Residential energy efficiency is one of the most effective — and cheapest — tools available to combat climate change. It can also be a great investment. By financing the upfront costs of weatherization and appliance upgrades, investors can earn steady rates of return based on the energy saved.
But expanding the market for home energy efficiency at the massive scale needed to meet pressing carbon emission reduction deadlines will require a whole series of alignments between contractors, installers, equipment vendors, utilities, government regulators and sources of public and private capital.
And that, efficiency companies and experts say, will take a new approach to enlisting households in the endeavor — starting with making sure that the energy efficiency they’re getting is just a side effect of their home improvements.
Take the example of New York–based startup Sealed, which just raised $16 million. The company arranges and finances home efficiency retrofits centered around weatherization and all-electric heat pumps, requiring no money down from homeowners and then sharing the energy savings. The new round — led by real estate tech investor Fifth Wall and joined by Robert Downey Jr.’s FootPrint Coalition Ventures and previous investors Cyrus Capital and CityRock Ventures — brings the company’s total funding to $33 million and will allow it to expand from New York into Connecticut and New Jersey.
Sealed doubled its revenue in 2020 and has doubled it again in the past six months, CEO Lauren Salz said, by earning a share of the savings from the average 25 percent reduction in energy use a typical customer achieves. Those savings can be twice as much for customers who switch from older fossil-fueled heaters to the latest heat-pump-based heating, ventilation and air conditioning technologies.
But these savings don’t get top billing in the Sealed sales pitch. “If you focus on energy and environmental issues, you end up missing out on a large segment of the population,” Salz said. “We’re not focused on energy savings. We’re focused on delivering a better standard of living for people [and] homes that are more comfortable, healthier and cleaner for the environment.”
A market in need of a major renovation
There are several reasons for this, according to Andy Frank, Sealed's president and co-founder. For one, most people don’t care nearly as much about saving energy as they do about improving their quality of life at home, he said. Second, many people don’t believe that efficiency upgrades will save as much as they actually do — and “banks are even more skeptical,” he said.
Sealed uses statistical data analysis of its efficiency installations to prove how much energy is being saved, which has helped bring lenders and financial backers on board with its approach, Frank said.
But when it comes to customers, “the first rule of selling energy efficiency is that you don’t talk about energy efficiency,” he said. “You talk about comfort, about getting rid of drafts in your bedroom. You talk about health” from cleaner air and replacing fossil fuel–burning appliances in homes. “The energy efficiency is what makes it affordable.”
That’s a vital point to keep in mind when crafting policies to speed the rate of residential efficiency adoption, Frank said. Data from industry group American Council for an Energy-Efficient Economy indicates that at historical adoption rates, it will take 500 years to complete whole-home retrofits of all U.S. homes and apartments, as compared to 60 years for retrofitting its commercial building stock — and, he added, “We don’t have 50 years, let alone 500.”
A key first step in boosting adoption rates is creating the financial and business models that can overcome the barrier of upfront cost, which for typical Sealed customers can range from $15,000 to $20,000. Multiple pathways exist to address that cost barrier, ranging from utility and government rebates and incentives to various programs that allow homeowners to pay back upfront costs over time.
Like many efficiency providers, Sealed takes advantage of the billions of dollars in state and utility incentives available in New York, Salz said. In 2016 it secured a $5 million credit facility from the New York Green Bank to help finance the upfront costs it covers.
Follow-on finance is starting to emerge from private-sector lenders willing to back portfolios of energy-efficiency investments. In February, Brooklyn-based BlocPower raised $63 million — $55 million in debt and $8 million in equity — from investors including Goldman Sachs’ Urban Investment Group to fund its work in shared-savings inner-city energy retrofits.
Energy-efficiency retrofits that do more than just save energy
But the addressable market for these investments is much larger, “anywhere from $100 billion to $500 billion,” said Cullen Kasunic, BlocPower’s energy efficiency and renewable energy finance leader.
The smaller number is a conservative estimate of the value of energy wasted every year that could be reduced by the kind of retrofit work that BlocPower performs. The larger number encompasses the market for work that could use energy savings to leverage investment in heating, ventilation and air conditioning (HVAC) and appliance upgrades that improve health and safety by replacing fossil-fired heating and cooking with all-electric systems, or environmental abatement like asbestos and lead removal, he said.
Other add-on benefits include bringing Wi-Fi to multifamily buildings. BlocPower uses the Wi-Fi to monitor the performance of its HVAC systems, but then the company can also offer free internet to tenants, Kasunic said.
“Energy efficiency is about more than savings,” he said. “It provides increased comfort, increased control of your heating. You get the health benefits of not having fossil fuels burned in your neighborhood.”
BlocPower’s 12- to 15-year lease structures earn back upfront costs through monthly payments from building owners, based on a mutually agreed-upon calculation of the value these combined improvements bring, he said. While the startup doesn’t guarantee or share the energy savings from its projects, as Sealed does, “what we do guarantee is that the systems will work.”
Much of the emphasis at the policy level has focused on expanding the pool of capital available for energy-efficiency projects. That’s the impetus of efforts being undertaken by green banks in New York, Connecticut and 19 other states, which have directed about $5 billion toward clean energy and efficiency in underserved communities over the past decade. The Biden-Harris administration has proposed a national green bank, dubbed the Clean Energy and Sustainability Accelerator, that could bring from $27 billion to $100 billion in similar financial backing to projects nationwide.
Salz agreed that green bank financing served as an important early step for Sealed, as was securing an energy savings insurance program with Munich Re in 2017. But as the company looks to its next steps, “the main thing that’s going to drive down the cost of capital is scale. The market has less of a cost-of-capital problem and more of a demand problem. That’s what Sealed is going after.”
