Episode 101: Brenden Millstein, Carbon Lighthouse
Today's guest is Brenden Millstein, Co-Founder & CEO of Carbon Lighthouse.
Carbon Lighthouse is a HVAC optimization startup, serving commercial property owners and management firms by using software and remote sensor technology to make buildings more energy efficient and reduce costs. Having raised over $130 million in financing, the company’s mission is to stop climate change by making it easy and profitable for building owners to cut carbon emissions caused by wasted energy.
A Berkeley-native who studied Physics at Harvard, Brenden went on to co-found the company with a long-time childhood friend who had taken a similar path. As Brenden shares in interesting detail, the early-years proved to be a sales slog, as they worked to crack the nut on closing commercial property owners.
We have a great discussion in this episode about everything building efficiency. What is it? Why does it matter? How does it work? What kind of climate impact it can have and does where Carbon Lighthouse fit in? I really enjoyed our conversation as Brenden's story is a good example of an entrepreneur who is building a very successful company from a capitalist standpoint, but also is having a big planetary impact as well.
Enjoy the show!
You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
In today's episode, we cover:
Carbon Lighthouse, its business, vision and clientele
The genesis of the company
The opportunity of improving energy efficiency
The early challenges of driving sales
Carbon Lighthouse’s non-profit arm
The substantial role commercial buildings play in emitting GHG
Misaligned incentives of the many stakeholders involved
Factors that led to a tipping point in the sales challenge
What is HVAC optimization
How Carbon Lighthouse uses software to optimize commercial HVAC systems
Value and savings delivered to commercial buildings
Carbon Lighthouse’s customer profile
How landlord adoption is a continuing obstacle
Carbon Lighthouse’s financing, operational expenses and costs
Brenden’s views on utility-level policies to reduce emissions
Brenden’s thoughts on the COVID-19 pandemic and how it relates to climate change
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Jason Jacobs: hello everyone. This is Jason Jacobs and welcome to My Climate Journey . This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help. Today's guest is Brenden Millstein, CEO and Co-Founder of Carbon Lighthouse, which is on a mission to stop climate change by making it easy and profitable for building owners to cut carbon emissions caused by wasted energy. The company's raised over $130 million.
We have a great discussion in this episode about everything building efficiency. What is it? Why does it matter? How does it work? What kind of climate impact it can have and where a Carbon Lighthouse fits in, including the origin story of the company. What Brenden was doing that led him up to company creation, where the company is today, their progress to date, the model, how it works, what kinds of clients they serve, what kinds of success and ROI those clients can expect to have, what's coming next for the company and the long vision if they're wildly successful.
I really enjoyed this discussion and Brenden's a good example of an entrepreneur who is building a very successful company from a capitalist standpoint, but also is having a big impact as well. And he strikes me as a very mission driven founder. Brandon Milstein, welcome to the show.
Brenden Millstein: Thanks so much, Jason. Pleasure to be here.
Jason Jacobs: Well, it's a pleasure to have you. It's a bit unnerving even though there'll be a little lag in terms of when this gets published. We are smack in the middle of, I don't know from your end Brenden, but from my end, it's probably day four or five of quarantine here for coronavirus and we're doing this interview.
I'm actually sitting on my bed because my desk is not near a power outlet. In my house with my two little monkeys running around downstairs, wreaking havoc. We'll probably come in here at some point.
Brenden Millstein: I have a similar setup. I've built a standing desk on my dresser and I'm very thankful I have south-facing windows with lots of light and that we are through the childcare scramble.
Jason Jacobs: But you are wearing a tie. So are you wearing your pajama pants underneath? Are you actually that dressed up at your home office?
Brenden Millstein: I'm dressing the same way I do for work. I've been on call since about 7:30 AM we're in the middle of a growth equity round, which is going actually well, thankfully Amazon client calls too, so I'm gearing up as if it's a regular day, except I have an extra hour to work out instead of commute.
Jason Jacobs: Well, thanks so much for taking the time to speak with me and speak with us, given given everything that's going on. So why don't we jump into it? What's Carbon Lighthouse?
Brenden Millstein: Carbon Lighthouse is a clean energy company and we work primarily in commercial and industrial buildings. So this is anything greater than about 20,000 square feet.
So suburban office building, downtown, high rise manufacturing, plan to hotel, anything like that. And what we do is we have figured out a way to cut energy use by 10 to 30% without replacing any of the major equipment in the building, just by adding sensors and controls and doing other light touch work so that the existing equipment operates more efficiently.
So it's a great way to cut costs for landlords. And from our perspective, it's a very excellent way to reduce emissions.
Jason Jacobs: And how did this all come about? What were you doing prior and what led up to the formation of the company? And when?
Brenden Millstein: I fell in love with the cause behind Carbon Lighthouse, actually in high school, my four years of high school were a little nutty.
So in four years we had six principals. We had 20 fires, one in which burnt the building down. And my freshman class of a thousand graduated around at 700 kids.
Jason Jacobs: Where was this?
Brenden Millstein: This was in Berkeley, California. Berkeley in the nineties before the first.com boom was a very different place. I mean, it wasn't even part of Silicon Valley yet.
