This article was taken from the August 2011 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online.
Clean-tech software business OPOWER had been in existence barely three years when, in March 2010, President Obama made a public visit to its headquarters in Arlington, Virginia, just outside Washington DC. There, he made a speech about job creation in the clean-energy industry and declared the company an American success story, "a model of what we want to be seeing all across the country". This happened just a month after David Cameron, soon to become British prime minister, gave a London TED talk where he also praised OPOWER. He cited their bills -- which compare consumers' use with that of their neighbours -- as an example of successful behavioural economics.
What fired Obama and Cameron's excitement is OPOWER's disruptive approach to energy supply: through analysis of consumer behaviour, customer-data analytics, iterative design of energy bills and targeted communications, the company promotes significantly lower power use. OPOWER cofounders Dan Yates, 33, and Alex Laskey, 34, have designed a methodology that engages consumers by doing away with utility-bill jargon and uses graphic design to make bills easier to understand. Messages and graphs clearly demonstrate measured energy savings, and OPOWER targets customers by using follow-up emails and text messages to issue reminders, cautions, alerts and tips on further savings. The company says that 85 percent of households exposed to its methods will cut their power consumption, typically by around 3.5 percent. "We invite our customers to set goals for themselves," says Laskey. "Our letter or email will say: 'Make a new year's resolution -- how much energy do you want to save?' Then, month after month, or every quarter, you get a message from us reminding you of that goal, rewarding you if you do well and giving you extra encouragement and recommendations when you're falling behind."
This approach was informed by the insights of behavioural scientist Robert Cialdini, who had worked for the Hewlett Foundation in Menlo Park, California. The foundation's aims include limiting the risk of climate change and improving education for students in California and elsewhere. Yates contacted Cialdini who, alongside colleague Wesley Schultz, produced a study showing how to motivate energy conservation via social and emotional factors.
Now OPOWER's chief scientist, Cialdini likes to illustrate his points with anecdotes of everyday life. For example, he says research shows that if a waiter leaves a mint on the tray with the bill, his tips rise by 3.3 per cent; if he leaves two mints, they rise by 14 percent. "The message," he says, "is that people give back to those who have given to them."
Cialdini's 1984 book Influence: The Psychology of Persuasion boils down to what he calls six "weapons of influence". One of them, the concept of "social proof", suggests that people are often swayed more by what their immediate neighbours are doing than by any other incentive -- financial or otherwise.
It was this idea that Yates and Laskey seized upon as a platform for building customer relationships. They would inform each utility customer how their energy use compared with that of an average of around 100 of their neighbours -- and then let competitive instincts take over. They would also arm these consumers with more than 100 energy-saving tips, from changing electricity-rate plans to turning down their thermostat.
Yates and Laskey started talking to utility executives, state legislators and environmental groups in early 2007. That spring, their testimony before the Texas state legislature led to Energy Efficiency Bill HB 3693, which set in law that "the energy savings from home-electricity reports could count towards the utilities' energy-efficiency goals".
This legislation made OPOWER attractive to utilities struggling with compliance targets, and to VCs: here was a
green-tech company that didn't require massive spending on infrastructure and that avoided the partisan politics associated with climate change. By mid-August of that year, they had raised $1.5 million (£900,000) in seed money, mainly from MHS Capital Partners in San Francisco.
OPOWER's home-energy report takes data about individual household usage and then analyses, verifies and sends it back to customers in targeted communications. "We don't sell reports with lots of information," Yates says. "We sell the idea of energy savings, with results that are measurable."
It draws upon hourly temperature and humidity data from weather stations across the US to suggest optimum household usage to reduce energy overloads at peak times. "It's what we call
'disaggregation'," Yates explains. "We take your hourly meter data and run proprietary regression analytics against the localised weather-data stream. We're able to use that to help diagnose the component of your usage that is your heating, your air conditioning or your base load, which is the stuff that's on all the time, such as your freezer, and separate out those loads to identify where you're having a problem with your excess." An important part of the company strategy is that it answers only to the utility, not the customer. This is the difference between OPOWER and Google's PowerMeter system, which rolled out in 2009. Google asks consumers to track their own electricity usage through a digitalised smart meter, which can be accessed from anywhere via a computer or mobile phone. OPOWER's other main rival, Microsoft's Hohm, recently announced a shift of focus to electric-vehicle charging, just two years after launching.
Yates and Laskey claim that the direct-to-consumer approach advocated by companies such as Google has largely failed because most people can't be bothered to monitor their own intake. Also, most homes in the US don't have smart meters -- until very recently, only four of OPOWER's 30 utility clients installed them.
Its recent deal with giant Californian utility Pacific Gas &
Electric will add five million customers with smart meters to the company portfolio; but, as Yates says, "The majority of our customers don't have smart meters installed in their homes, and they still get great savings. We're supportive of smart meters, but we don't sell them."
