Evolution of the home energy market

That Nest and Opower have emerged as the leading companies fighting over this business says something about the small and slow-moving industry. Over the years the market for devices, websites and services that attempt to get consumers to reduce their energy use — a largely unsexy and unappreciated task — has been riddled with struggling startups and failed clunky product launches.

Home energy dashboards never made a dent with consumers. Various startups from Tendril to EnergyHub realized early on that high-end energy dasboards were not the way to go. People don’t care enough about energy and didn’t want to spend money on an energy-specific device.

At the same time, residential-focused energy efficiency services from utilities have taken years to roll out in any meaningful way. Utilities are notoriously slow moving and cautious. Companies that tried to work in these markets got frustrated, too. Google and Microsoft both shut down their energy efficiency web tools after failing to gain much interest or develop any partnerships.

Opower’s entrance

When Opower launched almost six years ago, it found early success with an energy efficiency product that provided immediate value to utilities: mailed energy reports. While Opower has always been an energy software and data company, it were these mailed reports that were initially valuable to utilities that (particularly back then) had unsophisticated digital presences.

Honeywell & Opower’s iPad smart thermostat app

The Opower reports came in envelopes that looked like bills (so were almost always opened) and they used behavioral techniques (smiley faces, peer competition) to gently convince the utility customer to reduce consumption. The mailed reports were also relatively inexpensive compared to home energy devices and dashboards.

But over the years Opower has had to morph into a company that largely sells digital energy data products to utilities. There’s only so much business — and so much effect on consumer behavior — that paper reports can have.

Opower now largely interacts with utility customers through email, text messages, and websites. Its newer digital products include a Facebook app and more recently software for connected thermostats, in partnership with thermostat giant Honeywell.

Opower’s work with Honeywell and its connected thermostat product was one of the first indicators of how competitive Opower and Nest could become. The thermostat has emerged as the great hope for creating a gateway into home energy efficiency following the demise of the energy dashboard. In addition, Honeywell saw Nest as a pretty direct threat, having previously sued Nest over patent infringement around the learning thermostat.

It’s unclear how much success the Honeywell/Opower thermostat is having, given that it’s such a new product. PG&E was the first utility that piloted it and some early results suggested that customers liked using the smart thermostats and particularly liked being able to remotely control the thermostat using their iPhone.

But one of the key differences between Opower and Nest’s business models is clear through that partnership. Opower’s utility products are almost always white-labelled for utilities, so, for example, if it creates a website and system of emails and texts for PG&E customers, then Opower’s alerts are branded with PG&E’s logo. In contrast, Nest has long been focused on selling directly to consumers and building a consumer brand.

Nest emerges

Nest was officially launched toward the end of 2011, though the company had been building its technology for a year and half before that. Its core business philosophy involves the production of a well-designed thermostat that users would covet and that could also collect data about the user and learn their behavior. The thermostat can use that knowledge to shave off between 20 and 30 percent of the user’s monthly heating and cooling, and Nest has mostly focused on selling the thermostat directly to consumers.

But Nest has more recently started to move into offering utilities and energy service providers energy efficiency services. Last month Nest launched a variety of energy services, including demand response, and also this week acquired a startup, MyEnergy, that aggregates and analyzes utility data. It’s clear that one of the most important aspects of the Nest thermostat is the services that can be run based on both the consumer’s individual and the collective Nest users’ data.

Nest appears to want to maintain its brand and its ability to connect directly with customers. When it launched its energy services last month, the company told me that its services sit between the consumer and the utility. It also approves eligible customers and monitors how the services are performing and how the customers are reacting.

This direct-to-consumer approach could also prove useful if (and when) Nest launched any more connected home products in the future.

Power in the data

Essentially, both Nest and Opower are cloud-based data analytics companies that are using various — and increasingly competitive — ways to access home energy data. Nest calls its cloud-based big data algorithms Auto-Tune, and the data that is collected is from its increasingly large amount of thermostats being installed throughout the world.

Opower has built out its big data platform, Opower 4, which collects data from at least 75 utilities, processes data from more than 50 million homes, and has 15 million homes fully connected into the Opower platform. Opower is analyzing 16 percent of all of the smart meters in the U.S.