There barely was Silicon Valley and there's only one public high school, and so it pulled sons and daughters of professors' kids, and it pulled kids from parts of town who were really struggling, and there's very little in between. Of the 700 who graduated, I went to Harvard with seven of my classmates. We had really high numbers at Harvard and Yale and MIT and Stanford and everywhere else pretentious and 70% graduation rate and 20 fires that burnt down a building.
So there's just very little in the middle. And I spent all of high school really struggling to help anyone around me. I was in low income tutoring programs and afterschool programs. That didn't work. But my senior year of high school, I took a nuclear engineering class at UC Berkeley and just fell in love.
And here's this way to use math to improve the lives of billions of people. And totally unlike education, the financial incentives were aligned. We could just hand people money, do the right thing for the planet. So figuring out how to hand people money to do the right thing for the planet has been my cause ever since. So off to Harvard to study physics. Raphael Rosen is my co-founder here at Carbon Lighthouse. We were physics lab partners in college together, but we actually grew up five blocks apart. He's at the end of me for private high school. But we've worked through that, and I point out Harvard had one more kid from Berkeley high than it did from college preparatory school.
That's where he went. Important fact. But yeah, fast forward a decade from the start of college, and we started Carbon Lighthouse with the exact same mission of stopping climate change and the mechanism of getting there by making it very profitable and very easy for clients to do the right thing for the planet.
Jason Jacobs: So what year did the company start?
Brenden Millstein: 2010.
Jason Jacobs: Got it. And then when you got going, what was the initial vision for the company and how has that remained consistent or how has that evolved? Fast forwarding to today?
Brenden Millstein: The initial vision is actually almost exactly the same as it was back in 2010. The mechanism for how is very different.
So what we didn't see coming was twofold. One is how much room for improvement there was technically in the efficiency market. So that's the upside. And then the downside was how nightmarish sales of energy savings to commercial real estate are. On the technical side. Within a couple of years of the launch, we were able to cut costs and buildings 10 X or 20 X more cost effectively than traditional industry, so that's insane.
You would never start an oil company and two years later it'd be selling oil profitably at $4 a barrel. That was actually the technical environment we found ourselves in in efficiency. On the flip side, sales were incredibly hard. And it took us from 2010 until about August of 2016 to finally crack the nut on the sales fraud such that engineering became the limiting factor on growth and not sales anymore.
Those were two pretty different than large swings compared to what we expected and launch in 2010.
Jason Jacobs: So then what was the vision when yoU.S.tarted the company?
Brenden Millstein: The vision when we started the company was going to commercial buildings to do energy efficiency, do solar, do demand response, and also start a nonprofit which we donate to, which competes with power plants for operating permits.
So that way we could make the overall package to the client profitable and make their buildings carbon neutral. And that is still what we do today, minus the demand response piece, which we haven't found a way to make cost effective. But today we go in, we do energy efficiency, we're extremely cost effective at it.
We do solar where it makes financial sense, and then our little nonprofit is Carbon Lighthouse Association shamelessly. YoU.S.hould go to it and donate Carbon Lighthouse.org but it's the only non-bank non power plant that participates in these markets. So there's 10 States in the U.S. where every power plant by law has to buy one operating permit for every ton of CO2 it emits. And the number of permits is fixed, and they're sold at quarterly auction. So our nonprofit goes to these auctions and just buys down the supply of permits and sits on them indefinitely, or it goes through the process. It's called retirement. And so those permits then can't be used by a power plant to emit, which forces utilities to find cleaner sources of energy.
Jason Jacobs: Interesting. I've never heard anything about that. It's almost like in a weird way, it's like a patent troll for emissions savings.
Brenden Millstein: Yeah, that's a good analogy. It's a very hostile nonprofit. I mean, we're just buying up permits, so coal power plants can't get them. It's a great system.
Jason Jacobs: And before we dig into the business itself, can you just kind of frame for listeners a bit about the built environment in terms of the landscape today and where it sits as it relates to an emission source and just kind of a snapshot from a climate standpoint.
Brenden Millstein: In the U.S. about 40% of emissions are from commercial and industrial buildings, and another 30% are from residential.
So about 70% of emissions in the U.S. are from the built environment. And then the balance of 30% is from the transportation globally. The numbers are a little different. It's about 30%.
Jason Jacobs: So if that's 70 plus 30 that's a hundred so does that mean that things like aviation, things like food and ag, things like reforestation and land use, I could keep going down the list.
So none of those other things. Show up on the radar at all?
Brenden Millstein: Some of those show up in transportation. So aviation is part of transportation, so it's in that 30% bucket. Food and ag. So large parts of those are split up in, so like all the transportation of food is in transportation and then much of the processing of food is in transportation.
You could probably knock off a couple percent from transportation and a couple of percent from built environment to account for, like, direct methane release from cattle type of thing, but it's not actually that high compared to transportation or processing, which is bucketed and transportation of built environment. Land use change in the U.S. is not substantial.
That's the big change between U.S. and globally. So globally, about 10% of emissions are coming from land use, change and land use change we could be more precise with this term. This is burning forest down and then replanting it with crop land or other uses of the land, like land use change is a very generous term for burning down the Amazon or pick your other favorite forest and destroy it.
So globally, the numbers are more like 30% commercial and industrial buildings, 25% residential, 30% transportation and then 10% land use change with 5% other.
