Speaker 1: You are listening to Redefining Energy.
Speaker 2: Your co hosts from.
Speaker 1: Berlin Gerard Reed and from London Laurent Sagalan.
Speaker 3: Today on Redefining Energy, we're going to talk about residential
Speaker 3: energy solutions.
Speaker 4: Yes, job, there's been a lot of startups initiative around
Speaker 4: how to put the solar batteries in the home. The
Speaker 4: difficulty is really to scale and I think our guest
Speaker 4: has cragged the code.
Speaker 3: Yeah, I'm really looking forward to Simon Field coming on
Speaker 3: the show. I met Simon ten years ago when he
Speaker 3: was about to sell his business up and he reached
Speaker 3: out to me and we become friends over this period
Speaker 3: of time, you know, and he's developed a very interesting
Speaker 3: business in the ukme Rock.
Speaker 4: So his business is called houm Tree and home Tree
Speaker 4: is a company that offers customer home emergency breakdown insurance,
Speaker 4: installation and financing for energy efficient hardware. Let's listen to
Speaker 4: Simon Simon.
Speaker 1: Welcome to the show, Laurent Jared, thank you very much
Speaker 1: for having me. Simon. It's great to actually have you
Speaker 1: on the show.
Speaker 5: And I think back when we met ten years ago,
Speaker 5: you wanted to set up a business and residential energy
Speaker 5: and I'd love to actually start with that and just
Speaker 5: talk about what you've seen over the last decade.
Speaker 6: Well, thanks Jared that it's quite a nice opportunity to
Speaker 6: come on to your podcast because you were probably amongst
Speaker 6: the first people I met in the energy ecosystem over
Speaker 6: ten years ago who I could chat about this vision
Speaker 6: for building a European residential energy services business. And at
Speaker 6: the time, you know, I had been in private equity
Speaker 6: and it'd started to see some of the leading US
Speaker 6: residential energy services business at the time, Solar City and
Speaker 6: sun Run, and they'd seen the first securitization deals that
Speaker 6: had started happening in that market in the US and
Speaker 6: kind of had an ambition and a dream to take
Speaker 6: that kind of model here to Europe. And fast forward
Speaker 6: nine years, home Tree remains resolutely in that space. I
Speaker 6: would consider ourselves one of the UK market leaders in
Speaker 6: the residential energy services market. But it's unquestionably been a
Speaker 6: turbulent market. It's a market that had lots of fits
Speaker 6: and stops, and it's also a market that I think
Speaker 6: it's been very hard for players to really think about
Speaker 6: getting a business model that can scale and create meaningfulsh
Speaker 6: holder value over a long time. The baseline model that
Speaker 6: a lot of people have entered into this space is
Speaker 6: kind of a direct to consumer style installation business, maybe
Speaker 6: with a financing.
Speaker 1: Arm to that, but we're at a point in the
Speaker 1: market where.
Speaker 6: The fundamental kind of economics of that business are starting
Speaker 6: to break down with hikas and the kind of perfect
Speaker 6: competition that you see in the installation market has meant
Speaker 6: that some of the leading venture and growth equity back
Speaker 6: players are really struggling as the market has turned, for
Speaker 6: example in residential solar, but the competition has only increased,
Speaker 6: and the kind of flawed business model of going to
Speaker 6: market just with a direct to consumer one off hit
Speaker 6: product where you're installing a one so off system in
Speaker 6: that fifteen twenty year relationship with a homeowner has become challenged.
Speaker 6: And so by summary would be it's not an easy
Speaker 6: category to create value in home trees had to think
Speaker 6: very hard around trying to create a business model that
Speaker 6: can create returns in the ups and downs of the
Speaker 6: market and ultimately not be so reliant on pikak getting
Speaker 6: through to the consumer through kind of traditional direct to
Speaker 6: consumer media channels.
Speaker 2: Just take a tiny step back and just pretend I'm
Speaker 2: a consumer residential consumer.
