Decarbonizing Commercial Real Estate with Lumen Energy
Peter Light is the CEO and Co-founder of Lumen Energy. Lumen Energy's software enables commercial real estate portfolio managers to identify the optimal clean energy mix for their buildings, then deploy via their marketplace. Lumen's Auto PPA product automatically generates power purchase agreements via software, eliminating the drudgery of bespoke underwriting.
In this conversation, Peter notes that many companies want to improve portfolio emissions for competitiveness but don't know where to start or invest in building-by-building analysis. He explains how energy responsibilities vary by lease and tenant type, and touches upon the motivation behind pursuing clean energy projects, all while drawing from his extensive experience in the clean energy sector.
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Episode recorded on Oct 6, 2023 (Published on Oct 26, 2023)
In this episode, we cover:
[02:38]: Peter's perspective on addressing climate problems
[05:37]: His background in clean energy
[14:44]: How he met his Lumen co-founder Dave through the MCJ community
[18:22]: Overview of difference in energy billing structures by building type
[20:43]: Increasing demands from investors and tenants to decarbonize buildings
[28:45]: Key actors in commercial real estate decarbonization
[30:00]: Lumen’s customer base
[37:32]: Details of Lumen's financial modeling software for buildings
[40:05]: Lumen's use of public data to provide initial analysis for customers
[41:45]: The company's AutoPPA product for streamlined PPAs across portfolios
[47:39]: Lumen's Series A and current priorities
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Cody Simms (00:00):
Today on My Climate Journey Startup Series, we have Peter Light, CEO and co-founder of Lumen Energy. Lumen Energy's software helps commercial real estate portfolio managers to identify the correct clean energy mix for every building in their portfolio. Their Auto PPA feature claims to be able to generate a power purchase agreement for a building via software, eliminating expensive consultants and advisory firms. As Peter tells it, many commercial real estate companies today want to improve the emissions of their portfolio and know they need to do so in order for their buildings to remain competitive with future leases. But many have no idea where to start today, and they don't want to invest money in a building by building analysis. Peter and I have a great conversation about how the commercial real estate market works, who is responsible for a building's energy usage and resultant emissions? And of note, this varies lease by lease, and by type of tenant. And we also talk about what's motivating them to pursue clean energy projects in the first place.
(01:14):
Peter has a long and illustrious background in clean energy, which we touch on as well. But before we start, I'm Cody Simms.
Yin Lu (01:22):
I'm Yin Lu.
Jason Jacobs (01:24):
And I'm Jason Jacobs. And welcome to my Climate Journey.
Yin Lu (01:30):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:35):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help. Peter, welcome to the show.
Peter Light (01:50):
Thank you, Cody. Delighted to be here.
Cody Simms (01:52):
Peter, as you and I were chatting just right before we hit record, I am really excited to have you on here today because I feel like the entire space of commercial real estate, when it comes to startups and go to market and how a startup cracks into selling into commercial real estate is an area that I personally need very demystified for me, I put it right up there with things completely outside of climate, like selling into health systems, as, man, founders who learn how to do that have really cracked something. Because from the outside it feels very hard. And I've never worked in commercial real estate, so part of it is just that unfamiliarity on my part, but I'm biased to think is a big challenge.
Peter Light (02:35):
It is, it's a big challenge, it's a delightful challenge. I guess my orientation is I work back from where is the big climate problem and marrying where the big climate problem is. There are many of those. As I like to say with climate, "There's something here for everyone," which is awesome news for all of your listeners. Personally, I said, "There are all these buildings that are persistent." And you look at the math and it's greenhouse gas emissions globally, roughly 17% from buildings, and basically double that if you include embodied carbon, we don't address that today, but it's a big, big chunk of climate emissions and there is going to be around in 2040 and 2050 for all these buildings. Looking at that, I really said, "Okay, big problem." And the great news is it's now profitable to decarbonize many of these buildings, but it's really complex to go figure out how first all the energy and all the economic side and then also marrying that with meeting customers where they are in the commercial real estate space, which we can talk about.
Cody Simms (03:37):
And commercial real estate is this giant monolithic category. It's the biggest asset class in the world I think. And we're going to get into Lumen Energy and what you do and all that, but I think part of it, I presume as well, is starting with, what's the sub-sector of commercial real estate? Is it retail building owners? Is it office building owners? Is it industrial facility building owners? Is it multi-tenant residential building owners? Each of those are going to have totally different motivations, incentive structures, things I would assume, yes?
