Catalyst with Shayle Kann - Getting heat pumps right

Episode Date: November 14, 2024

Oh, the heat pump — a climate tech darling that still hasn’t hit the big time yet. One challenge for heat pumps is that the customer experience can be difficult, involving a complex installation process, poor installation jobs, and even technicians that don’t want to sell you one. What’s it going to take to get heat pumps right?  In this episode, Shayle talks to Paul Lambert, founder and CEO of the heat-pump company Quilt. They talk through the nuts and bolts of the customer experience and how to improve it. (Shayle and Energy Impact Partners invest in Quilt). They cover topics like: Why many technicians are ambivalent or resistant to selling heat pumps The cost stack for heat pumps, including the surprising cost of materials The complex labor involved that ratchets up the total price of installation Lessons from other industries, such as solar and auto Whether users actually save money on heat pump installations The challenges of vertical integration of the value chain Recommended resources Latitude Media: We have more data on the energy benefits of heat pumps — and they’re big Catalyst: Ramping up the pace of home electrification Catalyst: Unleashing the magic of heat pumps Catalyst is brought to you by EnergyHub. EnergyHub is working with more than 70 utilities across North America to help scale VPP programs to manage load growth, maximize the value of renewables, and deliver flexibility at every level of the grid. To learn more about their Edge DERMS platform and services, go to energyhub.com.= On December 3 in Washington, DC, Latitude Media is bringing together a range of experts for Transition-AI 2024, a one-day, in-person event addressing both sides of the AI-energy nexus: the challenges AI poses to the grid, and the opportunities. Our podcast listeners get a 10% discount on this year’s conference using the code LMPODS10. Register today here!

Latitude Media, podcast at the Frontier of Climate Technology. I'm Shayal Khan, and this is Catalyst. I actually did go to try to get one installed, and then the whole classic story around heat pump adoption on that side really hit me, where I had to talk to multiple people to even find a contractor would sell me one. Most people wouldn't even sell me a heat pump when I wanted it. This week, figuring out the right way to do heat pumps. When utilities need flexible capacity they can count on, they turn to Energy Hub.

Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energyhub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Catalyst is supported by Fish Tank PR. An award-winning PR firm focused on climate and energy tech, renewables, and sustainability. Fish Tank is known for generating prominent and effective media coverage for the brands they work with.

If you want a PR partner that's thoughtful, shoots straight, and gets results, you'll like Fish Tank PR. To learn more about Fish Tank's approach, visit fishtankpr.com. That's F-I-S-C-H-Fish-Tankpr.com. I'm Shail Khan. I invest in revolutionary climate technologies and energy impact partners. Welcome. All right, so a bit of a personal story is a segue into this episode. So I live in Berkeley, as many of you know, I moved into this house in 2018. We bought the house. And when we were looking at the house, we learned that there is no central heating or air conditioning. In fact, there's basically no

heating or air conditioning at all. And we moved into it. The house was built in 1910. And we we were still pretty new to the area. And so my wife and I thought, wow, maybe Berkeley is the only climate in the country that requires neither heating nor air conditioning at any time. So we bought the house. We, of course, pretty quickly learned that's not true. Even in Berkeley, California, you definitely need heating, and it's nice to have air conditioning as well. So for a while, we may do with, like, you know, room heaters and things like that. And then my wife got pregnant, and we were expecting a child, and we realized that that's not really going to work in a baby's room. And so we need to actually get mini splits.

And so we went through the process. This is now in 2021 of getting heat pumps installed. We got a heat pump made by an unnamed Asian manufacturer, large company. I won't name them for the sake of what I'm about to tell you. And two mini splits and got it all installed in 2021. And I got to tell you, that experience, explained very well to me why the heat pump market

has not taken off more than it has. Now, of course, it is growing, but it's not really in that inflection point of growth yet. And at least from my

end of one personal experience, I understand why. It was more expensive than I expected it to be. It was a really poor sales experience. The installation was kind of messy. And then, of course,

the unit itself kind of sucked. The controls were difficult. It broke all the time. It was not a good experience for me. And despite the fact that I was excited that I had a heat pump finally, it has always made me a little bit more skeptical of this market. So fast forward, and my firm, Energy Impact Partners, invested in a company called Quilt,

which is trying to basically change that entire process, everything from how you buy heat pumps to the actual product itself and the user experience thereof. It's a vertically integrated strategy. It's a big swing at, heat pump world. So when we invested in Quilt, I realized this was an opportunity for me to see if it really could be done different. And so as of a couple of weeks ago, I am customer, I believe number seven of Quilt. I got my quilt installed. It replaced the other unit that I already had.