Speaker 6: What do you offer from it Palm Trees today god
Speaker 6: three divisions. Our first division is a residential installation division
Speaker 6: installing heat pump, solar, battery and EV charging assets. The
Speaker 6: way that we're approaching that category is not building a
Speaker 6: direct to consumer business as I mentioned that might struggle
Speaker 6: with us having to fund the marketing costs. We're growing
Speaker 6: that business more as a buy and build and so
Speaker 6: we we have identified that it's clearly a hyper fragmented space,
Speaker 6: the installation space, but there are regional players that get
Speaker 6: a certain level of scale where they have a certain
Speaker 6: brand cachet within a fifty kilometer radius, they have a
Speaker 6: heritage in an area, and they have a management team
Speaker 6: that are local to an area that remain ambitious to
Speaker 6: grow a business that maybe are looking for both equity
Speaker 6: support but also other kind of back office support. And
Speaker 6: so what we found is that we're actually able to
Speaker 6: go into this market and acquire these companies for relatively
Speaker 6: low entry EBITDAM multiples three to four times EBITDAM multiples,
Speaker 6: incentivize management teams through four or five year earnout structures,
Speaker 6: really give them access to tools to help them be
Speaker 6: more effective on the sales, marketing and the installation side,
Speaker 6: but really try and centralize a lot of the back
Speaker 6: office in terms of hardware proturement, so go and do
Speaker 6: deals with the OEMs so we can try and drive
Speaker 6: better pricing on the hardware purchases. Typically we're going into
Speaker 6: quite non digitized businesses putting them onto our systems.
Speaker 1: That's the first part of our business.
Speaker 6: From a consumer, you can now through these local brands
Speaker 6: at home Tree Owns, get access to the actual hardware
Speaker 6: installations itself. Our next business is a financing business where
Speaker 6: we offered the homeowner long tenor lease and loan products
Speaker 6: for residential renewable retrofit.
Speaker 1: Typically you're looking.
Speaker 6: At a five to a twenty five year loan or
Speaker 6: a lease. A loan is unsecured, you own the asset
Speaker 6: the lease, we will own the asset and be responsible
Speaker 6: for the service and maintenance of that. But again we're
Speaker 6: not just offering that exclusively on our own installers. That's
Speaker 6: become a whole of market financier. So we're effectively a
Speaker 6: B to B business in the financing space where we
Speaker 6: sit behind many third party installers, utilities or manufacturers that
Speaker 6: are installing renewables, and we are becoming the financing engine
Speaker 6: for that. And in the last business, which is our
Speaker 6: largest business and our most consumer oriented business, is we're
Speaker 6: the fourth largest provider of what's called home emergency insurance
Speaker 6: or home warranty in the UK, where we offer homeowners
Speaker 6: insurance giving them coverage against breakdowns to their boilers, heating, plumbing,
Speaker 6: home electrics and when they.
Speaker 1: Have a breakdown, no heating.
Speaker 6: No hot water, we have a national network of five
Speaker 6: thousand engineers who can go out to their home and
Speaker 6: get them back and fixed. So what we like to say, Jared,
Speaker 6: is that we can offer a solution to the homeowner
Speaker 6: across the whole life cycle. We can install the hardware,
Speaker 6: we can finance it, and we can own it for you.
Speaker 6: And in life we can service and maintain that asset
Speaker 6: and give you that piece of mind. And ideally, of course,
Speaker 6: from a business model perspective, we can wrap all of
Speaker 6: that up into one contracted twenty year relationship where we
Speaker 6: own the acid in the home, we're responsible for the
Speaker 6: service and maintenance. So we've made some margin on upfront
Speaker 6: hardware installation, and as that customer needs more hardware without
Speaker 6: us having to acquire them through Google, we have the
Speaker 6: established relationship and we can keep it as that kind
Speaker 6: of annuity.
Speaker 1: Can I ask just one more question?
Speaker 2: And I know the wrong ones to also as questions
Speaker 2: it is, but my question really is go back to
Speaker 2: the consumer value proposition. For me at present, I'm buying
Speaker 2: electricity from a utility, why would I go install solar
Speaker 2: batteries heat pumps in the UK and why would I
Speaker 2: even lase it solar?
Speaker 6: When I started had feeding tariffs in the UK. Today
Speaker 6: there are no.
Speaker 1: Tariffs subsidies for rooftop solar and.
