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.