Tag Archives: Honeywell

Google’s Acquisition of Nest Shows How B2C and Advanced Automation Make for Success in HEM

Yesterday Google announced a cash purchase of home automation start-up Nest Labs for $3.2 billion; Google Ventures has been a major investor in the company, whose last funding round totaled $80 million (client registration required). The acquisition represents a re-entry of sorts: Information technology companies’ initial foray into HEM last decade proved to be tricky, owing to fragmented utility sector, lack of clear standards, high hardware costs, and lack of clear incentives, leading Google, Microsoft, and Cisco to exit the space in late 2011 (client registration required). Google’s acquisition signals that home energy management (HEM) is a hot sector for investment again. In addition to Google, Microsoft has shown the intention of re-entering HEM with the acquisition (client registration required) of id8 Group R2 studios in Q4 2012.

Nest labs has done three things well to overcome the difficulties faced previously by HEM segment: 1) making an aesthetically appealing device with a simple payback under two years, which is the tipping point for the residential consumer; 2) combining a B2C distribution strategy with advanced automation capabilities; and 3) moving beyond energy management into security and smoke detection to offer a more complete user-comfort package (client registration required). Lux Research mapped 25 innovative developers in the HEM space based on their distribution strategy and automation capabilities (see upcoming report “Master of the House: Cutting through the Hype in the Home Energy Management Space“). What is striking is that there are just three companies that have both B2C and advanced automation: Nest Labs, Tado, and There Corporation.

Although the price for the acquisition looks rather high, 4X of the valuation in the last funding round in January 2013Google has three distinct motivations for it: 1) innovation in smartphones and tablets is incremental and arguably with diminishing marginal utility; 2) a smart thermostat and smoke detector are good additions to the line of connected gadgets from Google such as Google Glass; and 3) the acquisition fits with Google’s long standing strategy (client registration required) of clean energy and energy efficiency investments.

The Nest acquisition has critical implications for utilities, venture investors, and consumer electronics companies. Utilities are looking for differentiation and customer retention, especially in a market like the U.S., which has 3,200 utilities, so partnering with large analytical powerhouses such as Google can now be very attractive. There have been early signs of such collaborations between Nest Labs and NRG Energy. For investors like Nest backers Kleiner Perkins, the attractive returns underscore the appeal of energy IT or “cleanweb” sector for the 10-year venture fund, no doubt prompting the VC herd to keep sniffing around for me-too deals. Finally, Nest’s success will increase the already high interest in “smart homes” from consumer electronics companies such as LG Chemicals and Samsung. Conventional thermostat manufacturers such as Honeywell have been behind the curve on this, and have previously tried to stop Nest through legal means (client registration required). These laggards should change tactics and seek a second mover advantage by coming up with a better version of the smart thermostat.

Occupancy Counting Devices Poised to Seriously Disrupt the Building Integration Space

Recently, we spoke with senior researchers at the U.S. Pacific Northwest National Lab (PNNL), who are working on an “occupancy counting device” (OCD). Such a device would use low-resolution video imaging coupled with image processing to determine the number of people in a given room, with decent accuracy. Currently occupancy counts are approximated using CO2 sensors, which are imperfect in their latency as well as calibration – they tend to drift from their set-points after a couple of years. The other disadvantage is cost, as CO2 sensors cost $100 to $200 each, plus a hefty installation labor cost. PNNL is aiming to produce a commercial prototype of an occupancy counter by the end of 2013, which it hopes to market for $60. Researchers claim to already be in talks with an EU-based sensor company that could make the internals, and thought has been given to working with EnOcean to provide energy harvesting capability. As if this isn’t dramatic enough, PNNL wants to incorporate temperature sensing capability as well, meaning one of their devices could replace three devices: an occupancy sensor (for lights), a temperature sensor, and a CO2 sensor – all for the price of a simple occupancy sensor (used for lighting).