Speaker 6: The economics have become a lot more compelling in terms
Speaker 6: of payback, especially when paired with a battery. And so
Speaker 6: what you find is that the adoption rates on solar
Speaker 6: and battery in the UK for homeowners are much further
Speaker 6: ahead than heat pumps, and so the consumer is somewhat
Speaker 6: perhaps green oriented, but in many ways, like what happened
Speaker 6: in Germany, is making increasingly an energy security or a
Speaker 6: cost of living based decision where they want to lock
Speaker 6: in a certain cost of electricity over a ten to
Speaker 6: fifteen twenty year period. The reality in the UK today
Speaker 6: on heat pumps is slightly different. As you'll know that
Speaker 6: the UK has the highest penetration of gas heating of
Speaker 6: pretty much any developed market maybe other than Japan, and
Speaker 6: there's pockets of the country that have oil heating. But
Speaker 6: the economics of flipping from a gas boiler to a
Speaker 6: heat pump today, even with the seven and a half
Speaker 6: thousand boiler upgrade scheme grants from the government, are not
Speaker 6: as strong because unfortunately, the spark gap or the cost
Speaker 6: differential between electricity and gas in the UK, is four
Speaker 6: times and that does mean that the economic of heat
Speaker 6: pumps today are challenged. And so what we find is
Speaker 6: the eighty five thousand or so heat pump installs this
Speaker 6: year are primarily going in with homeowners that have four
Speaker 6: gride homes, so they might have an oil heating system,
Speaker 6: but they tend to skew towards more wealthy consumers, maybe grandparents,
Speaker 6: who want to be seen to be doing something good
Speaker 6: for future generations. It's not today being exclusively driven by
Speaker 6: an economic business case, and so depends on the technology Juard.
Speaker 6: But you know, we think that you are starting to see,
Speaker 6: for example, solar and batteries starting to make more sense.
Speaker 6: We've partnered up with the right kind of tariff and
Speaker 6: of course, look you're seeing players like octopus and others
Speaker 6: coming in with a heat bomp solution partnered with the tariff,
Speaker 6: where the economics with the government grant can start to
Speaker 6: make sense for more very specific types of homes. But
Speaker 6: I think we're in the very early innings of that.
Speaker 4: So if we go back to your three business and
Speaker 4: thank you for being clear, because sometimes we've got guests
Speaker 4: on the show and after half an hour we see
Speaker 4: don't really understand what they're doing.
Speaker 1: At least a year. I always understand it. Sluran and
Speaker 1: doesn't understand.
Speaker 4: Sorry, okay, sorry, let me rephrase because Jill's much more
Speaker 4: intelligent than me. Understand Jarna and I. We've done that
Speaker 4: in Germany with Fabe Sool. Of course it depends on
Speaker 4: the price electricity, but it was a very good proposition
Speaker 4: provided that you had put the infrastructure behind, which is,
Speaker 4: as Daniel would say, STUMPHI strumph, which is rins repeat,
Speaker 4: rins repeat, rins repeat. Now I understand what you're saying
Speaker 4: for heat pumps, because somehow it pumps. You need to
Speaker 4: go inside the house and it's going to take you
Speaker 4: four days. Where was the solon It's done in twenty
Speaker 4: four hours, And of course the price of the panels
Speaker 4: has gone down. You mentioned as total admiration for autopas
Speaker 4: because they are also the suppliers, so they can even
Speaker 4: probably package it more than you. And they've got all
Speaker 4: these software tools with dynamic pricing and so on, which
Speaker 4: really create a mini ecosystem. So is it a competitor?
Speaker 4: Are you collaborating with them? How does it work?
Speaker 1: Jared and I were talking ten years ago.
Speaker 6: There was Philip at Tormando, there was myself, Greg at
Speaker 6: Octopus had started the business maybe a year or so before,
Speaker 6: maybe it might have even been a number of months.
Speaker 6: And there was the founders of another challenger energy supplier
Speaker 6: called Bulb. And it can come questionably what Greg has
Speaker 6: achieved that Octopus is the most impressive energy story of
Speaker 6: the last ten years, certainly in Europe. It's a phenomenal
Speaker 6: success story today, the kind of business that clearly can
Speaker 6: do what they want. But my experience is I think
Speaker 6: there will be two winners in the residential energy space.
Speaker 6: There will be that whole full stack utility that socides
Speaker 6: they want to be both the supplier, they want to
Speaker 6: play in flexibility and that kind of virtual power plant space, but.
Speaker 1: Also build a large services business.
Speaker 6: And then I think there will be the rest of
Speaker 6: the utilities that our clear experience is will mostly decide
Speaker 6: to partner on the services side of the business. And
Speaker 6: for me, when I categorize services, it is how's the
Speaker 6: hardware going to get installed? How does that get finance?
