David Bowie died today, that was all over the news, and I heard a side story that got me thinking.
Long ago he wanted to get the money for his songs that he would eventually get through royalties. but how to do that? Well, he always was an innovator. He figured out a way to 'securitize' the royalties. Basically, he sold bonds that would be paid back over time by royalty money. Wow, I never was much of a fan of his music, but I am really impressed by his business acumen.
Hmm. There are lots of programs that claim they allow clients to get homes retrofitted and use energy savings to pay for the retrofit. The problem is most don't actually save the client any money until the loan is paid off. It just locks them into spending the same amount of money monthly for the next 10-15 years as they were before work was done, then they save money. Most of the time, the job is several tens of thousands of dollars and the client has to put some of the money out up front. Often the job costs 20-40% of the expected value of the house if it were sold. Also, part of the amount they pay is interest. I have a hard time getting clients to take that on.
That is not want Bowie did.
There is a business model for retrofit where an outsider pays for the job and looks at that payment as an investment. He is not a lender, he is an investor. Investors are gamblers who hedge their bets in favor of them, not the house. Home performance, if we believe the hype, is a sure bet.
When I was a full on HP Business owner, I wished I had the nest egg to offer jobs to clients for free. I wanted to get several years of utility history from the client and average it out to a monthly amount. I would not care if it was baseload, there was a pool, or whatever, I just wanted history. I would make an agreement with the client saying that monthly amount would now be paid to my business, and I would pay the clients utility bills for some set term, ideally 10-15 years. The client would allow my business to do whatever we felt was prudent to improve the house. Everything would be on the table, appliances, lighting, HVAC equipment, insulation, demo, moisture remediation., radon, PV, solar thermal, everything. once the utility bill was paid the balance of the cash we received from the client was ours to keep. The client assigned all consumer incentives associated with the work to the contractor. The client never paid anything up front or signed a loan document, he or she simply agreed to pay the contractor or investor a fixed amount every month for X years and the investor agreed to pay the client's utility bill for the same period of time.
Investors would have access to client utility bills going forward. Investors would have the right to investigate sudden aberrations in the bills. Investors would suffer the consequences of all rate hikes. The payment could be changed if the house changed significantly. Additions, pools, electric vehicles, etc. could affect the payment up or down. (eliminate a pool, the bill goes down, add a welder bill goes up) The investor or his agent would be the primary point of contact if any envelope or mechanical changes were under consideration, and those changes could affect the payment. (There would have to be a notation at the building permit office telling permit seekers they had to notify the investor if changes contemplated added or subtracted area or volume to the structure or changed HVAC equipment or design in any way.) The client could refuse to let my business do any further work, but in that case, the payment to the investor would be adjusted as the investor felt necessary, then readjusted 1 year later to a prescribed spread over actual normalized monthly utility bills. All jobs would get NEST thermostats on each zone in the house, and the investor would have 24-7 monitoring abilities on those thermostats. Parameters would be set before the deal closed as to what the thermostats should be set at and what range of adjustment was acceptable on the thermostat. In the event of thermostat failure prompt replacement of the thermostats was the responsibility of the client. This would be enforced by a contract phrase stating such and defining the penalty for not repairing the stat as double the cost of the stat plus a reasonable fee for installation of the replacement.
These arrangements would have to be tied to the house, not the owner, so if an owner sells., the payment arrangement continues. At sale though the buyer is told, he or she has to pay the monthly stipend, but they would not get any energy bills until some date in the future, which could be a decade away. The buyer would be given an opportunity to buy out the investor at closing. the investor would establish the amount that buyout would be.
There are two variations on this that could work. In one the investor pays for the job and the client pays the investor over time. This is similar to what we have now, and it is short sighted.
In the other model, the investor works with a specific contractor and the contractor and investor work deals where risk is shared and reward is shared. Cash flow is valued higher than short term gains and the shared risk/reward equation would adjust over time as cash flow allows the contractors to defer payment.
This model gives businesses like mine steady cash flow, something we drool over. It gives us the opportunity to get paid what we are worth. Clients never see a price for the job or a big bill, they simply pay as they were. They have frozen their utility bill for 15 years.
