🤑 Accelerating adoption with financial incentives #016
Money Talks with Abhi Muchhal and Dasha Cherepennikova
TLDR: Money as the Theory of Change. We don’t want to admit it, but financial incentives shape our behavior which shapes the world we live in. I discuss all this with Abhi Muchhal who leads product at Tenet, an EV financing startup and Dasha Cherepennikova, co-founder of Line Build, helping contractors secure funding for their customers to do energy efficiency upgrades.
When it comes to a problem that is as vital, complex, and urgent as the environmental crisis, hope is not a strategy. Neither is spreading ~good vibes~, doing the opposite by shaming people for eating meat, or de-growth for that matter. In a special situation where everything is seemingly interconnected, untangling this mess can at times feel futile. By zooming out and observing the systems and incentives that steer us in subtle, but powerful ways, we can begin to understand how we might enact a different vector of change. One that’s just as powerful, but in a different direction than how we’re currently headed.
There are multiple types of incentives and perhaps financial incentives are the most powerful. They enable rapid coordination of change through abstraction and compression. Imagine if we still had to barter for everything. Back in the day, if you were a fisherman looking for shoes, you couldn’t just go to the shoe cobbler and buy them. You’d need to figure out what the shoe cobbler wanted and trade your fish with other merchants until you had what could be swapped for shoes. We’ve come a long way since. Cash is only something I get from the ATM when I’m craving $4-for-10 dumplings in Chinatown. I don’t even need to carry a wallet anymore because I can Apple Pay my way through life. It’s easy to take for granted financial technology because as products approach 100% adoption, we view them no longer as actual products and more embedded like “it’s just how things work”.
From the bartering system, rudimentary currencies such as cowry shells emerged in Mesopotamia. Then came paper money in China during the 7th century and the initial forms of debt called bills of exchange were invented in the 12th century to facilitate long-term trade. Government bonds in the 18th century, insurance in the 19th, and mutual funds in the 20th. The seemingly ubiquitous credit card wasn’t around until the 1950s. Stock exchanges and financial derivatives like options are financial products as well. Through this framing, we can begin to understand the potential of today’s climate-relevant financial products: financing, rebates, tax credits, and other financial incentives. It was Adam Smith’s invisible hand of unrestricted free markets that incentivized individuals to act in their own self-interest. Now there’s a green visible hand giving out billions of dollars in financial incentives (the IRA + its friends) that will accelerate deployment of climate-positive technology if well executed.
Starting decades ago with solar, we’ve seen learning curves that benefit from positive feedback loops where cost dramatically decreases while adoption scales up rapidly. Another example is the rapid onset of heat pump demand caused by the EU energy crisis which shows how negative financial incentives (high natural gas prices) influence people to act accordingly. Regardless of the end product, incentives shape our behavior. In the climate context, they lower the activation energy required to catalyze adoption of proven technology that still has limited penetration rates (electric vehicles, heat pumps, insulation, induction cooktops, etc.)
Money Talks
To learn more about how financial incentives are shaping climate solutions, I chatted with Abhi who leads product at Tenet, an EV financing startup, and Dasha, Co-founder of Line Build (YC S23). On the surface, EVs and heat pumps seem like two completely different things, but they actually both play a key role in electrification as we transition to a decarbonized grid. Ultimately, they both converge at home electrification. Through this couplet of interviews, we navigate the role of financing, utility rebates, and government incentives on the deployment of climate-relevant solutions.
Together we cover:
The financial incentives that are available today
Bottlenecks in adoption of climate-relevant solutions
The role of financial incentives in climate
How this could all play out
What does Line Build do?
Dasha: We are trying to make it easy to find all of the available rebates and financing related to energy efficiency upgrades for the built environment - think getting a heat pump installed in your house. We're targeting the folks that are doing the installations because they're the ones proverbially at the kitchen table when consumers make a buying decision. When your furnace breaks you call a contractor, and 90% of replacements happen as a result of a breakage. Right now, replacing an old gas furnace with a new gas furnace is still a lower up front cost than getting a heat pump - by a factor of 3! We know we need the economics to work out for consumers to be willing to make the switch. There’s also incentive alignment with the contractor - if they can reduce the cost to the consumer, they get a higher conversion rate. Our goal is to make heat pump financing as ubiquitous as auto loans.
What does Tenet do?