Peter Light (04:05):
Yes and... Yes and... Both in motivations but also in the solutions set that makes sense. But I will say that what ties them together in commercial real estate is it's a highly financial industry and there's a common logic of what is going to make a building more valuable and an enterprise more valuable. That fortunately distills to typically what is the internal rate of return of investment, the ROR, or in the industry speak, what is the net operating income increase? Those are common. Now to answer those questions, you get into the dizzyingly complex world of onsite clean energy meets tariffs, meets costs, policies, all these pieces. And our grand mission is just to abstract all of that away for people and give them an actionable pathway to something that they say, "This hits my return. This is great news for my CFO. We can now go actually take a big stride forward on our decarbonization journey and have it be profitable."
Cody Simms (05:04):
And I also recognize you spend most of your day talking to people inside the industry who understand the complexities of how all these things work. And now you're talking to me who does not. So part of what we'll probably do here today is go up a level and just help unpack the broad industry context for those of us who don't live in the commercial real estate world on a day-to-day basis, but then dive down into some of the specific solutions that you offer and hopefully listeners who are on varying degrees of familiarity with how the industry works will get something out of this conversation.
Peter Light (05:35):
Great. Perfect.
Cody Simms (05:37):
Before we do that, let's start with you. You have been working in and around the energy space and to some extent in the building side of it in multiple capacities over your career. Why don't you walk us through that and how you got to deciding to start Lumen Energy in the first place?
Peter Light (05:54):
I'll take you back a few chapters. I think we've all hopefully been fortunate to have great mentors, somewhere along our career people inspired us and I came out of college and I had the great fortune of working in a place called the Rocky Mountain Institute, and it was founded by a person named Amory Lovins, he's a MacArthur fellow and really an energy and climate pioneer, deep OG if you will, in that domain. I got to learn alongside of him right out of school and say, "As the world goes from the early two thousands, six and a half trending to nine or 10 billion people by mid-century, how are we going to give people an abundance, and have people scale up the economic ladder, and give them health and prosperity, and also do that with while we have to radically bend the curve on our carbon emissions?"
(06:44):
And that is a great challenge of our time. How do you decarbonize the electricity system, the transportation system, agriculture? And so I'd just say I fell in love. And that led me on a path to San Francisco and I had a stint at a firm called Energy and Environmental Economics, and I learned all the electricity system and the gory guts of just like how do utilities work? How do we get here into the system we have? Which is a remarkable feat of engineering a hundred years ago, that we were able just to have electricity to every building and it's like we don't even think about it anymore.
Cody Simms (07:18):
Peter, this was early two thousands, is that right?
Peter Light (07:20):
Early two thousands. That's right. And personally, my own draw, I said, "Look, I want to cause breakthroughs and powering our world with clean energy. And at the time I looked at things like wind and solar and I was like, "God, these are really expensive still. There has to be a technology breakthrough." At the time, just to go back, coal was 50% of US electricity power, so getting off of coal was just job number one. At that time, using natural gas looked to be a big decarbonization lever and be able to use it twice as efficiently was a huge one and in a pathway to use other biofuels.
Cody Simms (07:56):
At the time, was the goal reducing CO2 emissions or was the goal more about reducing particulate matter and smog and air pollution?
Peter Light (08:04):
Interesting. My own read of this, from a policy arc is that the real goal has been to reduce CO2 emissions and certainly local pollution smog sidebar. I think the policy strategy in the mid two thousands was a little bit easier to effectuate the change on reducing coal through the lever of non-CO2 emissions. That's my personal take on this policy arc. But in any case, I just share with you to say that I had the great fortune of meeting a team very early at Bloom Energy, it was 2004, it was a group of NASA scientists at Moffett Field, and they were developing a magic box that made very clean and reliable electricity. And the aspiration was just to make this magic box and make it cheap everywhere. And I hope you can hear the naivete in my own thinking on that.
(08:57):
And it's glossy eyed like, "This can really change the world." And flash forward, Bloom is a public company that's provided onsite clean energy to many of the Fortune 100. And so I went on this journey from science project in the lab to being part of the early commercialization team and figuring out what is the path to market? How do you meet people where they are? How do big companies think about clean energy and that Clean Tech 1.0 era? And these were companies that had lots of properties all over the country. First there were the pioneers like the Googles and the Apples of the world, but then later companies like Staples and Home Depot and Walmart that just have hundreds of addresses and they would just say, "Here, here's my list of addresses looking at them all in a spreadsheet, which one should I do?"
(09:42):
And looking at buildings with their electricity use annually and a spreadsheet was the state of the art at the time to answer the economic question of where this makes sense. And we'll come back to that question of what Lumen does today. We found that the details are actually a lot more nuanced in that to really get to investment grade underwriting of deploying billions of dollars of clean energy. But that was a state of the art and learned a ton about product management, later led international market development and took the company to Japan with a joint venture with SoftBank. And in 2014 I personally looked around and said, "I want to get the world to a hundred percent renewable energy. I want to go work on that problem and dedicate my life to cracking that nut." And I stumbled into Google X, who turns out was working on many very early stage zero carbon technologies in the lab, things like flying wind turbines from Makani, if you have ever seen that, to floating solar panels to non lithium ion batteries that could get to very low cost.
