As we work to accelerate the energy transition, a new frontier has emerged as a key opportunity area: the home. Over the last three years, the Energize team has been closely following the software solutions that will help decarbonize the built environment, and we’ve recently honed in on home electrification. We believe this market is ripe for delivering both strong financial returns and significant climate impact. Our investments in Aurora Solar and Monta, among others, have shown us that adoption of residential solar, home chargers and heat pumps continues to accelerate in the U.S. and in Europe as more consumers recognize the economic benefits of electrifying their homes. From an impact perspective, residential buildings are responsible for a far larger share of GHG emissions than their commercial counterparts through their direct and indirect consumption behavior – all linked to the decisions we make "around the kitchen table."
Energize has built our thesis around the important role that software plays in reducing soft costs and enabling scale for climate technologies, and the home electrification space is no exception. That’s why we’re excited to share our outlook on the software solutions needed to help homeowners, installers, utilities, original equipment manufacturers (OEMs) and other stakeholders achieve full home electrification meaningfully and efficiently.
Want to learn more about Energize’s PoV on home electrification software? We’re sharing our proprietary deep dive report publicly here.
Tailwinds are converging in the U.S. and Europe to make it a prime time for the home electrification software market. Major drivers include:
- Governments are getting behind decarbonization. While Energize doesn’t invest in businesses supported by subsidies – or “carrots” – alone, we believe the recent spate of climate-focused legislation and policies have helped boost the economic viability of home electrification to an all-time high. This is especially true in the wake of the Inflation Reduction Act (IRA), the U.S. climate legislation passed in summer 2022. The Biden administration is even using the emergency powers of a Cold War-era law to fund more domestic manufacturing of electric heat pumps, citing their need to stave off climate change and increase domestic security. Other subsidies and programs around the globe are also playing a major role in helping homeowners decarbonize. Renovating both public and private buildings was singled out in the European Green Deal as a key initiative to drive energy efficiency, aiming to at least double the annual energy renovation rate by 2030. Germany, France and the Netherlands have been key examples of countries with comprehensive programs in place in response to this initiative, playing a strong hand in helping homeowners decarbonize, whilst also strengthening their economies.
- Homeowners are seeking energy security, especially in Europe. Rapid rises in electricity prices and concerns about reliance on Russia for gas have driven a rush among homeowners across Europe to add solar panels, heat pumps and batteries to their homes. In 2020, 655,000 air-to-air heat pumps were sold in Europe. That number is expected to reach 2.5 million in 2023 and 6 million annually by 20301. Rooftop solar is following a similar trajectory—causing the European Commission to propose emergency regulation to address installation bottlenecks and inflated prices—and we expect home solar installations to accelerate across Europe for at least a few more years.
- Conditions in the U.S. are ripe for software solutions. We believe the U.S. market size for software companies that help deploy and manage both new and existing heat pumps is considerable. Electric heat pumps are affordable compared to other residential technologies like solar, and they’re becoming increasingly popular: Adoption of heat pumps in the U.S. is already quite high at around 15%2 – compared to 7 to 8% for residential solar – and sales surged past gas furnaces for the first time in 2022. Residential rooftop solar, especially paired with batteries, is also expected to continue growing. Private equity consolidation and mega installer rollup activity has also continued to accelerate in the U.S. – driven by a highly fragmented industry, many business owners looking to sell, and modernization of HVAC services more broadly, creating ideal go-to-market avenues for software solutions.
Despite the market tailwinds, major roadblocks are still impeding mass adoption of home electrification technologies. Homeowners are often debilitated by the overwhelming number of decisions they face when making the electrification switch, and many underestimate the magnitude of work required, the availability of qualified installers, and the ability to qualify for federal and state incentives. We believe software solutions are best suited to address these challenges and enable meaningful scale for the home electrification market. Below are what we view as four of the most urgent challenges in home electrification– and the software innovations that can help solve them:
1) The most obvious challenge in the home electrification puzzle is how to pay for it.
- The issue: Many home retrofit projects will have high upfront costs – installation and sometimes full structure transformation. As customers look to finance their home electrification upgrades they will also need to navigate the dearth of rebates and tax incentives available. With the rollout of the IRA, eligibility for rebates and tax incentives will be critical to purchase decisions, especially in a rising rate inflationary environment.
