Technarians at the Gate: How Google Could Become Your Next Power Company

The corporate campus of Vivint Inc., among North America’s largest home-automation companies, rises up on the outskirts of Provo, Utah, a handsome sprawl of glass and gleaming white metal set against the snow-capped Wasatch Mountains.

On a recent day in a conference room of funk-modern furniture and floor-to-ceiling windows, Todd Pedersen, Vivint’s founder, chief executive officer and seer-in-chief, had come to explain how he’s steered what had been a burglar-alarm company into the electricity business, by plugging into the rooftop solar and digital energy-management revolutions.

The 45-year-old Pedersen could be in a commercial for the anti-CEO: the Lululemon workout shirt, the calculated stubble, piercing blue eyes and hair that looks like it’s trying to escape from beneath the hip-hop-brimmed ball caps he often wears to work.

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If you’re a utility industry executive, you might want to take a good look at him. His company, bought by private equity giant Blackstone Group LP (BX) in 2012 for about $2 billion, is already stealing away some of your business -- and plans to steal a lot more. And Vivint isn’t alone.

With more than 800,000 North American customers, Vivint is in the vanguard of what might be called Technarians at the Gate -- tech, cable, even phone companies -- that have begun to cast a covetous eye on the utility industry’s customers and revenue by exploiting the portals that they already have into tens of millions of American homes.

Photographer: Mike Fuentes/Bloomberg

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Photographer: Mike Fuentes/Bloomberg

Power lines in Garland, Texas.

Nest Acquisition

Google Inc. (GOOG) with its recent purchase of Nest Labs Inc.; Comcast Corp. with a pilot project to sell electricity with its cable packages; AT&T Inc. entering the smart thermostat business -- they and others are moving into positions that portend a challenge from companies with deep balance sheets to the 100-year-old regulated utility model.

In Silicon Valley, hotbed of startups that have upended entire industries, Peter Hebert, co-founder and managing partner of venture capital firm Lux Capital, sees “a proliferation of smaller startups all targeting this market.”

“It helps,” said Pedersen, sipping cold-pressed fruit juice, “that we’re competing against an industry that isn’t particularly evolving.”

Vivint isn’t the only one ready to pounce. “The battleground over the next five years in electricity will be at the house,” said David Crane, CEO of NRG Energy Inc. (NRG), the nation’s largest independent power producer, which competes against its conventional power customers with large investments in solar.

Photographer: Yuriko Nakao/Bloomberg

Todd Pedersen, Vivint’s founder, chief executive officer and seer-in-chief, steered what had been a burglar-alarm company into the electricity business, by plugging into the rooftop solar and digital energy-management revolutions. Close

Todd Pedersen, Vivint’s founder, chief executive officer and seer-in-chief, steered... Read More

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Photographer: Yuriko Nakao/Bloomberg

Todd Pedersen, Vivint’s founder, chief executive officer and seer-in-chief, steered what had been a burglar-alarm company into the electricity business, by plugging into the rooftop solar and digital energy-management revolutions.

Inside the Meter

“When we think of who our competitors or partners will be, it will be the Googles, Comcasts, AT&Ts who are already inside the meter. We aren’t worried about the utilities because they have no clue how to get beyond the meter, to be inside the house,” said Crane, who has voiced ambitions to turn NRG into the Amazon.com of the U.S. energy industry.

While the financial impact to date of this incursion on utility industry revenues is negligible, the long-term implications are anything but. At stake is a chunk of the nearly $400 billion a year retail power market and the future shape of an industry already under pressure from deregulation, green politics, the rooftop solar revolution and growing competition from independently owned, small-scale clones of the electric grid called microgrids.

Technology is the driver. These interlopers now have the ability or potential to install, generate and harvest cheap rooftop solar, selling to both consumers and the utilities themselves. They are also learning how to deploy smart technology that can track and aggregate energy conservation from millions of homes and businesses.