(10:46):
And I said, if there are these technologies which are rapidly coming down the cost curve and have high technology potential but are still unproven, then there's really a promising pathway to cheat the valley of death, if you will, that I think happens or had happened especially in Clean Tech 1.0 for hardware companies where making the first one or the first five, that is really hard, but scaling from the 10th to the hundredth unit is super challenging because it can be very capital intensive where the edges are. So that's really what led me to Google X.
Cody Simms (11:25):
This idea of, I've now worked in clean energy both essentially as an analyst or as a market observer to some extent. And then I worked in a business that was actually helping to drive deployment of what I would call traditional clean energy, even though at the time it was still pretty new. And so it was this idea of like, are there other things that can accelerate the transition even faster? Are there better mousetrap technologies, new innovations that aren't getting deployed today that we can try to accelerate?
Peter Light (11:53):
Yes, that's exactly right. And I think all of this is a windup to answer your question, how do we start Lumen and why? What's the background? I'd say around 2018, my worldview started to change where I had been very fixated on finding the next breakthrough thing, the next device and technology. And I think there's plenty of room for that and I celebrate all the initiatives of all your listeners who are continuing to do that today. One of the most powerful forces in the universe is, I think even Einstein called this like, eighth wonder is just compounding.
(12:27):
And I think you see that financially, but you also see that in technology in the form of rights law where you're just keeping more of something and once you get the manufacturing scale going, you just get this relentless cost reduction. And I started to see that that was happening with a variety of technologies, most notably solar batteries with heat pumps to come. And I just saw a whole slate of technologies that continue to scale, continue to cost reduce, and that meant their unit economics relative to their competitive environment just kept getting better and better and better.
Cody Simms (13:02):
Hopefully storage is the next one of those, right?
Peter Light (13:05):
Storage is the next one of those, and that's playing out right now at scale. But the deployment was way behind the potential. And I think that was the sort of crux of the insight for me. And I created a program, it's now called Tapestry. It's essentially modeling the global power grid and the distribution grid, and think of it like creating live Google Maps for the power grid. The reason behind that was, the utility grid was this incredible creation for a hundred years ago, but flash forward to today, there are going to be all these new devices, electric vehicles, thermostats, heat pumps, distributed energy that's going to connect to the grid and the utility operators have to allow that to happen. And in talking to them, they said, "Look, we don't really know what's going on on our grid. Sometimes we don't even know where the map of the poles and wires are, much less the line capacity or the loading."
(13:57):
So we created this program using time series data, satellite imagery, to essentially try to work back from the outside what is actually happening, what is the realtime pulse and signature on the grid? And that led me to get all this data for entire cities of what is the electricity use for every building. And you just got a sidebar analysis with a friend of mine who was looking at this like, "Wait, there are all these commercial buildings that could make money now with solar, and only about three or 4% of them have done it. Why? What is up here?" That was the inquiry that I couldn't let go of, and I'm happy to share how we transitioned into creating Lumen with my co-founder, Dave Cohen, who I met through the MCJ podcast Slack Forum when it was just getting going right before COVID in 2020.
Cody Simms (14:44):
I love hearing that. Do it. Let's turn the corner into how Lumen got going.
Peter Light (14:48):
Fixated with this question, many commercial buildings, 6 million in the US, they use roughly half the electricity, but relative to starting with solar, while solar had taken off in residential and become more productized, there were multiple public companies, Sunruns of the world, and then utility scale had also started to scale. If you looked at commercial building rooftop solar, it was the sector that despite analyst reports that said, "There's 150 gigawatts of economically viable potential." Which is I think anecdotally confirmed anytime if you've taken off of an airport and looked out the window over LA, or Atlanta, or any big city, you see all these large commercial rooftops that are empty. And you say, "Why don't they have solar on the roof?" And so fixated with that question, I actually originally thought, "If you could just model the buildings, figure out where it made most financial sense, maybe there's something there just to help ease the process."
(15:45):
But through the MCJ Slack group, I met Dave. Dave studied computers very early in life, was very early at Stripe, was an engineer and then product leader there. And then later had gone to a company called Snapdocs, where it automated a lot of mortgage processing, so had real estate exposure, and he really wanted to get into climate. And so I think both approached this with an aspiration but also a skepticism to say, "Something is up." So we went to talk to many, many building owners, and what they told us again and again was either, "Look, if there's a way to get additional savings, additional net operating income, and I can go green, yeah, I'd be for that, but I'm doing my real estate thing. I'm haggling with my tenants or my brokers or my whatever. I am trying to sell my building. I'm focused on my core business, so I'm not going to look at this unless it's really easy."