And without giving you a sales pitch for it, it was a dramatically different experience. And every step along the way, including through to today when they're just running in my house, It's just very, very different. And I think it is easy to underappreciate how much room there is to innovate in sectors like HVAC. And this is important, obviously, because, you know, heat pumps are a big lever in building decarbonization. Residential heat pumps in particular is not a lot you can do that's bigger in decarbonizing homes other than maybe installing solar or maybe buying yourself an electric vehicle and charging. So I wanted to have Paul Lambert, who's the CEO and co-founder of Quilt on, not to talk to me so much about my experience, but rather to talk about what he learned about the HVAC market, about the heat pump market, and how those lessons are getting adopted in trying to build a different version of a customer experience. All right, here's Paul.

Paul, welcome. Thank you. All right, so I want to talk about it. Actually, let me ask you this. When did you start, like, looking into heat pump world? How long ago was that? Very end of 2021. I was on paternity leave, and I was trying to figure out how I was going to get into climate tech.

And I saw this tweet that was about how heat pumps are the sort of unsung hero, sleeper hit climate solution. And I just went down the rabbit hole and I haven't come back. Okay, so you're still relatively fresh eyes on this three years in now, more or less, to thinking about the sector. I guess I'm interested as you started digging in going down that rabbit hole in the first place. What were your observations at that time around the heat pump market, either the products that you were seeing out there or how they were getting installed and sold and adopted? Yeah, it did start with the product. So I started Googling heat pumps, probably the same thing as everyone else. And I found these mini splits.

I didn't know what that was. I had to look at a, that's a new concept for people who haven't either had it as an AC before or new to heat pumps. Because you can't make a fossil fuel mini split. It just doesn't make sense. and it kind of struck me right away that these things could potentially be really cool, but they were really ugly. And being really cool, like you could control each temperature in every room, and that was something I was struggling with. We had a newborn at home, and we were honestly stressing about the temperature in that room. You're not allowed to put blankets in the room or in the crib with the baby, so you're always really controlling temperature of that room, and the whole rest of the house will suffer.

And I spent most of my career making consumer technology, and I just kind of jumped out at me as something that had kind of been not really looked at in a couple decades. It kind of felt like a relic of the late 20th century product design. So that's what first jumped out at me. And then I actually did go to try to get one installed. And then the whole classic story around heat pump adoption on that side really hit me, where I had to talk to multiple people to even find a contractor would sell me one. Like most people wouldn't even sell me a heat pump when I wanted it.

Right. So I think you're getting to this, I don't know, two of the common complaints about heat pump market as it stands today, which is both the products is like for various reasons, kind of mediocre. And the second is that it's actually hard to get it installed. And installers, HVAC technicians generally don't want to give you a heat pump even if you want one for a variety of reasons. So, okay, you spend a bunch of time you learn about this market. I guess I want to talk about how it is structured today, and that'll segue into how it

could be better. But maybe let's step back at the high level. Like, can you walk me through the value chain of the heat pump market as it exists today? Who are the big players and how do they interact in the ecosystem? Yeah, so I'll also focus on residential heat pumps because for heating and cooling, because I think most people in the pod know that heat pumps are technically just everywhere, right? They're in cars, they're in fridges, there, and tons of commercial applications. So for residential heat pumps, they are, there's sort of the central AC,

and there's kind of the large American brands people will know there, that they, that have been producing them for a while, carrier and train and companies like that. With the mini-split market, it tends to be pretty dominated by Asian brands. So a lot of Japanese companies, Mitsubishi, Dikin, Fujitsu are all quite popular. LG, Samsung, all make them as well. So there's also some Chinese companies, Gree and Medea. Those are sort of the big players. And, yeah, the way it works is they have factories in Asia that produce these products at very, very high volume for a global market.

And then they're sold to distributors in each country. very large ones in the U.S., and so there's kind of a markup there that happens. And then the distributor will go on and sell it to end contractors who will hold the inventory, and then the contractors will go and sell that onto the end homeowner. And at each stage of that chain, of course, there's a markup on the pricing.

