FirstFuel: Is this startup the next Nest?

April 2, 2014, 8:19 PM UTC

FORTUNE — Move over social media. The next hot tech sector might just be the very unsexy-sounding energy efficiency business. Companies in this industry use sophisticated algorithms to analyze how much energy a home or building uses and then suggest energy-saving solutions.

Nest, founded by ex-Apple designer Tony Fadell, is the most famous example. His elegant Nest thermostat “learns” your living patterns and turns down the heat when you’re not around. In January Google (GOOG), apparently seeing a future in energy efficiency, bought the company for $3.2 billion. Opower, a startup that works with utilities to map energy use in homes and find ways to save power, announced in March that it plans to IPO and raise $100 million.

The next disruptor in this space just might be a small Lexington, Mass., startup founded in 2009 called FirstFuel. Its name, says founder and CEO Swapnil Shah, comes from the idea that energy efficiency should be considered the first fuel. In other words, instead of building a new coal or gas plant, get the electrical power you need from energy savings.

The private company, which won’t reveal revenues or profits, seems off to a fast start. Its focus is to find energy savings in America’s 17 million commercial buildings, which account for a hefty 35% of the nation’s energy demand. FirstFuel acts as an intelligence provider for utility companies and commercial building owners, a kind of Dun & Bradstreet for energy efficiency. It has an analytics software technology that allows it to create rich information on buildings ranging from what time the AC goes on to what the weather in the facility’s area is that day. Then the company analyzes this information to make recommendations to achieve large-scale efficiency savings. “The information is very specific,” says Shah. “We don’t just say you need more energy-efficient lights. We can tell the building manager he needs to replace five lights on the 14th floor.”

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What’s behind this drive for efficiency? To combat climate change, regulators are pressuring the $2.2 trillion utility industry to build fewer plants and close old, polluting coal plants, while at the same time providing a steady supply of electricity. One way to do this is for utilities to implement energy-efficiency programs that reduce usage. In fact the industry spends about $11 billion a year for efficiency programs, a pot of money FirstFuel is tapping into.

Says Dhiraj Malkani a venture capitalist at Rockport Capital Partners and an investor in FirstFuel: “The company provides the missing link for utilities and governments trying to hit these big commercial-building efficiency goals we keep hearing about.”

So far FirstFuel has picked up 15 large customers, including the California utility PG&E, the Defense Department, and the Government Services Administration (GSA).

So does FirstFuel’s software really work? The GSA owns and manages 9,000 federal buildings including courthouses, federal office complexes, and border stations — 378 million square feet in total — the equivalent of almost three-fourths of all the office space in Manhattan. A little over a year ago it hired FirstFuel to conduct automated audits of its buildings — previously all audits had to be done by sending crews out, which was a time-consuming process that could cost as much as $15,000 a building. According to Mark Ewing, the director of the energy division at the GSA, FirstFuel has identified $15 million in energy savings in the first 100 buildings it audited — a nice windfall for taxpayers. Most of the savings come not from expensive retrofits, but from simply changing behaviors such as turning out the lights when no one’s in the building.

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As Dorothy Robyn, who recently stepped down as the public building commissioner at GSA, puts it: “The software reduces operating costs, energy and water consumption, and CO2 emissions, all while making our tenants happy.”

How do the prospects look for FirstFuel? The commercial market is huge, and FirstFuel has only begun to penetrate it. Competitors, however, are emerging. Opower, which has been concentrating on the smaller residential market, has recently moved into the commercial space. Tom Siebel, the Silicon Valley billionaire, runs a company called C3, which partly plays in the same space as FirstFuel.

That’s not fazing Shah, who believes that no one has a software system like his that can analyze energy use practically in real time. “Besides, he says, “this market is plenty big for everyone.”