People who get really rich in America do it by providing a convenience for a very small investment. That convenience has to be indispensable and low cost. A little continuous drip from a lot of pots is much better than a whole pot once.
There are probably several hundred people on this forum who have a much better understanding of the bond market and how to organize programs than I ever will have. I am a semi retired practitioner.
Could some of you put your heads together and see if we can figure out a way to give this market that opportunity? It would never work in low income housing, so the programs in place for low income will have to remain, but there are a lot of homes built in the past 10 - 20 years that have the same performance issues and are owned by affluent high credit rating folks who don't see their current bill as objectionable, so they don't fix anything. They need the help too, but they prioritize the Ferrari over home repairs they cannot see or brag about. They would enjoy getting work for 'free' though.
Folks have been doing serious retrofit following state programs for 10 years or better now. those programs should have data bases they can exploit to establish a baseline of expectation for investors to use to evaluate risk on funding jobs. Contractor A is usually within 10% of his predicted results. Contractor B is usually 15% better than she predicted. Contractor C is always overly optimistic. That makes the risk easier to evaluate. Once we establish a baseline, we ask an investor to buy the job for the client, collect the monthly stipend from the client, and pay the utility bill.
We frequently see savings over 20%. Where else can you buy bonds rated B or better that yield 20% and are backed by consumers with 700+ credit scores today?
Such an interesting post Pat. Bloomberg posted this story about David Bowie: Bowie: The Man Who Sold Royalties and Brought Music to Bonds
Pat, This seems like pretty sound economics. Have you brought this to the attention of any decision making entities in New York or anywhere else? Although I don't know much about this topic New York is establishing their Green Bank and Clean Energy funds and I would think they would be interested in workable concepts such as this.
Mike Jones, CNY Weatherization Services
I didn't bring it anywhere but here. I literally heard the news account about Bowie and thought 'man, why didn't I think of that?' Then I realized I don't know anyone who would be able to create this and I doubt I have the necessary skills.
But I am not too proud to recognize that or too insecure to spew an idea and see what happens. Worst that can happen is someone who doesn't already know I am a nut job finds that out. Best is someone says, 'hey, this is doable!!'
Your idea makes some sense from an economics standpoint. But how many homeowners will give up so much control to your company in order to save some money each month? Granted, they would enjoy other benefits, such as more comfort, less worry about maintenance, and possibly higher IAQ. Your company would basically be controlling all the mechanical equipment and purchases, by applying positive and negative consequences to homeowner actions. If your business were associated in any way with the government I can just hear the screams of "Big Brother, Big Brother!" Have you considered the human dimensions of your ideas?
I'll bet plenty of utility energy efficiency program managers have dealt with this conundrum through demand response programs. I know people who will only let you pry their thermostats from their cold, dead hands. Any program managers who want to chime in?
I made a mistake by mingling 'investor' with 'my company' a few times in this.
Clients would have to realize it is a two way street the investor needs assurance the investment is safe. There are too many variables for investors account for before work is done. There has to be the opportunity to monitor, educate, and enforce the plan for the investor to minimize risk.
The state sponsored programs I am familiar with have a problem with contractors who do stuff that isn't really what was intended. But since they are state programs they cant really stop that practice immediately by excluding problems.. instead, they create more rules and change process to accommodate those rules. That puts a big bureaucratic burden on contractors and creates overhead we pass on to consumers, effectively raising prices substantially.
In a private set up like this, participation is not guaranteed, bureaucracy can be cut, and prices can be more reasonable.
Yes, the consumer has to allow more monitoring, but that buys lower cost, a stable energy cost for multiple years, reduces greenhouse gases, excludes government, allows some practitioner creativity, and accomplishes many of the market transformation goals the government programs were initiated to foster.
The monitoring itself will be invisible to clients who don't cheat or make big changes in their living practices. I think this ideas is less intrusive than something like OnStar that tracks everything you do in the vehicle, Google, that tracks everything, the chip you put in the car to prove you are a safe driver for Progressive, or the I Phone that weirdly erupts with a message saying you are 23 minutes from home and traffic is light when you get in the car. I still don't know how the hell it knows where home is.
