Nest Learning Thermostat, $249
Courtesy: Nest

How Alphabet’s Nest Helps Utilities Cope With Summer Heat Waves

Aug 29, 2016

Alphabet's Nest, which makes a smart thermostat, has been helping utilities curb energy use this summer as record high temperatures draw major air conditioning use and as some utilities simultaneously deal with fluctuating power sources.

The company, bought by Google (googl) in 2014 for $3.2 billion, has been working with Southern California Edison for about three years. The utility was one of Nest's first partners for its energy reduction program called "Rush Hour Rewards."

Now, Nest is working with the utility to try to convince 50,000 of the utility's customers to agree to have Nest thermostats automatically reduce the amount of energy they use during peak grid times next summer.

Bloomberg first reported the deal, which is Nest's largest concentrated partnership of its kind, Nest's director of energy businesses Ben Bixby tells Fortune. Collectively those 50,000 customers could alleviate about 50 megawatts of energy capacity in Southern California, where the utility needs it the most as afternoon temperatures go up alongside the demand for air conditioning.

The deal shows how Nest is starting to gain traction with its energy reduction program, an unusual algorithm-driven service that taps into Nest's connected gadgets that have also proven popular with consumers.

Why utilities are interested

To put those energy reduction numbers in context, 50 megawatts would only be a small part of Southern California Edison's overall 1,300 megawatts worth of such on-demand energy savings programs, commonly called demand response programs. But every little bit helps.

Southern California Edison (eix) is particularly interested in Nest's thermostats to help it alleviate the lost energy resource that resulted from the closure of the Aliso Canyon natural gas reservoir after a massive and disastrous leak occurred at the site in late 2015. The utility has rushed both energy efficiency and energy storage plans forward to try to overcome the shuttered asset, which provided fuel to natural gas power plants that generated energy specifically during those peak grid times (called peaker power plants).

For demand response programs, utilities commonly form an agreement with customers—home owners, office building owners, or industrial companies—to have their energy curbed during peak grid events in exchange for financial rebates, or in some regions, for a free Nest thermostat.

Southern California Edison currently can curb 500 megawatts in under 30 minutes using demand response programs, 700 megawatts in under an hour or less, and another 185 megawatts with agreements made a day ahead.

Nest's demand response program is different from others in that the company's smart software can automatically lower customers' thermostats a couple degrees so that their homes or offices still remain comfortable. The customer also doesn't have to actively do anything during the peak grid event—other than to have already agreed to participate.

Years ago, many demand response programs couldn't be done automatically, so customers would have to manually reduce their energy use themselves. The energy reduction demands could also be oversized because there were fewer participants.

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Nest says its customers that are enrolled in the Rush Hour Rewards program see their air conditioning energy usage reduced during peak grid events by over 55% on average. Nest's program is also rare in that it uses a device that has proven to be popular with consumers.

A growing program

Southern California Edison isn't the only utility that's turning to Nest thermostats. The tech company is also working with Austin Energy, Kansas City Power and Light, CPS Energy in San Antonio, Texas, and Commonwealth Edison in the Chicago area, among others around the United States.

Nest's Bixby, who gets an email every time a utility curbs their customers' energy consumption using the Nest thermostats, says the Rush Hour Rewards program already had a lot of use during this summer.

"During the heat wave, I couldn't keep up with my inbox with events around the country," says Bixby.

Nest won't reveal how many customers or how much energy load is currently under management by their Rush Hour Rewards Program. But Bixby says that program could theoretically have "gigawatts of capacity," if all the Nest thermostats installed out there were enabled to participate. In Southern California Edison's territory, he says that "many thousands" of Nest devices are already enrolled in the program.

Bixby says that while Nest itself is growing about 50% year over year in terms of revenues, sales, and customer installations, the Rush Hour Rewards program is growing 100% year over year. Nest expects that the program will double again in 2017.

Nest's smart thermostat.Nest's smart thermostat.  Courtesy: Nest 

Nest's overall business, which also includes smoke alarms and connected video cameras, has faced some hurdles this year. Nest's CEO and co-founder Tony Fadell left the company earlier this summer. The Alphabet subsidiary has reportedly been under increasingly pressure to grow and generate revenue, but Fadell's intense management style has been described as polarizing.

Compared to the rest of Nest's business, the energy programs with utilities appear be a relatively small but growing part. Nest is working with 50 energy service providers, and the company says 30% of homes in the U.S. have access to a utility that offers either a rebate for the Nest thermostat or offers Nest Rush Hour Rewards program.

A changing world

The company's demand response program is gaining some traction because it piggybacks on some key trends.

Homes and buildings are increasingly becoming digital, connected to the Internet, and enabled by smart software. Nest can easily tap into customers' Wi-Fi networks, and utilities can use Nest's algorithms to collectively control the devices during the peak grid times.

Many buildings also use thermostats, and utilities are encouraging customers to use Nest's thermostats (or other connected ones) by offering rebates and incentives. A Nest thermostat costs about $250 and customers are interested in the gadget beyond just to enroll in a demand response program. Other demand response programs that use battery banks or a smart hot water heaters could require a larger investment and are less compelling to consumers.

For more on Nest's thermostats, watch:

Utilities are also facing an increasingly uncertain future when it comes to where their sources of power will come from and how they'll be used. Solar and wind farms are being built across the country, but these power sources only provide energy when the wind blows and the sun shines. In some states, battery farms are being built to store some of this fluctuating power.

At the same time, some older nuclear and coal plants are being shut down across the U.S. without plans to replace those large assets. State and federal regulations are pushing utilities to make their power sources cleaner to reduce their carbon emissions.

Bixby sees a huge opportunity for Nest's thermostats to help utilities better manage the power grid and quickly reduce energy when needed in this changing world.

"There's no reason that you couldn’t have everybody participating in this," he says.

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