Today, World Energy [NASDAQ: XWES] announced a partnership with Alban Engine Power Systems, a Maryland-based Caterpillar [NYSE: CAT] equipment dealer, to offer demand response capabilities to existing service agreements for standby power systems clients.

What's the significance?

Alban executives say they have about several thousand downstream clients, and have identified 1,000-1,500 of them – with standby power systems around 1MW or more and all in the PJM power grid – for demand response activities. Alban expects its efforts to amount to about 1,500MW of capacity, which World Energy is to then auction to curtailment service providers on its World DR Exchange auction platform.

With demand response dominated by three big firms – EnerNOC [NASDAQ: ENOC], Comverge [NASDAQ: COMV] and privately held CPower – this news may not seem like much capacity. Until you realize it’s nearly half of what Comverge controls, about equivalent to the output of three of the U.S.'s smaller coal-fired power plants.

And it’s only a single partnership channel that, if it gets Caterpillar corporate signoff, could be rolled out much wider.

It could also turbo-charge World Energy’s auction platform. Since launching earlier in 2010, the firm has done about a dozen curtailment auctions, totaling about 100MW in capacity.

Theoretically, in an auction business, having CSPs bid against each other for deals should drive down existing hefty margins on these deals – about 30-50 percent of the saved energy’s value – and make the market available to more small participants that have expertise in one sector or subsector, like backup power generation systems.

So is this the beginning of the end of today's CSP business model? Yes…and no.

On the “yes” side, the argument against 50 percent margins over the long haul in a free market system is well established.

As in the equities, commodities and debt markets before them, transactions formerly brokered between two parties, resulting in a large fee for the broker, inevitably become competitive, as more market participants figure out how to either carve out a niche, execute the same deals with less overhead, or simply grab market share as a second or third entrant in an untapped market.

And while firms like World Energy could “automate away” smaller deals by taking lower fees to run an auction, other firms that could look a lot like Caterpillar could continue to add DR as a value-added service to a specialized client base.

At the same time, large multinational firms with a wide footprint and complex operational spheres – WalMart [NYSE:WMT], for example – could bring what they learn from CSPs today in-house. Given the line item costs of energy in some firms, it could warrant the hiring a Chief Energy Officer (Let’s call it a CEnO, or “Chino”, since the good abbreviation is taken by higher up the executive food chain.)

Losing small and large clients, having its lunch eaten at both ends, bodes poorly for EnerNOC and its ilk.

But on the “no” side, there the simple issue of market penetration. Research shows the DR market is expected to grow dramatically in the next several years, from $1.4 billion in 2010 to $8.2 billion in 2020. So this could be a 2025 problem for CSPs, not a 2013 problem.

Knowledge of complex regional energy markets will still be a selling point, since these make for an illiquid market in curtailments. That means today’s CSPs could still find themselves leveraging growing experience to serve a sweet spot of large firms without the desire or skillset to manage operations at that level.

After all, service-centric firms, like in financial services, routinely hire outside software firms and consultants to handle problems they seemingly could staff internally.

More likely, there is room for both for some time to come, one analyst covering both CSPs and World Energy told us.

But while the top CSPs could evolve, it may be tougher for the smaller CSPs without a good niche pitch.

And the wild card in DR could be the reaction of traditional consulting or technology firms, too. Whether it’s a firm like Johnson Controls [NYSE: JCI], SAP [NYSE: SAP] or McKinsey, they could seek to acquire their way into the space.

All said, expect more rapid evolution ahead – DR is headed for interesting times.