Abhi: The mission of Tenet is to be your partner in financing the electrification of your home, starting with electric vehicles. The thesis of Tenet is based on a couple trends that are playing across in the industry right now. First, we see a higher consumer awareness of climate change and consumer impact of climate change and therefore higher adoption of climate positive and electric technologies.
Another one is government incentives. So with the IRA especially, tax credits are incentivizing customers and businesses to buy more climate-positive. Then we have investors who increasingly want ESG assets in their portfolios. Finally we have the OEMs (original equipment manufacturers) which in auto are companies like Tesla and they're leapfrogging and building electrification technologies such as electric vehicles.
Tenet sort of sits at the intersection of each one of these. Our first product is effectively to provide loans to customers that reduce the sticker price of an electric vehicle. We wanna start at EVs, but we don't wanna stop at that. We wanna help you with your vehicle and also get add-ons. So we'll help finance the charger or the warranty or gap insurance. Eventually in the future we wanna help you do that for other things in your home. Solar panel, heat pump, et cetera. But we're starting with EVs because that's where customer attention and need is right now.
What’s the full breadth of these financial incentives? Across the IRA, utility incentives, and other policies?
Dasha: There's a surprising amount of different organizations that are interested in funding energy efficiency, and one of the top ones is your utility company. We've all heard of the grid strain when it's extremely hot or extremely cold out. For example, in California, you probably know that there's a risk of rolling blackouts whenever the temperature is really hot because all of us turn on our air conditioners, and for most folks, your air conditioner is something like 15 years old. It's not particularly energy efficient. About 40% of the load on the grid (depending on where you are) is coming from just space heating and cooling. If you think about it from the perspective of the utility company, they could either fund new generation capacity - new solar, wind, natural gas - or they could reduce the demand on the grid, especially at these peak times.
You might notice if you have an investor-owned utility like PG&E in California that there are some specific line items on your bill that aren't related to your consumption. Usually it's like a buck or two and all of that goes into a big pool of money that the industry refers to as “rate payer funded programs”. The California Public Utilities Commission, or the local utility regulator, sets rules on how how that money can be spent. A lot of it is used for funding energy efficiency projects. For example, you might get $75 off a smart thermostat or $2,000 off a heat pump.
There's also cities and states that are making net zero commitments and care about the environmental impact. For example, if you live in Redwood City and you're a homeowner, you can get an additional $500 to do energy efficiency upgrades. Meanwhile, Washington state is getting billions of dollars from the Climate Commitment Act, and a large portion of those funds will be allocated towards funding energy efficiency projects in homes.
And of course, there’s federal dollars - I’m sure many of your readers are familiar with the IRA. The IRA is a combination of things under the hood. The first, which is already live, are tax credits. If you owe taxes, which is about 50% of Americans, you can use the 25C tax credit to deduct a portion of the cost from your tax liability. For heat pumps its 30% of the cost, up to $2,000. So if you owe $10,000 in taxes you can claim the $2,000 credit and your tax bill now goes down to $8,000. Disclaimer, not a tax lawyer.
In addition to tax credits, the IRA created two rebate programs - which are still in the process of being launched at a state by state level (with the exception of Florida who chose not to participate). One is called HOMES and the other one is called HEEHRA (High-Efficiency Electric Home Rebate Act). HOMES is focused on actual energy savings. So the way that you would access the rebate is getting paid essentially per kilowatt hours saved based off of the changes that you make. That’s accessible to any income level. HEEHRA is a different program that based off of the equipment that is being replaced and it’s targeted at folks that are below a certain average median income. Each state gets to choose exactly how these two programs are going to roll out. Most states probably won't be rolling these out until 2024.
And we haven't yet touched on private capital and green banks, which are also another super important portion, and I expect will be growing in the coming years. The reality is that we need a lot more capital. Here’s some stark back of the envelope math - the $4.2B in HEEHRA rebates are capped at $14K per household, which means about 307,142.85 households will benefit... or not even 10% of the housing units in LA County.
The four stakeholders you said are investors, OEMs, the government, and the end customer. If these four stakeholders were nodes in a graph and there's edges that define the relationship between these stakeholders, what’s the dynamic of these relationships and how does Tenet sit in the middle to facilitate activity?
Abhi: Let's start with a customer. So where are customers right now? They are starting to have an understanding of electric vehicles and want that technology, but there's been a couple deterrents. The first of which has been sticker price.
