Wall Street’s Big Bet on Rewiring America

This article appears in the February 2023 issue of The American Prospect magazine. Subscribe here.

In 2019, Ithaca, New York, a lush college town bounded by giant gorges, set a goal of going carbon-neutral by 2030. That might sound like a vague, feel-good pledge for a city in the liberal Northeast. But Ithaca’s timeline is unusually aggressive. Weatherizing and electrifying Ithaca’s old building stock, 40 percent of which was built before 1940, will mean tearing out boilers and gas stoves, installing heat pumps, and fixing drafty walls and leaky windows in some 6,000 buildings.

Ithaca’s Green New Deal is aimed not only at cutting emissions but at reducing economic inequality. More than a third of its residents live below the poverty line. The city chose Luis Aguirre-Torres, an energy expert who had previously managed international green-finance initiatives, to lead the operation. “We are the first in the world to attempt something so crazy,” Aguirre-Torres told NPR, adding, “it can be replicated all over the United States.”

Over the next year, Aguirre-Torres attracted more than $100 million in private capital to fund the overhaul. The venture capital firm Andreessen Horowitz and the investment bank Goldman Sachs are now among the investors with a stake in the heating and cooling systems that will be installed in Ithaca’s residential housing, much of it low-income. A green private equity firm is financing the transition of Ithaca’s commercial buildings.

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Those commitments were secured in the heady summer of 2021, when interest rates were low and investors were rhapsodizing about environmental, social, and corporate governance (ESG), a catchall term for investments that promise to bring about positive social change. ESG was in high demand: During the first half of 2021, it was mentioned in almost a fifth of corporate earnings calls.

Then, the post-pandemic economy turned grittier. Supply chain shocks made it hard to source appliances, and central bankers raised interest rates, slashing demand and tilting the economy toward recession. Capital suddenly had less appetite for longer-term investment. With energy prices also soaring, decarbonization schemes were put on pause, and ESG offerings began to include “energy security,” a designation that could mean investment in fossil fuels, seemingly in conflict with environmental aims.

That was bad news for Ithaca’s Green New Deal. By mid-2022, Aguirre-Torres told the Prospect in an interview, Ithaca’s decarbonization funding scheme was hanging by a thread: “It was no longer profitable.”

But last summer, the Biden administration passed an unprecedented set of subsidies for clean energy. “Suddenly, the Inflation Reduction Act made it work again,” Aguirre-Torres said. “It’s profitable for pretty much everybody. The bill is not passed on to the residents. Private equity makes money. The government manages to do what they want to do.”

The IRA was indeed historic, pumping $369 billion into climate investments. But the revenues on clean-energy installation in a midsize city like Ithaca are still, on their face, hardly worth the cost of setting up the deal. To understand investors’ involvement, it’s necessary to consider broader shifts in the energy system that are just beginning to come into view.

Rather than providing up-front cash, the IRA runs through the tax code, so households may have to wait to receive benefits.

The financial industry is eyeing the emergence of clean energy-as-a-service, where profit margins are slim for now but agreements could last in perpetuity. Ithaca is an early case study of how, due to the design of the IRA, the ambitions of the green-energy transition rest on deals between building owners, small cities, and Wall Street, the terms of which are only beginning to be negotiated.

THE ENERGY TRANSITION HAS BIG UP-FRONT COSTS, but the potential for massive long-term savings. In residential buildings, electrifying space and water heating can reduce utility bills, especially compared with fuel oil, propane, and electric resistance heat. The electrification advocacy group Rewiring America has averaged out potential savings and says the typical home could cut $516 per year by electrifying.

Ari Matusiak, Rewiring America’s CEO, has been a public booster for the IRA. “The nice thing about the Inflation Reduction Act is it effectively creates an electric bank account for every household in America,” he recently told the news site Vox.

But some groups focused on the climate transition have cautioned against leading with the claim that energy efficiency always saves money. In many places, air-source heat pumps are not yet cost-competitive with gas, though that could change with widespread deployment. Even where they are already competitive, savings would come on future utility bills. The question remains: Who pays up front for the equipment and manpower to retool the United States’ 130 million buildings?