Each company’s approach has unique benefits and hurdles. Opower has been widely successful with utilities using the approach of starting out with a basic data analytics service, and adding on more complexity and control over time. Utilities are hard customers to win over, so the benefits of winning their business early is invaluable. Nest, with its direct to consumer approach, could be slightly threatening to some of the more conservative utilities.

Nest, on the other hand, has the capacity to build a consumer brand that can make money from direct consumer electronics sales as well as working with energy service providers. Opower has little consumer brand presence and mostly subverts its brand to its utility customers.

Which method will prove more successful over time? It’ll be interesting to see, but in reality there will be room for both. It’s also refreshing to see different types of innovation and execution in the home energy efficiency space — an industry that has been neglected for quite a long time.

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A Khosla Ventures-backed energy analytics startup called Bidgely is the latest to go after the next-gen smart thermostat, and it has told us that it has an agreement with thermostat maker Emerson to commercialize a thermostat in the coming months that syncs with Bidgely’s energy software. Bidgely’s algorithms can take home energy data and section out which appliances in the home are consuming what amount of power, without having extra hardware or sensors on each plug or appliance.

Consumers that can get that type of data can see, for example, if their pool pump is consuming too much energy in the winter time, or if their air conditioning unit is sucking down much more power than the average (see itemized bill). Utilities could offer such a smart thermostat to customers in their areas that want to be included in energy efficiency programs. Emerson’s thermostat wirelessly connects to smart meters or a home router with a Zigbee connection.

The deal between Emerson and Bidgely isn’t all that unique in the rapidly growing energy software sector. Emerson is also working with other software startups like EcoFactor, EnergyHub, and Calico Energy to have its thermostat sync with their software, too.

Next week at a major utility conference called Distributech, all of the energy software startups and large energy giants will be touting their smart, connected thermostats; including both new thermostat models and new services. The thermostat is a unique device. It’s an object that can provide demand response services for utilities, or the collective turning down of utility customers’ energy use during peak times (like a hot summer day in Texas). Software startups like EcoFactor can create algorithms that can do this, without making the climate of a home uncomfortable for the inhabitant.

On the other hand, because of its prominent placement in the home, the thermostat also has the potential to have a unique relationship with consumers. That’s the neglected path that Nest has chosen, designing a coveted thermostat to sell directly to consumers that can shave 15 percent to 30 percent off of air conditioning and heating bills.

The thermostat is also the latest device to become part of the growing world of the Internet of Things. In this always-on connected ecosystem, everything gets a connection, all devices are made smarter with software and data and these devices can make human lives easier, more interesting or more efficient.

Nest is one of the few that’s aggressively targeting consumers. Most of the energy startups are aiming for the utility market. One of the better known collaborations around a thermostat maker and an energy software company is between Opower and Honeywell. Honeywell is the giant in the thermostat maker market, and Opower is the leading energy software player.

Make sure to watch the buzz around thermostats next week at the Distributech show. We’ll be at the event and will be covering all the latest in energy software and connected energy devices.

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What’s most impressive about Digital Life’s plans aren’t the individual apps, but the glue that binds them all together. If AT&T is truly going to build a service that will network hundreds of sensors, appliances and objects, there needs to be some kind of central intelligence to manage and filter that flow of information. There needs to be user interfaces that allow us to easily access and act upon that information. Otherwise, our personal Internet of things would quickly become filled with endless chatter, which, far from being useful, would actually be annoying.

Managing, filtering and redirecting that information, as well as building the interfaces that allow us to grok our home networks, are going to be monumental tasks, and I’m skeptical that a single company can put all of those disparate pieces together. But Lurie claimed that AT&T has the expertise and the resources to accomplish it. Luire isn’t just talking about building a simple iPad app or a management portal. He hinted at future in which we might be able to interact with our homes the same way comic book superheroes interact with their lairs: by voice command.

