Google Buys Nest Labs for $3.2B and Gets Back in the Energy Game

By now its old news that Google purchased Nest Labs for a very large sum,,,,in cash no less. This author purchased a Nest early on and has been greatly impressed by its learning capabilities (it knows what days I work from home). The real value in smart thermostats goes well beyond their adaptive learning capabilities, scheduling functionality, or optimization tools. These thermostats represent a grid level resource and are the first step towards a consumer facing smart grid.

For approximately the last 20 years, many utilities around the country have had residential and small commercial demand response programs that have relied on thermostats, electric hot water heaters, and other devices that can be cycled or interrupted by a radio signal sent by the utility. There are several companies that offer this service to utilities and some of the best known would be Honeywell and Comverge. For utilities, residential demand response represents a demand resource at the top of the dispatch stack and consumers typically decide to participate in order to receive a bill credit each month. These programs typically don't involve much consumer engagement and many consumers forget that they are participating in these programs. The graphic below, shown on the Bonneville Power Authority's webpage, illustrates residential demand response 1.0 very well.

Graphic from Bonneville Power Authority's Energy Efficiency webpage. Graphic links to BPA website.

Graphic from Bonneville Power Authority's Energy Efficiency webpage. Graphic links to BPA website.

Residential demand response 2.0 emerged in the deregulated Texas electricity market, known as the Electric Reliability Council of Texas (ERCOT), approximately three years ago. Deregulated electricity markets have become laboratories for consumer facing smart grid technology and ERCOT has led the way in many respects. Over the last three years, nearly every residential electricity customer in Texas has received a smart meter from their utility. The following Texas Investor Owned Utilities (IOUs) have deployed smart meters: AEP Texas; Oncor; Centerpoint; and Texas New Mexico Power. In addition, many of the Co-ops and municipal utilities in Texas have either deployed smart meters or have plans to do so. Smart meters are the first piece in the smart grid puzzle. The second is meter data management.

Each of the Texas IOUs banded together to create a single entity to manage the collection and storage of the vast amounts of data generated by smart meters. This entity is known as Smart Meter Texas and by combining resources, the Texas IOUs were able to create a robust platform for meter data management for all of ERCOT. Oftentimes, smart meter deployments do not live up to expectations due to the massive investment required to modernize utility Meter Data Management Systems (MDMS). When the MDMS isn't capable of handling the "Big Data" from smart meters, the data becomes trapped. We wrote a previous post about this. Each of the Texas IOUs, Smart Meter Texas, and ERCOT invested heavily to ensure that consumers could fully benefit from their smart meters from day one.

The third piece of the puzzle is a deregulated electricity market. In ERCOT, all customers are required to purchase electricity from a deregulated third party electricity supplier. These electricity suppliers must use the interval data that records the usage of their customers to purchase electricity in the ERCOT wholesale electricity market. An electricity supplier in ERCOT has to balance purchases with actual usage as recorded by the smart meters. This is unique to Texas and a handful of other jurisdictions. Most utilities in other deregulated electricity markets use what is known as a "profiled load" for market settlement of residential load and customer interval data isn't a part of the process....presuming its even available.

The ERCOT market can get crazy expensive during the summer months and wholesale prices are allowed to rise as high as $9,000 MWh (that's 9 bucks a kWh). Since deregulated electricity suppliers are fully exposed to these price spikes due to their need to purchase electricity according to the interval metered load of their customers, they have a large incentive to discourage their customers from using electricity during these high priced events. The graph below indicates the real time price of electricity in the ERCOT market on September 3rd, 2013. This wasn't a particularly hot day (by Texas standards), but a generator tripped offline in the late afternoon and the associated loss of supply was enough to make the market very tight. Prices spiked to $4,900/MWh during the interval ending at 5:45 PM. These types of fleeting price excursions are pretty common in the new ERCOT nodal market and they can be very hurtful to deregulated energy suppliers, especially the smaller ones. While this price spike didn't kill any of the smaller suppliers, several of these in a month or a spike lasting more than a few hours would be enough to cull many of the under-capitalized ERCOT market participants.

