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There’s no getting around the fact that the road to electrifying U.S. homes runs through contractors. And it will take a lot more than government incentives or even mandates to get those contractors on board with this transformation that’s vital to fighting climate change.
That’s the view of longtime contractor, building-science consultant and self-styled “house whisperer” Nate Adams. He’s the founder of HVAC 2.0, a business that provides software and training for contractors trying to make electric heat pumps a cost-effective option for their customers.
More than 200,000 contractors in the U.S. install heating, ventilation and air-conditioning systems and do other building-renovation jobs like wiring up induction stoves, electric-vehicle chargers, backup generators and solar-charged batteries. They include HVAC contractors, electricians, and a smaller group that focuses on whole-home efficiency audits and retrofits.
Some of the contractors are larger companies, but many are small businesses or sole proprietorships. This is the workforce that needs to ready the U.S. housing stock to run on increasingly low-carbon electricity.
Today, electrification simply doesn’t pencil out economically for many of these contractors or the customers they serve, Adams said. The historic level of federal funding that will flow to home electrification through the Inflation Reduction Act and the state-level incentives and mandates encouraging the switch from fossil-fueled to electric equipment may help reduce those barriers, but won’t necessarily overcome them, he said. They may even slow progress by adding complexity to the sales process.
That’s because equipment costs aren’t the main problem for home-electrification retrofits, Adams said. Sure, heat pumps currently come at a price premium compared to fossil-fired furnaces and water heaters, and supply-chain disruptions and bottlenecks have driven up costs. But most of the equipment available is built around mature technologies that have largely proven their efficiency and cost-effectiveness.
The big problem is that contractors make or lose money based largely on how efficiently they deploy their most valuable asset — their workers. Well-trained and qualified electricians, HVAC technicians and other tradespeople are in short supply and high demand today. The more labor hours involved on a job, the higher a contractor’s costs and the lower their profit margins, and the less likely a contractor is to propose the job in the first place. And most homeowners do what their contractors suggest rather than demand alternatives.
It’s almost always faster and less labor-intensive to replace a broken-down fossil-gas-fueled furnace or water heater with a new fossil-gas-fueled one, rather than design a project around a novel heat-pump replacement. Most homeowners only think about their heating when it breaks down, and are highly motivated to replace it as quickly and cheaply as possible when it does.
Contractors are in the business of giving customers what they want at a price they can afford. Sales pitches based on long-range energy-bill savings are tough when there are considerable upfront costs and complications involved in switching from fossil-fueled to all-electric systems. And trying to use the threat of climate change to convince these contractors to overlook the tough economics may well backfire, Adams warns — particularly in more conservative markets like his home state of West Virginia.
Of the roughly 120,000 HVAC contractors in the U.S., “80 percent of them are conservative or centrist,” he estimated — and that doesn’t take into account their customers’ points of view. “If the argument is climate, you’ve shut them down.”
We need new business models that can overcome these barriers. Creating and supporting these models will require cooperation between contractors, electric-equipment manufacturers and distributors, and pro-electrification advocates and policymakers. Of the 131 million households in the U.S., about 17 million now use heat pumps. Getting that number up to anything close to the majority of homes over the next decade will take a major shift in how contractors approach the task.
Luckily for the fight against climate change, a growing number of companies are taking on the challenge.
Cutting the “soft costs” of home electrification
Adams sees the primary task of electrification advocates as helping contractors manage and reduce the “soft costs” of electrification. Soft costs include finding new customers, assessing their homes’ needs and educating them on their options, plus filing for permits, paying for inspections, and helping customers navigate unexpected installation snags and long-term performance and maintenance issues. Basically, everything except buying and installing the equipment.
The rooftop solar industry in the U.S. has significantly reduced its soft costs over the past decade. The fledgling home-electrification industry needs to do the same thing. “The way we lower prices, to a degree — at least in the space we’re working on — is to create a consistent process,” Adams said.