Despite its size, the IRA did not solve this problem. Rather than providing up-front cash, it runs through the tax code, so households may have to wait to receive benefits. And while heat pump rebates are generous, they only cover part of the cost of the equipment and installation, which can range well past $20,000 before incentives.

This is not a new problem. The 1970s energy shock saw the emergence of Energy Service Companies, or ESCOs, which helped businesses escape the rising cost of oil by reducing their energy usage. Companies like Honeywell, Siemens, and Johnson Controls provided the expertise and technology to upgrade inefficient systems.

The basic ESCO works like this: Offer a building owner a deal to keep paying somewhere around their current utility bill, or a little lower, indexed for inflation. Rehab the building with more efficient equipment. When bills go down, pocket the difference between the energy savings and the cost of the new machines. There can be more perks for the ESCO. If Honeywell’s system is proprietary, when a switch breaks, you’ve got to buy it from Honeywell. But these deals have mostly been made with large and relatively sophisticated customers: cities, universities, hospital systems.

For years, private lenders have flirted with the idea of extending energy savings to residential housing and smaller businesses. A McKinsey study on “energy efficiency as a resource” projected that $520 billion in up-front investment could gross savings of more than $1.2 trillion. But there have been a series of scandals around PACE, or property assessed clean energy financing, a state-run lending program that has led to predatory schemes. Private lenders are given a lien against the resident’s house and priority in payback, with little independent oversight of the contractors who have incentives to layer on unnecessary charges. This has burdened homeowners with debt and even foreclosure, while often failing to deliver energy bill savings.

Now, with cities passing requirements to overhaul their housing stock, and with the federal government handing out a new spate of tradable tax credits, financiers are considering whether this is their opportunity to become energy efficiency lenders. If they harvest the tax credits and take a cut of the profits from future energy savings, it could prove lucrative for this modern spin on ESCOs.

But do the fundamentals work out? Profit margins for energy efficiency are slim. In New York, electricity prices are nearly 50 percent higher than the national average.

It can be hard to get specific answers about affordability. Asked whether air-source heat pumps are competitive with gas heating in Ithaca’s Tompkins County, the state energy agency, NYSERDA, did not answer the question, but said in response, “Occupants will benefit from a more healthy and comfortable building for decades to come. These efficient homes and multifamily buildings are also more resilient to temperature changes, putting fewer stresses on the power grid.”

Experts interviewed by the Prospect said that air-source heat pumps in cold climates are often still more expensive, on an annual basis, than heating the same house with gas. When retrofits are done thoroughly and well, including insulation, air sealing, and other upgrades, they can break even or produce savings. But that requires careful installation, and comes with a high degree of uncertainty. That begs the question of why Wall Street is ramping up to deliver what could be a money-losing service.

Lisa Marshall, who directed an organization that worked with contractors to assist residents in Tompkins County with converting to heat pumps, said she is puzzled. “When you’re saying you’re going to finance something based on the cost savings, and realize the cost savings don’t exist, then I don’t understand the financing model,” she said. “I have asked myself why investors are interested, and not gotten a clear answer.”

WHEN AGUIRRE-TORRES ARRIVED as Ithaca’s sustainability coordinator, his first idea was to issue a green bond. But the city’s post-pandemic $80 million budget was overleveraged. Borrowing hundreds of millions of dollars in startup cash seemed out of the question. “The amount that was needed is way bigger than a small city could invest,” said Anna Kelles, state assemblymember for Ithaca. “You’re trying to electrify an entire city. That is going to require very large starting capital. That’s why no one’s ever done it.”

Affordable cost of capital for residents, Aguirre-Torres figured, would mean below-market-rate financing of around 3 percent. He turned first to local community development financial institutions (CDFIs), but their high origination costs and inflexible fees put them out of reach. He then went to Wall Street.

Aguirre-Torres was connected with Generate Capital, whose co-founder, Jigar Shah, now heads the Department of Energy’s Loan Programs Office, which gave Tesla its startup loan. Through Generate, he met Alturus, which he described to the Prospect as “a satellite private equity firm of Generate Capital.”

