Homes Schooled in Energy Management

Consumers are cutting back on almost everything. They’re switching to discount stores, eating at fewer restaurants and driving hybrid cars to save on gas. Yet when it comes to cutting corners on home energy consumption, like not running the dishwasher during peak times, most people are still in the dark.

But a growing number of venture capitalists and startups believe that home energy management is the next frontier in the fight against global warming—and the lingering recession. Over the past few years, VCs and corporate investors have pumped more than $700 million into 20 companies that offer devices and services that enable consumers to personally manage their energy usage by tapping into the smart grid, according to data gathered by Thomson Reuters (publisher of VCJ). (See table.)

Pike Research, which specializes in smart energy research, says a number of factors are converging to make the home energy market a hot spot, including rising energy costs, growing environmental awareness among consumers, government incentives and utility-sponsored energy-efficiency programs.

Utilities and the U.S. government have been pumping billions into the construction of a cleaner, more efficient electrical grid that uses two-way digital technology to speak to a variety of appliances within the home. This new communications channel could help utilities and their customers save energy, reduce cost and increase reliability.

Under a typical scenario, you would install an energy management device that talks to your smart meter, which is wirelessly connected to your utility company. The device then tells you how much electricity your washing machine is using in real time and what it costs. It also tells you the price of electricity based on the time of day and year, allowing you to avoid using certain appliances during high-cost periods.

Once we open up the smart grid to the home, who knows what great leaps we’ll see in terms of creativity, innovation and entrepreneurial activity? It’s like the Internet 15 years ago.”

Jesse Berst

If you’re running your washing machine in the middle of the day, when prices are typically higher, you will be immediately notified that you are paying more for electricity. The idea is that consumers will change their energy consumption habits based on the real-time feedback.

To date, most of the money that has gone into the smart grid, including $4.5 billion in federal government spending, has gone into developing infrastructure and upgrading technology at utilities. Now the spotlight is moving over to consumers. In the next few years, more than 30 million U.S. households are scheduled to have smart meters installed. To realize the benefits offered by the smart grid, each of these households will need to connect their smart meter to a home energy management service.

“What’s the point of implementing smart-grid features like peak-time pricing and demand response if you have no way to communicate to consumers what the price of electricity right now actually is?” asks Andrew Williamson, a director at Physic Ventures and investor in EnergyHub, which sells home energy management systems.

Jesse Berst, managing director at energy research firm GlobalSmartEnergy, says the market for home energy devices could be as large as $3 billion annually within the next three years. And Pike Research predicts that home energy management systems and energy information displays will be used by more than 28 million people worldwide within five years.

Utilities are now furiously setting up trials with a slew of venture-backed energy management companies that are bringing the smart grid directly into the home. Here’s a sampling of the activity:

One home in Texas saved more than $1,000 with EcoFactor over the course of the year, and the people said they were even more comfortable.”

Nat Goldhaber

• Control4, which sells a full suite of home automation services, has entered into partnership with a number of utilities, including Xcel Energy and Bluebonnet Electric Cooperative. It raised $17.3 million last year from Foundation Capital, Mercato Partners, vSpring Capital and others to target the energy market, bringing its total funding to about $94 million.

• EcoFactor, a provider of software that can continuously adjust the settings of a home thermostat based outside temperature and real time price of energy, is in a trial with Oncor, which delivers power to 3 million customers in Texas. The company netted $2.4 million from Claremont Creek Ventures last December.

• EnergyHub, a maker of an energy management system that wirelessly connects to various appliances and thermostats in the home, has partnered with Con Edison to introduce its device to homeowners in New York. EnergyHub has raised more than raised $3 million in Series A financing from .406 Ventures and Physic Ventures.

• GroundedPower, which delivers real-time electricity consumption data to consumers over the Web, has partnered with six municipal-owned electric companies in Massachusetts to pilot its technology. It has raised just under $1 million from an undisclosed investor.

• And Tendril Networks, a maker of a smart grid-connected device that shows how much energy a household is using and how much it costs, is in trials with Con Edison, Reliant Energy, Tucson Electric Power and others. Last year, the company secured $30 million in series C financing led by VantagePoint Venture Partners.