Part of that is decreasing customer “callbacks” about faulty or insufficient performance from newly installed equipment, which aren’t just expensive but can wreck a contractor’s reputation and prospects for new business via word of mouth and online reviews, he said. Conducting better home assessments, picking the right equipment to install, and carefully calibrating it to each home’s needs can reduce the kinds of problems that trigger callbacks — even if it may add time and costs to projects that are done right, he noted.
Another part is spreading out soft costs across a larger revenue stream, Adams said. That can be done by increasing the “ticket sizes” — the dollar amounts charged for projects. Expanding the overall scope of projects to encompass whole-home energy-efficiency services is one way to increase ticket sizes while also supplying customers with the right equipment and upgrades. Another way to spread out soft costs is to improve “closing ratios,” or how many jobs a contractor ends up winning out of the total number of jobs they’re bidding for, he said.
And contractors need to know that electrification work will grow steadily for them over time, Adams said, so they feel comfortable hiring and training workers and ordering more electrified equipment.
Smaller contractors don’t have much control over how quickly the market for home electrification will grow. That’s where companies with a specific focus on large-scale electrification — and with funding to expand — can play an important role in giving contractors a clear path to make a living in this emerging field.
Getting a foot in the door — from EV chargers to broader home electrification
An increasing number of companies see an opportunity to take on the role of electrification matchmaker between contractors and customers.
Take the example of Qmerit, a 2014 spinout of ABM Industries, a company that offers facility-management services nationwide. Qmerit works with electric-vehicle manufacturers and dealers to connect new EV owners to electrical contractors that install EV chargers.
Qmerit’s software and services platform pulls together data from automakers, EV-charging manufacturers, customer surveys and building records to smooth the installation process, explained Tom Bowen, president of the company’s Qmerit Solutions division.
That process includes assessing whether a home will need new wiring or electrical-panel upgrades to support its new charging demand, a need that can add thousands of dollars and weeks of extra time to a project. About 20 percent of Qmerit’s installations trigger a panel upgrade today, but that figure is likely to grow as the market for EVs expands, he said.
To help its contractors do panel upgrades and wiring, Qmerit has partnered with financing providers willing to extend low-cost credit to contractors as well as to their customers, Bowen said. Electrical panels are eligible for the new home-electrification tax credits and grants created by the Inflation Reduction Act, but being able to finance the remainder of the cost can help homeowners decide to move forward with a project.
Once a household has a new panel and updated wiring, it’s ready for more electrification. The EV charger is the gateway drug, smoothing the way toward adoption of heat pumps, induction stoves or other electrical appliances.
A one-stop shop for home electrification
D.R. Richardson, CEO of Elephant Energy, sees an opportunity to consolidate even more parts of the whole-home electrification process under one roof, making it simpler for contractors as well as for homeowners. The Colorado-based startup launched in 2021 and raised $3.5 million in seed funding in September.
Richardson described the company as a “full-stack electrification service provider,” offering home-specific system design and installation of heat pumps, heat-pump water heaters, induction stoves and EV chargers.
“We’re fully vertically integrated except for the labor,” he said. “We partner with a network of vetted contractors to provide them more reliable, regular revenue.”
Elephant offers its contractors the use of its software that can remotely audit a home’s building envelope and heating load, and pull utility billing data to compare the costs of providing heating from gas furnaces versus heat pumps. Such software systems are usually out of reach for small contracting companies working on their own.
Software has played an important role in fine-tuning energy-efficiency investments and reducing soft costs for residential solar installations. Applying the same concept to improving home-electrification project efficiency can free up HVAC contractors to spend far less time chasing customers or conducting energy assessments and more time on the moneymaking work of installations, Richardson said. It also reduces the risk of installing a system that doesn’t provide enough heat — a risk that often leads contractors to pitch oversized heating systems to avoid leaving customers cold and unhappy, he noted.