And the final package of goods and services that the homeowner is buying is the labor, the hardware, and the materials. So there's the hardware that might have the brand on it. There's materials, lines set covers, like all this stuff that isn't, you don't think about, but it's actually a big part of it.

and then the labor is labor pretty significant as well. So that's kind of the full value chain today in kind of the standard industry. That's a good takeaway actually into the question of the cost stack. Like for a typical homeowner today who wants to get, I don't know, I mean, it obviously depends how many units you're getting and so on, but say you're getting a couple mini splits or three or four mini splits. You pick your amount. Getting installed from scratch.

Like, to a first order, how much of the costs is the heat pump versus all the other stuff? This is one thing people, I remember in the early days of residential solar, people often did not appreciate. And that has reared its ugly head in a substantial fashion over time, which is people would look at the trajectory of the cost of solar panels. They'd be like, oh, solar is getting really cheap. And it turns out it's not. In fact, in the U.S. in particular, residential solar is still ridiculously expensive, despite the fact that panels have gotten very cheap because most of the cost is outside the panel. It's either other hardware or more importantly, it's the soft cost, the permitting, the installation, labor, all that kind of stuff. So how does that, is that a similar dynamic in heat pumps?

It is. It's a very similar dynamic. And it's not quite as dramatic because the costs are not dropping at the same pace they were on the panels. But when I look at the three big cost drivers to our final costs, so labor materials, like non-hardware materials in our hardware. They're actually in that order in terms of size. So we spend the most on labor, the second most on materials. I'm talking about like linesets and mounting brackets and things. And then the third on our actual hardware, the thing that says quilt on it, the stuff that says quilt.

on it, the dial, the indoor unit, the outdoor unit. And that was really surprising for me as well. So, yeah, that's the same structure of the industry. The relative cost of the heat pump itself is, it's small. It's probably 20% or so of the overall cost. And there's actually a mistake, I think, some people make where they Google mini split. And they'll find, they'll go to HVAC direct or something online. They're like, oh, I can buy this Mitsubishi for $1,500 for indoor and the outdoor unit. Like, why is this guy trying to sell it to me for $7K? Well, terms of $7K is actually a fair price. because that's actually those, you know, you have to add the materials in labor and then everything else associated with it. I mean, to be honest with you, I'm not that surprised that labor is number one.

I am surprised that materials are number two. Is that just because, so it's linesets and stuff like that, is that just because that's like commodity? I'm trying to think what that entails and what if it could be high margin for somebody, or is it just that, you know, people's houses are big, and so the line sets are a, bunch of, you tell me what they're made out of, but like a bunch of aluminum or whatever, that like you have to buy enough of it that there's no way to drive those costs down or something. Yeah, it's both those things. So there are certain pieces that are extremely high margins, and the distributors are just making a lot of money on. And there are other parts that are literally

just got really expensive, like copper in particular. Copper is expensive. The linesets are mostly copper. And, you know, one of the downsides, I guess, of the ductless architecture is you are piping every room to an outdoor unit versus a, uh, a central system, you have one central system that's being piped out to the outdoor unit. So you do use more copper, and that is the biggest one of the materials. But there's a lot of others as well. The line hide cover. So this means you have the lines out of the side of the house.

It's kind of this bundle of copper wires and data and power and stuff. You hide it with this thing that looks like a gutter. It's literally like a plastic gutter. It's typical distributors today. If you go out kind of retail, if you're a contractor, you're going to go buy it from one of the big distributors, you're paying about $25 a foot for that line. We've been able to source it from China for less than a dollar a foot, the exact same product. So there are certain items like that that are just kind of crazy expensive, and then there's

these others that are just legitimately costly. Okay, that's interesting because my reaction was going to be that I assume there's probably a lot you can do to reduce labor costs, and I want to talk about what some of those things might be, because this has been a big focus in solar and other spaces, like what can you do to leverage modern technology to drive down those costs. But the question from a cost perspective is really how much can you drive down those other two categories of costs? And if you had asked me, I would have said, well, probably there's a fair bit you could do on the

heat pump itself, but actually not much on those other materials. But it sounds like you think actually there is a bunch of headroom in the other materials. I do. And I think it's one of the advantages of, you know, my company is vertically integrated in that we have those relationships overseas and we can play the role of the distributor in certain cases. and then get those cost advantages and bring them through to the contracting side of the business

or our contractor partners we can help them source lower cost supplies. But yeah, if you were to look at those three buckets, those cost drivers and which ones we're going to have the biggest improvement on

over the next two, three years, it's materials. What about labor? To a first order, my assumption would be that the cost of labor is mostly dictated by the number of truck rolls