- The software innovation: Companies like Upfront Energy and Coral have stepped in to provide more affordable financing by automating and directly applying incentives upfront, lowering monthly payments and increasing conversion rates for contractor partners. These solutions help bring down the payback period for various upgrades from installation of home chargers to heat pumps by getting cash into homeowners’ pockets faster and more efficiently.
2) The skilled labor shortage is slowing the pace of home electrification and the energy transition broadly.
- The issue: Given today’s nationwide labor shortage of electricians, even if a customer is insistent on electrifying, it can take them weeks to find installers with capacity. As demand for electrification increases, the supply of electricians has been slow to respond given the four to five years it takes them to complete their education.
- The software innovation: Software companies are working to provide more efficient and modern workforce development opportunities. For example, Interplay Learning is a digital platform that offers comprehensive training programs and resources for all kinds of skilled labor professions and has recently focused on providing tools for HVAC installers to transition to more sustainable heating and cooling technologies. Skoon, another digital platform, provides training, advanced tools and community to enable heating engineers to grow their businesses by decarbonizing homes. Greenworkx is using learning modules and algorithmic matching of jobseekers to connect them with relevant opportunities in the green economy.
3) Existing installers are expending resources on initial home visits.
- The issue: In the U.S., installers currently spend 50% of their time on non-revenue producing tasks. This includes home assessments, with some installers reporting spending six hours on a home assessment despite one-third of assessments not converting to a sale.
- The software innovation: A growing crop of climate startups are creating software solutions to enable installers to gather relevant data from households and automate suitability assessments, allowing installers to cut down assessment times to 15 minutes. This is done by leveraging a combination of open-source data like satellite imagery and cadasters, as well as geographic information system (GIS) and thermal imaging from the home. Companies such as Arch and Conduit Tech are helping installers create system designs and proposals faster, reducing soft costs and increasing their conversion rates.
4) The retrofit landscape lacks a streamlined customer journey and reliable supply chain.
- The issue: There is no such thing as a magic bullet to achieve a fully electrified home. Rather, there is a complex web of retrofitting solutions across verticals that homeowners must navigate. In some cases, homeowners must assess and improve their home’s insulation before considering a heat pump or solar array, including replacing windows and replacing entire walls. Further, some 50 million homes in the U.S. would be required to upgrade their entire home electrical panel prior to electrifying. The process requires homeowners to decide which retrofit they should start with, research the necessary equipment and, finally, manage the installation – which often involves coordinating with multiple contractors and juggling time-consuming, supervised home visits for the installation.
- The software innovation: Two types of software solutions are stepping up to address the challenge. The first are tech-enabled home electrification installers such as Helio Home in the U.S., 1Komma5° in Germany, and Effy in France. The second are end-to-end home renovation platforms such as Enter, a Berlin-based startup focused on right sizing energy renovations with a lean and digital-first approach.
The cumulative effect of these innovations is that the home electrification software space is experiencing a transformative shift. As the economic advantages of home electrification become more apparent to consumers, there's an escalating demand for software solutions that support the broad spectrum of stakeholders across the home electrification value chain.
Each of these solutions is crucial in achieving varied electrification objectives starting at the home. At Energize, we are particularly excited about software companies with business models that are diversified across multiple retrofit projects (such as heat pump, solar, insulation) and that bundle services (such as financing and maintenance) into one package. This approach not only supports an engaged customer base but also helps maintain reasonable customer acquisition costs.
Finally, we would be remiss not to mention the role residential electrification could play in improving overall grid stability. The emerging concept of virtual power plants (VPPs) and residential heat pumps are beginning to join hands, as local utilities and battery makers look to boost demand flexibility by using software to connect household energy systems to the grid—more to come here!
We look forward to watching this market mature, and we’re eager to explore the latest wave of climate software startups entering the space. Most importantly, we’re excited for how the accelerating pace of home electrification is helping enable a decarbonized and sustainable future.
Want to learn more about Energize’s PoV on home electrification software? We’re sharing our proprietary deep dive report publicly here.
[1] Statista/EHPA
[2] US Department of Energy