Earlier this year, we pointed out the increasing interest in occupancy (client registration required) rates, because of potential to leverage this data to reduce ventilation air supply to spaces – known as demand-control ventilation (DCV). Several sources claim ventilation savings as high as 40% in commercial offices when leveraging this strategy, and primary research indicates that the energy savings for a relatively high-performing new office building, the savings may be 1% to 4% of total annual energy savings. In addition to DCV, the smart players are looking to building systems integration, such as Digital Lumens (client registration required), who in Q2 2013 announced a plan to collaborate (client registration required) with other lighting suppliers and even HVAC sensor and equipment makers to leverage their sensing and control capability beyond just the lighting system. We believe a high cost of deploying building energy management (BEMS) in existing buildings, especially those at the bottom of the pyramid, is the high cost and invasiveness of sensors and controls installation. Should PNNL deliver their multi-function OCD, it would present a strong threat to controls incumbents, such as Johnson Controls and Honeywell.

The demand response market shakeout continues

On March 3, the building controls giant Johnson Controls announced its acquisition of EnergyConnect, a demand response company, for $32 million. EnergyConnect offers a software-as-a-service energy dashboard focused on the commercial and industrial (C&I) “price-response” demand response market, which helps customers save money by shifting consumption to times with lower electricity rates. It also offers traditional “dispatch” demand response to reduce energy consumption during periods of peak demand. 

Building on a 60% revenue growth in 2010, EnergyConnect further increased its acquisition appeal in January when it won a multi-year contract with the California State University (CSU) system, which also happens to be a customer of EnergyConnect’s competitor EnerNOC. This head-to-head competition of direct response players within one institution is indicative of the increasingly competitive C&I marketplace, and the competition will only get hotter as building management systems integrate more deeply with smart-grid systems. 

The strategic alignment of Johnson Controls with EnergyConnect furthers the ongoing consolidation in the DR industry, highlighted last year when Honeywell acquired Akuacom (see the May 17, 2010 LRGJ*). The “big four” building controls companies – JCI, Honeywell, Siemens, and Schneider Electric – all now have significant stakes in the lucrative C&I demand response market. As these diversified companies supplement their core offerings with a demand response add-on it will squeeze pure-play demand response providers like EnerNOC and Comverge by driving their margins down (see the November 17, 2010 LRPJ*).

As we reported last fall (see the September 29, 2010 LRPJ*), it is not only the building controls companies who are applying the squeeze, but also utilities (see the September 22, 2010 LRPJ*) and third-party deal-makers. As the size of the pie for C&I demand response grows, the winners will be determined not only by their ability to find new slices in uncharted territory, but also their ability to take bites out of competitors’ pieces by offering multiple DR services. Clients should divest investments in pure-play demand response companies, and look to establish partnerships in the building IT space before the best offerings are off the table (see the Lux Research report, Sifting Winners from Losers in the Building IT Acquisition Frenzy*).

*Client registration required.

Solazyme files for IPO

As we mentioned in an earlier post, Solazyme recently filed for an initial public offering (IPO) targeting $100 million. This wasn’t a surprise: Just as we had seen Amyris form multiple strong partnerships in the months leading up to its IPO (see the July 6, 2010 LRBJ*), Solazyme’s been revving up its own stable of new partnerships. It’s been forging partnerships in fuels and chemicals more intensely in recent months than it has throughout its lifetime. Since September, the company has inked deals with Bunge, Unilever, and Roquette (see the September 14, 2010 LRBJ* and the November 9, 2010 LRBJ*) on top of existing relationships with companies like Chevron, Honeywell, Abengoa, and Virgin (see the August 17, 2010 LRBJ*), and a joint development agreement with Dow announced last week.

Some highlights from the company’s S-1 include the company’s claims that it has already achieved “attractive margins when utilizing partner and contract manufacturing for the nutrition and skin and personal care markets,” and that it believes it can undercut fuels “when we commence production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock,” citing oils at a cost below $1,000 per metric ton, $3.44 per gallon, or $0.91 per liter.

Solazyme also notes that its Roquette JV will fund an approximately 50,000 metric-ton-per-year facility for nutrition products, which would be the first serious challenge to DSM-owned Martek (see the January 13, 2011 LRMCJ*). The company also mentioned a deal with Colombia’s national oil company (NOC), Ecopetrol, and a Brazilian letter of intent to form a JV that would add capacity of 400,000 metric tons of oil per year – nearly a thousandfold increase over the 455 metric tons the company produced in 2010.

But for all its strengths, Solazyme still lost $16 million last year on $39 million in revenue. By comparison, Amyris brought in $65 million in 2009, the year before its IPO.

