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