Extremely Comfortable Home Makeovers — Episode 180 of Local Energy Rules

And then I’ve come across you on Twitter, you’re one of the few contractors I see really engaging in policy conversations on Twitter about this. I’m so grateful for it because I feel like it’s a really important grounding for those of us who live so much in the policy environment and our experience with contractors is really anecdotal and personal and not professional in terms of knowing folks who have worked in this space. So I guess maybe if you could just start by talking a little bit about how did you get into the work of doing home contracting and energy efficiency, but also really how did you <laugh> What motivated you to join the like energy Twitter sphere and to like talk with policy wonks on social media? It just doesn’t seem like many contractors wanna make that leap from the work they do every day until like engaging with people in 280 characters or less.

But then my job disappeared with the housing crisis in ‘09 and I became an installation contractor. I’d actually, I was unhappy where I was, we’d been bought by a manufacturer and it felt like office space. I had five bosses. But I became an insulation contractor and then started digging in more, met an energy auditor and dug in more, got Building Performance Institute certified. And basically I learned how to do work that was better than I knew how to sell. And I went out of business because my margins did that. They went from decent margins to nothing. Doing bad work is profitable. That’s actually probably like a really key thing.

So what I, what I went searching for, my now business partner, he was telling me that his average job, well my average job as an insulation contractor was 2,500 bucks in HVAC with insulation. His average job was 16,800. And I’m like, what are you doing? Something’s going on there. Like there’s a major step change that I’m missing here. So he started teaching me how to do that. So I should say I’ve never truly been a contractor in this space and I’m not an HVAC contractor. I was a consultant and still am a little bit for building performance work. So it’s been this, there’s all of this learning that goes through all of this. And what we have been trying to do the whole time is can we reach mainstream homeowners and mainstream contractors with building shell stuff, which is what you need the insulation and air sealing to make homes truly comfortable and healthy and efficient. You have to deal with both the building shell on the outside and the HVAC on the inside. It’s like diet and exercise as far as getting healthy. Like you can do it with one or the other, but it’s kind of imperfect. If you use them both, that’s where the magic happens.

So that’s what we’ve been trying to figure out for a long time. And we keep trying and failing and trying and failing. And we’re, we’re getting very, very close with one last piece that we’re working on within the HVAC 2.0 program, which is, it’s basically, it’s a sales processor, a business model for contractors that happens to be very electrification friendly. So we don’t sell it on electrification because the first rule of heat pump fight club is never talk about heat pumps. Like you really shouldn’t. You talk about how they like, the best way to make houses more comfortable is to match the output of the HVAC to what the house needs at any moment. And that requires being able to step down to a very low output. Heat pumps are just, they have lower outputs than furnaces, so heat pumps are naturally the better solution, which was a big chunk of how I learned how to use them. And the second one that I sold, that’s how I sold it.

I talked to my client Paul, and I said, Paul, you’re gonna think I’m crazy. He has this little 1300 square foot house in Cleveland that was leaky as a sieve. But I remember this conversation, I was like, Paul, this is gonna sound crazy so just don’t tell me no now. You can tell me no tomorrow, but I don’t want you to tell me no now. There is no equipment that is sized right. There’s no furnace we can buy that’s sized right for your house as it stands. We need to be looking at a two ton heat pump to have something that’s sized right. And I had actually insulated his previous house and done the whole thing top to bottom and it, it changed how his house felt. So he had a lot of trust and it was like, okay Nate, if that’s what you think we should do, that’s what we’re gonna do. And he kept doing that. So like I got to do anything I wanted on that house, which was fun. So I didn’t charge enough for my services frankly, but I got to learn, it’s a great case study, but I sold that heat pump. Like he didn’t care about climate, he didn’t care about electrification. This is also 2015, like nobody even knew what electrification was, we’re the weirdos out there doing it. So he bought a heat pump and was just thrilled with the comfort because he wanted a comfortable home that didn’t cost too much to operate. That’s what he got. And we just happened to use a heat pump.

Now you live in the hardest large city in the US. Minneapolis and Winnipeg, just north of you in Canada, those are the two hardest large cities because you spend a lot of time below zero Fahrenheit, which is where things get hard with heat pumps. Not impossible, but hard and where building shells starts to come in to be more important to be aware of. If nothing else, where I live now in southern West Virginia, this is not a difficult climate to electrify because we don’t spend a whole lot of time below zero. That’s where things get interesting. If you can get contractors to put a couple of Ecobee on some of their systems and then watch what’s going on and understand that the load calculations they’ve been doing are flat out freaking wrong. So this is one of the, the key things, and I didn’t put this into notes, but if we don’t solve HVAC load calculations which determine what size equipment you need, we’re in real trouble because it’s typically twice what you need.

