Making the Energy Efficient Choice Affordable: PACENow’s David Gabrielson Talks with JP McNeill, CEO and Co-Founder of Renovate America.
David Gabrielson: JP, tell us about your background and how you got interested in PACE.
JP McNeill: Being a father and a spouse and wanting to promote sustainability led me into solar energy. I joined SunEdison, a company working on large scale solar PV projects for commercial, municipal and utility customers and worked with home rule municipalities that could write their own legislation to put assessments on properties in their jurisdictions, and subsequently issue bonds to fund large solar PV installations. This was prior to the first two PACE programs being launched in Berkeley and Palm Desert, CA. In 2008, once I learned about the passage of statewide PACE legislation in California, I left SunEdison and started Renovate America with the goal of creating a solution that would catalyze the mass adoption of EE/RE and water conservation measures at the household level. When home owners move forward with a project that saves them money, they realize that being more energy efficient is in their financial interest, and, ultimately, the concept of being green is not only good for the environment, but is also good for their pocket books. This realization changes people’s behavior further, when they consider what other things they can do to live more efficiently or sustainably. Thus, I think PACE can serve as a catalyst to live more sustainably.
DG: You are talking about community based awareness that comes out of individual homeowners making decisions in their best interest, and in turn sharing sustainable practices with their neighbors.
JM: David, one can make an argument that building a nuclear power plant or a PV system in the desert is a positive thing, but it doesn’t change the behavior at the household level. Putting a solar PV system on one’s home and seeing the impact that it has in terms of saving money, ultimately, results in making other decisions that create a more sustainable culture, which is what I want to be a part of.
DG: So you started in Riverside County and builtthe HERO program that has been successful. What you think is the key to this success?
JM: The HERO program is an energy efficiency financing program and these types of programs, whether they have been implemented by utilities, municipalities or public agencies, have been around for more than sixty years in North America and Europe. Operating any energy efficiency financing program means doing hundreds of things on a daily basis that impact the consumer experience. This covers the gamut from policies, processes, software, workforce training, marketing, etc. It is a culmination of doing many things really well that resulted in the success we have achieved. I’ll give you an example, last month, we handled 30,000 calls from property owners and contractors, received about 3,000 applications, and funded over 1,000 projects. There is a lot of interaction that goes on behind the scenes in order to create a better consumer experience and achieve success.
DG: You also made it simple for contractors, who are the key sales force in the residential market, to sell PACE funded energy efficiency and renewable energy upgrades.
JM: One can create a program with accurate documentation, but in order to achieve high levels of participation, it needs to be viewed as a consumer product. Contractors also need to view PACE as a product that can help them. Each property owner and contractor have certain expectations about how things should operate. Similarly, when we use cell phones or turn on a light in a room, we have certain expectations. So if a program is not aligned with a property owner’s and contractor’s expectations, neither party will use it. It requires a tremendous amount of work to build a program that meets consumer’s and contractor’s expectations.
DG: How do you market PACE to property owners?
JM: Homeowners want two things: first they want to know what options they have when it comes to home improvements. Secondly, they want to select the best product, the best contractor and the best financing option. In terms of getting the word out, we do some outreach to homeowners, but it’s difficult and expensive to do a lot of outreach to homeowners. Many homeowners call their bank to see what financing options are available to them. Contractors also inform homeowners what payment options exist, which also includes credit cards and HERO. HERO is a much better option than credit cards, because interest rates are lower, payments are fixed, interest is tax deductible and the payments stay with the property. Thus, we work with contractors to educate them on the benefits of HERO. From the property owner’s perspective, HERO protects them by ensuring that only contractors who are licensed, bonded and in good standing with the program can participate; only products that meet the U.S. Department of Energy Star minimum efficiency standards are available; permits must be pulled for all projects; the contractor must provide fair pricing; and the project must be completed and homeowner must be completely satisfied before payment is made. Unfortunately, if a homeowner uses a bank or credit card, none of these consumer protections exist.
DG: Have you put together a training program? If so, how many contractors have you trained?
JM: We have a certification program and a continuous training program for contractors. So far, over 5,000 people who have registered with the program, which includes field reps, technicians, office staff, and marketing staff. Also, we built partnerships with big box retailers: Lowes and Home Depot. The interaction with the contractor community is never ending. We have a team of people that work with contractors on a daily basis. Our team makes sure that contractors understand how to answer questions from property owners and when to use the call center.
DG: In the commercial arena, contractor training and certification seem to have brought great results in markets where this is being done. Are you seeing an 80/20 rule in action, 20% of contractors you train bring 80% of the leads?
JM: HERO is a new product so there is an adoption curve associated with it. The 80/20 dynamic is more typical in mature markets. The new product paradigm is different. Each one of us adopts new products within a different time period. Some of us are early adopters and some of us are laggards. Over time, as the product matures, more people use it and then I think we will see the 80/20 rule.