Demand Response

Known as demand response, these savings are essentially a commodity that can be sold into the wholesale power market for a profit or sold back to the utilities themselves because it take the pressure off during peak-generating periods. It can also spare power companies the costs of building expensive new plants and transmission lines -- even as it steals utility revenue and curbs growth opportunities.

This isn’t a small piece of pie. Though the idea of demand response has been around for decades, the ability to measure and harvest it digitally has given it new currency. Demand response has the potential to cut 10 percent off total U.S. peak demand by 2030 -- creating a market worth $3.5 billion, said Mike Gordon, CEO of Joule Assets Inc., a financier of energy efficiency and demand response projects based in Bedford Hills, New York.

Utility Threat

This won’t happen overnight and “it will take both successful policy and gadgets to do it,” according to Gordon, but the competitive threat to utilities from these interlopers is real.

The problem, from the utility viewpoint, is that profits are tied to a century-old model: A regulated monopoly that undertakes a steady expansion of power plants and distribution lines to serve an ever-expanding customer base. In exchange, it gets a guaranteed rate of return from regulators. Competition and disruptive technology do not fit well into that arrangement.

For consumers, the allure of the Technarians isn’t simply lower electricity bills and a choice of greener energy but the ability, through digitally controlled interfaces and gadgets offered for a fee by these vendors, to intricately control electricity use in ways impossible before.

Vivint, for example, offers a home-automation module with computerized energy-saving features -- the ability to set thermostats, control appliances and remotely adjustment temperatures -- even as it doubles as a security system.

Comcast Electricity

Meanwhile, Comcast, the cable giant, is in a pilot project with NRG in Pennsylvania that adds electricity to its cable, phone and Internet packages. AT&T last year entered the home automation and security business in 15 markets; while not yet planning power sales, it has introduced a smart thermostat that puts it solidly in the home energy-management business. It could do what Comcast and Vivint are doing.

Google’s $3.2 billion acquisition of smart-home startup Nest in February “ought to give utility officials a sinking feeling in the pit of their stomachs” since it makes clear the Technarians have begun to seriously eye at least the periphery of utility business if not its core, said Adrian Tuck, CEO of Tendril Networks Inc. a Boulder, Colorado-based energy-services management company.

Google Energy

While coy about its ultimate energy ambitions, Google is already a power generator through more than $1.4 billion in clean energy investments and holds a wholesale power license. Last month it contributed $100 million to a program to promote rooftop solar power with SunPower Corp.

Nest, maker of the Learning Thermostat that memorizes and adjusts to users’ preferences, gives Google a leap-ahead presence in the burgeoning smart-home market at the precise time that power in the U.S. has begun to flow both ways with the rise of rooftop solar and other forms of decentralized, home-grown energy, collectively called distributed generation.

Though Tuck said he has no special insight into Google’s thinking, he believes that its Nest acquisition may well be a “Trojan horse” that gives Google a back door into the utility industry with the ability to leverage its smart thermostats into massive quantities of salable demand response even as it begins to compete directly with utilities with its own green-power projects.

Google spokesman Tim Drinan declined to comment on Tuck’s speculation.

Tuck’s company Tendril is also doing a brisk business in advising regional cable, home-security and home-automation companies how to exploit this opening. He said the utilities he talks to feel constrained by tradition, phobia or regulatory uncertainties from wading in -- a mistake he likens to Eastman Kodak Co. being slow to join the digital camera revolution.

Airlines, Telecom

That utilities are under pressure from unprecedented forces is unquestionable. Last year, the Edison Electric Institute, a trade group representing the investor-owned utilities that accounted for 46 percent of U.S. power generated in 2012, warned in a report that the utility industry is in for a drubbing similar to what befell the airline and telecom industries in the 1970s unless it restructures its model for a greener, more digitally-and choice-driven age.

EEI said its utility members understand the dynamic and are working to address the competitive threat. “Customers today want more information about their electricity usage and how they can manage it better,” said Lisa Wood, executive director of the Edison Foundation Institute for Electric Innovation. Many utilities are working to smarten the grid in ways that encourage efficiency and empower their customers. “In fact, utilities see these new technologies as an opportunity to really engage customers and provide benefits on both sides of the meter,” Wood said.

