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.”

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