DG: Tell us more about the approval process for HERO financing. We’ve heard it’s easy and fast?
JM: We are meeting consumer expectations and providing a service at the level they have been accustomed to. If you don’t meet consumer expectation as it relates to a timely response, they look for alternatives. And credit card financing is an option many homeowners use, not because it’s the cheapest financing, but because it meets their expectations. We are working really hard to offer them a more affordable option.
DG: How many communities in California offer HERO financing? Where do you expect to be in 6 months?
JM: Today, there are 140 cities and counties that have approved HERO. Five of the top 10 cities, 10 of the top 20, and 49 of the top 100 make HERO financing available to their constituents. Over time, we think every city and county will adopt HERO, and probably other programs as well. The ability to offer multiple options will raise awareness of EE/RE, , improve service and lower the price for homeowners. Cities will benefit by creating more jobs, a higher economic stimulus and lower emissions. Plus, they reduce risk, because they shouldn’t put all their eggs in one basket by just offering one program to their residents. Many cities are doing this including San Diego and San Jose.
DG: Is HERO offered anywhere outside of California?
JM: People underestimate how difficult it is to create a successful program, whether it covers a city or a region. We are focused on creating a great consumer experience within the markets we operate in and overtime we will expand to new markets outside of California.
DG: How many homes took advantage of HERO financing? What types of projects were these?
JM: Over 11,000 homeowners have utilized HERO to make improvements to their home to lower their energy bill. Approximately 2/3 of the homeowners financed an energy efficient measure such as insulation, weatherization, efficient furnaces, efficient air-conditioning, efficient roofs and other products that consume less energy. About 1/3 of the homeowners used HERO to purchase solar PV systems and charging stations. We are also seeing an increase in homeowners using HERO to finance water efficient measures due to the drought in California.
DG: This is impressive. Are you seeing any trends with mortgage foreclosure rates?
JM: I don’t know if you have ever done a home improvement project, but it’s not what most people want to do on weekends or weekdays. These people move forward with higher quality projects that use less energy because they want to lower their bills and increase their disposable income. As a result, it doesn’t surprise me that we are seeing homes that participate with HERO have a lower mortgage foreclosure rate than homes that would otherwise qualify for HERO, but did not participate. This is important because the lending industry would love to lower utility bills and increase disposable income so that homeowners can pay their mortgage. In fact, the lending industry has long sought to create a financing product that would enable adoption of EE/RE measures for this reason. If we, as an industry, can demonstrate that a PACE product, with proper underwriting and consumer protection, can lower the mortgage default rates, protect the consumer better than other financing products and have a positive impact on job growth and environment, it will be a compelling value proposition for the mortgage industry. We will continue to monitor our portfolio and share data.
DG: Moving on to your position on home energy audits. Do homeowners take advantage of audits through the HERO program?
JM: We certainly encourage audits, but at the end of the day it is up to the property owner to determine whether they want to take advantage of one. When homeowners are in the market to replace broken or poor performing equipment, they are less inclined to purchase other products (audits) with it. Property owners undertake audits when they are looking to do an evaluation of their home. Historically, analysis of energy efficiency and renewable energy programs in North America and Europe shows that the more hurdles a program puts in front of a property owner, the less likely it is to achieve a high participation rate.
DG: Let’s talk about the recent securitization of residential PACE bonds.
JM: We started the process to securitize PACE assessments four years ago and began working with rating agencies and attorneys, who went through a very thorough analysis of our portfolio. We are very happy with the outcome.
DG: This issue was privately placed? Are they municipal bonds?
JM: It was a private placement. It was a not a municipal bond product, but an asset backed securities product.
DG: 4.75% seems pretty attractive at this point, but might still be a bit high given the credit strength. It’s still a very illiquid market.
JM: You have to look at the weighted average life of the pool and at the spread: 180 basis points over the swap rate at 11 years. More than anything these numbers are a function of the illiquidity of the asset. When you have a small inventory of assets, you aren’t going to have a significant amount of trading on the secondary market. So any product that was purchased will more than likely, won’t be traded. Overall, credit is strong but liquidity is weak, which has an impact on price. As far as it being AA rated by Kroll, it is hard to find too many AA notes with and 11 years average life that trade at a tighter spread.
DG: What would you tell a homeowner about HERO program?
JP: Consumers have a variety of choices, not everybody qualifies for HERO and there are people who might be able to get a lower cost of financing elsewhere, (although one can’t get the same PACE characteristics in a mortgage or a home equity line). Homeowners should look at all alternatives and find the best option. Our goal is to create a financing mechanism that enables homeowners to select the products they want to save them money.
Article appearing courtesy PACENow.