Speaker 6: And in life, how does that get service and maintained.
Speaker 6: If you look at the key connecting tissue of those
Speaker 6: three businesses, it is the engineer, the installer, the engineer
Speaker 6: going into homes, which is fundamentally different to the DNA
Speaker 6: of a of ore retail utility. So you take something
Speaker 6: like our financing business, where we've just recently done the
Speaker 6: first ever securitization in the UK. We've raised a three
Speaker 6: hundred million facility from Barclay's and CPBIB. We've had pretty
Speaker 6: much every one of the utility providers in the UK
Speaker 6: reach out in active discussion, and we have for already
Speaker 6: two signed up saying that look, we're a regulated consumer utility.
Speaker 6: We're not going to become a regulator consumer financing business.
Speaker 6: As well, we'd like to partner with someone on who
Speaker 6: can finance the assets and own the assets and service
Speaker 6: maintain those assets. So the great question, I think octopus
Speaker 6: from what I can see right now is everybody's competitor
Speaker 6: because they've just been such a tremendous success story. Most
Speaker 6: these will struggle. British Gas or Centrica is a anomaly
Speaker 6: because of their historic position as.
Speaker 1: A national gas monopoly.
Speaker 6: They have this ingrained services business built around the gas boiler,
Speaker 6: and of course the question for them will be can
Speaker 6: they transition that asset British Gas home services towards the
Speaker 6: green assets going.
Speaker 1: Into the home.
Speaker 6: But I think if you look at all the other
Speaker 6: utilities they've struggled over the last twenty five years to
Speaker 6: replicate British Gas as services capabilities. Some have dipped in,
Speaker 6: some have not, some have partnered, some have not, but
Speaker 6: none have really been able to get a scaled installation, service,
Speaker 6: maintenance and now smancing business. I would argue there will
Speaker 6: be the octopus of the world, the pure plays, and
Speaker 6: then they will I hope be players like Cometry or
Speaker 6: White competitor for example Home Serve which is now owned
Speaker 6: by Brookfields, and a pure place services businesses that I
Speaker 6: think will really be kind of focused around having the
Speaker 6: engineer based as your DNA and go deep on that.
Speaker 6: That is my view of the going to two ways
Speaker 6: that you can win in this space.
Speaker 4: I'd like to summarize your the best of the rest.
Speaker 6: Well, we think it's a different model today. We're not
Speaker 6: competing with Octopus on financing. We're not sure they're going
Speaker 6: to come into that or necessarily serve as a maintenance.
Speaker 6: You're right, we will definitely not be anytime soon going
Speaker 6: into having a home tree tariff.
Speaker 1: We would partner on a tariff.
Speaker 6: And in truth, you know, when you look at flexibility
Speaker 6: and virtual power plants are peers in Europe that started
Speaker 6: on the services side, mostly on the installation side, and
Speaker 6: unparalor an einstem Afoff in Germany, they're kind of transitioning
Speaker 6: their businesses from the install towards the flexibility. The VPP
Speaker 6: gives a way to try and extend the consumer lifetime,
Speaker 6: drive that recurring revenue. I guess I've always had a
Speaker 6: sense that Kraken has a meaningful competitive advantage there given
Speaker 6: the scale. Does someone who's starting from the point of
Speaker 6: the install have a meaningful advantage there and what inevitably
Speaker 6: I think is going to be a lowmar and business at.
Speaker 1: Best, We're not sure.
Speaker 6: So we think that part of our business model we
Speaker 6: will partner on and really focus in on the three
Speaker 6: business lines that we're in today.
Speaker 4: Now let's move to the second one. Securitization. It looks simple,
Speaker 4: but in fact it's difficult because what you're doing is
Speaker 4: you're bundling thousands, if not tens of thousands of individual
Speaker 4: owners into a gigantic portfolio, which means a lot. It's
Speaker 4: all analysis about credit risks and so on, and then
Speaker 4: you flip it to Barclays well done. This has been tried,
Speaker 4: you know, by sun Run for quite some time in
Speaker 4: the US around soda. So were you kind of inspired
Speaker 4: by those securitizations initiative?
Speaker 1: Yeah? Absolutely so.