(16:38):
That was the signal we got from some people. And then there was a different cohort who said, "Oh no, Peter and Dave, I looked at this, I tried hard, I get it. I have this huge empty roof. Why don't I put solar there? But every time I felt like I got stung, it was like there were all these data complexities of just trying to answer the basic question, does this make sense for me and my building?" Was confounding and seemingly impossible for building owners to get that answer in a financially robust way that made sense for them. So they said, "Look, I tried for six months, I got consulting reports, my inbox is full of proposals, but I haven't gotten the answer that I'm looking for so I'm going to move on."
Cody Simms (17:20):
Let me ask a few questions about how the space works generally before we get into Lumen solution. Today, typically, who pays for the energy footprint of a building, the building owner or the tenants in that building?
Peter Light (17:35):
The answer is it depends, and it depends by asset type. Generally there are what's called gross leases or net leases. In most office buildings, the office building owner is also paying the electricity bill ultimately to the utility. There's aligned incentives. In contrast, industrial buildings which have the biggest roofs, there is this split incentive, as it's been called, where the building owner owns the building, but they don't pay the electricity bill, the tenant does. And the tenants can be, let's say, not always motivated to even just share the data around their electricity use, they see it as a business trade secret.
Cody Simms (18:13):
Interesting.
Peter Light (18:14):
So that has been historically a very big challenge. Just to even answer the question, "Does it make sense for this building?" is almost a black box question.
Cody Simms (18:22):
Ultimately these come down to how individual leases are structured, but in the aggregate, typically an industrial building, the industrial tenant is likely to be responsible for the power because how much power they use is essentially a trade secret to what their process is or how it works. Whereas in an office building, it could get structured either way, and probably depends heavily by geo and by who the building property manager is, but in many cases it ends up being the building owner taking responsibility for the building's energy usage. Is that what I'm hearing?
Peter Light (18:54):
That's correct. And then multifamily is a third large category, which is somewhere between where you have the building owner always responsible for what's called common area, and then tenants pay their own bills. There's some cases where the building owner pays all the bills called master metered. But what I just spoke about, if you're a visual thinker, you can start to imagine this cascade of web of a decision tree or pathway of who pays the bills, what's the metering structure, what are the policies in place at that location and all of that. There's many different pathways to get to the answer, does solar and batteries and clean energy make sense at this particular property? And that's what we're really out to solve.
Cody Simms (19:36):
And then let's take a different angle at understanding the space, which is, once a solar project is put in place on the roof of said building, is it typical that the building itself is usually going to be the direct financial beneficiary of that project, or is the building owner just selling that as another real estate thing and selling that power purchase agreement to some other project somewhere else in the world?
Peter Light (20:01):
I'd say there's a past and future answer to that. I think generally speaking, the past has been, it just becomes part of the building and then it becomes just like a... If you get into the wonky world of real estate, each building has leases and permit rights and accesses, whether it be a right of way, and so it just becomes this artifact of the building ownership.
Cody Simms (20:25):
So you build it into the financial modeling of that particular property and that property's energy usage.
Peter Light (20:31):
That's right. There's the specific financial answer you're thinking about, or I think you're asking, around the before and after electricity use and expenses with some solar, some utility grid. But I think there's a different way to look at it. And this is actually the market is changing on this front, which is it is not merely a question of the electricity cost and benefit. That is where most people start, but there's increasingly the carbon liability. And that is the big change that is happening in this industry along with many industries, where even if, let's take your industrial case where the tenant pays the electricity bill and they're the beneficiary of any savings.
Cody Simms (21:10):
Beneficiary of savings and presumably responsible for emissions from their building's industrial process.
Peter Light (21:17):
They are. But I think the big change that we are seeing is that commercial building owners, you say, "Well, what is their real motivation as a business?" They're investment businesses, and so they want additional investors to grow their businesses for their next office fund seven or industrial fund four. And so their customers, if you will, are investors who are typically large pension funds, or endowments, or large financial institutions. And those entities, the great news and I think a lot of climate world that is maybe not fully understood yet, is those entities are saying, "No, no, where is your real decarbonization strategy? I saw your reports from the last few years and I saw the pie charts and I saw your 2040 or 2050 commit, but now I want to see a glide slope, and I want to see you start working towards that." And so that is the big change where the building owners are seeing core to their business, making real progress on decarbonization matters to them. And so that's where we're really seeking to help unlock.
Cody Simms (22:23):
The next question I was going to ask, we talked about where does the energy usage flow, but I guess related to what you just said, the next question I would ask is, where does this scope two emissions benefit? Once you have put up renewable project in place on your building, is it the building owner who's typically claiming this scope two energy benefit? Are they enabling their tenants to claim a piece of it? Again, I assume it's all factored into how leases are structured and whatnot, but in many cases these projects are put on the roof after a lease has already been negotiated.