ERCOT Sept 3rd Price Spike.png

Deregulated electricity suppliers can't directly influence the wholesale cost of electricity and historically they haven't been able to influence the load patterns of their customers. Smart thermostats changed all of that and sophisticated electricity suppliers in ERCOT have been using thermostats to reduce the consumption of their customers during price spikes like the one shown above. Reliant, an NRG Subsidiary, made a big splash in 2012 when they began bundling Nest Thermostats with new fixed price electricity rate plans. Just Energy has a similar offering via their partnership with Ecobee. TXU offers a bundled thermostat rate plan in the Oncor service territory and Champion Energy Services is also getting into residential demand response. Smart thermostats are a valuable risk management tool for deregulated energy suppliers because they represent a physical hedge since they can reduce load rapidly and reduce exposure to price spikes. Bundling deregulated electricity supply with efficiency products is an emerging trend that is rapidly building momentum. Right now, the thermostats are a risk management tool for the suppliers as much as they are a consumer engagement strategy.

Back to the Google acquisition of Nest. These smart thermostats are the first commercially successful products in the coming "internet of things." The thermostat provides Google a window into your HVAC system, but also your lifestyle and sleep/wake patterns (marketers might like this info). In addition to learning about you, the smart thermostat will soon be able to talk to all the Zigbee enabled devices in your house (think dishwashers, clothes dryers, etc.) and direct a symphony of appliance activity based on energy prices. In the near future, your dishwasher will know to slow down or pause if there is a price spike in the ERCOT market. Nest also offers Google a great entry point into home security systems. The smart thermostat knows when you are home and it probably always knows when burglars break in when you are not home, especially if your mobile device tells the Nest that you are not home.

The home security angle is particularly interesting because the Honeywell line of Wifi thermostats were developed using the Honeywell security system platform. This author recently installed a Honeywell RTH6500WF thermostat for a friend and installed the Honeywell Total Connect Comfort app on multiple smart phones. Notice that when you click on the Total Connect Comfort link, it takes you to a login page on the website. Honeywell used its security system platform to move into smart thermostats (although Honeywell has long been king of conventional thermostats) and Google will likely use the Nest acquisition to develop a home security product.

Presuming the Nest acquisition gives a window into what Google is thinking regarding the future of the smart home and the internet of things, this author is very excited about what is to come. 

My Utility Gave Me a Smart Meter, So Now What?

Many utilities across the U.S. and Canada have been deploying Advanced Metering Infrastructure (AMI) or "Smart Meters" over the last several years. The 2009 American Recovery and Reinvestment Act (ARRA), also known as the "stimulus" included funding for many Smart Meter projects via the Department of Energy. As a consumer, your ability to capitalize on a deployment of AMI by your utility depends on a variety of factors. In this blog post, we'll review some of these factors and discuss various AMI deployments.

Pennsylvania Power & Light (PPL) is a progressive utility in northeastern PA that led the way in AMI deployments in the U.S. In approximately 2002, PPL commenced the installation of hourly interval meters for all of its residential and small commercial customers. This hourly interval data is helpful for PPL (e.g., outage tracking, etc.), but it can also be used by competitive energy suppliers who can offer prices that reflect a customer's usage pattern. This is great for customers who use more energy on nights and weekends, but its bad for customers with poor load profiles whose true cost to serve would otherwise be socialized by flat rates. PPL's data also enables demand response and other innovative energy technologies to thrive in their service territory. PPL's communication technology is unique in that their meters send data back to PPL over PPL's powerlines.

The Electric Reliability Council of Texas (ERCOT) is currently on the leading edge of AMI integration into retail energy markets. In ERCOT, every consumer is forced to choose a Retail Energy Supplier (REP) and each REP must settle the hourly usage of their customers in the ERCOT market. The ERCOT market's maximum spot price is $9,000/MWh and a few hours of those prices are enough to blow up many REPs. As a result, the REPs have a significant incentive to help their customers conserve energy during high priced hours. The result is that small-scale demand response has become a retail energy product in ERCOT via bundling packages offered by REPs. For the REPs, this is a necessary risk management tool (DR as a physical hedge in their supply portfolio) and for the customer there are savings opportunities if they can shift usage away from peak periods with severe price spikes. Reliant (an NRG subsidiary) has partnered with Nest Labs to offer discounted supply in exchange for the ability to control the customer's thermostat. Champion Energy Services has recently begun to offer bundled DR options in its supply product offerings. Just Energy is one of the biggest residential DR companies in ERCOT, although there is little public evidence of it. Through their partnership with Ecobee, they've bundled energy supply with Ecobee thermostats and use them to manage residential air conditioning load during high priced intervals. The bundling of supply and DR in ERCOT is a great example of how smart meter data can unleash a wave of innovation that helps balance supply and demand and make an ERCOT capacity market totally unnecessary......., but I digress.