What you are describing is truly a partnership, and that has to make a huge difference in the way potential customers approach this. Best of luck to you and/or anyone who pursues this idea.
This concept might make much more sense in a multi-unit situation like a condo/apartment complex where the individual homeowners have already lost much of their autonomy to the home owners' association. The greater number of units participating would also be much more attractive to an investor. I think it would be a much harder sell to individual home owners as the "renter mentality" (e.g., we're not going to be living here for that many years) or the "it's good enough" (so I can spend my $ where I want to) or "what if something happens" (e.g., loss of employment, unexpected high-priced health issue, long-term disability, etc.) mentalities will prevent a long-term partnership as you describe.
No doubt multifamily projects involve more dollars on a grander scale and would be easier to adapt.
The only way it works for individual residential projects is for someone to create an entity that pools several dozen individual residences into one bond. Another whole new enterprise for someone to figure out.
[Post moderated: Text removed due to non-compliance with Home Energy Pros Guidelines]
The failure is the presumption that these projects have the strength to self fund. Do the math. $35 a month takes 50 years to pay for a $15,000 job.
This is one reason NYSERDA doesn't track results. The math doesn't reconcile to narratives of "payback" or "SIR" - and this truth moves from 88% true to 98%true as energy prices drop.
You fail to realize my idea is a sea change to the status quo.
In the case of my former company, I found the programs brought so much administrative burden that pricing went up in the neighborhood of 35%. that will be taken as BS by program managers, but think about it. doing an audit and getting that data into a report, presenting the report, and going through the process of selling that job is all what I call burden. failing to sell a job for a variety of reasons, 7/10 times or more is extremely expensive. auditors can not work fofr free, so we paid them, we developed piecework rates for an audit, test out, etc. program rules changed, more equipment, more training. BPI certifications, usually multiples for each individual auditor, and lately for crew personnel, training, equipment, time. BURDEN. it begins to eat into the bottom line of other facets of the business. All of a sudden, the company is carrying costs associated with the burden of the program and spreading it into overhead computations for all work in the business.
In the scenario I suggest here, much of those costs go away. Market forces (the results you so loudly debate) will determine the likelihood of work from contractor A getting funded and contractor B losing his ass. We don't necessarily need software on every job. See a house heated by wood off the property? just tell them that house doesn't fit the profile for this plan and move on. No need to do a full audit, software model, get utility data, get forms signed, etc. just because Mrs Clampett was told she qualifies for a free energy audit by some state guy.
When Markets rule process, and competition exists we all benefit. Dropping prices 35% while increasing my net margins and doing good seems like a good idea. I didn't do all the math for everyone, but if Programs can release the data on contractors to give investors a way to judge risk, this idea can be tested.
Maybe someone would create a business that did QC exclusively at the behest and cost of the investors?
Car dealers figured out a way to assess credit risk with a birthday, name, and SSN.It should be that easy for an investor to choose a contractor to work with. Most likely the investor will not do this directly, some service will appear to connect investor dollars with contractors. More service sector jobs.
Maybe it is not feasible, but it is worth thinking about it on a level I am not qualified to judge on.
Pat, I admire your passion here! Your notes on burden show a lot of pain behind them, I greatly appreciate the frankness. I've learned how to charge about $1000 for the audit and planning process. It's still not amazing money, but it covers overhead.
I've seen a few fuel oil customers come close to self funding, but they are an anomaly in my market, and they both were around a 1 SIR. With fuel under $2, the math starts to get bad. $.50 therms are much uglier. SIRs for my projects are usually in the .2 to .5 range.
As far as the market forces argument, YES! A program based on Negawatts that allows inexpensive financing for the energy savings portion on the energy bill makes a ton of sense. Check out my One Knob series from last year. My hopes of a program having the guts to actually implement that have largely failed. My goal is to show it can be done completely outside of programs. I firmly believe we can do it, I'm pulling it off personally right now by tracking realization rates of my own projects. I'm lucky that there are no programs in Cleveland right now, there's nothing to screw that up.
If you'd be interested in tracking how your projects actually do to see how your math actually pencils, reach out. nate at energysmartohio dot com.