Peter Light (22:56):
That's right. And I will say scope two emissions reporting and the nuances of grid emissions reporting are things that I will love to go deep and nerd out on. I will say, if people want to get excited about this, I will gladly go very deep on it. But I also say it gets pretty wonky into how do you measure the grid emissions. And you get at that question first, and there's lots of legacy reporting infrastructure, which has been done on very course annual averages that the EPA published and it's three or four years old, and it's just these fat finger numbers. And that was the state of the art before. And I think flash forward to today, and part of what we do is enable people to have real time, 24 by seven hourly emissions reporting for your building so you can really get rigorous to say, "What are the carbon emissions at this location given what's happening on the grid before and after?"
(23:49):
And so those are the scope two emissions. To your question, the answer is it depends who they're apportioned to really primarily based on the lease. But I'd say the third sub answer is that there's the actual emissions reporting, but there's also increasingly, I would say, the asset value halo around, "Is this building going to be a carbon liability in 2030 when I try to go sell it?" Because I think what we see happening is institutional investors see that carbon liability is increasing and it's increasingly getting real and being measured with SEC reporting looming underway. And so as people buying these assets are saying, "When I want to sell it in 10 years, this thing's going to be a boat anchor for me if it doesn't have a decarbonization strategy."
Yin Lu (24:39):
Hey everyone, I'm Yin, a partner at MCJ Collective here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change.
(25:06):
Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done. Many early stage investments have been made as well as ongoing events and programming, like monthly women in climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks and enjoy the rest of the show.
Cody Simms (25:39):
And I presume as well in the interim, even before you were trying to sell it in 2030 or later, your tenants are going to move in and out, you're releasing it, and to the extent your building is a clean building, for lack of a better term, you presumably have a higher likelihood of finding strong tenants.
Peter Light (25:54):
That is absolutely directionally true. And there's actually a number of market reports from groups like Jones Lang LaSalle, JLL, who's a nationwide broker. And you see those where they say, "Look, green buildings with green leases trade at a higher premium." So it's interesting to see that data come out, but it's still analytical. And people are like, "Well, I think so. Someone said so." But what's actually really funny is to see some of our customers that have industrial buildings. The building owner owns the building, the tenant is merely renting it. What has happened a few times is the tenant says, "Hey, I'm going to put solar on my building." And like, "Hey, owner, I'm going to do this now." And they're like, "What?"
(26:32):
They're on their heels and they're like, "Wait, I own the building. You can't do that, but I hear you're my customer and you want to do that now." So that's kicking people into action too, is, "I need to have a strategy around this." And those are these very consequential changes that are happening in slow motion, but it's a big iceberg that's really moving and changing.
Cody Simms (26:52):
Again, back to nuances and how different leases and different sectors work. In some of those cases, probably the tenants actually do bear the cost of building improvements. If they want undo it, they can do it, but they got to pay for it.
Peter Light (27:04):
That's right. And the large corporates, like the Amazons of the world, have said, "We're going to own all this. We'll do it all." I think there's just a much wider swath of particularly industrial and commercial tenants who said, "Look, we have green objectives." We historically thought we couldn't do anything about it, but they're taking the future into their own hands now and really actively seeking a way where they don't own the building, but to still reduce their scope two emissions and have a sustainable footprint. And we just did a product announcement and right around Labor Day, it's called the Auto PPA, where we can remotely price every building and give every eligible building a pathway to click button, get clean energy. And we've done this specifically for industrial buildings where the tenant pays the electricity bill with the building owner. We've found ways to optimize for all of their interests, which happy to share more of that.
Cody Simms (27:56):
We'll definitely get into that. I have two more questions on the landscape side of things. Because I think it'll be really helpful to understand some of your product announcements as we continue to click into what you do specifically. We've talked about commercial real estate building owners, we've talked about commercial real estate tenants, it feels like the other... There are probably many more, but the other two big actors that at least I see in this whole world are project developers in clean energy who are out trying to sell clean energy projects to these building owners and/or tenants. Then there's the financial partner who's helping to fund the creation of these clean energy projects. Historically, maybe more on the tax equity side and whatnot, but now even more broadly across funding clean energy projects. Are there other big actor categories that we should at least touch on quickly before we start to dive into Lumen's product?
Peter Light (28:45):
The last one I think that's increasingly important is regulators. And there are many, there are state and local laws. New York, there's local law 97, which was real pioneering measure to really create penalties for carbon emissions for buildings that weren't on a glide slope. But then I think the federal actor, you mentioned the SEC, that is just having to say, "Companies, you have to report." Is a pretty groundbreaking measure that is forcing people to pay attention, count it up, and then if they don't like what the scorecard says, then they're more motivated to take action.