Alturus is widely understood in Ithaca to be a private equity fund; multiple public officials characterized it to me this way, and it is listed as private equity on Crunchbase, a business intelligence firm. But two Alturus managing directors disputed that designation in an interview with the Prospect, distancing themselves from a business model that has been criticized for its tendency to wring profits from struggling firms.

“Our capital is dedicated, ESG-focused capital. So it’s not just, I want 20 percent returns and I’m going to LBO [leveraged buyout] Ithaca,” said Managing Director Gopal Vemuri. “We’re not Apollo, we’re not KKR, we’re not the barbarians at the gate here.”

A private equity firm typically purchases companies and resells them in a few years. By contrast, Alturus calls itself an energy-as-a-service provider, since it maintains equipment and works with contractors over a longer term. In Ithaca, it plans to help small businesses decarbonize. Its leasing model takes risk off of customers’ hands, Alturus managers claim. Instead of making a big up-front investment, mom-and-pop stores can treat decarbonization and energy efficiency as an operating expense.

Aguirre-Torres also needed financing for low-income homes, traditionally the toughest segment of buildings. Scouting a solution, he hit it off with Donnel Baird, another charismatic green-energy leader who has generated a flurry of news coverage for his startup BlocPower. Baird tweets under the name “Turn Buildings Into Teslas.”

BlocPower, which Baird founded in 2014, works with local contractors and provides no-money-down leases on electric heating, cooling, and hot water systems, as well as rooftop solar. This attempts to solve the problem PACE has struggled to address: Low-income residents often have bad credit and little cash. There is not much transaction history for energy efficiency in residential housing, meaning banks see the deals as high-risk.

Given the information asymmetries between private investors in complex and untested deals, cities may be at a disadvantage.

Ithaca brought the company in as a project manager, overseeing the implementation of the Green New Deal, including Alturus’s work. Fundamentally, Baird said, “we’re not a bank, we’re like a venture capital–backed technology firm.”

That technology is a proprietary software that assesses the risks of a green makeover for each building in a neighborhood. What are the chances that the equipment doesn’t work, or the customer defaults on the loan, or construction labor is scarce, or the house turns out to be unusually expensive to rehab?

BlocPower then sets an equipment lease rate to offer that building owner. This property-by-property price-setting is critical, Baird argues, since the profit margins lie in determining the exact level of risk for each property. “Our bet is that we can do risk management better than a traditional Wall Street firm for this category of investment, because we’ve invested millions and millions of dollars in software.”

The contract with Ithaca, Baird said, is just a “hunting license.” Building owners are offered a deal, and if they take it, BlocPower will lease the equipment. BlocPower adds that building to a portfolio, creating a financial product that Baird said is similar to a mortgage bond. Investors including BlackRock, Barclays, and Goldman Sachs, which already invests in BlocPower, have expressed interest in a securitized bundle of these projects, Baird said, as part of an ESG portfolio.

To help attract capital from investors like BlocPower and Alturus, NYSERDA set up a loan loss reserve that has agreed to take first losses if projects default, up to $2.5 million for each company. Baird was able to scale up its reserve by attracting a $3 million loan guarantee from the Kresge Foundation, which provides philanthropic financing for construction and renovation projects. Joe Evans, portfolio director for Kresge’s Social Investment Practice, told the Prospect he decided to get involved after BlocPower’s glowing media treatment came to his attention.

“It was a for-profit company owned by a Black man. The board was diverse, the staff was diverse. Their focus was on improving the quality of life and operating expenses for housing where lower-income people and communities of color live,” Evans said. “There was a fair amount of alignment.”

THE LOAN LOSS RESERVE REMOVED MUCH of the default risk, and the whole enterprise, Baird said, became dramatically more lucrative after the passage of the IRA. Decarbonizing all of Ithaca’s housing stock previously would have cost around $600 million, Baird said. If BlocPower fully utilizes the IRA’s tax credits, it will probably cost $450 million.

But direct profits remain low. Aguirre-Torres said that the overall project has a cost of capital in the low single digits. Alturus and BlocPower declined to specify the rate of return but both said it would be in the single digits. As interest rates rise, investment banks like Goldman Sachs could make more doing many other things.