Even now, electric vehicles are more expensive than other technologies. So now how do you get customers to adopt these EVs? This is where you see all these players come in. So start with the manufacturers. As you get to scale, they're gonna be able to drop their prices. We've seen Tesla do this again and again. Rivian is gonna start doing this. As you get scale, the fixed costs get distributed across more units so you can drop prices.
Second is the government. So the IRA provides federal tax credits for you to purchase and also to lease electric vehicles, and you can leverage those. This also propagates the state and even in some cases, local governments have their own credits so that is a big plus.
Finally you have the investors who are ESG investors that want to contribute towards this trend and make climate positive investments and they're financing in a couple ways. Some of these players are actually buying or backing these OEMs and the supply chain of these OEMs or they're working with players like Tenet.
There's a lot of earmarked money coming online. What does the process look like today for homeowners and contractors with the current paperwork to redeem these financial incentives?
Dasha: The unfortunate answer is it varies and depends on where you are. So California is a great example because they have multiple rebate programs coming from different funding sources at the same time. You as the homeowner might qualify for more than one of them.
But how you go about redeeming each one is actually different. And so one challenge is that someone, whether it's you or the contractor (probably both of you) is gonna have to have a high tolerance for paperwork - to do the research, to document everything, and then ultimately to submit it. And that's one of the things that we see as a bit of a challenge. It's unclear to folks how much they actually qualify for and what they need to do to redeem it.
For some utility programs, it's relatively easy. You log into where you would normally pay your utility bill, and there's some “fill out a form”. For others, you need to discover some PDF, print it out, fill it in, mail it somewhere. Sometimes your contractor has to do the paperwork on your behalf and you, the homeowner, may just provide information to them and they'll do it.
The process is non-linear and unpredictable. You're getting different information from different people. We've seen a challenge in folks wanting to take advantage of the incentives who say: “I know they're out there, but it seems hard. It seems like I'm gonna have to do a lot of research. I don't know how to do that.” That’s one of the problems we’re looking to solve at Line.Build.
What are the major bottlenecks to EV adoption?
Abhi: There’s a couple bottlenecks I think. First is education and awareness. When EVs first started, people didn't understand how they worked, why they were better, and what the positive incentives could be. Electric vehicles, unlike internal combustion engine vehicles, have a slightly more limited range that you can drive them for. So on a full charge, a Tesla could probably go somewhere between 200 and 300 miles before you need to charge again. What that means is that if you are someone who is using your car day-to-day in a city or for residential use, this is probably not even a problem. But everyone has that thought in their head that one day I wanna make a trip to Tahoe or from New York to Boston. How am I gonna make that trip? And that's a deterrent.
There are two things here. One is manufacturers are working to make better batteries, which can provide better charge, and they're led by Tesla creating better charging networks. Superchargers make it so that you can find a charger across most populated routes in the US and the charging shouldn’t take long. It could be 15 minutes.
What exactly is the Tenet product? Describe its relation to the EV purchasing journey.
Abhi: So very simply, the product is a loan. We're offering you financing so you can get the vehicle. What's perhaps important to talk about is what is the experience and where does Tenet fit in? Let's say you’re interested in buying your first vehicle and it's gonna be a Tesla Model Y. Sticker price is around $50,000. You go and realize that you're interested in buying it, but you may not have $50,000 sitting in a bank or you just decide that you don’t wanna spend $50,000 right now. You'd rather finance it. So you can pay down a little bit. There's a lot of people in this bucket right now in this current high interest rate environment. And so that $50,000 or however much is sitting in the bank could be earning in your S&P 500 fund. That's why a lot of people choose to finance, even if they do have the capital.
How the experience works is you go to Tesla or to other OEMs. For Tesla and Rivian, you can buy directly. For other cases, you go to a dealer. In both of these cases, they'll ask you, Hey, are you gonna pay in cash or you want financing? Once you say you want financing, that's where Tenet comes in. So at that point, once you've reserved a vehicle or have interest in a vehicle, you can come to Tenet's website and figure out what loan you can get.
Why we're different than other lenders that operate in the EV space is we provide a fully digital best-in-class experience. If you go to a traditional lender like Wells Fargo, you have to get on the phone with multiple people and go back and forth over emails. It's gonna take a long time. We pride ourselves in being completely digital, providing a great experience, and getting it done fast because we know time is important to our customer base. The second thing is we will give you competitive rates. We're gonna be competitive with what's in the market, often better than the financing rates that the OEMs provide themselves.