Elephant Energy uses software to optimize system design and to reduce the total cost of ownership. That includes managing all the applicable rebates that can drive down the upfront cost of heat pumps. In the Colorado territory of utility Xcel Energy, for example, city, county, state and federal incentives can reduce the cost of a heat pump by more than $5,000, he said. But not all heat pumps qualify for the full panoply of available incentives.
Elephant Energy manages equipment purchasing for its contractors, Richardson said, making sure to stock models that are eligible for incentives. The company can take advantage of economies of scale and buy larger quantities of equipment at lower cost, plus it can borrow money at more favorable interest rates. This strategy also provides a store of available equipment in case of supply shortages like those seen over the past few years, he said.
All of this adds up to lower costs for contractors overall — less time spent seeking out and assessing customers, lower equipment costs, and less risk of choosing equipment that doesn’t qualify for incentives or doesn’t meet customer needs, he said.
“We’re able to offer the customer the same or lower price that they’d get from the typical contractor, while the contractor is spending less than they would have otherwise,” he said.
Finally, bundling together lots of separate projects from lots of contractors opens the door to securing more favorable financing terms for a larger scale of business, Richardson said. Elephant Energy now works with the Renu program of the Colorado Clean Energy Fund, a state-run “green bank” lender, to finance the projects it lines up between its contractor partners and its customers.
Richardson pointed out that Elephant Energy is also working with Tenet, a Silicon Valley–based startup that offers financing for EVs and home EV chargers, to bring in prospective home-electrification customers. “I think we’re on the verge of mass heat-pump adoption,” he said. “We can partner with companies like Tenet to finance them.”
New financing and ownership structures
While financing can play a key role in lowering the upfront cost of home electrification, another approach to making new systems affordable is offering equipment leases. That can be a better deal for both homeowners and contractors, says Anuj Khanna, CEO of Service 1st Financial. Khanna’s company hopes to scale up a leasing business model across multiple U.S. markets through a network of contractors that’s a hundred strong and growing.
The HVAC industry has seen a “lot of innovation and progress in terms of technology,” with the latest heat pumps offering energy-efficient performance at temperatures well below freezing, Khanna said. “Where there’s been very little innovation in this industry is in the fundamental business model that contractors use — they go into the home and they sell a box.”
Most homeowners are forced to choose how much they’ll pay for that new box when the old one breaks down, he noted. “Under a traditional model, they have to pay for 100 percent of that system when they replace it,” which disadvantages higher-performance heat pumps that are more expensive but cost less to run over their lifetimes. And while homeowners can finance those replacement systems, “once you strike your pen on that contract, it’s your obligation” to maintain and repair a heat-pump system.
Service 1st Financial secured $20 million in equity and debt financing in November to expand the network of HVAC manufacturers and contractors using its leasing model, which allows customers to avoid upfront purchasing costs and instead pay a set monthly fee that includes a long-term maintenance contract.
That’s a simpler and cheaper option for homeowners, but it’s also good for contractors and the distribution companies that sell them equipment, Khanna said. Higher-priced systems are a much easier sell when they’re broken into monthly payments, which opens the door for higher-efficiency heat pumps, which now make up roughly one in three of Service 1st’s installations, he said.
Contractors can also lock in 10- to 15-year service contracts that are a key source of ongoing revenue, he noted. And at the end of that contract term, contractors can make a replacement sale — potentially before the system breaks down and forces the homeowner into another emergency replacement situation.
“For a younger homeowner, the leasing option makes a lot of sense,” said Dennis Stinson, vice president of sales at Fujitsu General America, a major heat-pump manufacturer that’s working with Service 1st. “Just like subscribing to cable, it’s a fixed payment. And if it ever stops producing heat or cold, there is full coverage” to pay for repairs or replacement.
Some home-electrification providers are going a step beyond guaranteeing heat-pump performance through maintenance contracts; they’re guaranteeing energy savings. Sealed is a New York–based startup that has raised $62.5 million and established a credit facility with New York Green Bank to finance home-weatherization and heat-pump projects. It charges customers monthly payments over 20 years to cover the cost of purchasing and installing equipment, with a fail-safe: If the customers don’t see monthly energy-bill savings compared to their pre-retrofit bills, their payment due to Sealed is waived for that month.