Jason Jacobs: And then industrial processes, for example, you're counting in the built environment because from a broader standpoint, it takes energy to power that and that energy is being used within the built environment.
So therefore it's under that bucket.
Brenden Millstein: Yeah, exactly. So a manufacturing plant, and like we've worked with Tesla for example, but the inputs to that plant, our electricity from the grid and natural gas for some specific heating uses. That's in the built environment from our perspective.
Jason Jacobs: Okay, so you said about 40% from commercial and industrial and then another 30% from residential?
Brenden Millstein: Yup.
Jason Jacobs: Okay. Keep going. Sorry for the little interlude.
Brenden Millstein: That's great interlude. And actually if you want more detail on this, I recommend Googling spaghetti diagram energy Lawrence Livermore National Labs. So if you Google that, that'll bring up a much more detailed view of exactly where energy comes from and where it goes and where waste is in the system and breaks out manufacturing more specifically than we've done here.
Jason Jacobs: We'll include that link in the show notes, and one thing I've learned about our listeners is you give them the chance to double click and they always will.
Brenden Millstein: So perfect.
Jason Jacobs: That's a great call out.
Brenden Millstein: So that's actually this background is why exactly we went to the built environment, which is in the U.S. 40% of emissions are coming from commercial and industrial buildings.
70% of those buildings are third party owned. Namely, there's a landlord that owns a building and they lease out space to tenants. And the reason we focused there is that there are no, especially in 2010, there are no other companies that were effectively addressing that market. And so that is why we spent six and three quarters years figuring out how to sell energy savings to commercial real estate.
And the sale is really complicated for a number of reasons.
Jason Jacobs: Commercial real estate, meaning commercial real estate owners that have tenants.
Brenden Millstein: Yeah, exactly.
Jason Jacobs: And is the big distinction there that the tenants are the ones consuming, but not the ones making the purchase decisions on the equipment.
Brenden Millstein: That's one of several problems, but that is a very important one, which is in most leases, even for industrial buildings too, the landlord has to pay for projects, but the tenants get the benefit.
Jason Jacobs: And the landlords are trying to spend as little as possible, and if the tenants are the ones that get the benefit and the landlord doesn't need to provide it in order for the property to stay booked, then there's no incentive for the landlord to make those improvements.
Brenden Millstein: Exactly.
Jason Jacobs: Okay. And so when you came in, the goal is to drive efficiency in those environments that you mentioned that you were able to drive efficiency, but it was hard to make sales. It would seem that if you were able to drive efficiency consistently, that it wouldn't be hard to make sales. So why is that?
What was the dynamic there?
Brenden Millstein: So there's a lot of problems with the sales. So the first is the landlord tenants split incentive we just talked through. The second is that it's a multi-party complicated transaction. So the landlord owns the building, but they outsource typically all of the day to day decisions to the property manager.
The property manager works at a different firm. The property manager in turn doesn't make any technical decisions. They outsource that to the facilities engineer who in turn works at a different firm. And then there's also the tenant. A lot of buildings on the office side in particular might have a hundred tenants.
So. The landlord can say, yes, the landlord can say, no property manager can say no. Facilities engineer can say no. All the benefit goes to the tenants who aren't even party to the transaction. So it's complicated. And then in many ways, worse than that, you have a very untrusted marketplace. And this is actually part of the reason we were able to become so much better technically is that the market place for energy efficiency, there's a lot of over promising and under delivering.
And I think the reason for this is that the contract incentives are just totally misaligned. So all of these energy efficiency companies are basically saying, Hey, buy this piece of equipment. It'll save you energy. But the contract deliverable is for the equipment. It's not for energy savings. Or hire us as consultants.
We'll save you energy with contract deliverables, report. It's not energy savings or hire says maintenance or sign up for a software dashboard. It'll save you all this energy, blah, blah, blah. But none of the contract deliverables for commercial real estate are actually energy savings. Like when I go to buy a car, the contract is for a car. It's not for an individual valve, which maybe I can then use to make a car or the tires or something. It's for the thing and energy efficiency. It's the only industry I've been in where what is being sold is entirely unrelated to the contract deliverable. And what Carbon Lighthouse did from the very beginning because of our environmental mission actually was we said, okay, we need to align the financial incentive with the environmental benefit we're trying to deliver.
And then once that's done, we just build the best company we can. And so our contract, the contract deliverable is a dollar amount of savings and a savings are less than expected. We read a check to cover the difference. And so that focused us extremely differently than the whole rest of the market.
Cause we never cared about equipment. We never cared about software. We never cared about maintenance. The only thing we cared about was a dollar amount of savings we were delivering. Cause that's where the environmental benefit comes. And so we got extremely good at delivering that and everyone else was focused on delivering their contract deliverable.
So equipment works really well. But that's different than saving energy.
Jason Jacobs: So is that your model today or is that the model you entered with many years ago?
Brenden Millstein: That's still a model today.
Jason Jacobs: So when you said sales were tough early on, then what changed to shift that pendulum? Assuming that it has shifted, and I imagine it has since you've raised all this money and you're in the process of raising a growth round.
Brenden Millstein: So compound annual growth rate for us has been 75% year over year on average for a decade. It's a little bit faster than Moore's Law, despite feeling remarkably slow. And moving forward and recently it has been actually much faster. So it's presently the middle of March. We've already signed more total contract value in the first two and a half months of this year, and then we signed the whole second half of last year.
