AI Analytics Heats Up HVAC
With the acquisition of EcoFactor, Trane adds intelligence to its heating and cooling products.
“To our knowledge, we’re the only ones that have done it at scale, with the type of results we’ve seen. That’s an interesting technology for a number of people in the market.” — Shayan Habib, CEO of Ecofactor
The manufacturing industry is built on established processes, long-standing value chains, and painstakingly slow operational improvements. Yet, in an age of innovation and technology, traditional industrial companies are acquiring future-oriented and digital-enabled businesses at an accelerating pace.
These acquisitions have proven to be highly successful, providing companies with an opportunity to expand their reach beyond the boundaries of their traditional segments, move up or down the value chain and add software development capabilities that can enhance entire product lines and transform their business models.
On June 13th, 2019, manufacturing company Trane took a step toward the future with their acquisition of AI-analytics platform EcoFactor. With this acquisition, Trane’s heating, ventilating and air conditioning (HVAC) systems gain new capabilities that propel them into an energy future dominated more by software and algorithms rather than by condensers and fans.
Who is Trane?
Known well for its HVAC systems for both residential and commercial applications, Trane also offers building management systems and controls. Trane is a top player in the industry. It has set itself apart from the competition with their broad range of systems, from air conditioners, to heat pumps, to thermostats.
Not only do they manufacture these systems, but they also provide servicing for their units, offering evaluations and repairs with seasonal and emergency maintenance services. Founded in 1913, Trane was acquired by Ingersoll Rand in June 2008 for approximately $10 billion, in an industry-shaking deal.
Ingersoll Rand (IR) is a global industrial manufacturing conglomerate based in Ireland, with global revenues in excess of $15 billion, almost 50,000 employees and commercial presence in 100+ countries. IR’s brands offer products and services in a range of climate and industrial equipment and applications, from commercial and residential HVAC, to heating, refrigerated transportation, compression technologies, and fluid handling. IR also owns, since the mid-90s, Club Car, a Georgia-based manufacturer of small-wheel, zero-emissions electric vehicles and carts.
Trane represents the main pillar of IR’s climate segment, which accounts for three-quarters of IR’s revenue. Given announced divestiture of Carrier by United Technologies, IR’s strategy seems to be one that aims to become a market leader in climate technologies to compete globally with the top Asian producers.
A stated commitment of IR is to focus on the global “megatrends” of sustainability, energy efficiency and “digital connectedness”, to reduce energy demand and greenhouse gas emissions which they see as a massive, global growth opportunity. IR’s pattern of M&A activity is in large part informed by this opportunity.
Who is EcoFactor?
EcoFactor is Silicon Valley-based residential energy analytics startups, “reinventing home savings” with their unique AI-analytics platform that is programmed into home thermostats. EcoFactor offers three innovative services to their customers: proactive energy efficiency, using thermostat data to minimize energy consumption; optimized demand response, helping utility and energy retailers create DR programs; and HVAC performance monitoring, detecting degradation of HVAC performance.
EcoFactor’s smart thermostats are designed to support optimized demand management, using a cloud-based platform and AI algorithms to process data streams. These data streams include not only the settings for their thermostats, but also individual comfort preferences and local weather conditions.
Having raised $31 million since their founding in 2006, including $10 million from NRG Energy, one of the leading integrated power companies in the US, EcoFactor made waves in innovation with their platform, offering energy-efficient solutions for their customers, claiming 10 to 15% in annual HVAC bill savings. With home heating and air conditioning consuming almost 40% of total household energy in the US alone, according to the DOE, the opportunity is obviously enormous.
EcoFactor has, in fact, tapped into an ongoing industry shift towards more and more stringent efficiency regulations in North America and the European Union and growing demand for Home Energy Management Systems (HEMS), a market expected to reach almost $4.5 billion by 2024, to claim a spot among the most promising energy management software startups. EcoFactor raised several financing rounds from Aster Capital, Claremont Creek Ventures, NRG and RockPort Capital Partners.
