Does the Nest Thermostat save money?

Background:

Welcome to my first READER REQUEST.  I love ideas for new posts, especially from readers.  This is my inaugural reader request, and I hope to do many more going forward.  A big thanks for the inspiration…

In this ROI analysis, I’m going to take a quick look at whether or not a smart thermostat such as the Nest Learning Thermostat can save you money.

For those that don’t know, smart thermostats like Nest try to save you money by reducing your heating and cooling costs.  They learn your daily schedule and turn the heat down when you aren’t in the house, and, on the flip side, they have everything all nice and toasty when you get back from work (vice versa with cooling in the summer too).  Additionally, you can control the thermostat remotely from your smart phone (everything is getting smart these days).  So say you forgot to turn the heat down when you left for vacation.  No problem, just adjust it during your layover.

Smart thermostats are part of a broader category of stuff called the Internet of Things, which basically just means that you have more and more devices talking to and coordinating with each other over the internet.  Another “Internet of Things” gadget is the Fitbit activity monitor bracelet that measures your steps, sleep, and other activity.  The name might be sort of lame and the industry / movement might still be in its infancy, but the Internet of Things seems like it will have a major impact on our lives in the future.

And for budget geeks like me, that future is potentially now.  Enter the Nest Thermostat.  According to Nest’s sexy little website (former Apple guys or something… go figure [as noted in comments below, Nest is owned by google now even though it was started by former Apple employees), heating and cooling costs account for roughly 50% of a household’s utility expenses.

The numbers:

This is how much you would save on energy costs by switching to a smart thermostat.  I got my numbers from Nest.com.  More on that in a second.

  • 10-Year NPV: $1,181
  • 10-Year ROI: 454%
  • 10-Year Payback: 2.6 years
roi - smart thermostat

click for link to live spreadsheet

chart - smart thermostat

 

Investing in a smart thermostat is worth about $1,200 over 10 years for the average U.S. household in the average U.S. climate.  The investment doesn’t pay for itself until halfway through the second year because the Nest Thermostat is pretty expensive at $250 per unit.  This means that the nest probably is a shakier investment if you rent or aren’t sure where you’ll be living in the next few years, but then again, you might be able to take it with you or, in the case of homeowners, it might actually be a selling point (as noted in comments below).

I’ll go into the methodology below, but the important thing to note here is that these numbers assume you aren’t already using an older-generation programmable thermostat.

This example assumes you mostly keep the heat or AC at a constant level all day, even when people aren’t in the house.  We use an older programmable thermostat at my house already, so the savings would probably be a lot smaller.  However, apparently we are the exception, because according to Nest.com, 89% of households with programmable thermostats don’t actually program them.

Another thing to consider is that some heating and cooling systems such as heat pumps, don’t save as much money with the Nest Thermostat because it takes more energy to bring the temperature back up to normal than to have never let it drop in the first place.  I also think this could also be an issue with homes that rely heavily on thermal mass to regulate temperature, but from what I have read, Nest software can handle this kind of thing.

Long story short, for the average home that doesn’t already use a programmable thermostat, a smart thermostat can probably save you a nice chunk of money.

In addition to the Nest Thermostat, there are two other smart thermostats that also get mentioned a lot… the Honeywell Smart Thermostat, and the Ecobee Smart Thermostat.  Apparently they operate on different algorithms which can sometimes save more money, but if you are looking to keep things simple, Nest seems like the best bet (think Apple).

Methodology:

I’ll come clean immediately and admit to using Nest.com’s energy savings calculator.  The first thing I did was to determine what cities have the most representative climate of the U.S.  From this list of 100 city climates, it turns out that Baltimore, Maryland is the most typical (minimum cumulative deviation from indexed variable averages).  Close behind were Wilmington, Delaware, Philadelphia, Pennsylvania, and Indianapolis, Indiana.

Then I figured out what the average square foot size of a U.S. house is these days.  I made an educated guess of 1,500 square feet based on information from the National Resources Defense Council.  Inputting these two variables and assuming the house has central AC, Nest’s calculator said I would save between $60 and $250 every year, or about an average of $155.  Because I’m a little skeptical of Nest trying to sell me, I multiplied by 80% to be more conservative, which gave me a final average annual savings of $125.

And that’s the basic gist of it.  If you don’t already use a programmable thermostat, get after it!