Cody Simms (29:18):
And I suppose thinking maybe more broadly about it, we probably overly generalized building owner because you have who's ever responsible for that specific address as the building manager and then you have essentially the commercial real estate portfolio owner on top of that, and they clearly likely have competing agendas to some extent, I would guess.
Peter Light (29:40):
They can. There are many species in the zoo or we even use that term, there's a whole ecosystem and the set of wildlife. And I think what we aspire to do is be good at backsolving for where people are and what their particular motivations and desires are, and then providing them with a pathway to decarbonize in a way that makes financial sense for them.
Cody Simms (29:59):
With that whole landscape laid out in front of us, and we could probably spend another four hours trying to unpack it further, but where does Lumen, where do you focus your time and energy? Who are you directly selling to today and who's directly using your product today, for the most part?
Peter Light (30:15):
Sure. What we do is we enable commercial real estate owners and tenants to profitably decarbonize their buildings. We do it across tens, hundreds, or thousands of buildings in parallel. And our customers are fairly large commercial real estate owners who have a national or even international footprint.
Cody Simms (30:35):
These would be like Tishman Speyer, Bridge Investment, when you see signs in front of big commercial property buildings, it's those types of groups, yes?
Peter Light (30:43):
That's exactly right. And those names you mentioned and others I can share about. If you work back from what they have today, they tend to actually have buildings all across the country, which means if you want to put your energy nerd hat on, it's highly heterogeneous economics. Every utility is different, all the policies are different.
Cody Simms (31:03):
And you mentioned the leases are different, right? Depending on the customer type.
Peter Light (31:06):
Yeah, and they typically have different asset classes. Say Bridge Investment Group who was one of our first customers came to us with their office buildings and said, "We have 82 office buildings around the country, we read the Wall Street Journal, we know solar makes sense, we just can't figure out how to go do this. And we tried for a year ourselves and got a project done and we want to scale this, but let's start with our office buildings. Lumen, can you help us?" And it was a funny moment for me as a startup founder. I remember vividly being in a conference room, it was like COVID hearing this conference room voice and the chairman and CEO were on the phone and said, "We want to do this with you." And we said, "We don't even have logins to our product yet. We're still building this, but we would love to help you scale this."
(31:47):
And flash forward, we worked with them across our 82 office buildings. We found a way to unlock about a hundred million dollars of new value for those properties. And the logic of that is if you decrease the operating expenses, the way real estate is valued is if you have lower operating expenses, it is that building underlying real estate is worth more and it's called the cap rate effect. You can check it out.
(32:13):
So we work with them first in their office buildings and said, "Okay, this works. Let's go look at our multifamily portfolio of a few hundred properties. Let's look at our industrial properties, let's look at our senior living." I share that as an anecdote to say we find our customers have multiple asset types, to come back to your question at the beginning, and I'd say we were led by our customers and we had no idea what we were getting into in that, "Multifamily, sure, we'll take that on, buildings are buildings." And we realized how complex all the different metering types are, the billing types, the lease types, and so that's a lot of the infrastructure that we've since built out over the past year and a half.
Cody Simms (32:58):
Have you picked a specific pathway and said, we're going to for now focus on this type of commercial property?
Peter Light (33:05):
What we do is we have a sequence where we go deeper. Again, working back from customers, what we find is they say, "Look, I have a bunch of properties. Here's my 150 addresses, just tell me where to start." And so whether it be industrial, office, multifamily, senior living, different states, we've developed a way to essentially build a financial model and software, a CFO ready investment grade cashflow model that says, "For every property, what is the internal rate of return of making an investment in storage or solar at this property inclusive of all the factors that an investor would want to consider?" And then we now give them a way to just get zero cost financing through a power purchase agreement so they can make money without deploying their own capital, which we can get into.
Cody Simms (33:52):
Definitely want to get into that because that leads me to a bunch of questions on how tax credits work for them and whatnot if they're not absorbing CapEx. But before we do, you said Bridge Investment Group came to you with 82 buildings, what had been, you don't have to give their specifics, but what typically is the process that these commercial property owners had been going through to try to understand where to do renewable projects before you were able to step in and provide a software solution?
Peter Light (34:21):
Yes, and this leads to a little bit of ideal customer profile, which we can talk about, and I'm sharing all of this because I hope it's of value to your listeners and other industries that people are working in where they're big complex industries, they have one name at the top, but it is actually many different branches. For us, the way that we've approached that is we've just said, "Look, we will give you the model for all the buildings and then we'll figure out the ones that make sense. And then for the ones that do, we can run them through a marketplace and help you get bids and will help them reduce the soft cost as they deploy across their properties." But I think the question around the different asset types for them it's really what they do today and what their historical pathway was.
