Sure, the Nest Learning Thermostat is smart, user-friendly, and downright sexy, but at $249, it’s more a luxury item than a mass-market appliance. Indeed, Nest thermostats are highlighted in upscale real estate listings alongside marble countertops and stainless steel appliances. Although Nest has done well since its debut in 2011, with almost a million units sold, it’s hard to see how a luxury market item would justify the $3.2 billion price Google paid for Nest Labs earlier this year.

More Than a Thermostat

But Nest is not just selling sleek thermostats. Nest is partnering with utilities to provide residential demand-response programs. Currently, Nest offers two: Rush Hour Rewards and Seasonal Savings. Customers participating in Rush Hour Rewards are compensated for allowing their thermostats to be adjusted during peak demand episodes. During a Rush Hour episode, Nest automatically makes small adjustments to temperatures based on each customer’s past schedule and settings. Typically, this means “pre-cooling” before the peak demand and short periods of cooling during the rush hour. The program is fully automated—the customer doesn’t have to remember to adjust the temperature and doesn’t even need to know there is a rush hour event occurring.

Last summer, Rush Hour Rewards helped achieve a 55% reduction in energy use during peak times. A better sign of success, according to Nest, is how few customers manually changed the temperature during a peak event—just 14%. This is an indication that Nest’s approach to demand response keeps customers comfortable, which should result in greater and more consistent participation.

Rather than responding to specific events, Seasonal Savings, by contrast, makes small, gradual adjustments to participating customers’ thermostats twice a year—in early summer and winter. The Seasonal Savings algorithm takes a customer’s historical schedule and temperature preferences and what the Nest thermostat has learned from the customer’s use to identify small adjustments that will save energy while minimizing the noticeable change. Seasonal Savings helped reduce air conditioning usage by 4.7% on average by automatically making small temperature adjustments over time. On average, the temperature changes were less than 1 degree.

Demand Response 2.0

Nest is not the first company to offer such programs, but it has uniquely combined smart and effective algorithms with a customer-focused approach. Most demand response programs require customers to allow their utility to simply shut off air-conditioning units with special thermostats. Other utility demand response programs send an email with savings tips and hope the customer remembers to implement them. The inflexibility and effort required with these programs are major barriers to greater participation. Both Rush Hour Rewards and Seasonal Savings are designed so that customers don’t even notice the changes. “In fact, 84% of customers who participated in Rush Hour Rewards and 89% of customers who participated in Seasonal Savings told us they were just as comfortable as they were before they participated in our energy service programs,” Tony Fadell, Nest founder and CEO, said in a statement. “This is critical to the adoption and ultimate success of these programs.”

Most importantly, Nest’s demand response programs are fast responding and centrally controlled. The main issue facing utilities and grid operators today is integrating renewable energy generation and the increased ramping that results. To address this issue, the California Independent System Operator (CAISO) is focused on increasing the availability of fast-responding demand response programs that it can control. CAISO wants more resources that are callable at a certain time or during certain system conditions. Specifically, in response to critical emergency or stressed system conditions, CAISO needs to be able to dispatch the demand response program itself based on real-time system needs.

Currently, Rush Hour Rewards episodes are called on by utilities, usually a day in advance of a forecasted shortage. However, Nest has just announced Rush Hour Rewards 2.0. In the past, Rush Hour events would last two to four hours, depending on the utility’s best guess of air-conditioning needs during a heat wave. Rush Hours Rewards 2.0 will allow on-demand events that last just 30 minutes. This option gives energy companies and grid operators the ability to react quickly to rapidly changing system conditions. This will be valuable during unexpectedly hot days and could also be used to respond to sudden changes in production from intermittent renewable generation. With Rush Hour Rewards 2.0, power companies and grid operators will be able to act quickly to balance energy needs instead of having to guess the day before.

It does not appear that selling fancy thermostats to design- and green-minded consumers is the reason for Google’s $3.2 billion investment in Nest. Rather, the potential is for Nest/Google to use the technology to become a major player in energy markets. Together, Nest and Google could help multiply the reach of this technology in a way that utilities have failed to do with utility-run demand response programs. While individual customers may notice few changes in their heating and cooling, the impact this technology will have when aggregated at utility scale could help avoid development of new power plants and transmission lines. ■

Olivia Para ([email protected]) is an associate in Davis Wright Tremaine’s energy practice group in the firm’s San Francisco office.