And finally what Tenet does differently than probably any other player I've seen is our deferred payment option. So the difference between an internal combustion engine gas vehicle and an electric vehicle is that an electric vehicle has a longer lifetime. And also electric vehicles have this tax credit of $7,000, $7,500 or $10,000 depending on where you are. What we've created with our financing terms is allowing you defer some of the payment of that vehicle to later on in the lifetime, which reduces the monthly payment.
So what a lot of people do is that they come to us and they're like, okay, I have this $50,000 Tesla Model Y that I wanna buy. I'm gonna get a tax credit on this next year so if I buy it this year, I'm gonna get a tax run of $10,000 next year. So that'll come in my refund. So what we do is provide you financing with monthly payments on $40,000 and that $10,000 deferred, just pay it whenever you get it to the $10,000. Whenever you get it, you'll pay it. And this works because we know that they’re gonna get tax credits. And it also works for ESG investors because the lifetime of an electric vehicle is longer. Since this is a secured loan, it makes it less risky for us to be able to defer the payments out in the future.
So all those things are kind of what differentiate Tenet from the other customers. At that point, we wire you the funds, you hopefully get the car, but we don't stop there, right? In that process, we’re also gonna be offering you additional add-ons. A lot of people want a home charger because that's another way you could be saving money. You want warranty or you want gap insurance. Once you've got the vehicle, we also are the ones who service the loan. So we'll be the ones who manage the payments experience. Over the lifetime of the vehicle, we want to continue providing you value. So we've got a dashboard on our website, which shows our customers how much they’re saving on a monthly or annual basis both in terms of dollars and CO2 savings. So if you had gotten a gas vehicle versus now here's how much you're saving. I think that's super useful and insightful for our customers.
I've seen manufacturers offer in-house EV financing. Let's say someone is buying a Model 3 and they see an option to finance via Tesla. Why would someone choose Tenet over in-house financing options?
Abhi: Yeah, I think there's two distinctions to be made here.
Companies like Tesla don't do the financing themselves. They have partners that they work with, so Tesla will partner with Wells Fargo for example. And Wells Fargo is actually the one providing financing because Tesla does not wanna deal with the financing business. It's a completely different business than the supply chain business that they operate in.
Tesla is not forcing you at all to go with their partners. You can go wherever you want and what Tenet offers is often the same or more competitive rates, a deferred payment, a better experience relative to this type of lender.
So that's one story. Then you have like the big auto companies, like for GM, who actually do have their own financial arms, right? Their own credit arms are billion dollar businesses themselves. And these companies do offer financing, but the dynamic here is a little different because these vehicles you're buying at the dealer.
So when you go to the dealer there's an interesting dynamic where the dealer sometimes tries to sell you financing based on whoever they're partnered with. So in a lot of cases, dealers will be exclusive partners with the OEM. In other cases, the dealer will be partners with other loan providers, including Tenet. So we are actually partnering with dealers as well. So the dynamic here is a little bit different because now you have the dealer involved in the equation and they have their own incentives. But in both cases, customers can choose to go with another lender.
What we've found is that a lot of people don't go with the default option that's shown to us because people are price sensitive, right? Go back to the customer. They're making a good amount of money, but it does matter if your rate is 6% versus 5.8% versus 6.5%. So most customers are actually gonna go search and see what are the other options available, how's the experience, what are the add-ons they can provide, and price shop. And that's where we have the opportunity to win with customers.
How does Line Build align with the goals of installers?
Dasha: HVAC companies spend a ton of money on marketing every year - because HVAC replacements are something a homeowner does rarely, they’re constantly having to acquire customers. One of the key metrics contractors care about is conversion rate. As a homeowner you're kind of classically given the advice of “get at least three to five bids and choose one.”
Well, that's a huge cost on the contractor because they're rolling their trucks to your house. They're sending a qualified person to figure out what needs to happen in your home and give you a bid. But if they're only winning one in three, one in five, and that's very large overhead for them. The workforce shortage, which I know you've written about before, is very real. Everyone is focused on how they maximize getting more work done with the resources that they have.
Most consumers (90%) didn’t plan and budget for their furnace breaking, so they’re going to be price sensitive - lowering the up front cost of the installation is really valuable. And as there's more consumer awareness that there is money available, if a contractor not able to answer “What are the rebates? What are the credits?” then consumers lose trust.
