How I Built This with Guy Raz - Tapping the heat beneath your feet with Kathy Hannun of Dandelion Energy

Episode Date: June 8, 2023

Millions of American households rely on oil for heat. Growing up in New Hampshire, Kathy Hannun was familiar with this decades-old and environmentally-taxing approach. As part of Google’s innovation lab, X, she began unearthing a solution — indeed from underground...This week on How I Built This Lab, Kathy discusses how her company, Dandelion Energy, has made geothermal energy accessible for heating and cooling homes across the northeastern United States. Plus, Kathy explains why widespread adoption of geothermal heat pumps is important if we want to reach our climate goals.This episode was produced by Sam Paulson and edited by Casey Herman, with music by Ramtin Arablouei. Our audio engineer was Katherine Silva.You can follow HIBT on Twitter & Instagram, and email us at [e-mail] Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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tall windows, beautiful old details, and plenty of space for all of us. And being in that home on Airbnb, right in the middle of Vienna, walking distance from so much of the city, made it feel less like a visit and more like we were actually living there. Plus, taking a trip is the perfect time to host your space on Airbnb. Your place with a place with a all of its personal touches and its amazing location could make someone else's vacation even better. Your home might be worth more than you think. Find out how much at Airbnb.ca.com slash host. Hello and welcome to how I built this lab. I'm Guy Raz. So the ground under your feet could cool and heat your home for a relatively low cost. And it doesn't really matter where you live,

because as you will hear in this conversation, once you dig about two to 500 feet deep, in most places around the world, the earth is cool, but also capable of providing heat. How this works, I will let Kathy Hanoon explain in a moment. Kathy is the founder of a company called Dandelion Energy, and she's on a mission to use the natural thermal system that already exists below ground to regulate the temperature inside our homes and buildings. It's a system, by the way, widely used in Sweden. And if she can get enough people to adopt it in the U.S.,

it could have a massive impact on reducing carbon emissions. And it could save people thousands of dollars a year. Kathy started thinking about geothermal heating and cooling systems back when she was working at X. That's the name of Google's Innovation Lab. Two of Google's most famous internal projects, Waymo, the self-driving car, and wing a drone delivery system came out of X. Dandelion Energy was also started there and eventually spun out as a separate company. But at the beginning, Kathy and a team at X were given an open-ended assignment.

Dream up big ideas that could make a significant impact and then try to see those ideas were workable. I was just hunting around for what is a project that would make a big impact on climate. And buildings are responsible for about 40% of greenhouse gas emissions. Heating and cooling is more than half of that. And it was clear then, as it is now, that heat pumps are going to be the answer. That's the way you electrify heating efficiently. And there are two types of heat pumps, air source heat pumps and ground source heat pumps, also called geothermal heat pumps.

And they both have a big role to play. But what we did was we did an analysis where we just ran the hypothetical if all homeowners, we focused on homes residential, switched from using whatever heating fuel they used today to using heat pumps, geothermal or air source, how much value would be created. So just looking at the difference of operating cost. And it was actually so striking and so surprising how much value would. be created by switching people from what they use today to geothermal. So just can you quantify what you discovered?

Like, what did you find? If you look at, for example, in the Midwest, comparing using a fuel to using geothermal, your operating costs, so how much you have to actually spend to heat your home, it's maybe a fifth with geothermal. It's similar in the Northeast. and emissions-wise is similar. It's a huge decrease. And so then, of course, it's like, well, why don't people use this if it's so inexpensive and so clean?

And the answer is very clear. It's just geothermal heat pumps are very expensive to get up front. And we're very not just expensive, but like for most normal people, very difficult to know how you would even go about getting one because it was. such an uncommon product. Yeah. And when you have heating oil, which many people in the Northeast to do, it's like having, it's like basically paying for a subscription service. Yeah, I think you're exactly right that you have a subscription to heating oil or natural gas or propane that you just have to pay because for most people, it's not an option to just say, you know what, this is getting a bit

expensive. I don't want to pay for this anymore. I'll be cold. You know, it's like probably not. You have to pay it. Whereas if you invest in putting in ground loops, and we can talk a little bit more about what that entails, but if you invest in that infrastructure so that you can access all of that free heating energy that's already in your yard, then you can draw on it essentially forever, because the ground loops are going to last as long as your home. Yeah, I guess I should mention, it was not a new technology. It's not something that you guys had invented. It was something that you were exploring because it exists. There are countries like Sweden where this exists already where people use this technology. So let's talk about how this works. Explain how a home is heated