that you're doing out to a given house. Am I right about that? Or is it more how much time it takes to do the installation once everybody's on site? Both. So, you know, some jobs are a lot larger than others, and it does motivate us to do larger jobs. The other component is also the site visit. So there's the installation, but there's also the visit that usually happens before the installation happens. And there's a lot of people working on trying to make that more virtual, including us in

certain scenarios, but we're not there yet. And I mean as an industry, not just as a company, where we can do virtual site visits and then not have it be good enough quality that you're not paying the price with the one. Totally. I think this is the one thing that people assume is going to be easier

than it actually is. And not to over-reference solar, but it did work in solar, mostly. But in solar, you have a pretty easy, like the thing that had to be invented, Sanjevity was really the company, it was like the first to pioneer this, right? Was use geospatial imagery,

use satellite imagery to map out the roof, look at whether there are trees blocking and providing shade, and you can get a pretty good approximation based on the square footage of the home, what the power demand is going to be, and based on the roof from above, how much solar are you going to be able to put there?

That's relatively straightforward. Having gone through the experience now twice with heat pumps, I can tell you there's a variety of things that are way more complicated about the heat pumps than solar that I can't quite picture how you could solve without a truck roll to my house. There's a questionnaire you could ask me, but it would be kind of an annoying process for me,

and I wouldn't trust my answers anyway. So, I mean, I guess I can see why we're not there yet on a totally virtual quote that is trustworthy on heat pumps. It's not good to me whether we can ever get there. Do you think there's a way we get there ultimately, or is this just like a folly of a thing? Because there are a lot of people trying to do it or talking about it anyway.

Yeah, I mean, I wouldn't be a good Silicon Valley tech entrepreneur if I could say that it's impossible, right? Like, there's got to be some tech that could be invented But the way we're thinking about it is, you know, you get a classification of sort of difficulty of jobs. So if it's a home that maybe is built as part of development housing, we've actually already installed on that house. So we can the same sort of plan, but it's just a different version of that plan. And maybe it was an easy install. And it's just all external walls.

And we have these sort of confidence drivers that could make it kind of a class one. And then we're going to, we feel like there's a class there that we will be able to get to virtual installs pretty quickly. Another, if it's a single room, or yeah, single zone, one heat pump, exterior wall, those are usually pretty easy. But the difficulty level can get really, really high. Like, we've seen some crazy installs with San Francisco, you know, Victorians, row houses, that you're going through 100-year-old structure, multiple levels, neighbors on both sides. I do not see how you're ever going to do that virtually, at least not with some pretty good robots and, you know, x-ray vision. Right.

What about the, so that's like, how do you reduce? the number of truck rolls before you install the thing. Where is their headroom in the installation labor itself? Like, what can you do to drive that down? Yeah, I think that there is going to be... So we've actually already done some in that we made the unit quite light. So one person can do it as opposed to two. And that's a huge deal.

We have also... If you look at where a lot of the cost is, It's when it comes to kind of like in-wall installations, that's a very complicated one, so meaning like you have to run the line set through the wall versus on the outside of the building. And there might just be smarter design things we can do there. Like either create a line hide that doesn't bother people in any way and is actually pretty invisible, so more people are willing to do the outside wall. Or we just talk to the homeowner at a time where they're already going to be doing some renovation

or have their walls open. I don't see any silver bullet there, to be honest. I think it is a series of iterations of, like, looking at the pain points, where are the hot spots, solving them. It's almost like optimizing software in a way, right? You just kind of look at the whole process and figure out where you can make the biggest impact. And luckily, we're early enough in our journey that I think there's still a lot of headroom on the table. So I am expecting to see improvements there, but it will start to plateau eventually. Unless there's some radical technology change that we can bring to the table, like, for example, if not having a pipe refrigerant at all,

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the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. Are you tired of overpaying for big-name PR firms, but not really knowing what they're delivering? Is your comms team wasting time reviewing lengthy messaging briefs and decks, instead of engaging journalists or producing content? Are you wondering why your competitors are getting press and you aren't? Fish Tank PR is an award-winning climate and energy tech, renewables, and sustainability-focused PR firm

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That's where I think, I mean, you already mentioned that, like, what you identified early was the product could have a better customer experience. And I want to come back to that. But before we do, let's continue on this, like, sales process part. That clearly can generate a better customer experience. I mean, certainly relative to your experience and actually my experience as well, originally trying to get a heat pump of like calling around to local HVAC technicians who were reticent to sell you one in the first place. So we should probably explain why that is.