In an interview at Connected World earlier this month, I asked Lurie about the Watson voice recognition and natural language understanding technology developed in AT&T Labs (not to be confused with IBM’s Watson). Lurie’s division has already begun trials with Porsche and RIM’s QNX to use Watson as the intelligent interface for the connected car. Lurie wouldn’t commit directly to whether AT&T had plans to craft talking houses, but he did say that a connected home platform would be ideal use case for new technology coming out of the labs.

“I can’t make any forward-looking statements,” Lurie said. “But you can make some assumptions. When you think about the very high-quality voice recognition technology we’ve developed in AT&T Labs, you know we’re going to try to use it wherever possible. You’re going to see a lot more of it in the future.”

Building a platform, not just a service

While the applications and the interface will be the consumer-facing elements of Digital Life, the industry should think of it as an operating system like iOS for the home, Lurie said. If AT&T can pull all the pieces together, Digital Life’s developers won’t just be coding apps. They will be building devices and objects, which will be sold in AT&T’s online and physical stores and eventually on the shelves of hardware and electronics stores, Lurie said.

Right now, Digital Life is working directly with select camera, thermostat, door lock, power control and sensor companies (AT&T is still a bit closemouthed about who its partners are), but Lurie pledged to eventually release a software developer kit to third party devs, opening up the platform. Developers will then not only be able to link their appliances to AT&T’s digital home controller, but also embed their controls as apps into the Digital Life’s tablet, smartphone and Web interfaces.

What’s more those devs won’t just be building apps that sit in a vacuum. They will be able to interlink them, feeding information to each another and allowing the apps and their attendant devices to act autonomously on that information, either individually or in unison. For instance, a solar sensor could communicate with an app controlling a home’s window blinds, lowering them gradually through the day to block out direct sunlight while raising the blinds at the other end of the home to let in indirect light.

A connected refrigerator (yes, Lurie brought up that old chestnut) wouldn’t need to send you a text message every time the milk expired or the ground meat starts sending off spores. It could simply add those items to a pantry or grocery list app embedded within the Digital Life interface (and hopefully alert you not to consume them when you open the fridge door).

The key, Lurie claimed, is to make that linkage automatic and seamless. “When I plug that refrigerator in it has to come online,” he said. “It just has to work.”

Will AT&T become your home’s overlord?

Ceding that much control to a digital home platform sounds a bit scary, and Lurie was quick to point out that this level of interconnectivity won’t be for everyone. Digital Life will suggest profiles that cluster together groups of devices, but ultimately the power will be in the homeowners to decouple them.

If you don’t want your dishwasher talking to your coffee maker, that’s fine, Lurie said. If you want your home security system to text you every time the front door opens, rather than only alert you when it opens at a time it shouldn’t be open — that’s fine as well. Ultimately the power will be in the customers’ hands to customize these systems anyway they please, he said.

There’s also the issue of whether consumers or developers want to put this much power into the hands of their phone company. As the central control point, AT&T could become like Apple in more ways the one, determining which developers and which vendors make it into the Digital Life “app” store. Forget figurative walled gardens; AT&T could build virtual walls around an actual garden.

Lurie said AT&T is taking steps to keep the platform open, promising that Digital Life will be completely independent of its wireless and wireline consumer divisions. You will be able to use a Verizon iPad to access Digital Life, and you can connect your home to the Digital Life grid with a Comcast cable modem, he said.

But when it comes to acting as gatekeeper for applications and devices, AT&T probably won’t be making any apologies. Your home isn’t a smartphone. Apps linking into Digital Life will be able to access your door locks, your furnace and the cameras monitoring your children’s bedrooms. AT&T will keep its full API very close to its breast.

If we’re really going to achieve the Internet of things, we’re going to have to put a deep degree of trust in the entity that manages these interconnections. The question is: will that company be AT&T?

Feature image courtesy of Shutterstock user alexmillos

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Essentially, the Nest thermostat should look good when you see it and manage your environment automatically in the background. If that’s the case, the Nest should simply be forgotten once it learns your comfort zones. Does it achieve that goal? Yes, it does. In fact, it does it so well that I’ve had my review unit far longer than I should have because I haven’t needed to adjust the Nest in months.