and cooled with a geothermal system. So you basically need two components. You need what are called ground loops, which are just plastic pipes buried in the ground. They typically extend 200 to 500 feet into the ground. And they're only inch and a quarter in diameters. They're thin, but they go pretty deep. So you'll have one or two of those. And then you'll have a heat pump, which essentially looks like a furnace. And it goes where your furnace was. And that will be typically in your basement or in your utility closet. And then you need to connect them. So it can feed water to that heat pump in the house. So essentially there's water running through these tubes under your home. And the reason why it's so deep underground is because the ground is more or less around 55 degrees Fahrenheit all the time. That's right. So help me understand how do these tubes with water underground heat your home? How does that work? So it's the same exact technology that you would find in a refrigerator or in an air conditioner.

But the way it works is that 55-degree ground will bring that water running through it to 55 degrees. Then that 55-degree water will go into the heat pump and pass through a heat exchanger where it will exchange its heat with a refrigerant. That refrigerant's been specially selected to expand and sort of vaporize at 55 degrees. And then it's run through a compressor, which uses electricity to compress. the refrigerant. And so basically when you compress that refrigerant, the temperature goes up. So now you have a very hot refrigerant. You can pass that through another heat exchanger with the air that you're going to send through your house. So it heats the air to let's say 100 degrees or so. And then you just send that air through your house as you normally would. It sounds really complicated when I say it like that,

but it's a very common technology. Again, every air conditioner, every refrigerator works in this way. And to cool your home, it actually removes heat from the house. Can you explain that? Yes. So cold is just the absence of heat. So the way an air conditioner works or the way geothermal heat pump works is you'll have the whole system run in reverse. And so you use that refrigerant again.

to absorb heat from your home. And then in the case of a geothermal system, the hot water where the heat has sort of been dumped is running through that 55-degree ground and dissipating into the ground. All right. So you know that this is possible, not just possible, it exists in parts of the world. This is in 2015. But there's maybe more than a slight challenge, which is the drilling equipment to do this in a residential setting was non-existent, at least in the U.S.

right? Like to drill down under a house without disturbing the house and installing these pipes, you'd have to bring like a big rig-sized drilling rig, and most homes can't accommodate that in their backyard. That's right. The challenge was the types of drilling rigs that people used for geothermal in the United States were the same rigs that were used for water wells. And they work well for rural homes with a lot of land and homeowners who don't mind if a giant truck with a huge. very heavy drilling rig drives onto their yard and sends mud everywhere. But a lot of our homeowners did mine and also didn't even have the land. So it was kind of... They're densely packed. They are. Yeah. So it's just like you couldn't even start. And so we needed to find a way of putting these ground loops in that was compatible with just a suburban home where, you know, you wanted to keep the areas neat. So how did you do that? What did you do? What did you? fine. This was something that we iterated on quite a bit in the early years. We experimented with

a few different types of rigs. But we ended up taking a trip to Sweden, which you mentioned. It's sort of the geothermal capital of the world. 20% of homes in Sweden use geothermal heat pumps. Pretty much all new homes going in use them. So they've managed to bring the technology to scale. So we made a trip to Sweden, and the companies that do this there were actually extremely helpful in sort of teaching us. Here's how we do it. Here's the equipment we use. Here's our process. And we've imported most of that back to the United States and really adopted the same rigs they use over there.

All right. So you start to figure out how to make this work. And you had this idea, and it started to get some traction. And so you sort of proposed that this become a startup, a separate company. It was becoming increasingly clear sort of over 2016 that this is an idea that could go somewhere. A lot of the checks we do on, is this going to work, were coming out pretty positive. Like, surprisingly so. You know, I was used to going through so many ideas and finding sort of the thing that seemed hard to overcome.

But with this idea, it was like the more I looked, the more convinced I be. became that there was nothing fundamental holding this back. But the issue was, you know, X really looks for a very specific type of project. Their ideal project is something like the self-driving car or Waymo where you have to invest a lot of money up front to create ideally something software or software adjacent like a self-driving car. And then once you solve that technical problem, all of the other problems that you'll have in starting the business are very minor compared to that central problem. If you can really make a car that drives itself perfectly, you'll be able to figure everything else out and it will be in an incredible business.

