlanta private equity firm MSouth Equity Partners. MSouth, which has more than $700 million under management, focuses on investments in companies in the South valued at between $25 million and $125 million.

Energy industry interest in PoGens technology was demonstrated in a big way through a recent equity investment from General Electric (NYSE:GE). Beyond infusing PoGens with an undisclosed amount of capital to secure a minority stake in PoGens, the deal means GE and PoGens will also work together on projects.

Szyperski said the relationship will be complementary. GE makes large energy management systems that cover a broad geographic footprint. Meanwhile, PoGens reaches customers too small for GE.

“We’re used to going out and working with a customer or a site in a city,” Szyperski said. “They’re used to going out and working with an entire city.”

Szyperski projects that PoGens’ headcount will be 55 at the end of the first quarter. The partnership with GE won’t trigger a massive expansion. As a primarily services-oriented business, PoGens can add more business without necessarily adding more people, Szyperski explained.

In the second half of 2014, PoGens could add some people in sales as well field technicians. PoGens is staffed by utilities and telecommunications industry veterans, including former workers of Duke, Progress Energy and Constellation Energy.

Szyperski expects that prevailing energy industry trends will offer more opportunities for PoGens. Utilities aren’t building new nuclear plants and many of them are shutting down coal-fired power plants. Utilities will need to find new sources of electricity generation.

“We have lots of it lying around,” Szyperski said. “We’re just not using it.”