Kilowatt Financial, Blazing the Way for Energy Efficiency Consumer Finance

For a company founded by self-proclaimed “information and analytics geeks,” Kilowatt Financial has certainly become quite popular.

Since the firm was founded in 2011 with $120 million in funding from backers including Kleiner Perkins Caufield & Byers, the consumer lending company has helped 20,000 clients finance clean energy or energy efficiency upgrades in their homes. The company recently partnered with Citi, which provided Kilowatt with $100 million in lending strength through a project finance fund focused on consumer energy efficiency retrofits.

Marshal Salant, Head of Alternative Energy Finance at Citi Alternative Energy Finance, said in a recent Forbes essay on the partnership that the coupling of Citi and Kilowatt will enable securitization of the energy efficiency market.

“Institutions such as pension funds and insurance companies will now be able to invest in this area, where before they have lacked such opportunities due to scale,” said Salant in the Forbes piece.

And while opportunities are still few, they’re growing. Deutsche Bank this month announced that it closed the first residential energy efficiency retrofit bond securitization with a $104 million bond in California. The bond is a property-assesed clean energy (Pace) bond, which gives governments the ability to fund energy efficiency improvements that are paid back over time by homeowners through property tax bills.

The Birth of Kilowatt Financial

For Kilowatt, the partnership with Citi allows for more flexibility in the types of financing products they can offer to consumers, and a chance to compete with the big banks.

“Part of the challenge for people like us, obviously, is that we are trying to create really attractive consumer finance products that incent consumers to take these efficiency measures,” says Daniel Pillemer, chairman and CEO at Kilowatt Financial. “Our long term goal has always been to be able to offer multiple financing alternatives to consumers.”

The senior management team at Kilowatt came together in 2007 hoping to set up a consumer lending business, but decided it wasn’t the right time. Pillemer, chief operating officer Matthew Melius and chief credit officer Robert Young were all bearish on the economy and the capital markets; it turned out to be a good call.

Several years later when the three were brainstorming about the idea of a clean energy consumer finance company, partners at Kleiner Perkins Caufield & Byers explained to the trio that they saw huge potential in the residential solar market but that there was a need for consumer finance expertise to solve the problem of financing clean energy improvements.

Then, when Pillemer, Melius and Young looked closer at the clean energy and energy efficiency landscape, they saw that consumers loved clean energy because it was good for the environment, and helps them save money, says Pillemer. Even more importantly, they saw that consumers who were borrowing money to make clean energy or energy efficiency improvements had a better repayment track record than people borrowing for other purposes.

“When you put those things together, that made us very excited,” says Pillemer. “We’re a bunch of guys who are data nerds and we know consumer lending very well, and we saw a huge opportunity to apply that expertise to the clean energy space. That is how Kilowatt Financial was born.”

After the company was founded in 2011, Kilowatt focused only on solar. They’ve since broadened their focus to include energy efficiency financing. Yet, Pillemer admits that there’s still an uphill battle to climb in getting homeowners to convert to solar and make energy efficiency upgrades. Still, Pillemer is bullish for several reasons.

First, there are psychological drivers at play, he says. More and more, people are driving electric vehicles. For example, the Union of Concerned Scientists estimated in December that 42% of U.S. households could use the electric vehicles available currently based on the number of passengers in cars, hauling needs, and average maximum weekday driving distances. And, IBM estimated in its executive report, “The Shift to Electric Vehicles,” that governments in major markets will begin formal programs to encourage drivers to shift from gas-powered vehicles to alternatively-powered cars by 2020.

Pillemer who admits to being a “huge believer in electric vehicles,” says that one of the things people underestimate is the psychological high of driving an electric vehicle largely powered by a solar photovoltaic system. Making that type of change is a gateway to making other energy-savings changes in peoples’ lives.

“Driving past a gas station knowing that your power comes from the sun… it’s just hard to quantify the value of that today,” says Pillemer.

And in solar, even though penetration is low, people are starting to buzz about how installing solar panels impacts the value of a home, he says. More brand names are starting to gain recognition and growth continues unabated and eventually mortgage brokers will become well-versed in how these types of features impact the housing market.

Indeed, McKinsey noted in its recent report on clean tech, “Myths and Realities of Clean Technologies,” that the average annual increase in global solar PV installed capacity from 2006 to 2012 was 57%.

As for energy efficiency, the challenges there are even greater, says Pillemer. With solar, at least companies can knock on someone’s door and easily demonstrate the cost savings of converting. It’s much more difficult to knock on someone’s door and convince them to purchase a new HVAC system because of the savings, which are difficult to quantify, he says.

But despite these challenges, there’s still an “immense opportunity,” says Pillemer, because the overall paradigm of how consumers use energy is undergoing rapid change.

“There’s so much runway… and a broad opportunity across all energy savings measures.”
And, ultimately, financing these upgrades will play a critical role in the growth of clean technology and energy efficiency.

“If a consumer wants to make any clean energy or energy efficiency improvement, we want to help them finance it in the most efficient way possible for that consumer.”

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