So we can discount manual j, backup manual j, it’s air conditioning contractors association manual J load calculation. We can discount it between 30 and 60% for almost every house and still meet loads. Meaning when it’s design temperature where you, that’s the temperature that you spend 99% of the year above or below, if you can keep the house warm or cool at that temperature, you have the right piece of equipment. But we’re doubling the size that you usually need.

So like if, if you look at a heat pump like a R, the standard two sizes are two ton and three ton, which is 24,030 6,000 BTUs. Not that the numbers matter that much, but two and three ton. The smallest normally available furnace is 60,000 or five ton. That’s also the largest normally available heat pump. Most houses uh, heat pumps need a lot more airflow to get their work done because they don’t heat the air quite as much as a furnace does. So you need more cubic feet of air to move the same amount of heat. And most homes don’t have five tons of air of duct work. They have two or three. So we have just all of these multiple challenges going on. But if you have a load calc that comes in at 60 or 70 or 80,000 BTUs, are they gonna put in a 36,000 BTU heat pump? No, cuz the load says 60, 70, 80, but the actual load probably is somewhere between 20 and 45,000 BTUs. That’s a problem.

But the whole idea is that you just run it all the time and keep pushing warm air into the home as opposed to the furnace which is basically set up, as I understand it, for that period where like I got my house down to 50 and I want it to get it back up to 70 in like a couple hours. And so it’s sized to like burn the living crap out of the house if it can to catch it up on that very coldest day. And you know, it does that very nicely. I do have a setback with my furnace that’s like 10 degrees less than our daytime temperature and it does have to work pretty hard that first hour or two in the morning and then it doesn’t do a whole lot all day. So it’s just fascinating to sort of see that play out then in practice.

So there’s, there’s all of these different pieces, parts, and now we’re getting probably too far into the weeds on the actual technical side of things. It is at least somewhat important to have some understanding of this because if, if you’re technical understanding is wrong, it’s like basing policy on the world is flat so all the policy you do is wrong. Like please keep the cats away from the edge so that they don’t fall off and they don’t push things off. Like no, that’s not what, we don’t need policy of cats at the edge of the earth, <laugh>, the earth is a sphere. So that’s one of our big frustrations. So my main reason for being on Twitter, which frankly I have failed now because I don’t like the program design of what’s in the IRA, was to keep policy makers from screwing us. Those of us in the field.

But let’s talk a little bit about like how HVAC replacements happen because I think one of the things that is fascinates me about this whole conversation about electrification is that, and this, I’m just speaking from experience with my neighbor, right? Like when they replaced their furnace, it’s cuz it had just died and it was cold out. And so talk to me a little bit about how do the most of these HVAC conversations happen, what does that mean then for the nature of like planning a good system? What does that mean for talking about heat pumps versus furnaces? What does that situation look like?

The easiest way to think of it is two identical cars. So picture a Toyota Camry, four cylinder and a Toyota Camry four cylinder. One has reverse, the other does not. Not having reverse is stupid. So, and I, a funny little story on this, a friend of mine in high school, his dad had a Volkswagen with a stick shift, which you had to push down and move over to get it to go into reverse. It was a unique thing, he couldn’t figure it out. So he was out with buddies and he put it in neutral and his buddies pushed him out of the parking space. To me, that’s what an air conditioner is – great, you just bought an air conditioner or that you have to push it out of the parking space. It’s like having a Ferrari with no reverse and having to push it out, like this is dumb, why wouldn’t you get that? It’s like 150 bucks in parts at the manufacturing level between an air conditioner and a heat pump. And most air conditioner models have a heat pump version. So they’re fundamentally the same piece of equipment. So it’s, it’s important to understand that.

I couldn’t believe it made it into his book, but my friend Justin Gillis, formerly New York Times Climate Desk and then Hall Harvey, he put in there – So I, I joked that heat pumps are like bisexual air conditioners. They go both ways. And I’m like, seriously? That made it in there. Like I said it as a joke, I didn’t know if that would be too far out there, but hey it’s in a policy book <laugh>, you can go look it up. But humor’s always nice because it breaks through people’s barriers. Their walls come down temporarily while you tell a joke and then they go back up again. So if you can sneak that Trojan horse in, you’re good. And that was one way that we describe it. Not usually the customers, though frankly, but it’s nice to have a sense of humor.