Pathways to connect capital to projects
To reach the next levels of scale, efficiency investments need to be tied to more pressing imperatives for building owners, said Richard Kauffman, New York state’s former energy czar and current chair of Generate and the New York State Energy Research and Development Agency (NYSERDA).
“There are clearly some financing obstacles, but I think the bigger problem is that there just aren’t a lot of projects,” Kauffman said. “Very few people wake up in the morning and say, ‘Gee, what I really want to do is become more energy-efficient,’” he said. Instead, most efficiency projects “have to be part of another improvement that a building owner would want to undertake.”
That’s why NYSERDA offers efficiency grants tied to planned upgrades, he said. Similarly, advocates of electrifying homes are calling for federal incentives that can cover the upfront cost of replacing fossil-fueled heaters and appliances when they break down and require replacement. This could capture and leverage the narrow window when most homeowners or landlords make these decisions.
NYSERDA also offers grants to support installing real-time energy management systems in buildings, Kauffman said. That means energy service providers “are able to look at a building’s energy use over a longer period of time and will be incentivized to offer a guaranteed savings contract."
This guaranteed-savings contract model, offered by a host of energy services companies, is a primary driver for efficiency retrofits in the “MUSH” (municipalities, universities, schools and hospitals) markets, where long-term ownership of buildings simplifies the financing structures involved. Commercial real estate that’s bought and sold more frequently can be more complex to finance in this way, but commercial property-assessed clean energy (PACE) financing structures, which tie repayment to property taxes, have emerged as an alternative structure for that class of real estate.
Pathways to securitizing efficiency investments
One of the benefits of commercial PACE financing, Kauffman said, is that it can open up opportunities for securitization, which consists of bundling a portfolio of projects into financial instruments that can be bought and sold by investors.
Securitization offers several benefits for efficiency investors, he said. “One is that you can get a longer maturity than you can get going to the bank” for a loan. “The second benefit is smaller loans, which are very difficult for banks,” and “the third benefit...is the ability for the securitization vehicle to issue different tranches of debt” with an overall credit risk that’s lower than any of the individual loans would have on their own.
The same logic has led to securitization of mortgages, auto loans and credit card debt. While there’s certainly reason for skepticism of such instruments — remember the mortgage-backed securities crisis that kicked off the Great Recession? — there are also good reasons for tapping the benefits of securitization for sound investments that might otherwise struggle to access capital at low cost.
“That’s clearly a very useful innovation as a business model and as a financing structure, because that kind of structure unlocked the residential solar market,” Kauffman added.
Over the past few years, loans from companies such as Mosaic, Sunlight Financial and GoodLeap (formerly Loanpal) have become the primary source of U.S. residential solar financing, with solar asset-backed securitization (ABS) lowering the cost of capital to add solar panels to rooftops. GoodLeap’s announcement earlier this month that it is expanding into what it described as the $430 billion U.S. home improvement services market highlights the opportunity for these companies to securitize efficiency investments as well.
Mosaic has issued nine ABS deals to date; it has seen the cost of capital for its solar installations and home efficiency improvements drop from about 8 percent when it launched in 2014 to about 2 percent in its latest ABS deal, CEO Billy Parish said.
“If you’re looking at how to get to 100 percent clean energy, you have to focus on heating and cooling,” which make up about half of a typical home’s energy use, Parish said. Mosaic’s home improvement business finances everything from new HVAC systems and home automation controls to new roofing and siding, with varying complexity in terms of linking the upfront cost of that investment to long-term energy savings potential.
“There’s no question that if you make it easy and affordable for people to adopt these technologies, a lot more people will [choose to do it],” he said. At the same time, Mosaic’s role as a central financier of a wide set of technologies puts it in a better position to assess their combined value than individual contractors dealing with air conditioners, water heaters or other appliances, he said.
Matt Murray, GoodLeap's chief marketing officer, noted that streamlining the process for homeowners to pick their preferred mix of home improvements was important to speed the pace of adoption.
“Within four or five seconds, consumers accessing GoodLeap technology can find out what it would cost to replace their HVAC system with something that’s more efficient or install drought-resistant turf or energy-saving windows," he said. Bundling multiple products into a single loan and offering contractors split pay, so that multiple businesses can receive payouts from one loan, also make it easier to complete more installations, he said.
Bringing it back to what matters to households
Sealed plays a similar role as the guarantor of the energy-saving value of its suite of home improvements, Frank said, and is exploring the opportunity to expand into securitization of its portfolio of projects.
“We’re in the early to mid stages,” he said, with a portfolio of projects being financed by the New York Green Bank. “When you get into the $50 million range or so of capital deployed, that’s when the securitization markets start to happen,” as the value for large-scale investors becomes large enough to justify the transaction costs of dealing with them as tradeable assets.
At the same time, Frank said, “securitization by itself is an effect; it’s not a cause.” “It’s a sign that you’re building a healthy market,” as has happened with solar securitization.
That’s not to say that policy won’t play a vital role in boosting the residential energy efficiency market, he said. More stringent appliance standards, for example, could drive manufacturers to build and contractors and installers to offer more efficient heat pumps, a key tool in switching homes from fossil-fueled to electric-powered heating, he said. And low-income households need more funding from existing and new programs to bear the upfront costs of reducing energy bills that are proportionally higher for them than more affluent homeowners.
“I do think that policy initiatives can be effective, particularly in creating awareness among individual consumers about what’s out there,” Sealed CEO Salz agreed. “[But] you have to tackle it from a number of angles.” Plenty of homeowners who can afford the upfront cost of efficiency upgrades put them off because “it’s too much of a hassle to figure out what to do and find a good contractor,” she said.
That’s yet another reason to frame home efficiency improvements as investments that are going to “change people’s home experience” and “improve the quality of their lives,” Salz said.
(Article image courtesy of Blake Wheeler)
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