So we've been accelerating really quickly recently, which is the main reason we're doing a growth equity round. The thing that changed with sales wasn't one thing. It was many things. We slugged it out and finally got a lot of track record and case studies and happy reference clients and so that made things easier.
We got Munich reinsurance to take the risk on the financials for clients. So that made things easier. We started paying rent directly to landlords, so that in addition to tenants getting benefits, the landlord is also cut in on the deal. And so now everyone is benefiting. So that made things easier. We developed demos of the software so that the facilities engineers would get more excited to work with us.
We simplified and simplified and simplified the contract and the sales pitch, so it was all easier. So it's been much more of a litany of things that have changed rather than any one individual thing to break through.
Jason Jacobs: What about the tactics to drive the efficiency itself? We haven't talked about those tactics, which I would love to, but have those also evolved a lot over the years, or have those remained consistent? Generally.
Brenden Millstein: That's what's evolved in many ways of those, especially compared to the original vision.
Jason Jacobs: And can you talk a bit about that? Like where did you start and what did that evolution look like and where are you today?
Brenden Millstein: The technical system we've developed was developed. It started back in 2010- 2011 primarily out of panic.
So what happened was sales were really, really hard. And the first thing we did in the first, I think two months of the company was make more than a thousand phone calls. So we called a friend of a friend of a friend of a friend saying, Hey, do you own or manage commercial real estate? Or do you know someone who might?
And after calling a thousand people, we finally convinced a landlord to sign with us. And so this was hard. And we talked to literally every person we knew that they would introduce us to, that they would introduce us to--this is launching. And when we finally signed this contract, and we don't make money if we don't cut energy use.
So we get to this building with this contract and this building is perfect. There's no low hanging fruit. And what happened was the land, like the first client that we'll sign with two guys with no track record and no real idea of what they're doing. It's someone who cares about the mission greatly and is not risk averse.
And so the same person had signed with every other efficiency company they could find already because they were trying to reduce their emissions and not risk averse. So this building was perfect. We've just exhausted our entire network. We had $10,000 to our names. So we said, okay, and we're too panicked, nerdy physicists.
And we say, okay, let's get $2,000 worth of sensors and measure everything. Pray someone missing something in the data. So we got 2000 bucks of sensors, measured everything, and sure enough, there was some relay broken in the control system. So the building management system thought it was turning off a fan when it actually wasn't.
It was a big fan. And we can eek out 3% savings by fixing this. And the next time we signed a building, it was very slightly easier because now we at least had one case study and happy customer. And the same thing happened. No low hanging fruit, no medium hanging fruit, all the equipment's brand new. But there are some complicated thing going on and we could turn a pump off and this time we eeked out 4% whole building savings.
And every time we went to a new building, we got more and more sensors and found more and more savings. And by 2014 we were raising money to hire software developers so we could start automating some of the data analysis. Now everything's all up in the cloud, and there's a 40 person software and data science teams.
There's terabytes and terabytes of data, and there's no way to analyze it by hand anymore. And the whole technical system developed over time and that we didn't. Predict at all at the beginning, but now it's extremely cost effective. We can get 10 to 30% whole building energy savings without replacing any of the major equipment.
Jason Jacobs: Where is that typically coming from or does that ratio vary greatly from client to client?
Brenden Millstein: We address everything in the building that is hardwired in so not coffee pots or laptops or printers. Those are considered plug loads, namely, you physically plug them into an electrical outlet, so that stuff is off limits and everything else is in.
And so by building it doesn't change that much. Plug loads range from, call it 15 to 25% of total building energy use, and then we have access to the other 75 to 85% of the building energy. So it's a lot of HVAC optimization, and then occasionally the lighting retrofit where there's still a lighting retrofit available.
Jason Jacobs: And around that HVAC optimization, what is stopping these companies from doing those optimizations themselves? Is it a skillset gap? Is it a resource gap? Is it a technology gap? Is it a sensor gap? Like what is the alternative to you guys that you're displacing by coming in, if any?
Brenden Millstein: There's no way to do this yourself.
So there's a massive data gap and a massive software gap. So. Let me tell you what we actually, so HVAC optimization, this is a lot of fancy syllables. Let me see what this actually means in like real terms. Let's pretend you're in an office building, not working from home in the middle of the pandemic.
Jason Jacobs: Sitting on your bed, wearing your running clothes, hypothetically, of course.
Brenden Millstein: Hypothetically. So if we're trying to heat the room, you're in in an office building, there's a fan in the ceiling. It's blowing air across a coil of hot water. That water is being pumped to and from the boiler where it makes it hot. And a typical office building might have 75 different fans, four different pumps and two boilers.
And so what our system is doing is getting data from all of these. And then making slight adjustments in real time. So it might say, Hey, right now, turn up this fan, which has a little penalty, but that'll let us turn these two pumps down and it has some cascading impacted the boiler and net that saves 25% and then 10 minutes later, as people move around the building and the weather changes, it needs a new automatic little adjustment.
So the engineering team doesn't love it when I describe it this way, but basically we built a $50 million software platform that turns things slightly up and down every five minutes.
Jason Jacobs: And is it based on occupancy?