Smart Meter Graphic.png

In other parts of North America, the AMI picture is more mixed. Ontario made the installation of AMI a major policy objective and the majority of Ontario consumers now have "Smart Meters" and are subject to Time of Use (TOU) rates. The Ontario Energy Board has made peak demand reduction a cornerstone of its energy policy and AMI coupled with customer education around TOU rates has been a critical part of its strategy. Due to massive design flaws in the Ontario deregulated power market (we'll cover that in a future post), Ontario consumers get the majority of the TOU price signal through the distribution component of their bill. So far, it appears that the strategy is working as Navigant consulting recently released a study confirming a link between TOU rates, shifts in consumer energy consumption patterns, and a reduction in peak demands. 

The experiences of residential consumers in the Central Maine Power (CMP) service area in Maine are more typical of AMI deployments. CMP deployed Smart Meters after it was awarded a grant from the DOE as part of the "stimulus". The Smart Meters have been very helpful to CMP in that they have reduced the need for meter readers and associated vehicles/travel expenses and have also given CMP much better situational awareness regarding outages. CMP consumers have yet to reap the full benefits of this AMI deployment. While consumers can see their usage through the Energy Manager application, competitive energy suppliers and energy service providers can't obtain this information in a timely fashion for use in ISO-NE settlements (as they do in ERCOT). CMP needs to perform an overhaul of its Meter Data Management System (MDMS) before the AMI data is available fast enough for all participants in the retail energy value chain. Maine Public Utility Commission Docket 2013-00168 proceedings have indicated that the expense associated with a new MDMS and associated billing systems have far exceeded CMP's original projections. While the AMI roll out has reduced certain expenses, it has necessitated a significant capital expenditure requirement in order for the AMI and associated data to be fully utilized. At CMP, AMI and Smart Meters have been a journey with a destination to be reached sometime in the future.

In Massachusetts, the MA Dept. of Public Utilities just issued Order 12-76-A which lays out a framework for AMI investment and deployment among Massachusetts utilities. To date, NStar, NGrid, Unitil, and WMECO have engaged in "Smart Meter/Grid" pilots, but the technology has not been deployed on a significant scale. While many residential electric meters in MA may look smart, they are mostly one way meters that chirp reading data to meter readers who collect the data via drive-bys in specially outfitted vehicles with equipment that can collect the data. Order 12-76-A requires the utilities to develop 10-year Grid Modernization Plans (GMPs) and a Comprehensive Advanced Metering Plan (CAMP) to be submitted as part of the public record.  For a state with lots of technology, MA is taking its time in the development of AMI policy.

Although there are many pros and cons to AMI deployment, Smart Meters are seeing increasing resistance from people who are worried about the radiation associated with communications by these meters. In Massachusetts, there is a group called Halt Smart Meters - Massachusetts who have organized a vocal opposition even to pilots of the technology. While it may be easy to dismiss Smart Meter critics as modern day Luddites and scientific studies (such as the one conducted for Vermont Dept. of Public Service) indicate that the radiation emitted by Smart Meters is safe, there are people who claim to have electrosensitivity. Electrosensitivity is poorly understood and while many knowledgeable people assert that the symptoms are psychosomatic, its hard to say with 100% certainty that what people with claimed electrosensitivity are feeling isn't real. Opt-out fees, and even the ability to opt out itself, have been a major source of controversy in Smart Meter deployments and will likely continue to be until the issues around electrosensitivity are resolved (which could be decades). Other issues involve data security as hackers could use this data for criminal purposes (e.g., best time to break into your house) and data security is a constant and evolving challenge. 

Regardless of the issues, this author thinks Smart Meters are cool and if your firm needs help understanding AMI as it relates to retail energy markets/tariffs, give us a call.