So maybe start with like why do traditional HVAC technicians not want to sell heat pumps often? And then second, just generally speaking, what has been your thesis on like how do you deliver a really good customer experience? Or maybe the other way to put it in more financial terms, like how do you reduce the pipeline fallout rate? How do you make sure that people who start the process, finish the process. Yeah, so we'll start with the beginning one, which is like where, why is it the way it is today. And I have a bunch of theories. I don't know if anyone knows exactly why.

But I'm going to start with the assumption that contractors are good people who want to do right by their customers and they want to go their business. But there's no sort of like malicious intent out there. People, okay, so contractors are generally representing a few brands. And some brands have made more investments in certain product categories than others. For example, the sort of more American brands, like the carriers of the world. have been very into the central systems, and those do work a little bit better with, I think the furnaces are more inherent to the central system

because you can't get a duckless furnace, as I said earlier. When if you're carrying a Mitsubishi or Fujitsu brand, you might be more willing to sort of say you should go that way if you're doing the duckless, that's one thing. The cost is a real thing. So, like, central heat pumps, if we're just to say compared with the furnace, are still generally more expensive up front.

And we haven't done a good job of capturing or communicating energy saving reductions. And the reality is it's a super complex story, especially in somewhere like California, where electricity prices are high and it's not that cold. Right. I mean, the savings, yeah, I want to come back to that question

of what the actual economics to customers look like. But I guess what you're saying at this point is like the communication mostly, if you just call an HVAC technician, they're like, well, okay, I can get you this thing or I can get you this heat pump, but the heat pump's going to be twice as expensive and they don't really, there's not like a clean way to say,

but over 10 years, they're going to save some money. And then I think that's the most common one in California that you hear. It's like, well, why would you pay more for this thing? Like, I, you know, I'll save you way more money. There's also just the maturity of the distribution system. And like, these the furnaces on the back of my truck, I'm going to have to order you a heat pump. I'll get a few in two months.

There's kind of the availability thing if they're not carrying it. And there's also, I think, just the industry catching up with both the state of technology and consumer demand. So some people, might still say things like the heat pump don't work well in the cold. I've had people in California, so again, very, very mild climate. I don't know how cold it gets in Berkeley, but it never gets below 40 in Redwood City and being told here that they need to have a dual fuel system for when it gets cold, which is just kind of absurd. I mean, my retired parents in Wisconsin were told that,

but that makes a little more sense. Yeah, for sure. I think if you're somewhere, anyway, yes, there are parts of the country that makes sense. They're getting fewer and fewer, but they exist. It's certainly not the West Coast of California, or really any coastal city in America at this point, my view. And then there's, you know, the additional thing of just, yeah, the inertia. So, you know, people, if you've been installing and doing something for 20 years and you built your business doing that, you're probably going to keep doing it. So, and that's true for anyone. Okay, so that's maybe why it's sort of still hard, a little hard for a lot of people to get a unit sold to them, surprisingly enough.

But what's been your thesis on, like, what's an ideal customer experience, sales experience look like for heat pump? Yeah. Well, and I'll also say that the whole industry here feels kind of stuck in the 20th century to me. And what I mean by that is that it hasn't had the internet be a fundamental building block and how it thinks about the sales process and distribution system. So the reason that everything has so many steps, the value you know, the value you described

before is that it wasn't possible for a consumer to just talk to a manufacturer and order a product. And you saw the same thing happen in cars, of course, right? With really Tesla being the major first brand to skip the dealership because they could build that direct to consumer relationship. And because the internet allows you to do that. It also allows you to skip travel agents and lots of other examples, right? Where once you bake it in, you can simplify the value chain. So I think the ideal customer experience, probably for a lot of people, does start on the internet where you do some research, you're probably Googling it anyways,

to figure out what a heat pump is and what's a good product to buy, what's good for my house, you can get a fair quote, you can actually see what it's going to cost for your home, or at least get a pretty good sense, something that a company will stand behind.

You get a sense of the products, so you actually know what it might look like in your home, you get a sense of something you want or not, which is funny to say, but actually a lot of these contractors, you actually don't even see the product you're going to get until it's installed, right? You might see a picture online.

But it's really not a big part of the experience. And I really think, like, if you think of the best buying experience as someone has in their life, sort of lowest friction, highest trust journeys from other parts of their life, what would that be applied to heat pumps? So I think, you know, for low-cost purchases, there's kind of these like Amazon-type things. But for higher-cost purchases, I do think the auto industry is a pretty good one on the consumer side to mirror. And so that's what we've tried to do it called. Is there a distinction?