I don’t believe that homeowners will engage en masse around energy management because there is nothing sexy about it. There’s no way they’ll pay $10 a month for it. In fact, I don’t think they’ll pay anything.”

Steve Vassallo

For many of these home energy management startups, utilities are where the rubber meets the road. Without them, these largely unknown companies would have a very difficult time gaining access to consumers.

James D. Robinson IV, a managing partner at RRE Ventures and an investor in two energy management startups, Tendril and OpenPeak, says that it may already be too late for companies that haven’t already forged relationships with utilities. “My sense is that utilities have spent the last 12 or 18 months looking at these consumer smart grid companies and figuring out where the state of art is,” he says. “They’re in their final stage of analysis.”

The big unknown, however, is whether consumers are paying attention. “The real risk is that no one ends up caring,” says Robinson. “It’s difficult to know for sure if and when people will change their behavior.”

The early signs are ominous. A smart-meter rollout by Pacific Gas & Electric (PG&E) turned ugly in Bakersfield, Calif., when residents began complaining that their new smart meters were malfunctioning and that their utility bills were suddenly two to three times higher. Other consumers are claiming that smart meters are a violation of their privacy and thus unconstitutional because of the real-time information they provide to utilities about household energy consumption habits. Causing further uncertainty are new reports of alleged security holes in smart meters that could allow hackers to tap into the communications between the homeowner and the utility. In such a scenario, hackers could remotely shut down power to a person’s home or run up the utility bill, critics say.

Another burning question: If consumers do embrace home energy management, how much are they willing to pay for it? Nat Goldhaber, managing director at Claremont Creek and an investor in EcoFactor, says most people would gladly pay $8 to $10 a month for a smart thermostat that could reduce their overall energy bill, while still keeping their homes comfy and cozy. “One home in Texas saved more than $1,000 with EcoFactor over the course of the year, and the people said they were even more comfortable,” he says. “The payback is quite dramatic.”

The real risk is that no one ends up caring. It’s difficult to know for sure if and when people will change their behavior.”

James D. Robinson IV

EnergyHub is so confident about consumer demand that it will soon start selling its device directly to consumers via retail channels. The company won’t reveal the names of stories that will carry its product, but chains like Home Depot and Best Buy are a logical choice. Consumers would pay roughly $100 for the hardware, and then pay a monthly fee for the ability to automatically shut down appliances during peak pricing hours.

But Steve Vassallo, a venture partner at Foundation Capital and an investor in Control4, thinks companies like EnergyHub and EcoFactor are dreaming. “I don’t believe that homeowners will engage en masse around energy management because there is nothing sexy about it,” he says. “There’s no way they’ll pay $10 a month for it. In fact, I don’t think they’ll pay anything.”

For its part, Control4 is betting that the utilities will offer energy management technology for free. How can they afford to do that? It’s simple, explains Vassallo. Utilities are motivated to get consumers to conserve, because, paradoxically, the less energy they use, the more money utilities can make. That’s because they no longer have to build expensive new power plants or turn on reserves during periods of high demand, which costs them millions.

“The real benefits are cost savings that go directly to the utilities, so they should be the ones to pay for it,” Vassallo says.

Essentially, Control4 wants utilities to become a major distribution channel for its all-purpose home automation system. The system includes a variety of applications for home entertainment, security monitoring and lighting control, as well as energy management. Once users get comfortable with the energy management piece, they will be motivated to upgrade to the other Control4 services, for which they will pay a fee, Vassallo predicts.

It’s still too early to tell which company is taking the right approach and who will ultimately win. But the consumer smart grid field is getting more crowded every day, and not just with startups. Google has set its sights on the market with PowerMeter, a software application that helps consumers track their home electricity usage. Also active in the market are Microsoft and Cisco.

Even smart grid infrastructure players are making moves on the consumer front. Silver Spring Networks, for example, has raised $275 million for its smart grid technology, and recently used an undisclosed amount of that money to buy Greenbox Technology, a startup known for its home energy management software.

Berst at GlobalSmartEnergy believes this is just the beginning. “Once we open up the smart grid to the home, who knows what great leaps we’ll see in terms of creativity, innovation and entrepreneurial activity?” he wonders. “It’s like the Internet 15 years ago. We simply can’t foresee what will happen. But we know it will be exciting.”