So anyway, it’s a really hot or a really cold day and your system breaks and now it’s a very expensive expense that you weren’t planning on that is second only to buying a car or a house. Cuz I mean you’re looking at, and actually we should talk about general pricing. So it used to be something like 4 or $5,000 each for a furnace and an air conditioner and it’s best to buy them together. So you’re not looking at 4 or 5,000, you’re looking at 8 to 10. That’s where we were pre pandemic. Now we’re seeing 10, 12, sometimes 14 for basic systems.

And it’s best to look at it changing them both out at the same time, particularly if you’re looking at higher end systems because they talk to each other. So it’s like you aren’t gonna put a Ford transmission in a Chevrolet like you’re just not gonna do that. You’re not gonna mix and match the parts like that. And that’s kind of what buying just one piece of equipment is if you are looking at replacing equipment, it’s best to do both at the same time and it’s a surprise expense. So you’re going to try and minimize that expense, not maximize that expense. Which makes it challenging because air conditioners are slightly cheaper than heat pumps with the same model. Not a lot, it’s 3 or 600 bucks. It’s not, not a massive difference, but it’s still 3 or 600 bucks. It’s not nothing. And so people tend to go for the air conditioner plus it’s a little bit more complicated to set them up when you install them. Not a lot like should be it. Our estimate is it’s no more than a half an hour extra to do a hybrid than it is to do a furnace and an air conditioner. So we’re not talking the huge difference here, but it’s a challenge because people are suddenly in a bad position with a big expense and what are they gonna do? They’re, they’re gonna buy the cheapest thing they can get from the first person that shows up to the house and has availability to install it and he’s gonna buy whatever’s on the shelf at the supply house at that moment.

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So why don’t we make it so that there are only heat pumps on the shelves. And so now that’s probably over from a national policy perspective, not that it’s off the table, but with, with IRA sucking most of  the oxygen outta the room on that, I don’t know that we’re gonna get another 10 or 12 billion, 10 or 12 billion by the way in the paper is enough to convert every air conditioner to a heat pump for five to seven years in the United States. So we’re not talking a lot of money at a federal level because what’s the two state policies in IRA are about 9 billion. So that’s almost right there. And what that will do is if we don’t get to where we have 100% heat pump penetration by 2030, we miss a 2050 completion date period because it’s a 15 or 20 year replacement cycle. So that’s the challenge. So if we can get only heat pumps on the shelves, we have a prayer at finishing by 2050. If we don’t, we don’t.

Dustin Denison, he has done a lot of great policy work in Minnesota as well as being a contractor and he’s one of those sort of visionary folks who had been looking at this of like, hey, here’s the opportunity. And I did not take the heat pump because I was very cost conscious at the time. So like perfect example. And I still to this day like grind my teeth thinking like, oh my gosh, like the opportunity that I missed there to have that thing. Even if I had not bothered to use the heat pump function for heating, it would’ve just, the equipment would’ve been there. And now of course the only way for me to get one is to buy an entirely new system and I’m probably gonna do that at the time I replaced my furnace. So it’s gonna be a lot out of pocket at the time. But anyway, it still makes me bitter to this day that I made the wrong choice there.

So if you have a leaky house, it’s gonna be a struggle, not that you can’t get around it. So you can do a hybrid, you can do a furnace, boom problem solved because of the same size furnace is doing the job now  it’ll do it when you replace the equipment. So you can use whatever backup heat you need. You’ve got up to 20 kw which is six, almost 70,000 BTUs of heat. If you have 20 kilowatts of backup resistance, which is the largest kit that you can buy traditionally. So you can do it with resistance, but the better way to do it is to run a blower door test on the house, see how much it leaks. Take a look at past energy bills where you can pretty closely estimate what the actual load of the house is. If you have that and blower or you can be pretty close, well then you need thermostat settings cause some people are weird.

I had one client that I was like, so where do you keep your thermostat in the winter? and he’s like 55 degrees, like oh that 800 therms is now really bad where I thought that that was an efficient house. And I put the blower door up and sure enough it leaked like a sieve. But looking at his energy bills, I wouldn’t have guessed it would be that bad. But if you have those couple of pieces of information you can size pretty accurately, which is also how the contractors reduce their risk and their fear.