Assumptions:
  1. Smart thermostat costs $250 – Amazon
  2. Average U.S. climate is Baltimore – 100 select cities data
  3. Average home is about 1,500 square feet – NRDC
  4. Takes about 1 hour to install Nest thermostat at $10.00 per hour – Amazon reviews
  5. You don’t already use a programmable thermostat
  6. Smart thermostat saves about $125 per year in energy costs – Nest.com

 

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Comments

  1. eliot rosewater says:

    I love the aesthetics of this device, and I’m glad that there is a positive ROI with a quick payback period of 2.6 years. $10 per month in savings will more than pay for my Hulu Plus, and all I gotta do is hang an awesome gadget on the wall.

    Because I’ll probably move in the next 5 years, my main question is this: Would a potential buyer find this feature desirable? People buy houses for all kinds of dumb, idiosyncratic reasons, and sometimes tiny details make a big difference. For example, I happen to have an irrational appreciation for pocket doors and old school laundry shoots…

    So I figure there are 3 possibilities: 1. buyer loves the Nest, and its expression of smart utility contributes to a positive assessment of the house, or 2. buyer is scared of this technology and it’s a net negative, or 3. they don’t even notice it because, dude, it’s just a thermostat.

    From my experience with realtors, this is exactly the kind of crap they would point out at a showing. So I would want to have some confidence that this feature would be a net positive for the buyer…

    • Yeah, I love the aesthetics too. I wanted to include a picture, but I couldn’t find any good ones with appropriate usage rights.

      Also, great point about the resale value; hope you don’t mind that I updated the article to include this perspective 🙂 . I was originally thinking more along the lines of short-term renters, but given your scenario, I see Nest increasing resale value by more than $250 in most cases. I guess it all depends on the demographics of expected buyers.

  2. Just wanted to make mention that to reduce your upfront costs even more make sure to check out Raise.com. You can get a gift card for Home Depot at an 8% discount (0.08 * $250 = $20). Also if you sign up on Raise.com every few weeks they throw you a free $5 discount to places like Home Depot…so potentially you can save $25 or 10% of the $250 purchase price.

  3. The financial analysis is done completely wrong. I am a corporate financial analyst that does this type of analysis for a living. The key mistake that was made over-exaggerates the NPV. What was done above is that the total revenues were inflated each year by 4%. First, this is a very high inflation rate given the last decade of rates. Second, the dollars shouldn’t be inflated at all, they should be discounted because inflation makes those dollars worth less next year than they are worth this year. This means that the savings might be $125 this year and $130 next year, but really that $130 can only buy you $120 worth of goods in today’s dollars. This is what should have been done in the present value calculation, but it was not done.

    Overall, the NPV is probably positive, but should be around $800 over 10 years, GIVEN $125 annual savings and the need for only 1 thermostat. If you get half of that savings, then the NPV drops to under $300. If you need a second thermostat, then the NPV is under $600 with $125/month savings, and roughly zero if you only save $60/month.

    THE BETTER WAY TO THINK ABOUT THE FINANCIAL ASPECT is a break-even analysis. This presents the period of time after the purchase in which you would recoup your purchase price. If you manage to save $125/year, then it will take 2 years, and if savings are half of that, then it will take 4 years to recoup costs. If you have to buy 3 (like me because I have a 3-zone system for a 3 level home), then you would have to generate ~$85 just to break even over 10 years. The real question in a break-even analysis for a house is how much longer than your break-even point would you expect yourself to be in the same house. It is only the savings generated in these year that you should focus on. All the years beyond this is savings that you are generating for the next homeowner!

    Don’t get me wrong, if (a single) Nest produces any material savings (more than $30-50 per year) then it will have a positive financial impact, but the real key is if your thermostat is the the most impactful place you can spend that money. For example, as I mentioned, I have a 3-zone heating/cooling system and so it would require that I spend ~$750 to expect to generate the savings I would expect could be in the $50/month average on a bill that ranges from $180 to $300/month. This makes my NPV -$310 (that’s a negative). Perhaps that $750 could have been spent on a home energy assessment which would plug the leaks around the house. Or perhaps that $750 could be used to install a whole-house humidifier, which will make cooler air seem warmer, and hence I can turn the heat down in the winter by a couple of degrees and not notice. (There is also a comfort factor here). All of this depends on where you live and how many “degree days” you have (i.e. how many hot or cold days, which would dictate if you should go after A/C or heating savings projects).