Nest Installation is a snap

My home is relatively new; only about 8 years old and I had no problems installing the Nest. The wiring system is all color coded, so if your HVAC system is relatively modern — say from the last 20 years or so — I’m willing to bet that the Nest install will be relatively painless. All it all, it took about 15 minutes to screw the base plate to the wall, connect the wires and attach the Nest. The device has Wi-Fi built-in, which you connect to your home network at the time of installation. You can use the Nest with secured wireless networks.

Included with the Nest is a small screwdriver to assist with the installation. The base even has a built-in bubble level to ensure your Nest won’t be askew. And there are optional mounting plates, which you can paint, to cover up any holes from the prior thermostat. I used the largest one in my installation.

The old thermostat module I removed is also a smart, programmable device; I’ve been using it since 2010, even flipping on the heat from halfway round the world. More on which one I like better in a bit.

A thermostat can actually be sexy and fun to use

Most people don’t think “bling” when describing a thermostat, but the Nest is beautiful to see. It’s a round metal knob with a circular display on the front. That’s it. To navigate the Nest’s interface, you simply turn the wheel through menu options and push the Nest in to choose an option: Simple, effective and intuitive. You can manually adjust your temperature by turning the wheel. And the screen won’t waste energy by constantly displaying information.

Instead, the screen times out in a few minutes and automatically wakes up when it senses you nearby. Yes: there’s a motion detector in the Nest and it’s not just for the screen. When Nest senses you’re not at home, it can adjust the thermostat up or down to automatically save energy. When Nest “sees” you get home, it disables the Away mode. Other useful items on the display include a blue or red background when cooling or heating, respectively, the current temperature and a green leaf when you’re saving energy.

How smart is the Nest?

Unlike traditional programmable thermostats where you have to key in various temps, times and days, you simply set Nest manually throughout the day and evening for a few days. In about a week or less, the Nest learns your climate habits and tells you that you no longer need to adjust the thermostat. From then on, Nest handles it all.

You can manually modify your temperature at any time, of course, and Nest will keep learning from that interaction. But I found that I really didn’t have to adjust the thermostat much at all over time. Even better, the Nest app for iOS and Android make it easy to remotely adjust the temp without even walking over to the Nest. Or you can log in at Nest.com via a web browser to make the adjustment.

And that’s where the Nest really shines compared to my old smart thermostat. Because your thermostat is tied to a Nest account — via an email address — there’s no complex setup to get remote access to the Nest. In contrast, for me to remotely access my old device, I had to play with router tables, network configuration and punch a hole in my network firewall; all things that take away from the simplicity.

Does Nest save energy?

That’s a difficult question for me to answer, but I suspect so. My heat source is liquid propane in a 1,000 gallon tank and I can’t monitor the propane use at a very fine level. I can say that we went longer between propane fill-ups this past season. And our summer season has only just begun. You can view your Nest usage and schedule directly on the thermostat or in the app, however. It doesn’t show actual costs, but tells you the hours you spent heating or cooling, and if you saved any energy with little usage.

Additionally, the Nest team recently added a new cooling feature called Airwave that should save money. The theory is that your air conditioning keeps making cold air for 5 to 10 minutes after it shuts off. The Airwave feature takes advantage of that cool air by blowing it in the home after the A/C shuts down. As a result, your air conditioner could run a little less while still cooling the home.

Would I buy one?

Given that I already have a smart thermostat, you’d think I’d pass on the Nest. But after I return the review unit, I may spend the money on one anyway. There are pros and cons here for me, although I think most people would benefit from a Nest. Since I have a whole “smart home” project in mind, the Nest actually doesn’t fit it. Why? Because one of its strengths is a weakness in my home: It’s a standalone device. As a result, my home automation server can’t speak to the Nest and I can’t control it from the same app and framework used to control my lights, web-cams and doors.

Still, the simplicity of the device may trump this particular issue. And most consumers don’t already have a home automation system to integrate with a thermostat, so all in all, it’s likely not a problem for you. I’m on the fence for now, but chances are the good looks of the Nest will get the better of me and I’ll retire my old smart thermostat for a better looking, younger model.

