Inside Ithaca's plan to electrify 6,000 buildings and grow a regional green workforce using private equity funds
Ithaca, New York, made headlines last year when its city council voted to fully decarbonize. Achieving the 2030 goal will require grid decarbonization, electrifying transportation and rolling out heat pumps to the city's 6,000 aging commercial and residential buildings.
Ithaca is known for its progressive politics — in the 90s the city pioneered a time-based currency to inspire local spending, for example. But the decarbonization plan is among its most ambitious efforts, according to Director of Sustainability Luis Aguirre-Torres.
"When I came to Ithaca last year ... my job was to craft a plan to decarbonize in eight years. I told the mayor, 'You're nuts. This is very difficult to achieve,'" said Aguirre-Torres, who took the job in April 2021.
Ithaca's plan is "innovative," Building Decarbonization Coalition Executive Director Panama Bartholomy said, and is an example of the kind of work many cities are now exploring.
"It's encouraging to see a city take a wholesale approach to buildings instead of trying to adopt policies that are more reactive," Bartholomy said. "Every major city in the United States right now is trying to figure out the right model for how to do this."
About 40% of Ithaca homes are more than 100 years old, and the city says a full retrofit of every building could cost $600 million. So how can a city with about 30,000 residents and projected revenues of around $80 million finance such an ambitious project?
Installing heat pumps and making other efficiency improvements makes financial sense for some buildings: the energy savings will pay for the improvements. Other projects may be close, or simply not pencil out. Either way, the savings accrue slowly. So in order to get all buildings decarbonized, the city aggregated blocks of buildings to manage project risk, and then securitized the project to attract private capital.
"Similar to the way the mortgage crisis happened," said Aguirre-Torres. Though he quickly added that the plan is also very different because the number of buildings being aggregated is so relatively small.
"The numbers work for some [buildings], they don't work for some. But in the end, as a whole, it works for the investor," Aguirre-Torres said. The program is essentially a way of covering the upfront costs of making building improvements and turning it into “electrification as a service,” he explained, resulting in long-term leasing or long-term lending at a low interest.
Investors in Ithaca's decarbonization plan are a Brooklyn-based climate tech company called BlocPower, and Boston-based private equity firm Alturus. The two have combined to commit about $105 million to make low- and zero-interest loans for heat pumps and other electrification technologies available to residents and businesses, with BlocPower acting as program administrator and also lending its expertise in building energy use analysis.
"This is a unique opportunity to build the blueprint of how we can actually accelerate the adoption of all the technologies," Tommy Freeman, head of strategic partnerships at Alturus, said during the Bloomberg Green Summit in April.
But how will these companies help Ithaca to decarbonize? What does the city need to accomplish its goals? And are there concerns about the use of private equity funds?
The 'easy' challenge of building electrification
Ithaca has annual emissions of about 400,000 metric tons of CO2, with about 40% from buildings, 40% from transportation and 20% from waste and other sources, said Aguirre-Torres.
A 2021 energy code will soon ban new gas hookups in Ithaca building construction, "so my job was the easy one," Aguirre-Torres joked: to figure out how to make existing buildings carbon-free.
Conversations with local efficiency and construction companies and nonprofits yielded an estimate of $50,000 per building, on average, to retrofit and electrify Ithaca's residential buildings. That figure included multifamily and single family homes, and is an average per-building cost (rather than per individual housing unit). For commercial buildings, the cost to retrofit will average $70,000, including the electric panel and wiring to the utility pole.
Aguirre-Torres estimated it would take at least 1,000 buildings to create the necessary economies of scale and reduce the cost of parts and labor for electrification, and also give the city some bulk purchasing power with which to negotiate the price of heat pumps.
But because the loans for commercial and residential buildings have underwriting differences, the financing had to be executed separately. And so in order to gain economies of scale, Ithaca developed a plan to initially retrofit 600 commercial buildings and 1,000 residential buildings in the next three to four years. The remaining 4,400 buildings will be tackled in a second phase.