To understand banks’ interest, it’s necessary to dig into what exactly they are underwriting. Firstly, BlocPower makes the case by emphasizing the ESG credentials of the deal. “We’re going to go in there and try and make it Wakanda,” Baird said of Ithaca, referring to a Black utopia from the Marvel Comics universe.

Baird emphasized that poorer homeowners will keep the full value of both the tax credits and the energy bill savings from the upgrades. But both of those claims are dubious.

While tax credits can be claimed directly by homeowners willing to go to the trouble of finding contractors themselves, they could also raise profits for investors. “The tax credit is cash. It can be assigned anywhere in the transaction, it just lowers the total cost,” said Reed Hundt, CEO of the Coalition for Green Capital.

Baird told the Prospect that BlocPower’s fee is just the cost of leasing equipment. BlocPower does not take a cut of the energy efficiency savings, he said, which “100 percent go to the customer.” That contradicts the understanding of Kelles, the state assemblyperson, who told the Prospect that BlocPower’s profits come out of energy bill savings. BlocPower takes a “set percentage” of those savings, she said.

An SEC filing by BlocPower sheds more light on the revenue model. It states that upgrades can save some households more than 40 percent on energy. BlocPower “then prices its leases to provide either 10-20% net savings to the customer, or to break even but provide a substantial additional benefit, like improved indoor comfort, improved indoor air quality, or hazard remediation.” In other words, BlocPower could capture up to all of the net energy savings, while providing buildings with nonmonetary benefits.

In interviews, BlocPower and its funder Goldman Sachs framed the deal differently. Baird argued that his interests are aligned with those of customers, who would only opt in to the program if they are offered a good deal. He added that BlocPower promises to lower energy costs, and that would not be possible if investors were taking double-digit returns. But a promise of energy savings is not a guarantee: If the equipment fails to deliver or raises costs, building owners are left paying the difference, plus the cost of the lease.

Asked about this risk, Michael Lohr, managing director at Goldman Sachs’s Urban Investment Group, said that their profits do not depend on building owners seeing lower energy bills. “If for some reason costs go up—because as you’ve seen now, with inflation and cost of electricity and what have you, there are rising costs—we’re not relying on there being savings,” he said. Asked whether he expects bills for the average building owner to rise after full electrification, Lohr said, “That obviously depends on the cost of electricity, which I can’t predict, or I’d be in a different role.”

The Prospect asked Baird for the names of satisfied customers in New York who could testify that BlocPower had completed successful projects generating utility savings. He declined, and also declined to provide a case study of their model.

Instead, Baird emphasized that BlocPower does not promise utility bill savings. “We do not predict future utility bills, which are set by regulation, and global events, like whether Russia invades Ukraine… What we do is predict that the energy equipment that we install will use less energy than the system that is currently in the building,” he said. 

That is sharply at odds with BlocPower’s public messaging and its self-presentation to clients. In a customer pitch deck reviewed by the Prospect, BlocPower bills itself as offering a tool to cut energy costs.

Metro IAF, a coalition of community groups that works on rehabilitating affordable housing, has argued for exploring a nonprofit ESCO-type entity that serves low-income communities. In the absence of that, the next best thing might be consumer protections to protect against higher-than-promised costs.

Lenders like BlocPower could choose to guarantee projected savings for customers. The city of Ithaca, or NYSERDA, which is underwriting the loan, could choose to require this. Instead, BlocPower’s payment is an additional monthly bill, charged separately from the utility.

With few competitors and little price transparency, Ithaca residents will have to put a lot of faith in BlocPower’s model. Baird, for his part, thinks they should. “I went to B-school right after the subprime mortgage crisis, so I just don’t believe in usury,” Baird said. “We believe that our job is to have our technology decrease risk. If we are right, then we will be very profitable, even with single-digit return profiles. If we are wrong, then we’re gonna take out a bunch of risk, and be overwhelmed by that risk, and go under.”

WHAT IS THE LONG-TERM VISION for investors? Beyond the ESG securitization BlocPower says it is discussing with Goldman and others, there are several other potential attractions.