And for geothermal heat pumps, it involved things like drilling deep holes in homeowners yards. It was operationally intensive. And I should also make it. mentioned you didn't need a billion dollars up front to get started. It was the type of problem that seems like it would benefit a lot from iteration. And you could actually get started without a lot of capital. So it just was better fit to be a startup than to be something incubated within X. We're going to take a quick break. But when we come back, Kathy shares how Dandelion Energy flopped out of the gate,

but eventually found a model that worked. Stay with us. I'm Guy Raz, and you're listening to How I Built This Lab. One more thing, before we get back to the show, please make sure to click the follow button on your podcast app so you never miss a new episode of the show. It's usually just at the top of the app. And it's totally free. Welcome back to How I Built This Lab. I'm speaking with Kathy Hanoon, founder of Dandelion Energy. It's a company that's making geothermal heating and cooling accessible to homeowners. All right, you mentioned starting it with not a lot of capital. I think you raised about $2 million, which might sound like a lot to some people, but for this project, it is not a lot.

And so, but from what I've read, the first year, and maybe two, was rocky. It was not, did not go as plant because I guess initially you sort of decided to try and contract with existing HVAC companies that focused on traditional HVAC systems, not geothermal. And I don't know, it was just, you ran into a lot of challenges. Can you talk a little bit about them and numerate them? Yes. We ran into so many problems.

I guess to start, the hypothesis we had when we spun out and started the company is we're going to create a marketplace. We'll contract with HVAC installers. We'll make this available to homeowners. We'll match homeowners that want geo with these contractors who we are going to teach. to install it. We'll provide the heat pump and do some of the drilling because we were testing some different ways we could approach that problem at that point. And that will be the company. So we raised the money. I moved to New York. We made the commitment. It's sort of a one-way process. And then it became obvious that that vision was not going to work. First of all, the

partners, the HVAC contractors we had chosen, were not used to selling geothermal, of course, because they did not sell this product. And so it quickly became clear, okay, we're going to have to sell this product. So we hired sales leader. Then we realized, you know, even when we sell it and pass it along, like these contractors need a lot more support than we're giving them. And it's not their priority because they have their own business and their own customers that they're always going to treat before ours. And so that led to a lot of customer experience issues, as you can imagine. And the economics of it were also very difficult. Because it was like $50,000, $60,000 up front to install this system in an average home at the time, right?

Yes, that was the typical price of geo, actually quite a bit higher than that in the markets in New York that we started in, we went in with a much lower price, but we were not making money at that point in the company. But I will say the one thing that was going really well, even from day one, was people wanted to buy the product. And to the upfront cost point, we launched with a financing option. So from the beginning, homeowners that signed up with us would come out ahead, like you could come out cash flow positive against fuel oil. And there was just like over, demanding demand, which is great, but also in itself created problems for us because we just didn't have the contractor network to support that demand. And we had mispriced at the very

beginning. So we were also, the more we sold, it was sort of like the deeper the whole we were digging for ourselves. So those were the early years. So how did you solve it? I mean, what did you, I mean, presumably, depending on these outside vendors and companies to install the product, wasn't going to work. Yes. But you also had, you didn't have, you know, huge buckets of cash to build out your own team of installers. So what did you do? I remember this decision point because I was actually on a hike with my dad. And my mentor, Dan Yates, who is chairman of the board at Dandelion, he called me.

And I took his call. And we sort of acknowledged this truth to each other. Like this model isn't going to work. And it was kind of clear that if the subcontractor model isn't going to work, really you don't have that many options if you want to keep going, except for just trying to insource. that workforce, you know, like what else are you really going to do? So we had been, or at least I should say I had been trying to avoid that truth for some time because it was frankly intimidating to think about leasing a warehouse, hiring electricians, plumbers, and HVAC professionals, figuring out all the vehicles, right? Like, I didn't think of myself as somebody who could know

how to run a true HVAC company in that way. But we had this call and it was kind of like, well, this is what it's going to take. And so we made the decision to do it. And I'm really glad we did because it allowed us to grow the company, improve the customer experience so much, improve the economics of our installs. We learned so much more quickly because we were actually doing all these things ourselves and truly understanding what all the problems were. So yeah, it was a very meaningful decision point in the history of the company. So that meant you had to raise lots more money. We did have to raise more money.

It's true that having a model where you're insourcing the labor is more capital intensive. But the economics of each install were also much better. So it ended up being a financial net positive for the company, even though it did require us to, yeah, raise the money we would need to lease the warehouses and the vans and that type of thing. Okay, so after this big revamp to the company, what do the customer experience look like? Our promise to the homeowner then and now, to be honest, is just you're a homeowner, you just want to buy a heating system that works. And so we'll come in, tell you how much you'll save by switching to geo in the same way a solar company, for example, would tell. you, this is your return on investment, this is how much you'll save. And then we'll do everything.