For Tenet, what comes after EV financing?
Abhi: So it's a good question and I think it's something that candidly, I'm brainstorming with you. We don’t have a firm answer yet. I'll also say, there's still a ton of work we need to do on the first product.
We've currently in an interesting situation where we have more demand than we can even service. There's more customers that we say no to and we want to be able to get to the point where we can grow our operations and our product to be able to provide loans to a bunch of customers. It's an interesting problem to have where the demand is actually more. We spend very little on marketing. So I actually spent a majority of my time on growing our existing business, but just brainstorming - if you think about what are other potential opportunities to provide value to the customers or cross-sell in the future…
I think about it in a couple different buckets. If you think about a 2x2 framework here, the first axis here is Financing vs. Optimization. and the second axis is Related to your vehicle vs Related to other assets in the home.
So in the vehicle financing bucket, you can think of other things that you might want to do with a vehicle. So when interest rates go down, some folks might wanna refinance. Another is we could maybe provide you a better auto insurance package when your auto insurance expires.
In the home financing bucket, solar panel, heat pump, HVAC, right? Those are the opportunities that we have. Then you can think about the other parts of the 2x2. So just speculating here, for a lot of customers when they buy an EV, that's the first time they really start thinking about their utility bill.
Most customers are kind of defaulted into whatever bill you have. But when you actually go on your utilities website, so if you go on Con Edison's website, there's actually multiple different types of rates that are available to you. You can optimize to find the best rate that works for you. So a lot of EV buyers actually switch to something called a time-of-use rate, which is paying based on the peak demand periods.
So you will be paying more for electricity, let's say between 6-9 PM versus 8-11 AM because that's when people are out of the house. So what we can help customers do is figure out what are the right rates they can get towards and help them save money through switching to better plans and deciding when’s the right time to charge your car. Like, don't charge your car between 6 to 9 PM; charge it overnight.
What are the opportunities we have in the future? I think it's too early to say what we'll prioritize. I expect us to try out multiple things and see what is the most valuable for the customer.
How do you think this all plays out? In terms of how complex climate is and the role of financial incentives.
Dasha: I think this is where knock-on effects are really important for us to take a look at.
It is not true that everywhere in the country switching from a gas furnace to an electric heat pump will lead to a lower energy bill.
This notion of the energy burden is a huge deal. I'd have to go back and look it up, but something like 40% of Americans have chosen whether to pay utility bills or buy groceries. There are some policies that are effectively creating gas bans that are getting a lot of criticism in states like Washington and California where people are saying they aren't going to be able to afford this.
It turns out that insulating your home first and foremost can give you a huge amount of energy savings without touching any of the HVAC equipment. So while heat pumps are the proverbially hot thing right now, we can’t overlook some of the other interventions. I’d love for someone to make insulation a hot topic.
In addition, while we are pushing for electrification, many utility companies are hugely backlogged in supporting electrical panel upgrades. When you upgrade your panel, say from 100amp to 200amp, you may need the utility to actually do a new drop to your house. You might be waiting 6-9 months for that. That might be okay if you’re planning ahead for installing an EV charger, but if you need the upgrade to switch your space or water heating from gas to electric, it is quite unlikely you will wait that long. So how these things are connected, literally and figuratively, is hugely important.
It's interesting to hear you talk about second order effects. And it is unfortunate that less wealthy communities are often the ones that have to shoulder the change.
Dasha: It's a really complex situation. For example, this notion of energy burden that we just chatted through, it's hyperlocal. It's really dependent on energy prices for both gas and electricity in any given market. We've been notoriously bad at predicting those prices. I mean, look at what happened with ERCOT in Texas and kilowatt hours costing thousands of dollars during spikes or the price of natural gas for spiking and then coming back down. There's a lot of nuance here. What happens as more homes do electrify? How do we ensure that those who could not afford the up front cost aren’t also stuck paying super high gas bills as the cost of maintaining gas infrastructure is spread across fewer users? I think that as much as we want to reduce the complexity, removing it entirely is also a failure mode.
Thanks for reading!
If you found this useful, please like or comment so more people can discover this through Substack. And lastly a note from Dasha:
“We'd love to hear your experience if you've either applied for a rebate to offset the cost of a heat pump or maybe didn't get a heat pump because of the up front cost. We're hoping to lower the up front costs and your feedback would be very valuable.”