The Deal
At the 2012 CES consumer electronics show in Las Vegas, IR unveiled its Nexia home automation and security platform. A collaboration between Trane and Schlage, Nexia was designed to deliver a complete residential system that could manage locks, cameras, lighting, air conditioners and thermostats and which included web and mobile-connected applications. The system received mixed reviews and several commercial partnerships notwithstanding failed to make significant inroads in a crowded residential DIY market that eventually became dominated by a handful of players including Google’s Nest, Amazon’s Ring, and Samsung’s SmartThings.
In EcoFactor, Trane saw a synergistic opportunity to add “unique artificial intelligence (AI) capabilities for energy efficiency and HVAC fault detection” and the data EcoFactor processes through its installed base, to the Nexia platform in an effort to focus it on efficiency and differentiate it from competitors. There are also other aspects of EcoFactor’s business model that make it particularly attractive to an industrial player like Trane.
Unlike, for example, Nest, which was launched as a consumer product with a direct online channel, EcoFactor’s business model has relied heavily on utilities as a channel. In many states, IOUs and regional utilities underwrite heavily funded programs for energy efficiency, demand response, and monitoring, which represent a well-establish path to market for technology vendors and equipment makers. Rebates and customer incentives in particular help lesser-known, but technologically advanced solution, accelerate customer acquisition. EcoFactor’s investment in working with, and through, utilities and partners, such as NV Energy, ComEd and Comcast meant that it had ample opportunity to test its technology and software in the field and demonstrate it could generate real benefits while building deep channel relationships with utilities.
Finally, the growing importance of demand response mechanisms in the energy markets have made companies like EcoFactor, which are all working to cut a slice of the demand response pie, particularly attractive acquisition targets. Similar to Trane, many other companies are taking the plunge into demand response deals. In early 2019, Shell New Energies acquired UK-based Limejump. In December 2018, LS Power, a power plant and transmission line investment company, purchased demand response-giant CPower for an undisclosed sum. One year prior in June of 2017, US demand response provider EnerNOC was acquired by Enel, a power company which specializes in the power and gas markets, for an estimated $250 million.
How Will the Acquisition be Used?
Equipment manufacturers the world over are seeing a clear market opportunity in the shift to IoT- and software-enabled services. While most are building capabilities and technology in-house, digital M&A provides a parallel track to accelerate development and gain share in the emerging market for services.
Trane is no exception. Its acquisition of EcoFactor means that they will now have the capability to integrate EcoFactor’s AI services with Trane’s energy efficiency and HVAC fault detection systems into their Nexia home automation platform. With 95% accuracy on EcoFactor’s diagnostics, consumers will have the opportunity to be notified by their thermostats when there is something malfunctioning in their AC units, or when parts begin to degrade. The EcoFactor know-how in energy analytics represents an asset that Trane will be able to develop and deploy across product and service lines.
This deal also means that Trane will add EcoFactor’s customer base (and the data that comes with it) in addition to established commercial relationships with the likes of NV Energy and Southern California Edison. Proven demand response and efficiency capabilities are the key factors in this acquisition, providing home and business owners with energy savings that will lessen their annual bills and meet regulatory targets.
Why it Matters
- It is worth remembering that, not too long ago, HVAC systems had no connection at all with the outside world. These systems did not store any information about usage or performance and did not have the capability to hold any data. With Trane’s EcoFactor acquisition and others, HVAC systems, equipment and controllers are becoming data sources for AI analytics platforms.
- The transition to high-margin, service-oriented and digital-enabled business model is an attractive, yet elusive proposition for traditional industrial companies. Investments and M&A are as much about proving the viability of new business models as about revenue and market share.
- Demand response, efficiency, distributed generation and trading is where the growth is expected to come from in the energy sector. Every major energy company is going for a piece of that pie.
- Proven technology and raw customer traction are not the only benchmarks for value in digital M&A. Channel relations and business model enablement can be as valuable.
- If AI is going to change every ecosystem that sits on large data pipes, then acquiring assets and IP that accelerate a company’s understanding of what AI enables, makes a lot of sense.
TL;DR
- Manufacturing company Trane acquired AI-analytics platform EcoFactor in June 2019.
- With EcoFactor, Trane can now provide their customers with further options to conserve energy, and the ability to know when their HVAC systems are malfunctioning.
- EcoFactor’s diagnostics also provide Trane with extensive data about their HVAC systems.
- This deal is part of a larger trend towards digital-enabled business models in the energy sector.
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