‘Ma Bell’

The problem for the utility industry, said James Marston, vice president for U.S. climate and energy for the Environmental Defense Fund, is that “these days technology is far outpacing the utility industry’s movement toward change even though some progressive utilities are trying.”

“Look what happened to Ma Bell,” said Marston. “The appeal of technology plus control for the consumer is just too strong. I tell a lot of utility execs, ‘you can embrace this or get run over by it.’ We may not have flying cars yet but the Jetsons are here.”

Smart Home

Pedersen’s strategy for Vivint shows how this is already playing out even as he concedes it’s a path far from his original business plan. A one-time Mormon missionary and Brigham Young University dropout, he founded Vivint as APX Alarm in 1999, hiring other past Mormon missionaries to go door-to-door peddling home burglar-alarm systems. These are people good at ringing doorbells -- as the $2 billion sale to Blackstone would attest. (Pedersen, according to a U.S. Securities and Exchange Commission filing, still owns 12 percent of Vivint.)

The price tag makes clear that he had steered the company beyond home-security systems. Pedersen early on recognized how the convergence of the Internet, broadband and digital smart gadgets was starting to make the smart home look like a profitably smart idea and thus Vivint bloomed into a provider of home-automation services.

Vivint was also hitting its stride as the rooftop solar revolution began to catch hold and –- ding -- a bell went off. For the first time, power was now moving two ways in America, not just from the power plant to the home or office. If you already have a digital entry into a customer’s home, why not include electricity and energy management in your packet of services? After all, digital-age consumers have grown accustomed to a multitude of choices in gadgets and services. “We saw an opportunity in innovation,” said Pedersen.

Vivint Solar

Thus was born Vivint Solar in October 2011. Vivint will send workers in bright orange trucks to your home to install a rooftop solar system for free. You sign a 20-year contract, agreeing to buy back the electricity your system generates at rates 20 percent to 30 percent below the local utility rates.

Vivint is able to make money because ever-cheapening solar-panel prices plus economies of scale allow it to take a markup between what you pay for electricity and what it costs them to generate it. One example of these efficiencies: Vivint can install a typical 6 kilowatt rooftop solar system in four hours, a job that just a few years ago took three days.

Because Vivint’s customers are still tied to the grid, Vivint is able to also sell any excess power they generate back to the utilities under so-called net-metering programs by which state regulators mandate such purchases.

Monthly Services

Oh, and while Vivint has your attention, how about a smart energy-management system for $57.99 a month? With this, consumers can intricately control every conceivable facet of their home energy life. About 400,000 customers have so far signed up for this service, Pedersen said.

To date, Vivint Solar has customers in six states and the District of Columbia and in just two years accounts for nine percent of all rooftop solar installations, the company said.

“We want to do for the home what Apple did for the phone,” said David Bywater, Vivint’s chief operating officer. “Energy is a big part of that. The idea is to convince consumers that we can revolutionize the way we generate electricity yet do it for less than what you pay your local utility which, by the way, you hate and treats you horribly.”

The problem is “the utility doesn’t know how to sell anything,” said Pedersen.

If you wander into the spacious Nest Labs offices in Palo Alto, California, you can at least get a hint at what prompted Google to pay billions for a company started in a garage about four years ago and what gets people like Tuck to speculate that Google has larger plans than simply the smart-home market. On a recent overcast morning, engineers were arriving on Google-themed bicycles, joining a bustling parade of jeans and t-shirt-wearing employees heading into the Nest skunk works.

Ex-Apple Designers

Google’s view seems to be that Nest’s founders, Apple iPod and iPhone designers Tony Fadell and Matt Rogers, have figured out how to do something that has baffled regulators and giant energy companies for decades: Make energy conservation cool, sexy and fun. “We finally built the object of desire,” said Ben Bixby, director of energy products at Nest, of the Nest Learning Thermostat.