(35:04):
It has historically been consultants where it's one building at a time, and that is the typical motion. And it's made sense, it's been an energy audit. And what we found is that people in the olden days, where it was fine to not really take action, but maybe just do a report, it was okay if it took six, or eight, or 10 weeks, and you'd get a four-inch binder on your desk as the big report, but then a policy would change. Or in California here where I am, PG&E's electricity rates went up seven or 8% in the last year. That was not captured in that four inch binder that's sitting on someone's shelf. And so that's what our customers found, was A, it was slow to do a bunch of consulting reports. And B, it was not live updating with a dynamic market.
Cody Simms (35:53):
And they didn't necessarily start with a prioritized list of which buildings to begin analyzing first.
Peter Light (35:59):
That's correct. And even if a company endeavored to get all those reports, it still left them with, "Well, where do I start? How do I stack rank all these four inch binders, if you will?" And that was a challenging question because it really came down to an economic question. And then I think where people also went was like, "This isn't so hard. Let's just build an Excel model, I have plenty of analysts." And so people have sent us a bunch of their Excel models, but what you find is that a true project finance model that companies use to go make these kind of investments are very detailed and deal with a lot of wonky details of investment tax credit treatment, the Inflation Reduction Act has these adders, which is great, but they're complicated. There's a lot of very specialist finance that goes into it that the casual observer would miss.
Cody Simms (36:48):
So in order to help these portfolio managers essentially understand the different buildings they have on a per building basis, you need to understand the energy usage of that building, which I presume often means getting lots of different reports from lots of different tenants of the building somehow, you have to understand the physical makeup of the building, what's the roof space look like? What is the access to power that the building has? And then you need to understand the state, and local, and federal criteria from a tax credit perspective and whatnot, and how they might apply to that building to understand how tax credit benefits could kick into flip IRRs on a given project. Are those the three biggies or are there others?
Peter Light (37:32):
It's those and more. And Cody, I'd say all of those pieces go into the big blender and people just say, "Look, give me the smoothie. I want to be able to check that you did the math right, but I don't want to wade through all of the complexity and more that you just described." Property boundaries, insulation on the roof pitches. You can go, what are different labor rates? Is there prevailing wage required in this geography? So all those things come into play, but I think when Dave and I got started on this, I had people who are AI researcher friends who we said, "What if we could forecast all this data to start?" And they're like, "It sounds cool, Peter and Dave, but I actually think that's too hard of a problem. I don't know you'll get that far." And we got very lucky building some work I did at X with National Labs.
(38:15):
We found that there's really actually incredible repositories of supercomputer modeling, of building energy use built up over the last number of years. And we've gotten pretty good in the R&D setting to be able to forecast the electricity consumption and profile building. We've since incorporated that as an initial forecast and that lets us give people a pretty good view to start without them needing to share any data with us. And so I think that's one of the things that makes Lumen unique, is being able to provide building owners this first touch that is a pretty good view and helps them stack rank where to focus on a financial metric.
Cody Simms (38:52):
Where do you get the initial data to help you build those models?
Peter Light (38:56):
It is a whole different set of data sources. There are real estate sources, there are electricity sources, there are whole companies today that all they do is provide an API for scraping utility bills and giving that data. I say, this company could not have existed probably eight or more years ago, and even five years ago, because some of the key ingredients, if you will, just were not available. But what we do is to stitch them all together and turn them all into an answer for our customers.
Cody Simms (39:25):
So you give people sort of a, call it, I'm making this up, 70 to 85% accurate view of the world based on publicly or pseudo publicly available data, gets the building owner a chance to dive in and then prioritize which buildings to go with. And then on a per building basis, then you can basically go to work and get extremely high fidelity levels of data on that building to help them then actually put a plan and project together, go out, create an RFP, get bids in from project developers and actually begin to understand what a true end-to-end project would come together and look alike and actually get the project complete through your platform as I understand it. Is that true?
Peter Light (40:05):
That's exactly right. And I'll just say on the data sources, starting in the beginning, public data we've developed a lot of data that we train our own models now with this continuous growing system. From a product philosophy, if something exists, we do not want to go recreate it. There's so much complexity here to just out to simplify, but yes, then we get to the place where people say, "Great, I'm confident in making these investments," or, "I can now get a power purchase agreement for zero capital deployed and I can get savings across a variety of my buildings and through Lumen I have a consistent way to do tens or even hundreds of properties." And I think that's the real breakthrough because historically you go back in time, people had the consulting report, well then they go get a bid from a contractor and all the contracting complexity, it's a year of legal time on that.
Cody Simms (40:59):
This is the Auto PPA, auto power purchase agreement product that you've recently launched, which is the ability to actually, through your software platform, go solicit and analyze different power purchase agreements, bids and then select one essentially.