We'll remove your furnace, do the right design for the geosystem, oversee the drilling, or today we do it ourselves. We today do everything ourselves. We install the heat pump, uninstall your furnace and air conditioner, and then get the whole thing permitted and inspected. We'll handle the rebates for you, right? Like, we just want to make this simple for the homeowner, so we take on the complexity ourselves. All right. So you start this basically building this vertically integrated company. How were you able to bring costs down? Because initially they were 60, 70, 80,000. I guess now it's sort of averages about 25 to 30,000. Is it just a more efficient process or what? There are a few different things. Certainly the policy landscape has been a great tailwind for us. Starting this company,

you know, Trump was president. Oil was relatively inexpensive. People weren't talking about heat pumps. I feel like I could have never imagined how much would change in our favor in the policy landscape since that time. So there's now a 30% federal tax credit. So for every homeowner who buys geothermal,

they just get 30% off of the price from that. The utilities have incentives that are worth $10,000 to $20,000. that go to the homeowner. And there's just like so much talk about heat pumps all the time, which is great. So that has been hugely helpful. But in addition to that, I think one of the things that was making geothermal very expensive in the past in the U.S. is that because it was so niche and so infrequently done, every time geothermal system was put in, it was kind of like a highly customized one-off project.

there was no assembly line. There was no company who is trying to figure out how to standardize the process and then do every step of it as efficiently as possible. And that is the role that we are playing. So to give one example, only 18 months ago, we had two drilling rigs of standalone, just small rigs that we've adapted to be optimized for geothermal in small suburban residential yards. So we went from having two to now we have 14 running full time. And this business is all about throughput. So if you have your rigs and your people and like all of your assets constantly working to put in systems, then you're able to amortize that overhead over many, many, many more systems. And the cost is much, much lower for homeowners. So once you install the system,

your cost and let's say it replaces fuel oil right um your costs to heat and cool your home or just the electricity cost to run the heat pump that's right yep that's right and how long does it take to install it i mean if somebody's like yep let's do it the actual work that takes place at the house you need one day two days is to put in the ground loops depending on how big the house is and how many ground loops are required And then installing the heat pump typically also takes about a day. Though some homeowners get a water heater or ductwork or things like that, and it can take a little bit more time. In terms of our wait times, they've varied at our worst.

We forced our customers to wait over a year in some markets because we had so much demand. But now we've managed to bring it down. It's more like four months. So we've made a lot of progress there. going to take a short break, but when we come back, Kathy breaks down what makes geothermal systems so versatile and efficient and why we need them if we want to meet our climate goals. Stay with us. I'm Guy Raz, and you're listening to How I Built This Lab. Welcome back to How I Built This Lab. I'm Guy Raz. My guest today is Kathy Hanoon, founder and

president of Dandelion Energy. To be clear, I mean, this is like, this dramatically reduces carbon emissions, right, but it's not totally carbon neutral. I guess it could be if you were using like solar power to power your home, right, then it would be totally carbon neutral. That's right. The way to think about the carbon neutrality of geothermal, it's similar to electric vehicles. Without heat pumps, you have just millions of point source emissions. So every furnace or every boiler is emitting its own stream of emissions if it runs on gas or oil or propane. And at least in my opinion, the only practical way to solve the problem, is to electrify the entire fleet of heating equipment,

and that will be done almost exclusively with heat pumps. And then what you've done is, yes, they still use electricity to run, but then you can just focus on cleaning up the grid. And once the grid is cleaned up, you'll have a totally carbon-free system. I'm curious why, in your view, is this system, is the geothermal system better or more efficient than, like, you know, heat pumps that use air, for example, to cool and heat a home?