Speaker 6: Look, as I said, when I found the Home Tree,
Speaker 6: I had been working in private equity. I saw one
Speaker 6: of the assets that we'd invested in, and private equity
Speaker 6: fund was a leading home improvement business. We looked at
Speaker 6: entering solar, and then we looked at saying, okay, well,
Speaker 6: this whole solar nancing thing that's happening in the US
Speaker 6: is very interesting.
Speaker 1: But if you step back for the last ten years, Lauren, there's.
Speaker 6: Been over thirty billion of abs issues for residential solar
Speaker 6: and energy efficiency asset in the American public markets across
Speaker 6: a handful of originators, Sun Run, Solar City, Sonova, Goodleap mosaic.
Speaker 6: And the best way to think about this if you
Speaker 6: take traditional home improvement finance, you're buying a kitchen, you're
Speaker 6: doing an upgrade to your home. You go to Barkley's
Speaker 6: or a traditional home improvement finance provider, you get a
Speaker 6: ten year loan a twelve point nine to nine percent APR.
Speaker 6: That's additional debt on the consumer balance sheet. So when
Speaker 6: the credit guys are thinking about this, it's expanding the
Speaker 6: debt load of that consumer balance sheet. The energy model
Speaker 6: is quite a unique asset class within the consumer credit
Speaker 6: space because what you're not actually doing is adding additional
Speaker 6: debt to that consumer's balance sheet. You're essentially securitizing part
Speaker 6: of their energy bill because you're installing assets that are
Speaker 6: reducing their monthly outgoings in terms of the electricity bill,
Speaker 6: and you're securitizing that part of their bill. And so
Speaker 6: what you've seen is that as an asset class, it's
Speaker 6: got the characteristics that has meant it's performed on a
Speaker 6: credit basis. You know, these are all homeowners tend to
Speaker 6: be quite prime credit. You're pretty much in line with
Speaker 6: like prime super prime auto, and I kind of prime mortgage.
Speaker 6: And so I think where people maybe sometimes tripped over
Speaker 6: themselves a bit, as all the infrastructure funds three, four
Speaker 6: or five years ago were kind of getting excited saying
Speaker 6: this is like a kind of infra type play.
Speaker 1: It's not really.
Speaker 6: It's a consumer financing play, but it is a prime
Speaker 6: consumer financing play for US. There's a track record in
Speaker 6: the US now of enough issuance where the rating agencies
Speaker 6: who we spent a lot of time with have been
Speaker 6: able to get comfortable with really categorizing this as prime
Speaker 6: consumer credit.
Speaker 1: It's performed quite well.
Speaker 6: There have been a number of originator issues in the
Speaker 6: US which we can talk about, but I think they're
Speaker 6: less connected to the underlying credit quality than they are
Speaker 6: to some market issues in the US Europe, as is
Speaker 6: always the case in financial innovation at five ten years behind,
Speaker 6: and if you look at what is quite an important
Speaker 6: moment for the category last week, fair play to them.
Speaker 1: MPAL, a German pier of ar as a competitor, did.
Speaker 6: The first public market ABS issue ince at two hundred
Speaker 6: and forty million euro portfolio of solar backed loans were
Speaker 6: securitized through a green bonds to the public markets.
Speaker 1: And what is really pleasing to see is.
Speaker 6: That had over seven times over subscription for this bond
Speaker 6: and it was exactly the same when we went to
Speaker 6: market to raise our three hundred million private facility with
Speaker 6: Barclays and CPBIB the level of interest from institutional capital
Speaker 6: to own these screen paper was sky high. It's not
Speaker 6: only because of the ESG angle. It genuinely I think
Speaker 6: there's there's the performance of the US the class that
Speaker 6: is informing them and think it desired to kind of
Speaker 6: help create this asked class here in Europe.
Speaker 4: Just for our listeners because I know job knows, but
Speaker 4: maybe or our listeners don't know. ABS means asset back securities. Correct,
Speaker 4: it's like a bond, Yeah, but it's a bond which
Speaker 4: is collecteralized by a certain number of assets. I haven't
Speaker 4: got into the details. So what interest rates have you
Speaker 4: been able to offer.
Speaker 6: We've been able to get a blended cost of capital
Speaker 6: across the Barclays and CPP facilities sub six percent and
Speaker 6: we're able to offer interest rates to the homeowner of
Speaker 6: eight to eight and a half depend So this is
Speaker 6: really competitive cost of financing.
Speaker 1: And if you look at the public market deal that
Speaker 1: MPAL did last week.