This assurance makes customers more comfortable about moving ahead with a heat-pump project — and that means more work for Sealed’s contractor partners.
A commitment to energy savings may not be a good fit for every home in every market, Elephant Energy’s Richardson said. Sealed works primarily in the U.S. Northeast, where many homes are older and some are still burning heating oil — a fuel that’s become much more expensive than electricity or natural gas.
But a similar underlying premise connects companies like Sealed, Service 1st and Elephant Energy, Richardson said. That’s to “take risk out of the equation for homeowners such that heat pumps are the de facto less risky, less costly, ‘no-brainer’ idea,” he said.
Pushing the envelope of business-as-usual to combat climate change
New York City–based BlocPower has taken its own tack on making building electrification work at scale. The startup has more than $100 million in project finance from investors including Goldman Sachs and the Microsoft Climate Innovation Fund, and it is hiring contractors to electrify hundreds of low- and moderate-income homes and apartments, as well as churches and community centers in its home state and in California, Colorado, Illinois and Wisconsin. It also has two ambitious citywide electrification projects in Ithaca, New York and Menlo Park, California.
BlocPower offers equipment sales and installations at low or no upfront cost in exchange for monthly payments over the course of a decade or more. It doesn’t promise that its customers will see energy-bill reductions because so many of the factors at play are beyond its control, such as changing energy-usage patterns within buildings or changing utility rates for fossil gas and electricity. But it does promise to cover the cost of keeping customers’ equipment and systems in working order over the life of their contracts.
This kind of risk reduction is particularly important when the homes being electrified are in lower-income and disadvantaged neighborhoods, said Roopak Kandasamy, BlocPower’s program lead for its Menlo Park project. Part of that project is targeting the city’s Belle Haven neighborhood, a majority Latino and Black community between the San Francisco Bay and the heavily trafficked Highway 101 corridor.
Many of the residents of this historically redlined neighborhood lack the household wealth and credit that could allow them or their contractors to finance home efficiency and electrification on favorable loan terms. To fill that gap, BlocPower and its contractor partners have tapped into a variety of funding sources, including state heat-pump incentives, zero-percent-interest loans from community energy provider Peninsula Clean Energy, rebates from regional energy-efficiency entity BayREN, funding from the Menlo Park city council, a $4.5-million state grant approved in last year’s legislative session, and private fundraising, he said.
All of these disparate sources of financing play a role in extending what Kandasamy called the “capital stack” for making electrification projects in Belle Haven profitable for contractors. “If you’re bringing down the capital aspects significantly — we’re talking about doing a lot of these homes for free — it builds trust for a new technology, and there’s work getting done that otherwise wouldn’t be getting done, that people wouldn’t otherwise be paid for,” he said.
That’s vital for accelerating residential electrification at the pace needed to fight climate change. The home-electrification industry is “about five to eight years behind where solar is now,” he said. “The typical scaling model for most industries is, we’ll put out a luxury product, and we’ll ride down the cost curve for everyone else.”
But with the fight against climate change demanding a massive reduction in carbon emissions across all sectors of the economy by 2030, home electrification can’t wait years for wealthy and eco-conscious early adopters to make it mainstream, he said. “We don’t have time to ride down this curve.”
The wide cross-section of work involved in whole-home electrification projects — from energy auditing and efficiency retrofits to HVAC installation and electrical work — presents a challenge to contractors that have typically focused on only one part of this puzzle, but it’s also an opening for those that can position themselves to serve homeowners with a complete package, Kandasamy noted.
“It’s a broad scope of work; it may be hard to get into,” he said, but he thinks sharp contractors will “see the opportunity.”
They can look to the Bay Area for signs of where the market is headed. There, contractors are “booked up” with electrification work, Kandasamy said. “They can’t train folks fast enough to do all the jobs they’re doing.”