BlocPower raised the equivalent of $55 million for the initial electrification effort, while Alturus committed $50 million.
Structuring the financing
Even with the financing secured, setting up Ithaca's program was complicated, particularly on the residential side.
The actual work — replacing gas appliances with electric versions — is "straightforward," said Bartholomy. The success of electrification programs comes down to, "are you running the right kind of financial model? And are you offering the right kind of customer and installer value proposition?"
New York's constitution doesn't allow a municipality to offer a loan guarantee for private individuals, so Aguirre-Torres negotiated with the state. "Eventually we had a loan loss reserve, basically guaranteeing loans for low-income people and reducing risk in the program," Aguirre-Torres said.
State funds and anticipated incentives were also used to help lower the cost of capital, meaning less cost to the community to electrify. And in order to access federal funds from the American Rescue Plan Act and reduce risk further, the city tapped BlocPower to act as program manager and focus on customer acquisition and building analysis.
BlocPower will analyze buildings that Ithaca wants to decarbonize, develop a work plan, and for a fee, pass the customer information on to local companies and contractors to do the actual work.
"Because we reduce the customer acquisition cost and the sales cycle for local companies, they're happy to pay this fee because it's even lower than their [customer acquisition] costs," Aguirre-Torres said.
A community advisory board is also helping BlocPower to better understand the community’s needs, said Aguirre-Torres. And on customer acquisition, the city of Ithaca is working with community groups, a local engineering firm and Cornell University, to identify buildings for electrification.
The need for private equity in decarbonization efforts
There was some local concern about using private equity to fund energy efficiency and electrification efforts, said Aguirre-Torres. Some activists feared local contractors or businesses would lose out, or BlocPower and Alturus would make too much money on the deal.
But there is also a growing recognition that private equity funding can be a boon to electrification and energy efficiency efforts, because so much capital can be leveraged so quickly, said Aguirre-Torres. Ithaca's investors will likely see a 3-4% return on their investment, he said, while allowing the city to ultimately decarbonize 1,000 buildings a year.
Experts say Ithaca's approach is a recognition of the urgency of climate change.
"Without a doubt, we're going to need private equity involved in this transition," Bartholomy said. "If you look at the speed and the scale of the energy transition, there's just no way that public capital by itself, taxpayer or ratepayer dollars, are going to be able to help us on this journey, if we're going to try to meet our targets. We need private capital."
"The key thing is really protecting homeowners and residents," Bartholomy said.
Alyssa Giachino, campaign and research director for a watchdog group called Private Equity Stakeholder Project, said there is a need for "creative and aggressive" decarbonization efforts across the entire economy but the use of private equity funds can be risky for communities.
"It's crucial that the public entities that are stewards of the public interest build in strict guardrails, because private equity does not have any obligations to the public interest," Giachino said. "They only have obligations to their investors or shareholders. So they have a singular purpose, which is to maximize profits."
To assuage concerns, Ithaca has worked to be transparent and to financially insulate residents from the program. "The money is either going to come from taxes or ratepayers or private sources," Aguirre-Torres said. "There were people thinking that by using Wall Street money, we were selling the town."
Ithaca's approach was "validated" in January, said Aguirre-Torres, when Gov. Kathy Hochul, D, directed the New York State Energy Research and Development Authority to consider private equity funding strategies to electrify the state's buildings. The state wants to develop 2 million "climate-friendly, electrified or electrification-ready homes" by 2030.
Decarbonization will require investing hundreds of billions of dollars globally, Freeman said.
"If we put that burden on every business owner or every homeowner, to be able to come up with that upfront investment, it's not going to happen — at least not in time," he said. "It is a little bit of a risk, obviously, because the city is the first one to do this. But that's part of the excitement behind it, as well."
