The future of Google’s Nest

Even before Google acquired Nest for $3.2 billion, the maker of the Learning Thermostat was a name brand. By taking its instantly recognizable, smart energy-saving device directly into the homes of countless Americans, Nest performed a rare deed: It made energy cool.

But although Nest has relied on direct-to-consumer sales to get where it is today, the smart-home player is increasingly focused on electric utilities. As utilities explore opportunities beyond the meter, companies like Nest could help utilities engage their customers, improve energy efficiency and win the prize: the all-important customer relationship.

There is speculation that Google has other plans for Nest. While these plans are not widely known, conspiracy theories abound that Google will use Nest to bypass utilities in a bid to secure a high-value relationship with the American energy consumer.

Utility Dive spoke to Nest executives about the success of the direct-to-consumer business model, the new emphasis on utility partnerships, and where the company could go from here.

Nest’s direct-to-consumer approach

Nest’s relationship with consumers is one of the company’s defining features — and one of its main advantages as a business partner.

From the start, Nest had ambitions of partnering with utilities to bring its thermostats into U.S. homes. But rather than go straight to the utility, Nest decided to woo retail customers first.

The approach gave Nest a direct connection to customers, Scott McGaraghan, head of Nest’s energy partner services, told Utility Dive. “It meant that we had some time to build the customer relationships and learn about our customers so that we could offer the kind of services that brought value first and foremost to our customers, but then thinking about how this would overlap with working with the utilities,” he said.

There are signs the approach is working. More than a year ago, the company was selling between 40,000 and 50,000 thermostats per month, largely on the strength of its direct-to-consumer sales. And CEO Tony Fadell recently said the Learning Thermostat was in “almost 1% of U.S. homes.”

Nest’s utility business model

Customers trust Nest. The Learning Thermostat learns homeowners’ habits, from when they are most likely to be home to how warm they like their home to be upon waking up. Within four days, the thermostat has gathered enough information to run with little interference, as long as the customer doesn’t suddenly change his or her habits. All this data is then collected and aggregated to create near real-time consumer behavior reports.

Nest’s data can give utilities previously unaccessible insights into their customers’ behavior. “Utilities have their grid, and their grid goes up to the meter and stops there,” said McGaraghan. “They have not spent much time inside the actual home.”

Devices like the Nest thermostat give utilities an entry point. Utilities get to see their customers’ behavior almost immediately, allowing the utilities to shift resources accordingly and develop strategies to address everyday customer experiences.

But while Nest can bridge the gap between utilities and their customers, the utility’s role behind the meter won’t change.

“Nobody is going to call Nest up when the power is out. No one is going to call us when there is a storm and they need preparation. No one is going to ask us to send a new natural gas connection out to them,” Ben Bixby, head of energy services at Nest, told Utility Dive.

Nest boasts more than 12 major utility partners across the U.S., and that number is likely to grow. While customers can see immediate and sustained savings on their utility bills, the utility can grow its demand response programs.

A recent partnership with ComEd gives the utility’s customers a substantial rebate to buy a Nest Learning Thermostat in exchange for participation in a summer AC cycling program. Nest’s user-friendly interface and initiatives like Rush Hour Rewards and Summer Savings can help break down the barriers between utilities and their customers. After all, very few residential customers know (or want to know) what demand response is.

For Nest, the utility partnerships are key for company growth. With a customer base that’s very tech-savvy and energy-aware, utilities can help Nest reach the average consumer. But as Nest grows, so too do concerns over the privacy of customer data.

Nest maintains a tight hold over that data. The company wants to safeguard its business model by keeping personal data private and only sharing aggregated, anonymous data with its utility partners.

“We are highly protective of the customer experience,” said McGaraghan. “The more people that are involved in that process, the harder it is to keep that in our control.”

Nest’s future

Nest officials are cagey about future plans.

The company wants to build on the platform it already has in place and further its relationships with utilities, McGaraghan said. But it also wants to partner with new market entrants and energy services providers Nest is looking at the success of residential solar leasing as a way to get its thermostat into more homes.

Nest has already partnered with companies such as Sunrun, a residential solar company that claims over 50,000 customers across the U.S. When signing a contract with Sunrun, customers have the option to bundle in a Nest thermostat. Similarly, Nest customers get a discount if they sign up with Sunrun, according to Bixby. Distributed energy is on the rise, and if Nest can become the customer-facing touchpoint that manages homeowners’ interactions with the grid and vice-versa, then the future looks bright.

This has yet to happen. Nest still faces a big problem reaching beyond its current customer base: The Learning Thermostat costs $249 — prohibitively pricey for lower-income customers. It doesn’t help that its savings are so incremental as to be easily missed.

But with Google behind it, many believe that Nest is set to become the market leader in the burgeoning smart home space.

How that will shape the future of utilities is difficult to say, said McGaraghan. Over the next few years, utilities will look to Nest and other energy efficiency technologies to see what approach works best for them and their customers, he said.

As for Nest’s next move, McGaraghan is tight-lipped. “We have an approach of not announcing things until we are ready to do them. We focus on what we have going on right now,” he said.

Recommended Reading:

TechCrunch: Nest Uses Its Data to Turn Electric Utilities Into Cash Cows
Smart Grid News: How Google’s Distain for Utilities Could Ruin its Nest Acquisition