An untold story: What the Nest acquisition means for utilities

The Nest thermostat.

We have seen many articles on Google’s planned $3.2 billion acquisition of Nest. And rightfully so. This story has its share of intriguing angles, like just how did a hardware company create so much momentum that it gets a multi-billion dollar offer after just a few years? Or will Nest really adhere to its privacy policy (as Tony Fadell says it will do) or is Google using this as a means to get even more insight into our daily lives?

But what I haven’t seen addressed is what this mean for utilities. I suspect some utility executives read this news and got a sinking feeling in the pit of their stomachs. At least I hope they did. And it’s not just because Google is involved, though there is a surprising amount of disquiet about Google in utility circles. Instead, it’s because this move threatens the utility business model.

Nest

The utility industry is at a crossroads. To meet the evolving needs of their constituents and become more than a commodity provider of energy they need to re-invent themselves. This requires utilities to evolve from pure-play energy companies to an energy service provider model. Such a transformation represents a critical decision for utilities. They can continue to build power plants and simply deliver energy over a network of wires (a not insignificant task) or they can become customer-centric and provide personalized services. Utilities that fail to choose the latter run the risk of being marginalized.

Take Tesla as an example. Customers get free electricity when using Tesla charging stations. They don’t even think (or care) about whether or not it comes from a utility. It has been de-valued because it’s bundled with a service (in this case, charging a car). The electrons will continue to flow, but consumers will see them provided from someone else other than a utility. This will only intensify as consumers depend more on distributed energy resources.

SolarCity

This is especially true with solar technologies. I recently put solar on my home, reducing my bill from about $3,000 a year to just $72. Yet the utility still needs to support the infrastructure for my house because the sun doesn’t shine all of the time. This represents both a sunk cost and an opportunity for utilities to provide a service (solar power in this case) that more consumers are demanding.

I think Google’s acquisition of Nest demonstrates this evolution in thinking. Google is lining up to battle over who provides energy-related services to the home. They certainly aren’t the only ones to realize this opportunity. I am aware of several syndicates forming to address this model, including partnerships between technology providers, solar companies, last milers and even retailers. There are a LOT of conversations going on in this area and I expect more announcements this year.

But I don’t want to leave you with the impression that the utility business model is doomed. They can still very much play and thrive in this space. Some service providers 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, wanting to provide services for whatever turns up in the home.

Electric grid substation

Though I don’t suspect they will all get there. Right now I see an 80/20 split of utilities thinking in terms of becoming a service provider (with the minority being the forward-looking ones). Those in the majority are resting 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.

We don’t necessarily need more utilities to buy into this thinking. What we do need, however, is for the ones that do see this transformation coming to lean in. They need to be confident in the fact that just because it’s been done one way for more than a century doesn’t mean the system can’t be changed. We also need similarly forward-thinking regulators to partner with these utilities to develop a successful model for energy service providers.

But it won’t happen overnight. So in the meantime, we will sit back and see how the other Google/Nest story angles play out. But no matter the outcome on these, a $3.2 billion acquisition in our industry is a great way to start the year and hopefully a sign of more good things to come.

Adrian Tuck is the CEO of Tendril.

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