Brenden Millstein: That is one of about 16 data streams we typically get, and so this is to the data side of things.
We're getting electrical measurements through individual circuits in the building. We're getting flow rates of air flow rates of heating or chilled water or refrigerated or condenser water. We're getting temperature, humidity, light levels, occupancy levels, CO2 levels, carbon monoxide levels, pressures.
It's a huge amount of data we're getting. And so we'll, for a big office building, we might install 350 sensors. And so then you have all this data and you need to be able to deal with it. So there's no way to do this stuff without way more data than is ever available in the building management system and all the software to address it.
Jason Jacobs: So what index are you managing to and where do you get those numbers? Is a client specific or do you have just kind of a fixed template that's your north star for where these dials should be overall from room to room, from building to building?
Brenden Millstein: This is one of the cool things of the system is it lets us do massive, massive customization on a per building basis, very time efficiently.
So there is no north star for buildings. The kind of the joke in industry is if you've seen one building you've seen one building, and the first thing you do when you build a building is you hire an architect to design it from scratch. So every building is totally different. And we see a lot of times where ostensible best practices are actually harming the building.
So it's very specific to that building. And what our software lets us do is figure out for this exact building, this is everything that should be done.
Jason Jacobs: But in terms of constraints, like the client might say temperature is a constraint, for example, that we want to keep the temperature at X degrees all the time, or during working hours or things like that.
But are there other units that the client is watching other than temperature? And is there a wide range of those from client to client, or is that pretty consistent.
Brenden Millstein: No, there's a huge range of those. And they're not even consistent within a building. If you have one area on the south side of the building with a lot of sun, and the guys in there are kind of heavy, they're gonna want it colder than a room on the north side of the building without a lot of sun and whatever.
It's a gym, so they want it a lot colder. So even within a building, there's very different requirements from zone to zone or space to space when it comes to comfort. To put numbers, and this is one of the probably most important elements of the sales challenge that we didn't even talk about. In addition to comfort, no one cares about energy.
So to put real numbers to this, the salaries of the people in the building are typically $500 to $5,000 a square foot, whereas the cost of the utilities is $2 and 50 cents a square foot. So no one cares about energy compared to comfort, and they shouldn't. Like the rent in the building is anywhere from $10 to $150 a square foot.
Again, compared to utilities, $2 and 50 cents. So the comfort constraints on the building have to be met. And what our system is doing is saying, okay, facilities engineer, you can make your set points, whatever you want in terms of the zones, and you can change them every three months as tenants move in and out.
Or people complain about stuff. And then on the back end, automatically our system reconfigures to most efficiently deliver what is desired by the building. So that's really important.
Jason Jacobs: If I were a commercial real estate owner or property manager or whoever you're selling into, and I, let's say I had 10 buildings that I oversee, and you're telling me that you can guarantee me 30% in energy savings, or you pay the difference.
And I say, well, that's great that you can guarantee it and stuff, but the reality is that right. I run a tight ship and I just don't think it's there. You'd be hard pressed to find 5% let alone 30% what's your answer to that person?
Brenden Millstein: This is why we go into deploy sensors and get data. So the whole premise of the company is one of humility, which is if we have the same information as everyone else, we can't hope to deliver different results.
And it's only by getting such different information and having such different tools to process it and make decisions from it that we're able to deliver other results. But honestly, the response to the customer is usually not that. It's, Hey, here's 20 other landlords who also between them control a trillion dollars of capital and our just as sophisticated as you. Go call them and find out what our results were.
You don't need to hear this from us.
Jason Jacobs: And within the certain size and scope that you focus on, I mean, are you confident that you can deliver these results across any type of client or if there's some percentage of them that actually do run a tight ship and don't have environments that have these type of efficiency gains available to them?
Brenden Millstein: So we certainly don't get 30% whole building savings everywhere. The full range is more like 5% on the low side to, I think, the best we've ever done is 52%. Which is a real outlier there, but we have a do others in the 40% range, so it's a very large range. The more typical range is 10 to 30% and usually how it shakes out is a well-resourced institutional landlord who has at least one full time facilities engineer, if not six in the building.
That's much more likely to be in the kind of seven to 15% whole building range. Whereas a building with a lot of deferred maintenance or without a fulltime facilities team, and it is going to be more like 20 to 30% whole building savings. So it depends on the building and what resources they have or have not made available to the engineering team.
Jason Jacobs: Is this specifically meant for properties that do have older infrastructure or if they do put in the latest and the greatest and the fancy stuff, are they potential customers too?
Brenden Millstein: It's both. And most of our customers have both types of buildings. Two buildings that are older don't have state of the art controls.
We typically do more onetime work, so all of the software in the world is totally useless if the air handlers and pumps aren't physically connected to a control system. So the first thing we do is actually hire and oversee a local contractor to wire everything to a control system and usually upgrade that system substantially.
While we're doing that, we'll also being out low hanging group. So if they don't have led lights and that makes financial sense, we'll install those too. Once the building is set up, then we start the ongoing optimization. So for buildings that were built two years ago, they might have everything ready to set up, and so there's no one time work in those.
It'll just be software. Whereas a building from 1970 we might do a bunch more stuff to get it ready.
Jason Jacobs: Does this same type of opportunity exist in the home as well?