I guess the other thing that people talk about and one of the challenges for heat pumps relative to something like solar. So solar you can kind of do any time. The only real constraint on that is like is your roof nearly at the end of life and you're going to need to do a roof replacement soon anyway. But otherwise, like you could just add solar. Same thing with an

EV, right? There's no time specific constraint on it except I guess if you're, you know, you need a new vehicle immediately. But HVAC is a little different because at least central units you think, okay, yes, you can rip and replace your existing boiler or whatever, but most of the time,

my understanding is that purchase behavior occurs when it's a replacement cycle thing. So it only comes up once every 10 years or whatever it is. And even more so, sometimes it comes when something breaks and then you need something immediately. Is that as true with mini splits as it is with central units? I could imagine it not being quite as true there. Well, what's your hypothesis there? What are you imagining? I don't know. Well, maybe I'm just like reflecting my own personal experience. That's an interesting question, which is we didn't, you know, we were in this old house that didn't have central HVAC and we just needed to add it, but it wasn't like an immediate overnight thing. But we didn't need to do it. And actually it was exactly the same situation as you where we did it in, we bought this house. We had a few years with no HVAC whatsoever other than some like room units. And then my wife got pregnant. And we were like, oh, we're going to have a newborn. We probably should figure out a way to keep.

keep his room the right temperature. And that was what caused us to do it. And admittedly, then we did have a time constraint. So maybe I'm arguing against my own thing. But no, I could imagine, I don't know why, that maybe like mini splits are less of a episodic purchase behavior. Yeah, there's another way in, right? Because some people will look to just solve a part of the room, or part of the home, sorry. So you can progressively adopt mini splits, which is not something you do with a central system. You can start with the office. You can start with just the baby's room, see how you like it. And then, when the furnace goes out in two years,

you already have these two or three mini splits you like. They're like, let's just put three more in, and I've got the whole house covered. So that is a entrance, an angle to adoption that doesn't exist for essential systems. I also, it's so this kind of emergency replacement of got a distressed HVAC purchase. On the heating side, it's roughly 50% of the market today.

So it's like people will, they're furnished, that's where they'll get it. On the cooling side, it's less than a quarter. And that's because cooling is still more of a luxury to people. And if your AC goes out, usually, unless you're in the middle of a heat wave and somewhere like Arizona, but usually it's something you can kind of get by with and you're willing to do a little bit more of a considered chopping journey around. And in the markets that you're going after, in the markets that are higher penetration heat pump markets, is it predominantly cooling or heating?

I guess I hadn't thought about the purchase behavior as being different for heating versus cooling because these units do both. Yeah, they are. And in fact, the cooling is a really great. kind of Trojan horse in for the heating side. So a lot of people, especially on the West Coast, maybe not so much Southern California, but really Northern California all the way up to Seattle, are adding cooling.

The world is getting warmer. And there's a lot of people out there shopping for cooling. And when they learn that these systems can then also do heating, they'll either turn off their central system or just when they get, you know, whenever the furnace dies, we'll just stop using it. But for us, it's actually primarily cooling,

where we are right now, which is the Bay Area. Is that part of the vision for you to ultimately have mini splits replace central units? Like, maybe these are customers who do have a central HVAC system that provides heating. You are the Trojan horse with cooling with mini splits, and then, but then ultimately they just say, okay, like, I'm not going to replace my boiler whatsoever. I'm just add a bunch more window units, or I mean, sorry, room units? Yes.

Well, I should say that I think 60%, we actually just pulled the stat. It's about 60% of our customers are coming from a central ducted system. So it's over half of all our customers are abandoning a central heating and cooling system. And by abandoning, I should say, upgrading to a duckless system. But a lot of the rebates are predicated on removing the fossil system. And so we actually have to take photos of it. You know, the furnace is there, and then the furnace not being there in the nameplate. And in order to get the rebates.

So what often happens is someone comes to us for cooling. And they're like, oh, well, actually, yeah, I guess my... My furnace is like nine years old, 12 years old, whatever. It's going to go pretty soon. You're saying I got an extra two grand off the price. If we just pull it out, let's do that. And that's usually what happens. And so one of our top company metrics that we literally report every Tuesday

and we report to the board is dead furnaces. We have a furnace graveyard, and we are very proud of every time that we pull a fossil system out of a home, and it's one of our key metrics. Let's talk a little bit more about the product side. Obviously, I'm going to list a bunch of things that you can, the levers that you can pull on the product. Obviously, you want to make all of them amazing, but I'm interested in sort of your rank order of what you think really matters to customers.