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We conducted a survey right after Honeywell announced the lawsuit on February 7 and asked GigaOM readers for their views on what will likely be a nasty legal tussle between the two companies. Now, we’ve published the findings of that survey (subscription required), which delves into what readers think will be the outcome of the lawsuit, how the lawsuit will affect the industry, and what will happen to Nest. Two sneak peeks: readers think that Nest could be toast, and Honeywell is the new bully.

To read the complete research note with data from the 200+ respondents, check out GigaOM Pro.

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Honeywell & Opower's iPad smart thermostat app

When tech patent lawsuits land in the middle of an industry they tend to make a loud, dull, thud sound. Nobody particularly likes them (other than maybe the media), both parties can often times end up looking bad, (or at least petty) and patent lawsuits are a guaranteed time and money-suck. But, in addition to all these moderate downfalls, when it comes to a newly emerging industry like smart, Internet-connected thermostats, tech patent lawsuits can also deliver some real harm by potentially hampering innovation.

Of course we’re talking about this week’s shocker: that thermostat giant Honeywell has filed a lawsuit alleging seven different patent infringements against learning thermostat startup Nest Labs. While we’ve solicited your survey results, and you’ve given some great comments on our posts, one thing seems clear to me that I wanted to expand on, and that’s that Honeywell’s patent lawsuit appears broad enough that it could potentially slow down innovation in this space. Here’s why:

• Patents need to be non-obvious and inventive enough to be worthy of a patent. Some of the patents in the Honeywell case — like the natural language Q&A patent and the remote control patent — just seem to be so obvious that I’m not sure how defensible they are. As one of our commenters on this post put it: there’s only a few ways to do certain things, so sometimes the obvious way is obvious to multiple people and companies.
• Major patent wars can be a damper on investment. Say, a promising young startup is building smart thermostat analytics, but they are looking to raise money next month, and all anyone is talking about around smart thermostats is this patent war. An investor could think twice about funding a company that a massive thermostat maker like Honeywell could set its sites on.
• This is a truly David and Goliath scenario. Honeywell has a $47 billion market cap. Nest raised several tens of millions of dollars in venture funding and just launched its learning thermostat. Nest could really struggle if Honeywell pursues this case, even if Honeywell isn’t able to win.
• The really large companies like Honeywell, but also GE and Johnson Controls, have been in this thermostat industry so long that they no doubt have researched a wide portfolio of things that they haven’t actually ever been able to commercialize. Honeywell said as much in its latest interview with me. But it’s unfortunate that instead of commercializing some of these products, these big companies will just crush them rather than see them come to market.
• Go big or go home. This is one of the trends I noticed at the annual DistribuTECH event in January. This industry is maturing and companies have to grow to compete and survive. Particularly if there are patent lawsuits around.

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Honeywell's thermostat with Opower software

Honeywell, one of the world’s largest thermostat makers, tells me that twenty years ago it tested out thermostats that can learn the home owner’s behavior and adapt the heating and cooling accordingly, but ultimately decided that consumers didn’t take to them, and would rather control their thermostat themselves.

I asked Honeywell’s President of its Environmental and Combustion Controls division, Beth Wozniak, in an interview if Honeywell was interested in making learning thermostats, because there’s been so much discussion about the startup Nest, which has created what it calls the world’s first learning thermostat.

“We found that consumers prefer to control the thermostat, rather than being controlled by the thermostat,” said Wozniak. Instead of learning thermostats, Honeywell is focused on adding intelligence to digital and connected thermostats through simple UI, mobile apps, and partnerships like its one with Opower.

Opower will be providing the analytics and data to help Honeywell use home and building thermostats for demand response programs, where utilities can ask home owners to turn down their heating and cooling slightly during peak times of day. The Opower thermostats are being piloted with utilities right now, including at PG&E. The Opower software will also be used to create new ways for the home owner to save money on their energy bill, and Wozniak says by the end of the year the partnership will launch other products too.

For Honeywell, connected thermostats are still a small part of the company’s overall thermostat sales. While Wozniak declined to say what percent or what volume of Honeywell’s thermostat sales are connected thermostats, she said it’s the very early days of the connected thermostat market. Honeywell sells a whole host of other connected home products such as humidifiers and security systems, and a “total connected home system.”