Brenden Millstein: No. So most of the savings we are getting are coming from interactive effects between equipment. So we're turning a fan up, which has a penalty, but that lets us turn pumps down, blah, blah, blah.
Cascading impact at the boiler chiller. And it's really in actually in capturing that blah, blah, blah, cascading impact that we're getting large savings. In the home, there's no pumps. Like you have a furnace and there's a fan and the fan is built in to the furnace, which means the manufacturer could optimize that in the manufacturing plant, there's no dampers to change pressures, so it's static. There's nothing interactive to play with. There's no dynamic system. You haven't sized it for the coldest day of the year, but then you're changing dampers and pumps and valves for like 99% of the rest of the year. So that type of thing doesn't exist in homes.
There's plenty of efficiency opportunities in homes, but not the way we do optimization.
Jason Jacobs: And what is the state of the state as it relates to these built environments today? How much emissions do you think that we could reduce by using efficiency as a tactic and how far of the way down that path are we.
Brenden Millstein: Somewhat, ironically, we look at the world through the lens of an oil and gas company, and so in the same way, oil and gas has reserves and proven reserves, which is how much dollars of oil or gas is in the ground, and how many of those dollars can we get out at today's technology and prices? We look at the built environment the same way, and so the efficiency reserves we see are about 50%.
Namely, about 50% of the total energy use in buildings can be eliminated through efficiency. So that's the reserve numbers. So that means we could cut emissions by about 50% in terms of what the proven reserves are, namely what amount of that 50% can we get at today's technology and today's prices, that's all over the place.
We've seen as low as five and as high as 48% and our kind of the usual range is that 10 to 30% and so that's the amount of carbon we can reduce in buildings very, very profitably.
Jason Jacobs: I think one of your former interns, David McCall, is in the My Climate Journey Slack room, and I put out to the group that we were going to do this episode and one topic he requested that I ask you about is just energy storage and where that fits into the overall picture here as it relates to these engagements.
Brenden Millstein: Absolutely. And David, we're hiring again, so you should apply. Yes. Sorry, could you state the question again?
Jason Jacobs: Oh, sure. Yeah. He was just asking about energy storage and where that fits into the picture as it relates to these client engagements.
Brenden Millstein: Storage is something we are looking at for every site now.
So the way our software works is once we've modeled something once, then we can apply it to every building. So we have the storage models already. For almost all buildings, it hasn't made cost-effective sense yet, but it's really close. And we now have a few proposals with a lot of storage in them actually.
So I think we're like right on the brink of seeing the financial split from not quite worth it to very worth it. Storage presents a lot of interesting opportunities. So there is demand management. So, part of the bill is just for how much energy you consume. The other part of you, your utility bill, is for how quickly you consume it at any given point.
It's kind of like to use a car analogy, the energy side is how many miles you've driven and the demand side is what was your fastest miles per hour point that you hit along your journey ever. And storage lets us resolve that faster. The fastest point ever, which is very helpful for the grid. It also lets us sell energy back to the grid when it needs it.
That also lets us do some arbitrage for pricing. Namely, energy is a lot cheaper at night than during the day, and so you can charge your batteries at night and then discharge them during the day. It also helps us deal with intermittency from renewables, both onsite and on the grid and provide grid services.
So there's a ton of opportunity with getting more batteries on the system that's very beneficial to the client and also the grid as a whole. So we're really excited about that and we are just now starting to see it make financial sense in our first few buildings. This is a great time. So 2021 is I think, very likely to be a very exciting year when it comes to storage.
Jason Jacobs: And if we have 50% of the current entities in the built environment could come out through efficiency. What are the biggest barriers holding us back from achieving that?
Brenden Millstein: Right now? The largest barrier holding us back from achieving that is landlord adoption. And again, that lack of adoption is for good reason, which is when Carbon Lighthouse is one of the only, if not the only company that is actually aligning the contract structure with the financials that the landlord is being sold on.
That's a real problem. So we've been doubling every other year since launch. Right now, we're expecting to do a little bit more than double every year, but there's $7 trillion spent per year on fossil fuels if we're not eliminating that by ourselves. And so the efficiency industry itself has to change, and it has to start aligning the contract incentive with what people are claiming the benefits are in sales.
So I think that is like, you could blame landlords, but it's actually on us. It's on the efficiency industry for wildly over promising and under delivering and having no accountability in the contract.
Jason Jacobs: And you guys have raised what, $70 million so far?
Brenden Millstein: Yeah, $73 and a half of corporate equity and then another $65 million of project finance.
Jason Jacobs: And so can you explain a bit about what that capital is going towards and I guess both of those, cause it wasn't obvious from our discussions so far, why a company like this would be so capital intensive.
Brenden Millstein: So about 70% of our costs are personnel. So that's where most of that equity has gone. We have a 40 person software and data science team, so that's obviously expensive to operate a 10 person marketing team.
So all of that is fixed costs. So the bulk of proceeds in many ways has gone towards building out the software platform and letting the world know about it. The exciting thing moving forward is actually the shift in where capital is going from this round, which is those teams, you know, the beautiful thing with software, which is why it's eating the world, is that it doesn't matter if you use it once or a billion times, it's the same cost. And so we actually have the team we need already on that side of the shot. The roles we are building out now are primarily sales engineers, which is the team that goes to site to get information and figure out how to make it work for the facilities team onsite and present the proposal to the client and then implementation engineers to actually hire and oversee local contractors to do the work.
