After 10 years as president of Lennar Ventures and now CEO of SunStreet Energy Group, a subsidiary of Lennar pionering a new model for offering home buyers rooftop solar systems, share why a homebuilder is offering solar?
David Kaiserman: Lennar Ventures pursues the innovation activities of Lennar. One of those is SunStreet, a company Lennar Ventures incubated with a full set of staff and resources to pursue a very exciting opportunity in the space of solar.
You may ask, “Why solar, and why a homebuilder?” For us, the answer is pretty simple. When people buy a home, it’s often one of the most expensive purchases or investments of their lives. The amount of products that goes into that home can be overwhelming. To understand every single aspect of how the home functions is often beyond reason for most.
Solar, on the other hand, is one of those few features that, when you see it on the roof of a home, you know exactly what it does. Of late, solar has been in incredible favor with consumers, especially in California and in our newly rolled-out communities in Colorado.
Solar offers an opportunity to make our homes desirable on the basis of new features, with products that immediately resonate with the average consumer. That’s an intriguing opportunity and one that we’ve pursued for a long time.
Give our readers a sense of the current size of the solar home market SunStreet Energy and Lennar, as well as other homebuilders, are targeting.
Lennar has over 100 communities in various stages of development throughout California with solar, which represents a large portion—if not the preponderance—of our new communities there. We’ve just announced a rollout to start bringing solar into Colorado. This is a major initiative for the company as we roll into market-by-market deployment.
For us, it’s not only about Lennar. It’s about the whole housing market. We find the model intriguing as a way to bring scale to the solar business—continuing to lower costs, reducing our reliance on incentives, and permitting businesses across the board to operate in the solar space both profitably and with longevity.
Regarding the nation’s housing market, what is the projected size of this new home solar market?
The solar industry has installed roughly 450,000 residential rooftop-hosted solar systems to date. In 2013, the homebuilding industry—which is emerging from a long period of lower than normal activity—started 900,000 single-family and multi-family homes. If the production homebuilding industry were to embrace solar as a standard feature and include it through programs like SunStreet as a standard feature of a home, the homebuilding industry could materially expand the market base of solar. This would bring with it all of the attendant benefits: greater volume, lower pricing, more diversity, and so forth.
Most would say we need about 1.6 to 1.8 million new homes a year to be started in order to keep up with the dynamics and demographics of household formation in this country. That number provides an even more shocking opportunity. If a large percentage of production homebuilders began to include solar as a standard feature like Lennar does, we could make the solar industry grow by orders of magnitude and through highly efficient channels.
Efficiency, as is obvious, comes in how systems are provided to the customers. Today, many of the solar leasing companies are offering solar at no up-front cost to consumers. Unfortunately, these companies have to spend a tremendous amount of money in marketing and customer acquisition. They have to find customers, speak to them, and close the deal. The beauty of the production home-building market is that we are able to include solar as a standard feature and in doing so, virtually eliminate the customer acquisition cost from the equation. Lennar has chosen to take that value—coupled with the production efficiency of building many homes and our installation efficiency—and turn it into a consumer program. That is a no-brainer.
How is Sunstreet Energy/Lennar now marketing its solar system offering?
Our program is called the 20/20 Plan. When consumers buy their home, they can either buy the solar system or buy the power the system produces. The preponderance of our customers chose to buy the power, as opposed to the system. Under the Lennar SunStreet 20/20 plan, we offer them a price for each unit of energy that isn’t fixed today, but rather, is fixed in its discount: at a 20 percent discount to prevailing retail rates for the next 20 years.
In September The New York Times included a feature titled, “Sun and Wind Alter Global Landscape, Leaving Utilities Behind” that documents the growth of solar in Germany and notes SunStreet/Lennar’s commitment to solar in the US. Could you address the paradigm shift regarding solar that the new housing market is in the midst of, and what it means for utilities going forward?
The New York Times article is a thematic piece about growth of solar. It highlighted activities in Germany where solar has grown at a tremendous rate—faster than anywhere else in the world. One of the reasons for this is that the legislative environment is sufficient in Germany to invest heavily in solar space. They have feed-in tariffs—prices paid by utilities for solar energy that’s not used but generated—that are extremely high. At the end of the day, solar providers in Germany operate in a subsidized environment that is extremely lucrative and compelling. As a result, you see a great proliferation of solar in Germany.