There have, however, been some doubters of OPOWER's intentions:
US bloggers in particular have questioned the motives of a company lobbying for government legislation from which it will financially benefit -- to the tune of $30 million in annual revenue from utility contracts, according to a 2010 interview with Yates. "For every dollar a utility spends on OPOWER's programmes, three get put back into ratepayers' pockets in terms of savings on their bills," says Laskey. "When the results of utility energy-efficiency investments are measured and only the cost-effective ones are rewarded, it is one of the least controversial ways to spend rate-payer funds: it financially benefits the customer as well as helping the utility run more smoothly. The fact that deregulated utilities are paying for our programmes proves that the product is driven by customer demand, not government regulation."
OPOWER employs 185 people in Arlington, part of a green-tech belt that has the highest percentage of technology workers in the US. By December, there will be 300 employees: a mixture of software engineers, product specialists, behavioural scientists, statisticians, marketing experts, infographic designers and efficiency advocates. The company currently supplies customer software for nearly all of the major utility companies in the US, handling data from more than 30 million households and claiming to generate energy savings that are equivalent to a third of the entire US solar industry.
Back in January 2007, Yates and Laskey -- who first met at Harvard -- were sharing a desk in a converted warehouse in San Francisco's Potrero Hill. Yates, originally from San Diego, had sold his educational-software company, Edusoft, to publisher Houghton Mifflin for a reported $20 million in 2004. Laskey, the son of a Brooklyn district attorney from Long Island, had been formulating environmental and energy policy for bodies such as The Nature Conservancy and League of Conservation Voters. At the time, Laskey and Yates didn't have a specific business in mind, but they knew that they wanted to use their expertise -- Yates with his gift for data analysis, Laskey with his campaigning skills -- to do something with an environmental slant.
The pair had read a New York Times article about the sharp rise in energy efficiency that occurred when a housing authority in the US replaced old fridges in low-income homes. Most green entrepreneurs, Yates and Laskey reflected, were looking at the supply side of energy -- far fewer were thinking about the demand. What if their business was about saving energy rather than making it?
It was a practical proposition for several reasons: the hardening regulatory pressures on western utility companies to cut emissions; the imperative for households to save energy; Yates's proven expertise in data-driven communications; and the immense potential cost-benefits to the US economy (according to McKinsey's 2009 report Unlocking Energy in the US Economy, energy-saving opportunities worth at least $130 billion go unrealised every year). "We had some basic realisations," Yates says. "There's a billion-and-a-half utility bills, for example, mailed out every year in the US -- that's a lot of wasted paper. Also, there's so much talk about the environment, and yet so little connection between the actions of an individual and that big talk."
OPOWER now supplies software for 52 utilities across 22 US states, saving its customers up to 3.5 per cent of their previous energy needs -- the equivalent of powering a city of 50,000 homes.
It claims that every dollar invested in its programme yields about three to four dollars in customer savings. The business has tripled in size every year, and is well incentivised: French biking holidays, for example, are a reward for client referrals. Last year the company announced that it had secured third-round financing of $50 million from Accel Partners, Kleiner Perkins Caufield &
Byers and New Enterprise Associates -- three of the biggest VC firms in technology. Energy efficiency was the most active segment of US green investing in the final quarter of last year, with 17 deals worth $162 million in total. "If we were deployed across all the United States," explains Yates, "a three per cent reduction in electricity saving is far more than the entire US solar and wind industry combined. This could be done tomorrow, and with immediate payback."
But what happens next? After the customers make their initial savings from the no-brainer "turn appliances off at the wall" tips, can they expect to continue making significant savings? "Home energy management is not a one-time action, much like money management is not solved by opening a savings account," says Laskey. "People's lifestyles evolve, and they need reminders and reinforcing messaging to maintain efficient behaviour. As new technologies become available they need advice on how to incorporate them into their lives."
Laskey is currently in discussion with utilities in Britain. "We think that in the UK we could save energy consumers approximately £570 million annually on today's rates," he says.
In March, the UK Department of Energy and Climate Change proposed installing 53 million smart meters in 30 million homes and businesses over the next 20 years. The result: the number of energy readings with a smart meter would, typically, increase from one a month to one every 15 minutes. Already, EU legislation makes it compulsory for energy-efficiency ratings to be published in all UK homes for sale or rent. New companies such as First Utility and the AIM-listed Bglobal are jockeying for position with the current "big six" utilities: EDF, British Gas, E.ON, npower, ScottishPower and Scottish & Southern Energy. OPOWER says it is very close to deals with at least one of them. "We have more consumer-energy-tagged data under management than anyone we're aware of in the US and, we think, internationally,"
Yates says. "I never wanted to be a businessman, I wanted to reduce carbon emissions. The business was a means to an end."
This article was originally published by WIRED UK