Speaker 6: Our analysis is that it came in one point eight
Speaker 6: percent tighter, so came in in the low force, which
Speaker 6: means that you know, if you want to create a
Speaker 6: virtuous circle of consumer adoption here, you have to bring
Speaker 6: the cost of capital down. And that is why securitizing
Speaker 6: to the public markets makes most sense, Lauren, because it's
Speaker 6: the only place where you got the deep enough pools
Speaker 6: of cheap capital that's willing to finance assets for twenty
Speaker 6: plus years. And look to your question around structuring its
Speaker 6: complex field, the best way to think about it is
Speaker 6: home Tree as an entity is a corporate originator. We've
Speaker 6: set up an off balance sheet structure so it's not
Speaker 6: guaranteed by the corporate that's originating these assets, and it's
Speaker 6: an SPV that has a trustee arrangement on top of that.
Speaker 1: The best way to think about that SPV is that SPV.
Speaker 6: All that's going into that is the cast flows from
Speaker 6: the consumer pain for the solar, the batteries, the heat
Speaker 6: pumps over fifteen.
Speaker 1: Twenty to twenty five years.
Speaker 6: And the way we financed that SPV is that Barclays
Speaker 6: are the senior partner. They will finance the first eighty
Speaker 6: percent of any loan release. CPBIB will do the mezzanine piece,
Speaker 6: and they will fund the next fifteen percent, and then
Speaker 6: he needs to fund the last five percent what's called
Speaker 6: the risk attention trunch. So we've all agreed a certain
Speaker 6: level of losses we think are likely and tolerable, but
Speaker 6: above that, the first five percent of losses on credit
Speaker 6: quality is home Tree's risk to take. So our cost
Speaker 6: of capital needs to be higher, and it is higher,
Speaker 6: of course, because we're putting inequity into that business. You
Speaker 6: then have the mezzanine slug who from ninety five percent
Speaker 6: to eight would take that level of losses if you
Speaker 6: got there, which we don't anticipate getting there. And Barklay's
Speaker 6: in the senior mean that they have to see twenty
Speaker 6: percent of credit losses in that portfolio before they would
Speaker 6: be taking losses, which is why they can be as
Speaker 6: aggressive on the pricing. Ultimately, banks and CPBIB, they're not
Speaker 6: set up necessarily in the current funds that we're in
Speaker 6: to own that paper for twenty five years.
Speaker 1: It's the public markets.
Speaker 6: It's the pension funds and the insurance funds that want
Speaker 6: to own that the structure we have would be when
Speaker 6: you hit a certain volume in that SPV of two
Speaker 6: million of assets, you would refinance out Barclays and CPBIB
Speaker 6: an issue a bond that investors would buy in the
Speaker 6: public markets to refinance them out.
Speaker 1: Home Tree will need to keep five.
Speaker 6: Percent in and that is a reason that I don't
Speaker 6: think all the utilities are going to want to get
Speaker 6: into this business because it's.
Speaker 1: Not a capital light business.
Speaker 6: Somewhat capital light in that you know we're not putting
Speaker 6: in twenty percent or fifty percent of our own money,
Speaker 6: but you know we still need to put in and
Speaker 6: keep in a risk attention trunt and ultimately that then
Speaker 6: would give us the capacity where Barclays and CPBIB would
Speaker 6: be back to zero. We can set up a second
Speaker 6: SVB and fill the portfolio again to the public markets
Speaker 6: and hopefully become a repeat issuer. And in doing that,
Speaker 6: as the markets and the rating agencies become more comfortable
Speaker 6: with what you're originating every time, you would hope, depending
Speaker 6: on where interest rates are, the spreads become tighter and tighter,
Speaker 6: which means that you can parley that into cheaper cost
Speaker 6: of financing for the consumer to hopefully make the economics
Speaker 6: better and better and better and becomes a virtuous circle.
Speaker 1: Wow.
Speaker 4: I like that. Okay, So business field business slide insurance.
Speaker 4: How did you came to develop this?
Speaker 6: If you remember at the start, I said that, you know,
Speaker 6: the challenge with the installation route into the home is
Speaker 6: that it's a one in fifteen, one and twenty year transaction,
Speaker 6: and that means that if that's your primary route to
Speaker 6: acquiring the consumer relationship, it's a very expensive marketing business.