Nest already has hundreds of thousands of customers for its slick, colorful control module that learns consumers’ heating and cooling patterns over time and makes automatic temperature adjustments based on that history. By buying Nest, Google overnight gains an impressive position behind the power meter -- while getting data on the growing number of customers whose energy use is tracked online.

While Google owns Nest, the thermostat maker doesn’t co-mingle its data with its parent company and operates with an independent management team, Fadell said yesterday at Re/code’s Code Conference in Rancho Palos Verdes, California.

Demand Response

This is where the ability to aggregate demand response -- and turn it into a business -- starts to get interesting. The company can profit on both sides of the meter. Demand response is utility jargon for conservation programs in which the electricity market relies on people, not power plants, to meet electricity demand.

Essentially, these programs pay consumers to use less power during peak periods instead of paying utilities to generate more power -- what some call negawatts instead of megawatts. Typically, utilities contract with third parties -- like Nest -- whose smart, in-home technology allows them to aggregate the collective energy savings of their customers.

Court Ruling

Although a U.S. appeals court ruled last week that utilities aren’t required to pay industrial customers a rate for demand response equal to the cost of power generation, the ruling doesn’t kill the demand-response market or prevent aggregators from selling their energy savings. More likely, it will shift the issue of how much this aggregated conservation is worth to state utility regulators.

As EEI points out, many utilities have demand response programs on their own but the Technarians say they tend to be blunt instruments -- programs pushed on consumers based upon generic premises such as turning off air conditioners in the hottest part of the day or turning down a thermostat before leaving for work.

Nest’s approach has been to “pull” residents to conserve by making it technically effortless, Bixby said. When marketing its thermostats, you don’t hear phrases like “home-energy management” and “demand response,” he said. Instead, Nest talks about “delivering delightful experiences” and “maximizing comfort” and “minimizing bills.”

Consumer Control

Rebates to customers are instant and participation in energy-savings programs is optional, said Nest’s Bixby. The idea is give the consumer more control and cut down on the complexity of having to manage their utility bills.

“There are very few of our customers who think about what we are doing as energy management or energy management on behalf of the utility,” Bixby said. “They think ‘I want it to be 72 degrees here now and I don’t want my air conditioner to be running when I’m not there.’”

Nest sees utilities as partners, not competitors, he said.

What Nest has that many rivals don’t is “a good understanding of consumer psychology,” said Rob Coneybeer, a managing director of Shasta Ventures and a Nest early investor. Managing energy in the home looked “like it was a market that had products that were sorely in need of innovation,” Coneybeer said. “As a venture capitalist, you love it when technology is at a tipping point where you can disrupt a market where consumers have been massively underserved.”

Looming Change

Yet Nest’s revenue stream also comes from the utilities themselves. It has touted the ability to reduce energy demand of its users by more than 50 percent during the hottest days of the year, when power reserves start to dwindle and electricity becomes more expensive, Bixby said.

To date, utilities, including Edison International’s Southern California Edison and Exelon Corp. (EXC)’s Commonwealth Edison now pay Nest for this service although the company declines to say how much money it makes from these contracts.

No one can say for certain how this will ultimately play out. The allure of the Technarians so far has been strongest in tech-savvy, solar-friendly, high-cost power states and less so in places where cheap power prevails and consumers have little interest yet in power choice or energy management.

Still, change is coming. “The next 10 years are going to change the electricity industry more than the past 100,” said Patty Durand, executive director of the Smart Grid Consumer Collaborative, which counts utilities and Technarians among its members. “Consumers will be the recipient of attention instead of the way utilities have treated them for the past 100 years, which is as ‘load.’”

To contact the reporters on this story: Ehren Goossens in New York at egoossens1@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editors responsible for this story: Timothy Coulter at tcoulter@bloomberg.net; Susan Warren at susanwarren@bloomberg.net Will Wade, Stephen Cunningham

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