While there are always reasons to be cautious when a loss-making company files for an IPO, one of the biggest challenges Solazyme will face is the public market’s mistaken association of its technology with older technologies like corn ethanol or dodgy algae developers. Solazyme is indeed an algae company. But it is wholly different from certain competitors, whose reliance on hype rather than commercially viable technologies poison the pond (pun intended) for legitimate players like Solazyme, Phycal, and Algenol (see the November 13, 2010 LRBJ*, the August 17, 2010 LRBJ*, and the March 10, 2009 LRBJ*). Gevo and Amyris represent better comparisons for Solazyme, and both had relatively successful IPOs (see the October 12, 2010 LRBJ* and the February 10, 2011 LRMCJ*). 

* Client registration required.

Demand response auctioning tightens the belt on pure-play providers

We recently talked with World Energy Solutions, an energy management services company that assists with auctioning of electricity and gas supplies, carbon and renewable energy credits. Notably, the company also conducts auctions in which demand response (DR) providers submit bids for government, commercial, and industrial contracts.

While DR providers profit by retaining a share of the revenues from these contracts, World Energy Solutions’ auctioning process motivates them to increase the share of revenue passed on to the customer in order to win the contract.

World Energy Solutions began its DR auctioning program in February of 2010, and it currently has a contract with Alban Engine, a PJM-based Caterpillar dealer, to auction off 1,500 MW of capacity to a number of DR providers. While its service remains in an early stage, increased competition like this can threaten the margins of DR providers that have a narrow market focus. More specifically, it gives the upper hand to utilities that would rather offer DR services directly than work with a third-party DR provider.

Providers with a primary focus on DR currently enjoy healthy gross margins, with EnerNOC and Comverge reporting 45% and 32%, respectively, from DR contracts for fiscal year 2009. However, when competing on price, a DR provider would need to forfeit at least 10% of the contract revenues, given that World Energy Solution’s share of the transaction amounts to roughly 5% of the contract value. This could signify moving from an 80:20 revenue share between customer and provider to a 85:5:10 share between the customer, the auction coordinator, and the provider.

Apply that shift to all contracts, and EnerNOC’s gross margins could drop to about -10%, and Comverge’s to approximately -36%. Meanwhile, more diversified competitors such as Honeywell and Silver Spring Networks, as well as utilities including Constellation Energy and Pacific Gas and Electric, are significantly less dependent on the rates of DR contracts and more capable of undercutting their competition – a concern that EnerNOC has expressed previously (see the September 29, 2010 LRPJ – client registration required). If pricing pressure persists, DR providers without a diversified source of revenues will get edged out. This lesson can be applied to the greater smart-grid industry, where innovative companies once enjoyed the benefits of an early-mover advantage. But as larger competitors enter the maturing smart-grid industry, scale and competitive pricing will determine the victor.

Honeywell’s entrance into demand response sends shivers through the nascent industry

Earlier this month, Honeywell announced its acquisition of Akuacom, a Bay-area company that provides automated demand response technology and services for the smart grid. The acquisition beefs up Honeywell’s current smart-grid portfolio by enabling it to provide utilities and independent system operators (ISOs) two-way communication with energy management systems at commercial and industrial sites. This capability lets utilities and ISOs automate the delivery of price and reliability signals to these facilities and more effectively trim peak demand.

With nearly ubiquitous temperature and HVAC controls (several of which already interface with demand response software), Honeywell is already one of the “big four” building controls firms – along with Johnson Controls, Siemens, and Schneider Electric. The company is currently the largest residential demand response player in North America. It also has a presence in more than 10 million commercial buildings and thousands of industrial plants. As such, adding demand  response technology will let Honeywell leap from inside the building envelope to the utility and provide an end-to-end connection between energy provider and user to reduce peak energy demand and maintain optimum building efficiency.

The acquisition marks the beginning of industry consolidation that will see a handful of winners emerging from the demand response segment. Among them will be established early entrants like EnerNOC, and a half dozen or so alignments between large building control players and key demand response firms. There may also be one or two stranger alliances between large appliance makers and demand response firms, such as by the Tendril-GE pact. Thus, look for a few more high-profile demand response acquisitions to occur as  other stalwart control firms quickly follow suit in the wake of Honeywell’s Akuocom acquisition. Meanwhile, we also expect the vast majority of mass-produced, VC-backed demand response and building energy management firms to be frozen out of the market and fall off the map.