So that's where the newer proceeds are going.
Jason Jacobs: And what about the project finance capital?
Brenden Millstein: The project finance capital is to enable an option for clients in which there is no out-of-pocket capital. So replacing a valve is pretty easy. That might cost 1000 bucks, but there might be 70 valves in the building.
And so all of a sudden you have a $70,000 capital costs. Any one part of which is small, but it doesn't matter it's still $70,000 and then if you add $40,000 of controls to that and maybe a lighting retrofit on top, you can pretty easily get to $200,000 of upfront work and it's really high margin for the client.
Like they should do it, but it's still, they need to have $200,000 and their lease structures might prevent them from actually recouping that from tenants, even though it's in tenants interest for them to do it. So what the project finance for is to say, Hey landlord, instead of paying this 200 grand, you can just pay us a higher monthly fee and our project finance fund will cover it.
And so that way the building can be cashflow positive from day one. So that's what the project finance.
Jason Jacobs: You're essentially owning the infrastructure in like leasing them use?
Brenden Millstein: We're not leasing them use like we install a bunch of sensors and controls and then we use that to deliver the ongoing service and the contract deliverable is the dollar amount of savings.
So we're not leasing the equipment back to the landlord. We've installed a bunch of stuff, and then we can use it to deliver $200,000 a year in savings or whatever.
Jason Jacobs: And some of the things that you install or all of them maybe are things that they would need to pay for in order for you to be able to deliver the service.
And this is a way that they can give you a higher service fee without having to make those payments.
Brenden Millstein: Exactly. Actually, I'll just call out since I know Jigar is in this Slack room, generally finance is our capital partner, so we work with Jigar and his team quite a bit on this, so thank you guys.
Jason Jacobs: Yeah, Jigar is great. And he is also active in the Slack room. So when we post the episode, I'm sure he will have some things to say as well, and he'll appreciate that shout out.
Brenden Millstein: Perfect.
Jason Jacobs: And what about structurally, when you look at kind of the role of government, the role of policy, I mean, is there anything structurally that could change that you think would accelerate this transition and anything that is fundamentally important to happen?
Or is it more just about time and resource from the private sector to do more of what you're already doing?
Brenden Millstein: If we want to accelerate, there's a couple of roles for government. The first is let's stop subsidizing fossil fuels. This is stupid. That's never going to happen because as soon as you try and get rid of a subsidy, and the fossil industry is going to put $10 billion behind keeping it, and so the relevant fact here is one of the largest and most unknown subsidy is LIFO FIFO accounting. So basically oil companies are able to use a different type of inventory accounting, which saves them billions of dollars a year on taxes. And so there actually was a movement in Congress to remove this. And the advocacy groups in favor of removing this spent $5 million lobbying. The oil company has spent $55 million lobbying and won.
But the thing with that is they didn't need to spend 55 million. It saves them billions a year. So they could have ramped that up to a billion dollars advocating and still had less than a one year payback on their lobbying investment. So like, we're not gonna win that fight. So the fight I would advocate instead is either a carbon tax and we can do it as a tax and dividend where namely we just give all of the money back.
But it at least prices in the externality. Or we could do a carbon tax and reduce the general income tax as a way to keep it revenue neutral and get a bunch of corporations lobbying for it since it would reduce their tax burdens. So I would advocate for that. The other thing that's much easier to do is what I think utilities should do, which is utilities, and this is a much longer discussion, but they have all of these incentive programs and all of these programs were designed before we had interval meter data.
Which is namely actual whole building energy usage every 15 minutes. And now that we have that data, there is an opportunity to both simplify programs dramatically and make them more cost effective and push the market towards real results, which is instead of utilities providing incentives based on equipment purchased or kind of made up engineering numbers that are agreed upon before the project is done.
All utility incentives should just look at what happens at the whole building energy use. And if it goes down, you pay an incentive based on that reduction. And if it doesn't go down, there's no incentive. And that would help force the market into honesty and be a very easy change to make. Now that we actually have interval meter data as in most building.
So that'd be the policy change I would advocate for at the utility level. And we're like sort of flirting with it, but utilities are still resisting heavily and not actually going for it and ending their previous programs.
Jason Jacobs: Just one question back to kind of the core work that you guys are doing. When you look at the different layers of the stack in order for you to do this work and deliver these efficiency results and savings, are there any layers of the stack that are missing that might be opportunities that are not ones that you guys are pursuing, but that would be fundamental to help you guys to be more effective at what you do.
Brenden Millstein: I mean, there's a ton of stuff we haven't had bandwidth to do, but we're very good at energy reductions. We're not that great at demand management. So temporary reductions to reduce that cost of the bill, which are helpful for grid. We're not selling energy back to the grid yet, which we actually could be doing in a useful way by aggregating a thousand buildings together.
And then when the is really in trouble, turning a bunch of stuff slightly down for five minutes, that doesn't impact comfort, but we'd be a great way to help the grid. I mean storage, if the cost of batteries comes down another 15% it's going to flip and become very cost effective. There's a huge amount we're excited for.