So there's upfront cost, there's CAPEX, there's efficiency, the efficiency of the unit. There's the visual UI, I guess the product design is the way to put that. And then there's the user experience of it, which includes, in your case, you have a dial and an app and so on. Which of these do you think, I mean, do you have a sense yet as to what is really, because the goal here is ultimately to dramatically expand the heap on market. So, like, what is going to drive, if you have to rank order, what's going to drive sales through the roof?

Which of those things do you think is what really drives behavior? Yeah, so I'd like to go back to just what are the problems. Like, what are the problems that people are struggling with, and then how do we solve those problems? and then at the top, what kind of drives into the funnel, then once they're in the funnel, what are the other problems are encountering? So the things that driving people in are,

they want to be comfortable in their home, which is obvious to say, this is why people are going out and buying cooling, right? And if their furnace goes out or they have the baby coming, they need to get heating. And then a cost, of course, as well, right? So that's kind of the next step in it. But if they need to buy something,

they generally don't want to spend as little money as possible to get as much valuable as possible. and of course that does vary a fair bit by market segments and people are more cost conscious than others. And what we have focused on is trying to drive those two value drivers as much as we can. And the way we do that is less on the KAP-X side but more on the OPEC side. So really focusing on efficiency and trying to build an extremely efficient system. And I'm very proud to say that I think we've done that. And then on the comfort side, that's where a lot of those other things you mentioned come into it.

So just the Declos system inherently is more comfortable because you get this room by room control, right? You can control it a baby's temperature room different than the room you're in. And by having low friction ways for people express their intent. So setting schedules, having a dial interface that they're comfortable using it. It's not like this, you know, Byzantine remote with 80 buttons on it. Just like those little products on things actually, increase the realization of the efficiency and comfort because you're lowering the friction to use the product. And then once you get in, but then the other thing is like why we focus on product

design is we just did a bunch of research earlier, given that we know that these ductal systems inherently have all these great attributes of efficiency and comfort. Why aren't people buying them? These statics are a big, big part of it. People don't want the big white, kind of cheap-looking the appliance boxes all over their houses. So we needed to find a way to create an object that people would actually be, like, proud of. So right now, people are assigning almost, like, negative value, too. So, like, it's going to lower the cost of my house by having these all over the place because they're kind of ugly.

We want to create something that's going to add positive value. It's going to increase the value. People are going to be excited to show it to their friends and family when they come over. So these stocks are a really big part of it because of this kind of squishy world of brand experience and pride of ownership, which is very real, and especially when it comes to someone's home. All right. So you mentioned the OPEX benefit. and getting a really high efficiency system,

which I guess is a good segue for me into this, this topic of actual customer economics. Do customers, I mean, this is very location specific, but let's just say in Northern California and the places you're installing, do customers save money ultimately? I mean, is it an economic value proposition yet? It certainly will be over time.

I think, well, I guess it depends where electricity prices relative to natural gas prices go, but yeah. Yeah, without no. the prices of electricity and natural gas today, and exactly where we're installing, and honestly, even the home itself, like, how it's how it's structured. Like, does it have a highly inefficient central system that uses a ton of gas to keep the house warm? It's just really, really hard to answer. But in general, places where the electricity is, you know... It's the spark spread. It's the delta between electricity and natural gas prices that drives. Yeah, it's the spark spread. Exactly. Yeah. Thank you.

You're better at this. You talk about this lot more than I do. But that is going to be the biggest single driver. But that said, we've just hung our hat on knowing that, like, within the heat pump category, if we can create it, make it more efficient, that is just good. Everywhere. Everywhere it's going to be good. In some places, it will cross the margin and actually make it economically beneficial to get one.