Speaker 6: And when we looked around and we'd made that mistake
Speaker 6: ourselves in twenty fifteen twenty sixteen, thinking that we could
Speaker 6: use third party investor capital to build an energy services
Speaker 6: business through the installer channel, we struggled with the cacs,
Speaker 6: and so we were searching for a business model that
Speaker 6: could give us a cheaper entry point into the home,
Speaker 6: but a more established long life relationship with that homeowner.
Speaker 6: And so what we've done is we've built an insurance
Speaker 6: business that is not competing against core home insurance protecting
Speaker 6: against floods or tefts or fire. It's a warranty business
Speaker 6: that protects against breakdowns when they happen, and we get
Speaker 6: an engineer out of your home what's really good about
Speaker 6: that business, Laron is it's a high margin kind of
Speaker 6: mid sixties gross margin, recurring revenue subscription business that has
Speaker 6: low to mid teen annualized churn. So you're looking at
Speaker 6: a seven eight year consumer relationship minimum. You get a
Speaker 6: payback on your marketing within twelve fifteen months, and so
Speaker 6: it's a very profitable contract that you have. But more importantly,
Speaker 6: it gives you this a bit like for Octopus, they've
Speaker 6: got their energy tariff with the consumer, and churn in
Speaker 6: energy tends to be a bit higher thirty thirty five percent,
Speaker 6: But at least you can talk to the consumer about
Speaker 6: solar or heat pumps. It's given me a cheap way
Speaker 6: to get in and establish a relationship with the homeowner
Speaker 6: to talk to them about their heating. But furthermore, because
Speaker 6: it's a maintenance product, it comes with an annual service
Speaker 6: visit every year, so I know.
Speaker 1: I'm going to have an engineer in that home for
Speaker 1: an hour.
Speaker 6: Ever year and can build a real time picture of
Speaker 6: what assets that consumer has. So they have a heat pump,
Speaker 6: do they have solar on the roof? And if they don't,
Speaker 6: can I start talking to them about it? And so
Speaker 6: what it does is it becomes a feeder for my
Speaker 6: installation division. Because the worst time to replace a gas
Speaker 6: boiler with a heat pump is when you've got a
Speaker 6: broken boiler and you can't replace it and all you
Speaker 6: want is a new heating system tomorrow. That's the worst
Speaker 6: time to install a heat pump.
Speaker 1: So for us being.
Speaker 6: Able to establish a relationship with that homeowner to talk
Speaker 6: to them every year about their heating system, to maintain
Speaker 6: it across the years, to then inform them that actually,
Speaker 6: you know, they should be thinking about a green solution,
Speaker 6: we could finance it for them and wrap the same
Speaker 6: level a peace of mind they've had on their insurance
Speaker 6: product into that financing. It's almost the subscription economy. It's
Speaker 6: really moving towards thinking about this kind of capex once
Speaker 6: off item into monetizing a whole consumer lifetime and doing
Speaker 6: it on a fifty cred a month, seventy credit a month.
Speaker 6: You know, that insurance business has been a real kind
Speaker 6: of boon for us, and we think is one of
Speaker 6: the kind of winning models in this space.
Speaker 2: So Simon, first of all, thank you very much for that.
Speaker 2: If I look across the whole residential solar battery space
Speaker 2: across Europe. It's in the doldrums. So could you give
Speaker 2: us a little bit of a view of how you
Speaker 2: see the future.
Speaker 1: So I think you're right, Jared.
Speaker 6: The painful lesson that Huntrey learned in twenty fifteen twenty
Speaker 6: seventeen about the inherent challenges of scaling up the direct
Speaker 6: the consumer installation model and the fact that the unit
Speaker 6: economics of that business don't work is unfortunately the lesson
Speaker 6: that the kind of venture growth equity ecosystem is now
Speaker 6: going through, where a lot of capital and high valuations
Speaker 6: on kind of revenue multiples has been put on consumer
Speaker 6: facing installation businesses. There's going to be a very painful
Speaker 6: couple of years in that European ecosystem where there's a
Speaker 6: number of players that are sitting on valuations that are unjustifiable,
Speaker 6: and they're going to be working through that and trying
Speaker 6: to find making speculative views on pivots towards business models that.
Speaker 1: Inherently have a sound economic engine.