    The final thought here is that if you can afford the upfront cost, then the other consideration is cash flow. I would think for many people that are considering a $250 purchase for a thermostat (i.e. homeowners who have median or above household incomes) that they don’t have a net worth problem. However, that doesn’t mean that they don’t have a cash flow problem. By reducing the obligation of cash from each paycheck to go to utilities, this helps free up the monthly budget and even in the case of an NPV that isn’t much or is negative, there can still be a cash flow benefit to be had. When a person enters retirement one of the first things that advisors suggest is to pay off the mortgage. This is an example of an NPV-neutral to NPV-negative scenario (unless your interest rate is above what you can earn on an investment) that is done to preserve cash flow. If you can spend some money now to reduce the amount of money you need every single month, then there is certainly a benefit to this, especially for those who will live on fixed incomes. The purpose of a Nest could support this type of action, even if it the NPV doesn’t show much gain.

    • I made a mis-statement above. If I save $50/month, I will have a strongly positive NPV, not negative. If Nest is saying avg savings are $125/year, I based the negative NPV off of only $50/year savings.

    • Matt, thanks for the very thorough comment. “Completely wrong” seems a little bit exaggerated to me, but I do appreciate the close reading of the stats, especially from someone with your expertise.

      The reason the revenues are “inflated” 4% each year is because I model all of my ROI’s with the assumption that the excess revenue will be invested in the stock market and grow at an average real rate of 4% per year (7% nominal minus 3% inflation). I should probably be more explicit about that assumption on some of these articles…

      Secondly, you make great points about the break-even period. I also include this in all my analyses, just called the 10-year payback period. Based on the assumptions in this example (1 thermostat is sufficient, 4% real growth, etc.) the thermostat is break-even after 2.6 years.

      And lastly, I couldn’t agree with you more about choosing to use your money in the most efficient way possible. I share a lot of the same thoughts in the article “how to use an ROI” in the “The Basics” sidebar above.

      Seriously though, thanks for the spot-on, thoughtful reply. If you ever feel like sharing your skills via a guest-post, please let me know!

      Cheers-

  4. Best Buy will have the Nest on sale for $200 from Black Friday through December 1st.

  5. Another thing to keep in mind is a lot of energy companies will offer you a rebate when you purchase a smart thermostat. I purchased mine on Cyber Monday @ $50 off and my gas company is giving me $100 rebate meaning I only paid $100 for the Nest and will get a much quicker ROI

  6. Yes, it not only do you have a great machine, but you can control it via an app on your phone which shows you how much energy you are using. Overall this is a top notch product that provides better insight to your HVAC activity
    Thanks for sharing.

  7. The premise here is that the Nest thermostat actually works. I was sent TWO of these for FREE as a result of inquiring about a certain product. I researched people’s experiences on the web. I examined the specs. What I found was that this is one of those systems which purports to know you better than you do. Many, many buyers have returned them. Some have damaged their furnaces. It claims to be smart but doesn’t give you any chance to modify the algorithm used. I refused to remove them from the boxes and insisted that the organization that sent them to me pick them up for return. I wouldn’t even sell them on craigslist because it might hurt someone. The fancy financial analysis is a total misdirection.

  8. “However, apparently we are the exception, because according to Nest.com, 89% of households with programmable thermostats don’t actually program them.”

    “If you don’t already use a programmable thermostat, get after it!”

    The key word here is USE. I would suggest you should change that to OWN.

    If you OWN one but don’t USE it, then surely the conclusion should be to just save yourself $250 on the Nest and start using your old prog-therm?

    I get that people are lazy etc… but if you have gone to the trouble to find and read your article then surely you will have the get up and go to work out how to program your already existing programmable thermostat, so for your target audience I think that conclusion is more valid.

    Cheers! 🙂

    TFS (Still rocking a 15 year old thermostat and enjoying very low heating bills)

  9. Thanks for running the numbers. I bought one last year and love it, especially during the winter.

  10. I’m pretty sure Google owns Nest now, not Apple. But either way, it’s a great review and very thorough analysis of the ROI of Nest thermostat.

  11. Also, in Michigan, you get $100 rebate so the ROI could be 15 months based on saving $10 a month.

  12. I like the thermostat too. Installed a Next G3 and it cut down my utility bill by 40% for heating. Nice! They only problem I had to deal with was to convert my hi voltage to low voltage when we installed it. Fortunately we found a handy guy Sam and his blog helped us out. You may want to check that if your house has the same problem.

    http://www.helponnest.com

  13. We found this article really helpful, and we referenced it in a blog we just wrote on home energy savings as we prepare for colder temperatures. Thanks for sharing the great insights, and check out our blog if you have a chance! https://www.epmbend.com/blog/2017/8/30/now-is-the-time

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