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Google and Nest: What the $3.2 Billion Deal Says about Energy Efficiency Markets

nest_thermostat_with_hand (1)A collective “wow” echoed throughout the energy efficiency industry this week when Google announced its purchase of thermostat maker Nest for a smashing $3.2 billion.

It is the first marquee deal to emerge since tech ventures began grasping for the new prize in energy: the home efficiency market.  The game has been to figure out how to get enough homeowners to save energy so that the kilowatts add up to megawatts and truly influence energy markets. Nest, with its Learning Thermostat, thinks it has the answer. And Google apparently agrees.

So what does this deal tell us about the state of the energy efficiency market? We asked some thought leaders this question (once they got back on their chairs.)

Here were the five main takeaways:

  1. The home energy efficiency industry is now clearly on its way to scale thanks to its courtship with Silicon Valley.
  2. This is good or bad for utilities – depends on the utility.
  3. Home energy efficiency smart gadgets and cloud devices are acquiring an IPhone kind of cool. Automation is key.
  4. But don’t expect it to be all uphill from here. It’s a tough market. Consumers get bored fast.
  5. Watch Opower.

Beachhead deal

The Google/Nest deal is a “the beachhead for the home energy network,” said R. Neal Elliott, associate director for research at the American Council for an Energy-Efficient Economy. “It tells you that energy efficiency, at least from the investor community perspective, is a real deal here.”

For Google’s part, it is looking for new growth markets, and seems to have found it in Nest, according to William Prindle, vice president for ICF International. Google has tried before to get into the energy monitoring business with a software product, PowerMeter, which it dropped in 2011 amidst problems getting access to customer utility data.

“Nest gives them a direct line into users’ data, though what kind/how much data remains to be seen,” he said.

Utilities take heed

Prindle pointed out that Google “would rather work with utilities than against them.”And Elliott noted that Nest creates an “attractive path for implementation with utility programs.” National Grid, Austin Energy, Southern California Edison and others already are partnering with Nest, providing rebates for the thermostats and offering its “Rush Hour Rewards,” an automated demand response program.

But the Google deal does not bode well for all utilities, according to Adrian Tuck, CEO of Tendril. In fact, it signals that many could become “spectators in the battle for engaged consumers.”

Utilities do a poor job engaging consumers – a problem in an era when consumers want “personalized and targeted services in all aspects of their lives,” Tuck said. “Google recognizes this, and with the acquisition of Nest, is one of the companies lining up to battle over who provides energy-related services to the home.”

How can utilities remain active players as the competition heats up? Stay agnostic, let go of the commodity model, and become a service business, Tuck said.

“Syndicates are forming to provide compelling solutions into the home (with Google/Nest being an example of one).  From a service provider perspective, some will go all in with one syndicate or another, others will try to stay neutral and work with all the OS providers for the home.  I strongly suspect utilities (the ones that want to become service providers rather than commodity businesses) will be in the latter camp, and companies like Tendril will help them provide services for whatever turns up in the home.”

How many utilities get it? Tuck sees only about 20 percent as forward-thinking. The rest, he said, rely on a false sense of comfort. “Just like any other industry, those that took a risk by acting before all the data was available are the ones likely to achieve the most success.”

But for those utilities fully in the energy efficiency game, the Google/Nest deal underscores their mission. National Grid, which invests more money in energy efficiency than any other U.S. utility except possibly PG&E, had positive things to say about Google/Nest.

“This partnership could be an example of how a free market and competition can influence technology development and innovation, ultimately leading to more customer choice, input and ultimately energy independence,” said Fred Kuebler, director of U.S. Media Relations for National Grid.

What $3.2 billion means

The deal also underscores the movement in the energy efficiency industry to think more like Apple – to create products with strong consumer appeal. Nest co-founder Matt Rogers is an Apple veteran and one of the early engineers who worked on the iPhone. Nest aimed for an Apple-like simplicity and intuitive design for its thermostat. For example, users don’t have to program temperature settings on a Nest thermostat; it learns based on their early settings and builds a personalized schedule.

“I think this deal gives the EE market 3.2 billion reasons to focus on compelling consumer value propositions and design thinking,” said Andy Frank, president of Sealed. “In practical terms this means downplaying companies with an engineering mindset and promoting companies with a design and sales mindset.”

Mei Shibata, co-Founder of ThinkEco and partner at utility consultancy Akasaka, says that the $3.2 billion price tag sends a message to consumers that they are doing the right thing if they are pursuing energy efficiency.

But don’t think the work is done selling energy efficiency, she warns. Consumers are easily distracted.

“I think the pendulum will continue to swing back and forth for a while longer. Yes, this acquisition shows that connected home devices have entered the mainstream and are mature enough to interest the Googles of the world. Yes, I think that consumers are engaging with their devices and finding the two-way feedback on energy savings cool. But I don’t believe it’s a permanent shift yet,” she said.

ThinkEco, maker of the modlet, has been working for three years with Con Edison on an air conditioning demand response program, coolNYC. During that time, Shibata has seen consumer interest wax and wane.

“It’s almost like a relationship – in the beginning, people are super excited and energy efficiency can do no wrong. But then the honeymoon period is over and people realize that energy efficiency has to fit into their lives or else they’re ditching it, so they pull back a little. And then eventually, they find a personalized level of involvement that makes sense in the long run – it may continue to be about energy saving or it may become more about convenient remote control of their AC,” Shibata said.  “All through this evolution, continued positive reinforcement is critical because people aren’t really sure of their relationship with energy saving yet.”

So what’s next? Where will the next big deal come from? It’s hard to say, but a lot of eyes are now on Opower, Elliott noted. The company is another high profile player in home market, with a strong focus on behavioral energy efficiency. (Opower is rumored to be readying an IPO.)

So what does Opower think of the Google/Nest deal?

“Google’s acquisition of Nest helps validate that consumers are interested in well-designed, information-based products to help them control their energy use and improve their quality of life,” said Dan Yates, Opower’s CEO and co-Founder. “The opportunity for people around the world to save energy is vast, and utilities deploy Opower solutions to help address this opportunity across every market demographic. We’re only at the beginning of what can be accomplished when data-driven products are put to work in the market.”

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Elisa Wood About Elisa Wood

Elisa Wood is an editor at EnergyEfficiencyMarkets.com. She has been writing about energy for more than two decades for top industry publications. Her work has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.

Comments

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