Finding the right strategy for home energy management

The successes thus far in the home energy management market have been rare as getting consumers to care about their energy use has proven difficult. But the last 18 months has seen the quick rise of Nest, the smart thermostat that has cracked the market by creating industry disrupting hardware that feels inspired by the culture at Apple.

I’ve written about the consumer cleantech design phenomenon before. Put simply, companies that succeed are those that are design focused in their hardware and marketing rather than specifically focused on energy savings. Tesla and Nest inhabit these principles.

But as smart meter deployment increases and the sheer volume of energy data grows, it’s worth looking at what successful business models could be built around software only strategies, particularly in the home. Can a software company rely on hardware makers like Honeywell to build connected thermostats, in the way media platforms will have to rely on companies like Samsung and Sony to build connected TVs?

Companies like EcoFactor believe it’s a perfectly viable strategy and that channel partners like utilities, broadband providers and HVAC installers are capable of greasing the wheels by installing basic connected thermostats and then selling their cloud based software as a service (SaaS) technology on top of that hardware. In fact, the company is a classic big data bet with its software geared to tackle the energy use of home heating and cooling units, which typically comprise 50 percent of a home’s energy use.

In a recent conversation with CEO Roy Johnson, it’s the macro trends in hardware that he’s more concerned about than anything in hardware design. Chipset costs are declining with a Zigbee enabled thermostat around $55 in volume. Cloud computing costs are coming down as it’s getting more cost effective to manage hundreds of thousands of thermostats on Hadoop clusters. And broadband penetration is broad.

In terms of marketing, EcoFactor also doesn’t want any part of consumer retail. “Our strategy is entirely channel based and service provider based. We are rolling out through Comcast and the other cable companies because it’s part of a full solution, including home security, home automation and home energy management. They do the customer acquisition.”

EcoFactor does avoid the significant marketing costs that involve selling consumers directly on the value of lowering their energy usage and cost, and instead focuses on building better algorithms, something they do around a core set of 4 data scientists and additional software engineers. What EcoFactor loses is control over the type of sensor data it gets because unlike Nest it doesn’t build the hardware. Nest has activity sensors that check whether people are in the house in addition to humidity sensors. On the flip side, EcoFactor’s relationship with utilities is allowing them to start testing their software enabled thermostats with demand response programs.

And it’s unclear whether you actually need additional sensor data. EcoFactor is doing microadjustments every 5 minutes that respond to consumers’s interactions with the thermostat, including manual overrides, temperature setpoints, and outside weather data. When Nest released its second generation thermostat, one of the breakthroughs it realized was that it could power down the HVAC unit more quickly after its activity sensors gleaned that there was no one in the house. It’s these tiny microadjustments, that get pulled from crunching large amounts of data, that will make the most effective product.

So Nest, like Apple, has chosen a hardware/software model geared at retail, though the company clearly has its eyes on utilities as customers, evidenced by a recent deal with Reliant in Texas. And EcoFactor wants to be a pure software as a service big data play, happy to rely on others to build thermostats and to sell them.

Like mobile, where Apple and Android play side by side, it’s reasonable to assume that both models will be viable. And given Google’s rocky foray into building hardware, EcoFactor’s strict software focus actually makes sense.

Because what’s occurring, heralded by Nest, is the broad education of the consumer regarding making appliances smart in order to save energy. Once that cultural trend happens is more firmly in place, multiple business models will open up.