In places where it already is economically beneficial, just make it even broader. And we need to do a better job to be able to capture that. And it is hard to do for all the reasons we were just mentioning. But we're going to need to be able to get there so that we can start to bring that forward. And eventually, you know, you, of course, can imagine financing products,

something like, you know, there's a company called Sealed that was or is doing a lot of this. But I think ultimately, if there is a real OPEX reduction, that's essentially a finance product, right? That's a problem that you can build

some solution to, to bridge those two things. That's right. But it is about, it is about that spark spread, which is tricky. And Northern California, where you guys are starting,

where you and I, live is a place where the price of electricity has gone up, I think, maybe more than anywhere in the country? It's not clear to me, but it's a lot is the point. Is it a barrier to price of electricity at this point? Or are we still in the kind of early adopter-ish segment of customers where, look, like, maybe it's hard to tell over the long term. Am I going to save money on this or not? But I care about this because of XYZ. It's a better customer experience. No fossil fuels, et cetera. Yeah, I think this is something where that consumer bias to look at the capex

where the OPEX is actually in our favor because people see the rebates available. And they're like, yeah, I want that money. I want that $5,000, $2,000, whatever it is. That comes off the purchase price. And that is usually tied to removing a fossil system. And in some cases, it's capping the gas at the home overall. And so that is driving people on the economic side. And just speaking from my personal experience, yeah, we are still in the early adopters.

segment, right? So at some point, we'll be doing millions and millions of homes. We're not there yet. So we get to sell to people who already at some level bought into a heat pump and they want a product that, they want to feel like they're getting the best product possible. Right, you're in the roadster phase of market adoption. Model 3 is yet to come.

Roadster to maybe early model. Model S, okay. That's fine. Fair enough. All right, so final topic for you is this topic of vertical integration, which quilt, as you said, is pursuing, right? So you are the OEM of the heat pump, you are the installer of the heat pump, you sell the heat pump, you do all the things.

And so you're cutting out all these steps in the value chain. That allows you to deliver this very seamless customer experience and cut out margin. There's all these benefits of that. Historically, that has also been true in other sectors. The cost of that, of course, is that like the infrastructure to you to stand up a new market is not insubstantial. So what does that look like for you? Do you need to, if you want to install in Chicago or whatever your next market's going to be,

You need to build a workforce there, and you need to hire technicians and train them and trucks and all that kind of stuff. You need a distribution warehouse. How are you going to do that? Yeah, it's a great question. And there is, like, I said, like an inherent speed limit if we're to just roll out nationally as fast. Say we had infinite capital in the bank. We still could only go so fast. How fast you can hire contractors that you're also confident are going to represent the brand

and do the kind of customer experience that we want to see and stock the warehouses and building infrastructure and all that. So I'll start off by saying that the reason we did the vertical integration to start with is because of the customer experience, but it doesn't have to be the be all and all forever. In that you have to know what great looks like before you can hold someone else accountable to it, but there's no reason we can't bring other people into the fold

now that we have a good sense of what great looks like. And I often think of it. it as like franchise restaurants. So if you had an vision for a new fast food burger restaurant and you had a new kind of sandwich you wanted to sell, on day one, you wouldn't go franchise that to bunch of people just out of an idea. You would build a restaurant. You'd own your own restaurant and you would run it until you really knew that you could deliver that product and then the brand experience. And then you could take that system and bring it to other people and give them both the support they needed to deliver it and the management to ensure that they were reaching those bars that you were

hoping they were ill. And that is the vision here. So we will continue to do the vertical integrated thing. And we're going to do that in probably a lot of major metros in the U.S. but I want everybody to build get a cold heat pump. We want to accelerate the energy transition. We want to bring a great quality product to everybody. And there's going to be people in rural parts of the country, tier three cities. We're probably realistically not going to stand up warehouses there. But we can build systems where we partner with local contractors who are excited about what we're doing and really deliver a differentiated experience through them. And that is kind of the next big challenge. So that is something

what we're working on. We're very excited about. But it does take time. I mean, even that takes time, right? You have to build the systems. You've signed the contractors. You have to train them. So, yeah, unfortunately, this isn't like a pure software world where you can just kind of build the best product, put on the internet, and have your chat GPT moment and be a billion users in a few weeks. Yeah. A few of us can. Yeah. Paul, this is great. Thank you so much for taking the time and for the heat pump. Yeah, of course. Thank you for having me on. And for, and, I don't know, also for picking quilt. I appreciate it.

Paul Lambert is the CEO and co-founder of Quilt. This show is a production of Latitude Media. You can head over to Latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Pralud Backs Visionaries, Accelerating Climate Innovation that will reshape the global economy for the betterment of people and planet. Learn more at Praludadventures.com. This episode was produced by Daniel Waldorf,

mixing by Roy Campanella and Sean Markwan, theme song by Sean Markwan. I'm Shail Khan. and this is Catalyst.