Germany has demonstrated that there is consumer resonance to solar when coupled with a productive financial offering. Lennar’s program attacks those same principles. Our program is financially rewarding to us and financially rewarding to our customers. It does not rely completely on incentives, but rather takes production efficiencies in the form of other cost-side reductions to make the program work. When you put an offer in front of a consumer that says, “You can save money and do good by the environment,” the kernel of that idea can be explosive.
Are the prices for Lennar-built homes materially impacted by the inclusion of solar?
We offer the solar program across price points. If you elect to go with the SunStreet 20/20 plan, the cost of the solar system is not included in the price of the home. It is ostensibly without the charge.
Unlike others in the marketplace where the offering is dependent upon achieving a certain credit score, or other related issue, our program is very simple. If you can quality to purchase a home, you can qualify to participate in our program. No questions today, or in the future, when you sell your home and want to transfer it. The discount is guaranteed to the next homeowner – no credit checks, no charges, no nothing. It’s that level of simplicity that the industry aspires to, but it’s very difficult to execute. We’ve been working at this for a long time and are proud to say that we’re able to offer it.
When you were creating the SunStreet/Lennar energy offering, what did you learn from your competitors in the solar home space? What, as well, did you learn about what homebuyers want and don’t want regarding solar?
We’ve been involved with solar since 2006 and experimented with a variety of different offerings. We first started including solar as a standard feature and as part of the price of the home in our Northern California divisions. Quickly, we learned that people were interested but didn’t want to spend the up-front money to get there.
We then morphed into a leasing program, which are widely available today. But those leasing programs had drawbacks. They had credit requirements. Not everybody who could qualify for the purchase of a home could qualify for a solar lease. That was problematic for us. They also had fixed payment requirements. Like any lease, yours would be X dollars a month. In the event that your solar system didn’t produce the energy, you were still required to make your payment—but there was a warranty allowing you to receive a refund for energy that wasn’t produced. We, and our customers, were uncomfortable with that because it placed the onus on customers to monitor their solar system, as opposed to placing the onus on the system owner leasing it.
Finally, what happens when prices change in the future? Is the lease going to be in the money or out of the money? Is it going to be more or less than retail electricity prices?
This combination of concerns led us to investigate for a long period of time whether there was a market offering that could accommodate our requirements. We quickly determined that there was not. In the entrepreneurial spirit, we decided to build it ourselves. We built a program based on our historical experience that attacks three principles that gave us pause when we were a customer. We built it as a tailor-made solution for the new-homebuilder, starting within Lennar.
For almost a decade, California policy and regulations have been very supportive of solar. I would assume that these regulations, laws, and incentives still apply to and support what Lennar is doing with SunStreet. But it must be asked: When will California solar incentives be unnecessary because market forces will be sufficient to incent solar installations?
I’m not sure exactly when that will happen, but we are closer today than we’ve ever been.
The answer is very straightforward: volume. In order to bring volume up, you need cost-effective channels through which to deploy programs—channels without customer acquisition costs and channels that can scale.
That is the quintessential opportunity for the production homebuilder. We sell customers a whole home, not just a solar system. Including it as a standard feature avoids customer acquisition costs and brings volume up. If the production home-building industry were really to harness solar, its impact on the overall solar industry would be game-changing.
Lastly, how have the competitive forces in the home-building market responded to what Lennar is now offering through SunStreet? And, as the New York Times feature flagged, how are utilities responding to SunStreet’s off-the-grid energy offering?
The market is responding very favorably to our offering. The first indication for us is consumers. We spend a lot of time making sure that they like the program. I think we’ve hit it this time in providing the discount guarantee, which has been validated by the consumer reaction we’ve received.
From the industry’s perspective, more and more homebuilders are beginning to dabble in solar. According to my colleagues throughout the industry, they are facing the same issues that inspired us to form SunStreet. People are watching us very carefully as we grow. The reaction from our peers has been very favorable.
In terms of utilities, the reaction to Lennar/SunStreet Energy is no different from the reaction to solar in general. It’s a mixed bag. On one hand, they want to embrace alternative forms of energy. On the other hand, there is a long-standing series of laws and regulations that are intricate and complicated, which solar is beginning to challenge.
Utilities are starting to explore different ways of utility rate design and different ways to deal with solar. This acknowledges that solar has become mainstream, because otherwise nobody would spend time on it. It’s heartening.
But, it is a process that will need to be worked through. This will take time with utilities, regulators, and legislators, to get the right solution and to encourage growth at the same time as not overburdening the system. That will take attention and focus.