Decarbonization pilot will focus on hard to reach 30%
The Ithaca electrification program is just starting up, and the city is taking applications for the first building upgrades. There has been a lot of publicity around the electrification push, which has helped to get the word out among residents.
Whether the program succeeds or fails will hinge on the city's ability to reach residents with limited incomes and who are not immediately interested in the energy transition, said Aguirre-Torres.
The city has first-adopter residents who are already driving electric vehicles and for whom electrification is a natural next step, he said. Likewise, there is a contingent that still resists the notion of climate change and is unlikely to make the electrification switch soon.
"That leaves me with about 50%, and of those, half are low income," said Aguirre-Torres. "But I have incentives, even an economic incentive to pay some of them. So I think it's just about talking to representatives of those communities."
Ultimately, the hard work of decarbonization will hinge on reaching about 30% of the city's population, said Aguirre-Torres. The electrification program will focus on houses that heat with baseboard resistance heating, fuel oil or propane.
Aguirre-Torres said Ithaca has developed a tool with Cornell University, allowing it to see the energy use of any building in the city. "Before doing an energy assessment, I know if it is worth it or not. Because if they have a brand new natural gas furnace, it is not going to make any sense."
"When you have the data on all 6,000 buildings in the city, you can start to tranche and prioritize things," BlocPower CEO and founder Donnel Baird said at the Bloomberg summit. "You can use statistical modeling to start to identify which buildings have furnaces that are about to fail, because you can analyze the installation dates of the gas furnaces in the home."
BlocPower builds digital models of buildings and helps building owners understand how they can save money while upgrading their building to all electric energy, improving health outcomes and using less energy, Baird said.
"All of those things create value for building owners and so you want to target and market to different building owners according to what makes the most sense to them," Baird said.
Developing a green, regional workforce
What sort of workforce does it take to electrify 1,000 buildings in a year?
Right now, Ithaca has about 70 people capable of doing the work necessary to electrify buildings. And BlocPower has a restriction on its contract that it cannot take more than 20% of the job opportunities it presents.
"We want to create local jobs," said Aguirre-Torres, who estimates Ithaca needs about 400 workers for the pilot and ultimately 1,000 for the full program. "The idea is to work with local companies and sole proprietors."
So Aguirre-Torres traveled to nearby New York cities of Binghamton, Rochester, Syracuse and Elmira, discussing the job opportunities with local officials and workforce development organizations. The cities formed a "Green Jobs Corridor" with 120 organizations across the state, including labor unions, and are working to share transportation, education, childcare and language support opportunities to develop a regional green workforce.
"I am proud of this," said Aguirre-Torres. "This is going to expand."
Not only will the local economy expand, but with more workers available to electrify homes, Aguirre-Torres said more communities may make similar decarbonization commitments.
"A lot of what we're doing is sharing wisdom," he said. "Hopefully this becomes a blueprint."
Grid impacts and Phase 2
The program will ramp up quickly, particularly as workforce issues are addressed. In the first year, about 20 buildings are expected to be completed, after that ramping as quickly as the workforce will allow.
The slow start will also allow New York State Electric & Gas to upgrade the city's electric grid, and the city is considering non-wires alternatives to avoid significant investment. Ithaca is also adding "as much solar as possible," said Aguirre-Torres.
But even assuming a 30% efficiency improvement in retrofitted buildings, winter electric loads are expected to ultimately triple as the city electrifies. If the city moves ahead with electrification but fails to upgrade the distribution system, "we have three substations that will just catch fire" by 2026, Aguirre-Torres said.
How the second phase of Ithaca's electrification efforts — another 4,400 buildings — rolls out will be determined by data from the pilot. But Aguirre-Torres said the city already has a "hard commitment for the money right now," so long as the pilot works out. Alturus has committed an additional $50 million if initial goals are met.
"Alturus has about $600 million in their pockets, and they can fund the whole thing, but we need to make sure that it works," he said. "That's why we're working so closely with them, to make sure that we're meeting their expectations and making sure that they are getting the returns."