(NASDAQ: GOOG): Why utilities are embracing smart thermostats
ComEd this month announced a new rebate program aimed at putting smart thermostats on the walls of about 1 million of the utility’s 3.8 million Chicago-area customers by 2020. The program, which will be implemented in conjunction with Nicor Gas (NYSE:GAS), Peoples Gas and North Shore Gas, lets consumers save around half the cost of a $250 smart thermostat, and should allow them to reduce their energy bills by as much as $131 a year. That’s an enticing prospect for consumers – but also for investors, for whom the rapidly expanding smart-thermostat sector represents an important opportunity for risky but potentially rewarding plays.
The Nest and ecobee devices covered by the ComEd program are essentially programmable, Web-connected thermostats capable of responsively adjusting temperatures based on usage and demand, allowing homeowners to shave between 8 and 15 percent off their heating and cooling energy costs. "This is a game changer," says Howard Learner, executive director of the Environmental Law and Policy Center. "The leap from traditional, manual thermostats to smart thermostats like this is akin to going from telegraphs to 4G. It's like going from a Model T to a Tesla.”
Utilities have been toying with smart thermostats for some time: Xcel Energy (NYSE:XEL) offers $50 rebates to consumers in eight states, for instance, while NV Energy offers free smart devices to Nevada residents, and Texas-based Reliant Energy, owned by NRG (NYSE:NRG), runs several thermostat-rebate programs. Still, ComEd’s initiative is by far the biggest to date. “We just don’t know of anybody who is doing it at this level, and this magnitude,” says Rob Kelter, a senior attorney with the Environmental Law and Policy Center.
Utilities are embracing smart thermostats not just to save their customers money, but also to reduce strain on their grids during peak usage periods. Smart devices allow utilities to directly control customers’ settings, and to nudge temperatures up or down by a few degrees during peak periods. That can have a big impact: in a recent study, Austin Energy was able to reduce peak-hour AC energy use by an average of 56 percent by using Nest devices to pre-cool homes before the peak-usage period began. “It’s like a virtual power plant where the savings go back into the community,” says Nest energy products manager Ben Bixby.
Under such programs, known as demand response, customers retain ultimate control, but receive small rebates each time they allow utilities to tweak their settings. That makes them appealing to consumers, and the costs of rebates are far outweighed by the benefit to utilities, which are able to reduce their dependency on expensive peaking energy plants. “[M]any utilities and their customers can potentially reap large savings with these technologies,” according to a Smart Grid Research Consortium study.
Utilities’ growing hunger for smart thermostats goes some way towards explaining Google’s (NASDAQ: GOOG) decision to acquire Nest for an eye-watering $3.2 billion in early 2014. While most Americans still use conventional “dumb” thermostats, the market for smart appliances is booming: Americans currently buy about 4 million smart thermostats a year, according to Parks Associates, making up about 40 percent of total thermostat sales, and researchers estimate that smart thermostats’ market share could hit 50 percent by 2017. Globally, according to Navigant Research, revenues from smart thermostats, and associated software and data services, should grow from $146.9 million in 2014 to $2.3 billion in 2023. "Cutting-edge devices like the smart thermostat might be low on the adoption curve today, but consumer appetite is evident," writes Forrester's Anjali Lai.
A growing number of companies are vying for a piece of the smart-thermostat market. In response to Nest’s success, conventional thermostat-maker Honeywell (NYSE:HON) has sought to shed its stolid image and break into the smart-home sector. Its well-reviewed Lyric device, launched last year as a direct challenge to Nest, features geofencing technology that adjusts temperatures based on the location of users’ smartphones. Another big challenger, Toronto-based ecobee, uses a room-by-room network of remote sensors to detect when owners are home and to provide responsive heating and cooling. “That may not be enough to knock off its larger rivals, but it should win ecobee a dedicated consumer base,” writes Daniel B. Kline.
The companies’ jockeying for technological dominance has brought a flurry of lawsuits, patent disputes, and strategic licensing deals, not all of which have yet been fully resolved. That could bring risks for some apparently established players, or opportunities for smaller companies to leverage their IP and box above their weight. Either way, though,
Companies to watch
- German smart-thermostat company tadoº has won a strong following in Europe for its Nest-like, design-forward approach. The company made its American debut in June, and aims to win 100,000 users in New York City by next year.
- Magnum Energy this year launched its Root device — a smart thermostat, designed for multi-residence buildings, that allows building managers to control temperatures and communicate with residents on a whole-building or individual-apartment basis.
- Proximity-based thermostat-maker Allure Energy has been involved in patent disputes with the biggest smart-thermostat manufacturers, and won an important settlement from Nest earlier this year.
Ben Whitford is the U.S. correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.