Cities overhauling their energy usage will produce not only a steady drip of payments for new equipment, but also a detailed stream of data. Carbon savings in low-income housing could be tracked and marketed as offsets, sold to polluting companies eager to symbolically reduce their carbon footprint.

BlocPower is offering “environmental justice carbon offset tokens,” a blockchain-tracked asset that it says will “represent additive energy savings and offset greenhouse gas emissions generated by BlocPower’s retrofit projects.” The company has a detailed measurement and verification system, which it says will become the basis for carbon offset sales.

The installation of leased equipment also provides an opportunity to control the demand side of the system. BlocPower is exploring “virtual power plants” that could make adjustments to household appliances, from toasters to refrigerators, in the low-income housing they serve. It has already put in an application for this with the Department of Energy.

Investors’ returns could depend on it, Baird told the Prospect. “We’re hoping that the advances in mobile technology, in machine learning, in cloud computing and Internet of Things allows us to access enough data to create a risk management model, so that we can do this in a single-digit returns kind of way.”

BlocPower’s investors may also be willing to accept thin margins because they recognize that the model for energy provision is evolving. BlocPower presents its equipment lease model as being like a mortgage. But you can still live in a house after the mortgage is paid. BlocPower offers 15-to-20-year leases for equipment that lasts roughly that same period. At that point, the panels will likely need to be replaced. It’s more like a car payment, which is how Assemblymember Kelles described it. And it could lead to energy lenders being able to profit from an endless supply of replacements and upgrades, with plenty of data harvesting in the process.

ITHACA’S BUILDING DECARBONIZATION PLAN has also been stalled by political turmoil. Svante Myrick, the youngest mayor in the city’s history, abruptly resigned early last year to become executive director of People For the American Way, a progressive advocacy organization.

The city’s interim mayor, Laura Lewis, has been less enthusiastic about the Green New Deal, according to several experts on Ithaca politics. (Lewis did not respond to requests for comment and calls for this story.) In October, amid protests by city employees, Aguirre-Torres resigned, citing racist microaggressions and a lack of support from the administration.

Aguirre-Torres has now joined the team at Rewiring America. Matusiak, the CEO, told the Prospect they are interested in the Ithaca model as part of a strategy called “Rewiring Communities,” which will involve cities aggregating demand for private investment.

Ithaca’s program is now being administered by Rebecca Evans, former campus sustainability coordinator at Ithaca College, who has stepped in as acting director of sustainability. She says the city may scale back the first phase of projects to be sure it can make full use of IRA tax credits. In the meantime, they will be using the “snowflake model” of community organizing, she said, holding block parties and going door-to-door to advertise BlocPower’s program. Baird himself is a former community organizer.

Asked what she thinks of Wall Street’s role in the deal, Evans balked. “I have to give Luis credit for shaping this, and I’m just running with it on the implementation side, and he really is the finance guru of our team—or was, I should say.”

Ithaca’s deal shows some of the compromises in the IRA’s public-private model. On one hand, low-income renters and homeowners need champions like Baird and Aguirre-Torres, energetic entrepreneurs attracting the investment needed to finance the transition at affordable rates, to chase down all available tax credits, and to find local contractors amid a shortage in construction labor.

But when the New Deal’s Public Works Administration set out to fund widespread electrification of rural America, it was up to local legislators to submit project proposals to the agency. That helped enterprising politicians build patronage networks and reinforce the constituency for public power. Today, instead of a public agency coordinating between direct federal subsidies, contractors, and public stakeholders, the initiative is being led by a community organizer turned Wall Street entrepreneur. A private foundation is providing first-loss capital, while investors look to package the product as an ESG security.

Baird is persuasive partly because his sense of urgency—and the creativity of the contracts he has designed—contrasts with the glacial pace and risk aversion of state agencies like NYSERDA. But given the information asymmetries between private investors in complex and untested deals, cities may be at a disadvantage when signing up with clean-energy investors like Alturus and BlocPower.

Evans, for her part, is putting her trust in Ithaca’s new financiers. “It is in BlocPower’s best interests to keep costs low,” she told the Prospect. Plus, she added, “Alturus is mission-driven, in the same sense as the Green New Deal.”

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