Plus a bit of resistance heat can help on the bottom, but needs to be set up right where it’s just boosting, it’s coming up underneath. Picture resistance heat like an afterburner. So like a fighter jet’s mainly flying on its engines and the afterburner burns a crap ton of fuel, but it lets you get beyond mach one. So the resistance heat is the afterburner, you’re not running it all the time. It’s there as backup. So if you can understand where the house is now and you can make some pretty quick modeling assumptions to where it could be within reason. And then you can decide do we wanna size this HVAC to where the house is now or where it would be after some shell work. And that’s part of the HVAC 2.0 comfort consult, which is, it’s basically half of an energy audit is what it works out to be.

So with homeowners, we solved that a lot by asking what comfort problems do you have in your home or what moisture problems or health issues do you have? Like do you have a lot of asthma and allergies or something like that. What problems are there to solve in your home that can be affected by HVAC? So that’s part of what we do with the HVAC 2.0 system, which is, it’s also software, it’s sales management software. So to reach mainstream, you basically sneak it in there. So it’s like if you want people to eat vegetables, you put ’em on pizza so you just sneak it in there <laugh>. But all of a sudden we’re putting peas in the mac and cheese, which works for our daughter pretty well. We have to find ways to do that. So the best way to deliver excellent comfort for homeowners is a variable speed, right size modulating heat pump. Period. It just is. With or without a furnace, that’s the best piece of equipment for doing that job.

So that’s how we sneak that in on homeowners. For contractors, we cannot politicize stuff. So 80% of HVAC contractors, just contractors in general are either politically conservative or centrist. So it skews fairly hard right politically. So don’t say climate, they’re gonna shut down, they don’t care. But if there’s one thing that I know that is completely apolitical and bipartisan, it’s money and profitability <laugh>. So if you can give them a better business model to where they make more money and they enjoy their lives more, that just happens to sell heat pumps, now we’ve got a path forward. So for contractors it’s mainly about business model and making their lives easier. For homeowners, it’s more about solving problems that they have. So that’s the second one of reaching the mainstream.

And I touched on the third one, which is that 80% of contractors are conservatives. So don’t, don’t talk climate, you can, you can talk clean air and clean water. I mean conservative is based on conservation. Teddy Roosevelt’s, I mean the EPA was Nixon, which a lot of people don’t know, he was not a liberal <laugh>. We’re safe on safe ground there. So like, there’s ways that we can get there, but really business is the best because it’s just apolitical.

And then number four is it has to be more profitable than business as usual, which is hard because number five is that good installs cost more. They just do – you have to take more time to do a good install. Typically the duct work is constrained. So it’s like you’re asking the system to breathe through a straw. And with these new motors like I was mentioning earlier, they’re like primadonna soccer players. So if you present them too much pressure that they have to work against – we’re already seeing, so there was a mandate put through where all furnace motors starting in July of 19 had to be ECMs, the new kind of efficient motor. They’re really efficient if they don’t have much pressure to work against, they can actually use more energy than the old style if you put ’em against a lot of pressure. So there’s irony for you and we’re already seeing five and 10% failure within three years. Those fans, because they’re being put into duct systems that are too small, they’re trying to breathe through a straw and they’re dying. To fix that, you have to do a better install, you need to adjust the duct work. It’s not necessarily a huge deal, but that does take hours extra at an install, which routinely will push you into a second day. And as soon as you get into a second day, that job needs to get considerably more expensive.

So if you’re trying to solve for more profit but more expensive installs, we have a problem <laugh>, we just do. And the answer is really to build more value. So you need to find reasons for the better install to happen naturally. So you can put a better filter in which knocks a bunch more of the dirt out of the air and you get to dust less. It’s also really good from a covid perspective and a viral and a bacteria perspective in general because a huge number of the bugs float around in the small spit particles coming out of our mouths. And those particles are of a size that good filters will pick them up. So you can actually reduce risk there and when you put that big filter in the air has an easier time going through and now your pressure inside the ductwork falls off a cliff.

I got a really good data set from a friend of mine, Jim Bergman of Measure Quick. It was 800 houses nationally. Representative pressure inside ducts. Basically all systems say it has to be a half an inch of water column or less. So the unit doesn’t really matter but a half an inch, 70% of systems tested were above half an inch. So they’re technically outta spec, 47% were above seven tenths of an inch, which is where the risk of early failure begins. So almost half of systems are at risk of early fan failure. Those fans are at least a thousand dollars installed, usually more like two. And if you put it in the wrong system, you’re gonna be buying a new one every two years for the life of that system. That’s not good. So we have to build value to improve that install and to also be able to increase profit margins.

