Friday, March 28, 2014

What does the Google acquisition of Nest mean?

Google announced its $3.2 billion acquisition of Nest, a manufacturer of smart thermostats and other connected products, in January 2014. This transaction positions Google as a key player in the rapidly changing demand response (DR) market.

Demand response programs are transitioning away from the traditional thermostat DR business model where the utility markets, procures, installs, and assumes the risk for long-term performance of the equipment. The new, more cost-effective pay-for-performance thermostat DR business model leverages customer-owned thermostats. In doing so, it offers customer choice, uses both vendor and utility marketing, has multiple installation channels, and reduces the utility financial risk. Austin Energy is one of the first utilities in the North America to move to a more cost-effective DR business model that rewards both consumers and thermostat vendors for participation. Under its program, Austin Energy pays thermostat vendors a recruiting fee and a small annual fee to manage DR events.

These annual fees from utilities certainly create a significant incremental revenue opportunity for Nest and other smart thermostat vendors, but the really big money is on the horizon. In 2011, the Federal Regulatory Energy Commission (FERC) created new rules to assure that demand response resources are provided comparable treatment in capacity markets. Order No. 745, issued in March 2011, requires that RTOs and ISOs pay the locational marginal price (LMP) for demand response resources participating in the day-ahead and real-time wholesale energy markets. Order No. 1000, issued July 2011, requires transmission providers to consider all types of resources, including demand response and energy efficiency, on a comparable basis in transmission planning.

The process to implement these changes takes time, so these rules are just now being implemented. In California, Rule 24, which will be finalized in the next few months, will define the rules and processes for utilities and third parties to bid demand response into the CAISO market. IOUs will be able to bid into the market by summer 2014 and third-party DR providers by summer 2015.

As an aggregator of load, Google is not limited to participation in utility programs that include contractual limits with consumers, which would limit the number of DR events to only a handful each year. Aggregators can use demand response to address both utility programs that focus on capacity constraints and market programs that focus on the daily variations in the cost of electricity. Economic demand response can be executed much more frequently, dramatically increasing the revenue potential.

In order to execute economic demand response without customer push back, thermostat vendors must implement solutions that do not require the consumer to sacrifice comfort. To accomplish this goal, vendors such as EcoFactor, EarthNetworks, ecobee, and Nest have developed various levels of energy modeling solutions. These algorithms use weather and equipment operating history to model the building and equipment performance and can be used to shift load without sacrificing comfort. While not much is known about Google’s EnergySense program, it is likely that Google is well along the path to becoming an energy aggregator.

Nest’s technology combined with Google’s big data makes the resulting company a strong competitor. Google, like no one else, understands the value of data. Google already has a social graph of users. The company understands a consumer’s likes, dislikes, and behaviors from email, search engine queries, web tracking, and social networks, and it uses that data to create personalization solutions, which is a strong differentiator for Google advertising.

As a result of Google's success, personalization is a common and expected part of the online experience today, and it will quickly become an expectation of smart home products and services as well. Product data provide even greater insight into users. User data originating from content consumed on an Internet-enabled device are much more granular in nature than previously available data—more data points are collected, supporting highly refined audience-targeting methods beyond traditional measures

Audience-based data and targeting practices segment consumers based on who they are, the devices they use, how they use them, and the media content they consume. Interest-based measures support techniques that pinpoint and engage consumers based on their interests and preferences. The learning capabilities that are built into Nest products are a great example of how the smart home will anticipate consumers' needs and automatically make smart decision on their behalf. The combination of this technique with interest-based user data creates even more value for all parties.

From the article, "What does the Google acquisition of Nest mean?" by Tom Kerber.

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