Who knows if Nest and its learning thermostat will one day make a dent in the thermostat market, but Wozniak acknowledges that the startup has brought some much-needed attention to consumer thermostats in general. “Cell phones and tablets have set a whole new bar for how things can be connected.”

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Honeywell's thermostat with Opower software

There’s a perception in Silicon Valley that smart learning thermostat startup Nest created the world’s first connected and digital smart thermostat. While the Nest thermostat is gorgeous and potentially a game-changing, there’s dozens of companies that are making connected smart thermostats.

I snapped a dozen or so photos of some of these thermostat players (see below) at the DistribuTECH smart grid event in San Antonio, Texas this week. It’s clear from the buzz from big box retailers, utilities, startups, telcos and cable companies that 2012 is morphing into a break out year for the smart thermostat. I wrote a report on the battle for the smart thermostat for our premium research service GigaOM Pro (subscription required) this week, which provides an indepth look at the players around the smart thermostat and who I think will come out on top in 2012.

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Demand response is when the customers of utilities agree to let their energy-consuming devices — like thermostats, pool pumps and smart appliances — to be turned down during peak events (like the hot summer months), in return for financial compensation or other benefits. Residential demand response projects aren’t all that common these days, but the numbers of customers enrolled in these programs are growing. Energy Hub says it already has 100,000 smart thermostats under management and the company plans to add another 100,000 this year.

The e5 service will launch in Texas this summer and use a WiFi-connected thermostat from 3M. The consumer is the one who enrolls in the program and installs the thermostat, which can be obtained at retailers or online. The consumer can benefit through energy savings, and the utility can benefit from better demand response. EcoFactor has developed a similar service using weather data, smart thermostats and real-time demand response.

Earth Networks was formerly called AWS Convergence Technologies, and the firm refocused last year to start working on building a network of greenhouse gas emissions monitoring stations throughout the U.S. Those stations will use gas-detecting sensor boxes from Picarro, a startup in Santa Clara, Calif. However, clearly, Earth Networks’ weather data is still important to its business.

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EnergyHub says through crunching its customers’ energy data it’s discovered such counterintuitive notions like: folks in cold climates have a lower average heating temperature set point than households in warmer states. So basically the average person in a warm state like Texas sets his/her heating temperature significantly higher than an average person in a colder state like Vermont — despite that you’d think the person in the cold state would need a lot more heating than the person in the warm state.

But that statistic is probably due to the fact that people in the colder climates would have to spend an exorbitant amount of money on heating if they wanted to heat their homes in a similar fashion to a person in a warmer state — because there are that many more cold days, and those cold days can be really cold. So the people who live in cold states are just, frankly, dealing with it and going without the extra heat. As EnergyHub explained it: “Darwin’s core tenet is alive and well—it appears folks in the colder climates have adapted to their surroundings!”

That tid bit is just an example of the kinds of things that connected thermostats and analytics will be able to reveal about home energy consumption habits. And the more utilities, consumers and companies know about home energy consumption habits, the more energy consumption habits can be shaped and pushed to be more efficient.

EnergyHub’s CEO Seth Frader-Thompson told me in an interview that the company is expecting to add another 100,000 or so connected thermostats to its software platform this year, and much of those will come from utility deals — we have some 16 or so utility deals in trial and commercial stages, says Frader-Thompson. Currently the company’s 100,000 thermostats under management are largely due to service provider deals (like telcos and cable operators), or sold through retailers, and Mercury is the smart software behind Radio Thermostat’s WiFi thermostat.

EnergyHub also sells an energy dashboard and service, but started selling the connected thermostat service after the company’s customers started asking for a stand alone thermostat product. “This is by far our best year for holistic energy solutions,” said Frader-Thompson.

The smart thermostat has gotten a lot of ink in recent months because of the launch of Nest and its learning thermostat. While Nest provides both a well-designed thermostat, and also the behavioral and learning analytics. many of the other energy software startups are now shying away from building the hardware and thermostats themselves.

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