And the other way to deal with profit margins is the same problem that solar industry has, which is reducing soft costs. So if you can increase closing ratios so you sell more of the jobs you look at and then you increase the dollar value of that project, now you have naturally increased your bottom line. So you increase the top line and you increase the bottom line, but the same number of leads goes into the system. So that reduces soft costs. So all of these things need to be mixed together. And what am I talking about? These are all business processes for HVAC contractors. Guess what business we’re in.

Let’s talk just basic wholesale equipment prices. So I’m gonna be very general here, but just basic. So a basic furnace, air conditioner, coil for the AC and thermostat are three grand, 3,500, something like that. They used to be closer to two before covid. Lots and lots of increased prices. A heat pump is like 500 bucks more on that same system, give or take, you know, plus another a hundred bucks for a thermostat. So not, not a whole lot going to good mid-level heat pumps, seven grand give or take a grand, something like that. Top of the line. This is just wholesale cost for the equipment. Indoor outdoor and thermostat is about 10. So the little Daikin fits that I put in at this house and it’s sister next door, they were about four grand wholesale, which the basic systems are three grand, 3,500. I was tickled when I found out what they were. Cause I didn’t really ask, I just, I had a friend who could get them and I’m like, get me two of them. Tell me what the price is, I’ll pay it. And it was like four grand. Like I feel like I’m stealing these things. This is amazing. I was ready to pay five, I had just paid 5,500 for a Bosch the year before and there’d been a bunch of price increases after that.

So I was tickled to get this. Well that piece of equipment is supposed to be getting a very large price increase because it qualifies for the $2,000 IRA. The CEO of Sagewell and he tweeted back that downstream incentives almost always end up getting captured by the supply chain, be it contractors or the OEMs. And we’re already seeing things move in that direction. So it’s what really frustrated with me is the, the three pieces that are for heat pumps in the IRA are all examples of policy that we already know don’t work. So let’s 100 x their budget and see what happens. And part of it I know was like political and what the, the art of the possible and all that stuff. But the programs that are in there are complicating the kitchen table transaction and they’ve sucked a huge amount of my time trying to figure out what the hell to do with them as well.

I’ve lost at least a month of work because of this and I think you’d probably rather me getting HVAC contractors on board selling heat pumps, but that I haven’t been able to do that. So, we’ll see where the $2,000 federal one will probably be at least somewhat useful. But the two state programs, the curse of them is they’re going through the states, there’s gonna be 50 different sets of rules. So it’s gonna be very difficult to navigate for contractors. And then they also have fairly tricky things to deal with. Either third party checks of installs or knowing how to do energy models, which almost no one does cuz you have to model to reduce energy use, which like with a hybrid you get 40% with your eyes closed on the house, like it’s just not that hard. So it’s doable, but I just don’t see a lot of uptake on them and it’s gonna be 50 different sets of rules.

So it complicates the kitchen table transaction. The better way to do things is either midstream, which is at the distributor level or upstream, which is at the manufacturers. So those are the better ways to do things cuz they can actually streamline things and make things better. So like one thing I think begin seeing for the manufacturers when we already have on the very high end heat pumps, you can’t buy an air conditioner version because they don’t sell enough of them to justify stocking two different units. They just make one and they’re already really expensive and they’ve got fat margins. So what’s, you know, another a hundred or 200 bucks in parts, whatever, just do it. And what we think will happen over time, but I don’t know how long it’s gonna happen or how long it will take to happen naturally, but hopefully we’ll get to where manufacturers are mainly just making heat pumps and it’s gonna march down in equipment levels.

So next up we’ll see mid-level stuff, which is what the $2,000 tax credit can go towards. It’s like 16 Sr give or take, which is middle of the road. It’s pretty good and there’s some cold temperature performance requirements, but it’s something like a third of equipment meets it where with the original thing from the consortium for energy efficiency, only 10% of equipment made it. So I think we’ll start seeing less and less air conditioner offerings in that range because they’re gonna be bought for heat pumps. But we need to get that all the way to the bottom and like the single stage stuff. So tell me if you think there might be causation and correlation here. 85% of installs are emergencies. Also 85% of equipment, give or take, is single stage basic stuff. Do you think those might be connected? Like you, you are at least one data point in that. Yeah, they’re connected to a degree. So the other thing that we need to figure out is how do we get people to think about replacement before the wolf is at their door?