Yeah, I mean, I don't want to say one is necessarily better than the other in general. I think that in some cases, air source is better and in some cases ground source is better. But let me tell you when ground source or geothermal is better. So for one thing, especially in places where it gets. cold, the cost to operate a ground source heat pump is about half of the cost to operate an air source heat pump because you have access to that constant temperature ground. And that's allowing you to always run your heat pump at high efficiency. Air source heat pumps run at very high efficiency in mild weather, but when it gets really cold, they lose efficiency. And that means that if you step back and look at

sort of the more societal view, one of the challenges that will face when we convert all of our heating systems to heat pumps is that peak demand will become a problem in the winter. And with air source, this is especially challenging. So a study was done for the state of Rhode Island of just like what will happen if you convert all your heating systems to air source heat pumps. And the peak demand on that grid would double. And the reason for that is on the coldest day, all of the air source heat pumps will be operating at their least efficient, and they'll all do that at the same time. Whereas with ground source, peak demand would increase by 17%. So it has that benefit, too, where the ground is serving as almost a buffer. You're not using as much electricity, and you're certainly not using as

much on the peak days. And then the last thing I'll say is that many homeowners in the Northeast today that decide to get an air source heat pump use a fossil-fueled system for backup. And that allows them to make sure they have enough heating on the coldest day. And with our customers, none of them have a, you don't need a backup. You don't have it. So that's another advantage. It's just 100% heat pump. And this kind of system can work anywhere in the world. I mean, you could install it in a home in Death Valley where it gets freezing cold in the winter, and obviously it's one of the hottest places on Earth in the summer. Yes, you definitely could.

It's sort of like, I mean, I think about the ocean, right? Like the ocean is stormy at the surface, but if you dive down now 20 meters, it's calm. Basically, wherever you go around the world and you dig two to 500 feet down, it's going to be a more or less a converse of a con. constant temperature of around 55 degrees Fahrenheit? Yeah, as you go down, you basically get to the average air temperature in that location. So exactly, as you said, the temperature varies so much at the surface with the winter and the summer. But once you get, you know, 10 to 500 feet underground, it's pretty constant. And that's exactly why ground source heat pumps work so effectively.

So essentially there's, and when we say 55 degrees, I shouldn't call that cool. I mean, I'm in California. So when it's 55 degrees here, people are wearing like Arctic gear. You know, it's got to be like 80 before people wear shorts. But 55 is warm. That is warm and cool. Like you can basically create, as you described, heating and cooling with that temperature. It's very mild.

And, yeah, to your point. when I was first pitching the company with our initial seed round and I would pitch to venture investors in Silicon Valley, I didn't get a lot of traction. When I would go to New York or Massachusetts-based investors, that ended up, those were the investors that ended up doing our seed round just because it's just you have a different relationship with heating, especially, but also cooling. It gets a lot more humid and hot in the East Coast. You've raised about $135 million total, and you are mainly right now focusing on New York, Massachusetts, and Connecticut. A lot of demand. Tell me what the expansion plan is. I mean, I have to imagine that you want to get bigger.

You want to be national, international. And probably people from other states are going on your website, and they're saying, yeah, I want to do this. Absolutely. I guess first I'll say one of the things that I just want to be up front about at this part of my journey in the company is like I don't even feel comfortable saying I've raised $135 million. I have built a team that I ended up in 2020 hiring a CEO for Dandelion. Now I'm president and run sort of our product and engineering groups. We have a very talented management team that has taken this idea. and built it to where it is today.

And our plan for expansion look, like so many more states are realizing we need to solve this heating problem if we're ever going to meet our climate goals. And the way to do that is heat pumps. And a lot of utilities don't want their peak demand to double. So people are starting to take geothermal heat pumps much more seriously as a tool to do this, especially as we've been able to bring the cost down so that the economics make sense in more and more places. So we're doing a few things. One is one of our investors in our most recent rounds, Lanar, the home builder.

We're really interested in starting to get into new homes, new construction. Why are we building new homes that have furnaces and boilers when we know we're just going to have to replace them with heat pumps? We should immediately start building new homes with heat pumps. And New Homes is the ultimate case where you can just put in like 100 ground loops, 200 ground loops at a time, and it's very, very cost effective. We're also constantly working on policy, so making more and more states heat pump friendly. And then, of course, we're just continuing to gain efficiency and sort of build our own operational capacity so we can bring our costs down and make the pricing work out for more and more people across the

country. Kathy Hanoon, thank you so much. Thank you. That's Kathy Hanoon, founder and president of Dandelion Energy. Hey, thanks so much for listening to How I Built This Lab. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And it's totally free. This episode was produced by Sam Paulson with editing by Casey Herman. Our music was composed by Remptine Arablewe. Our audio engineer was Catherine Silva. Our production team at How I Built This includes Alex Chung, John Isabella, Chris Messini, J.C. Howard, Liz Metzker, Kerry Thompson, Carla Estevez, and Elaine Coates. Neva Grant is our supervising editor. Beth Donovan is our executive producer.

I'm Guy Raz, and you've been listening to How I Built This.