So we have a, it's called the building innovation group, or the big team, which is one of our favorite acronyms. And so they're constantly scanning academic and government labs and industry looking for every possible way to cut energy use in buildings. And there's just a huge amount on the horizon. So that's very exciting.
Jason Jacobs: And I'd be remiss just given everything that's going on if I didn't ask you about coronavirus and what's going on with that and how you're thinking about that and how that's affecting your business.
Brenden Millstein: Obviously a Corona is, this is a terrible thing that is happening to society beyond the disease itself.
Actually, the economic damage is going to be immense, and we're already seeing a lot of hardship. So I think that's horribly tragic in the way war is horribly tragic. In terms of Carbon Lighthouse, there is significant upside. So obviously not right now while everyone is sheltering in place. But generally the reason we lose deals is because landlords focus on lease attention.
And if you can't increase your rent, you focus on cost cutting instead, and we're, if not the best, one of the best ways to reduce costs. So Carbon Lighthouse does really well in recession. The other thing for our particular business is we're experimenting with mailing facilities engineer's GoPro cameras so they can do a site walk without us needing to go to site, which is both exciting and fun for them, and also saves us a lot of time and travel costs.
And there is a number of other elements like that. We're mailing sensor kits for engineers to install onsite themselves so that we don't have to send an engineers to do it. So there's a lot of structural efficiencies we're able to test right now that I think will benefit us significantly in the longterm.
Jason Jacobs: And it may be too early to say, but since everything is so fluid with what's happening with coronavirus, but does this change at all, or could you see this changing at all how you think about the problem of climate change and the best ways for us to address it? Everything that's going on today with this pandemic?
Brenden Millstein: Corona is interesting. so the likely source of the disease is human contact and proximity with bats. And bats in particular are a creature that have been forced into closer living contact with people due to habitat destruction and the rise in particular of their own disease, which is not Corona virus. I think it's a mite or something, or a bacteria, but there's been an infection that has ravaged bat populations, which is related to climate change.
Namely that infection does better when it's warm. And so, I think we should, like this is in many ways a kind of terrifying harbinger or of what is to come if we don't take action. So my hope is this will help galvanize the world to move swifter and get its head out of the sand a little bit when it comes to climate change.
So we'll have to see, I mean, this is literally exactly the type of thing we're trying to prevent by stopping climate change. So it's somewhat twisted that it may serve as a catalyst for action.
Jason Jacobs: And two final questions. One is just if you had $100 billion and you can allocate it towards anything to maximize its impact on climate change and the clean energy transition, where would you put that money in? How would you allocate it?
Brenden Millstein: Easy. Get the cost of batteries down, and I think that's actually about the right number. So the way to do this is we already have incentives for electric vehicles and the caps for manufacturers and triple the incentives, and we're there in like three to five years. This is such an easy problem to solve.
We spent $4 trillion on the wars in Iraq and Afghanistan, like $100 billion would do it for climate change, we'd be done. So that's all that needs to happen.
Jason Jacobs: And would those incentives be at the federal level or state to state?
Brenden Millstein: Whatever is easiest and fastest? Federal would be great. I think right now we can start with state to state.
Jason Jacobs: And a final question is just a bunch of the people listening to this show are people who swing a big bat in some capacity and our newcomers to the space in here because they're are climate motivated and concerned about the problem, but not really sure where to send their teeth in and want to work on the most ambitious things that they can, what advice you have for them as they're trying to figure out where to anchor.
Brenden Millstein: First invest in our growth round. Shameless donate to Carbon Lighthouse Association. But I think the third is figure out the area of overlap for what you already know and what the areas of improvement for climate need to be. So there's immense opportunity for software development in this space. There's immense opportunity for manufacturing around batteries and tons of other stuff.
There's immense opportunity for helping companies expand internationally. I mean, there's just every possible set of past expertise could be leveraged into this space, and I think the way to be effective is to figure out where those points of leverage are.
Jason Jacobs: Awesome. Well, is there anything I didn't ask you that I should have, or any parting words for listeners beyond what you've already said?
Brenden Millstein: I think the key thing for everyone to keep in mind is that the world is really different now in a wonderful way than it was five years ago, which is the cost of technology has come down so much so fast that anyone using numbers that are even three years old is hopelessly out of date. And what has shifted now is that financial returns from reducing emissions are incredible.
And 10 years ago that wasn't true, whereas now it is. So this shouldn't be an either or. The world we're in now is that is incredibly profitable to stop climate change. And I think those areas of capitalistic opportunity are much easier to scale up very, very quickly. And I'd encourage everyone to find them and gun up when it comes to emissions reductions from them.
Jason Jacobs: Well, you guys are a great example of that. So I have a feeling that anyone who's an aspiring entrepreneur in this space that is motivated by impact, but hyper ambitious, you're going to be hearing from a bunch of those people after they listen to this episode, I suspect.
Brenden Millstein: I hope so.
Jason Jacobs: Well, Brandon, best of luck to you and thank you so much for coming on the show.
Brenden Millstein: My pleasure. Thank you so much, Jason. Always a pleasure.
Jason Jacobs: Hey everyone. Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us at My Climate Journey dot C O note that is dot C O not dot com. Someday we'll get the.com, but right now dot CO. You can also find me on Twitter at @jjacobs22 where I would encourage you to share your feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving a review. On iTunes. The lawyers made me that. Thank you.
