IN THE QUEST FOR

alternative energy, ethanol is harvesting rewards and solar is having its day in the sun, but less light has been shed on an already viable solution to part of the nation's energy needs: "virtual power plants."

The two main companies going head to head in this field are Enernoc, of Boston, and Comverge, of East Hanover, N.J. The companies went public within one month of each other earlier this year and are so far yielding promising returns. Enernoc shares are up over 50% since its initial public offering in May, and Comverge shares have gained about 60% since going public in April.

California's rolling blackouts and the Northeast's major outage several years ago have brought a renewed urgency in the push to modernize the country's outdated power systems. Over the past decade ending in 2006, commercial electricity demand grew 33% and residential demand grew 25%, according to Pacific Growth Equities analyst Richard Rambaldo. At the same time, the country's infrastructure is aging, with more than 70% of transmission lines and electricity transformers more than 25 years old.

Enernoc and Comverge are taking a different approach to solving this problem. Rather than developing new fuel sources, they are focusing on increasing energy supply by reducing demand during peak usage periods. In industry parlance, the companies provide energy-management services.

Enernoc and Comverge don't operate physical power plants. What they do have are IT systems that manage the demand and supply of electricity across a network of local electricity users, such as businesses and office buildings. The goal of these systems is to lower usage when demand and prices are highest and electric grids are under the most pressure. For instance, in the heat of summer when air conditioners are on full blast, Enernoc and Comverge have found businesses willing to have their air conditioners automatically turned off on a temporary basis. In turn, Comverge and Enernoc pay these businesses a fee.

During peak periods, the cost to utilities of providing power can exceed $50 per megawatt hour, or more than 10 times the usual cost, Comverge says. During extreme peaks, the cost can soar to $1,000 per megawatt hour. "We're reducing consumption when they're producing some of the highest-cost power," Enernoc Chief Executive Tim Healy says.

Utilities and grid operators transmit a signal to Comverge's or Enernoc's systems to indicate when they need more electric capacity. Enernoc and Comverge then send signals to local electricity users in their networks, automatically turning off air conditioners, refrigerators and other nonessential drainers of power. This frees up energy that otherwise wouldn't be available. "Thinking about it like a virtual power plant means you don't have to generate new energy to meet demand, you can also control demand," says Lynne Kiesling, a member of Gridwise, a group advocating energy-management technologies, and an economics lecturer at Northwestern University.

Comverge and Enernoc earn revenue from the utilities and grid operators paying for their energy-management services. For utilities, hiring Enernoc or Comverge is cheaper and more politically palatable than the alternative of building new power plants.

One Enernoc customer is Southern California Edison, a unit of Edison International and among those swept up in California's electricity crisis in 2000 and 2001. "If you can get people to take advantage of demand-response programs when there's a supply shortage and price hike, it benefits all rate payers because you can defer putting in new power plants that cost a lot more money," says Bill Bryan, vice president of the business customer division at Southern California Edison.

Don Flynn, senior program administrator at Connecticut Light & Power, a customer of Comverge, says Connecticut has had electricity supply problems during the summer when so many air conditioners are in use. "If we didn't have these programs, we'd have to go out and build a power plant," Flynn says.

Wall Street is bullish on the sector, although analysts don't expect Comverge to post a profit until 2008 and Enernoc is expected to have losses through that year, according to Thomson Financial.

"There is a ravenous demand in America for alternative energy and energy-saving measures, and Enernoc is very well situated to grow at a triple-digit, top-line rate for a number of years," says Tom O'Halloran, director of small-cap growth investments at money management firm Lord Abbett. O'Halloran says the firm increased its positions in alternative-energy companies including Enernoc after oil prices spiked when the Fed cut interest rates in September.

Juliet Ellis, portfolio manager of the AIM Small Cap Equity fund and AIM Small Cap Growth fund at AIM Investments, says she is a holder of Enernoc but not a buyer a current prices. "We're going to pick our price point, but it's a nice portfolio-diversifying company," Ellis says, adding that she sees the company riding "a huge secular trend."

Enernoc shares edged up Thursday to $49.88. Comverge shares gained 7% to close at $38.46, after announcing a contract with Southern California Edison.

In the second quarter, Enernoc's revenue tripled to $12 million and the amount of electric capacity under its management rose nearly fivefold to 756 megawatts. But the company lost $8.2 million, compared with $1.5 million a year earlier. Healy, the company's CEO, says, "We still believe that now is the time not to focus on profitability and cost-cutting. Now is the time to be focused on hiring, training and increasing our engineering and expertise."

Comverge's revenue increased 26% in the second quarter to $4.6 million. It also had deferred revenue of $14.4 million, up 8% from a year earlier. The company posted a loss of $4.4 million, improving from a loss of $5.2 million the year before. Existing contracts represented 495 megawatts of potential electric capacity, up 125% from the year-ago quarter.

One risk for both companies is that they currently rely on a small number of big customers for their revenue. Enernoc, as of the second quarter, derived 52% of its revenue from grid operator ISO New England, and revenue from its three largest customers accounted for 89% of its quarterly total. Comverge's three largest customers accounted for 47% of its revenue in the June quarter.

There's also a chance that utilities will opt to develop their own energy-management technology in-house. But state regulators justify their existence at least in part by keeping electricity rates low for customers, which is why building new infrastructure can be a tough sell if there are cheaper alternatives. For now, at least two of those alternatives are Enernoc and Comverge.