Speaker 6: For some people that could be flexibility and VPP, as
Speaker 6: I said, I've got question marks about that. For others
Speaker 6: that could be moving towards our financing business, financing the
Speaker 6: whole market rather than just their own installs.
Speaker 1: So I think there will be.
Speaker 6: A period of introspection, some kind of value destruction in
Speaker 6: terms of down rounds and companies going under that we're
Speaker 6: seeing in the in the residential space.
Speaker 1: Clearly, I have to talk my own shop.
Speaker 6: I think for a player like Palm Tree that learned
Speaker 6: the lesson early because Jaredy, you know, I was in
Speaker 6: early into the category with Philip Powser at Tomndo and others.
Speaker 6: We learned that lesson and felt that we spend the
Speaker 6: last six seven years building a model that can scale
Speaker 6: and scale with really profitable unit economics. So our sense
Speaker 6: for home Tree is that the future is bright. We
Speaker 6: talk a lot in Home three about what we call
Speaker 6: economic stamina. You need some engine that gives you the
Speaker 6: capacity to not have a government intervention or change on
Speaker 6: regulation about a certain asset like solar killing your model.
Speaker 6: You need to be able to write the inevitable ups
Speaker 6: and downs because it will remain turbulent. It's not just
Speaker 6: going to go into overdrive now and every year for
Speaker 6: the next fifteen years.
Speaker 1: It's going to be bigger in heat pumps.
Speaker 6: There'll be better years, they'll be worse years, And you
Speaker 6: need a kind of business model that can sustain through
Speaker 6: the ups and downs. The long term future is clear.
Speaker 6: There will be big businesses built in the residential decarbonization ecosystem.
Speaker 6: As I said, I think there will be some that
Speaker 6: are utility first, maybe the octopuses and others like that.
Speaker 1: But I think there will also be pure place.
Speaker 6: Services businesses like home Tree, but that the emphasis in
Speaker 6: those businesses will be not just being once off installars,
Speaker 6: fit and forget. They'll have to have found much more
Speaker 6: sound business models to kind of stand the tests of
Speaker 6: the inevitable turbulence of the market.
Speaker 4: I'm very impressed. Thank you very much for Comhamster.
Speaker 6: Thank you very much, Simon, thank you, and just say
Speaker 6: thank you for all the advice and the help over
Speaker 6: the years.
Speaker 1: It's been a brilliant relationship that we built. My pleasure.
Speaker 4: Well jah, thank you so much for bringing Simon on
Speaker 4: the show. Thank you for all the help you have
Speaker 4: providing him for a decade now. Because of what a
Speaker 4: success oh.
Speaker 2: Yeah yeah, yeah, yeah yeah.
Speaker 3: I think he can really have a big impact the
Speaker 3: next years. And he's done a great job.
Speaker 4: If I look at the landscape, the equivalent in the US,
Speaker 4: Sonova Son not a great success. But in Europe, whether
Speaker 4: it's Home Tree or in Germany and pal One Coma
Speaker 4: film Thermondo, we really had some startups who managed to
Speaker 4: scale around the energy solution business.
Speaker 3: Yeah, and by the way, it's not easy. It is
Speaker 3: not easy, but these guys have, all of them, have
Speaker 3: done a good job.
Speaker 4: And the way I interpret it is they've turned the
Speaker 4: system upside down, which means rather than pushing a solution,
Speaker 4: they've been pulling the customers toward a solution, which means
Speaker 4: first create a long term relationship around the insurance product,
Speaker 4: making sure you have hit power twenty four seven, and
Speaker 4: then say, okay, now that we have established this relationship,
Speaker 4: why don't we put solar on your own for a
Speaker 4: battery or heat pump if you look at it. Yeah, yeah,
Speaker 4: of course, except he has done it and other have not.
Speaker 4: Plus all the solutions around seriotization are already very innovative
Speaker 4: and very intelligent. So thank you very much for bringing
Speaker 4: the step of entrepreneur on the show.
Speaker 3: As I said, I only wish him really well in
Speaker 3: the next few years with that business. His moment has.
Speaker 4: Come exactly and of course we salute, salute Hail Greg Jackson,
Speaker 4: Hail the king Hale, but untrees coming for you, so
Speaker 4: don't rest on your La rolls. Okay, job with Thank
Speaker 4: Simon and I'll talk to you next week looking forward to.
Speaker 3: Thank you for listening to Redefining Energy. Don't forget to
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