Peter Light (41:13):
That's exactly right. And in that product, we're taking away part of the thousand paper cuts of just trying to get to how do I go get this done? How do I go from A to B? All the data complexities were taken away from the end customers just to say, "Here are all your buildings, here are the ones where you can click buttons now and start to get bids to make money decarbonizing your buildings." And we show them exactly the savings in terms of emissions and also the new net operating income that they could enjoy by decarbonizing their buildings with solar and batteries.
Cody Simms (41:45):
You mentioned a few times zero upfront capital, zero dollar CapEx to do this. How does that play with all these tax credits that groups could take advantage of now if there's no CapEx, you don't have the tax credit to offset, presumably?
Peter Light (41:58):
That's right. What we found is there are a number of companies who've said, "We really see this as a new asset class." And I think that's where Bridge Investment Group has been a pioneer and they've set up their own dedicated fund called Bridge Renewable Energy. And so they've been an amazing partner. But there are many others who've said, "Look, even if this is a good IRR," just for whatever reason, "I can't get company approval," or if you get into real estate, all the ownership, there's joint ventures and different partners. And so yes, there are tax credits and some will I think sensibly take advantage of those, but we just see a much larger market where they would rather have someone else deal with the complexity of tax credits and being a specialist and energy infrastructure financing and just translating all of that into how can I save money and start to make progress on my green objectives?
Cody Simms (42:51):
And then the different financing paths are also something you help the building owner understand. We've done a whole episode on commercial pace financing, for example, which I don't know if we want to spend time talking about that now or people can just go into the archives and listen to that, but there's so many complex models that a building owner could pursue on how to actually finance... PACE financing, I guess for folks who aren't familiar with it is essentially where you move the financing of that project away from the building itself and move it into the property taxes of the building. How in the world are you helping automate those decisions? That all sounds really complex.
Peter Light (43:26):
What we see we can do is, if people want to look at all the options for all the buildings, they're usually more in the education phase. So that's where go learn and we help people do that through content we provide and certainly walk them through that, but our mission is to help them make it easy to do something, just turn all that complexity into savings and a pathway. That's really what the Auto PPA is designed to do, and I think increasingly what we're seeing is that people are overwhelmed with all the complexity, all the energy data complexity, policy complexity, financing complexity, and they have to go through a little bit of a journey to see all that tasted and then say, "I want an easy button."
Cody Simms (44:09):
On that note, my brain was starting to go exactly where you just said, if I want an easy button, not just an easy button on the financing, but as software more and more comes into helping commercial real estate owners manage their properties, just generally, not even just in the energy space, do you think that the whole ecosystem will become more efficient and will become more standardized? Or is this inefficiency and non-standardization a feature, not a bug of real estate?
Peter Light (44:42):
It's a very large and fragmented industry today, and on the one hand you could say, "Well, I'm going to run the other direction." And many wise people have done that. I guess we looked at it as, it is complex but finite. And so really it's a data problem, and it's a systems and company structuring problem, that's at least how we've thought about it. Real estate, if you look at, I don't know, a Gartner matrix of technology adoption, real estate is a laggard historically, but it is really changing. And so there are a variety of software tools, which for all the reasons you'd expect, reveal leasing data or occupancy sensors or things that might seem obvious, but those changes are making building owners say, "Software can really help us improve our operations or business."
Cody Simms (45:27):
Moving on in your product, it seems like once you've taken people all the way through and being able to analyze the different options, and even select a project to finance their clean energy project through Lumen, then you go into management and maintenance. You have to ensure that the project is delivering, once you get all the way through installation and procurement, which is a multi-year process, you get to the point where is this project actually delivering the electrons and the financial benefit that it claimed to do upfront? Is that still something you play in from a product perspective?
Peter Light (45:57):
The third part of our product suite is called Shine. And we're providing this start-to-finish platform to enable commercial real estate owners to decarbonize all the properties that they want to in a consistent way. What we found is the key piece that's been missing is that once you deploy onsite clean energy at a property, you then usually still have a residual utility bill. And so there's this financial reconciliation we'll sell like, "Well, wait, I signed this new contract A, but I have this old agreement B with my utility. How do I add these up?" And it sounds like simple addition, but it can still just get annoying and complex. And so we've built a software capability to reconcile all of that based on actuals. And a lot of our early engineering team came from Stripe, so we're very familiar with payments and payments processing.
(46:47):
And I think that leads to our long-term aspiration is to be in an ongoing payments and data relationship with all these buildings because as new technologies come along, geothermal is starting to ramp up for commercial buildings. I think really getting rid of gas and oil heating in buildings is going to be a next big piece to go crack, that it is ultimately still just a math question about it comes back to the meter at the building and the configuration of the building and the policy environment of it. And we find it is ultimately a financial decision. And so what we seek to do is just be the hub that can be a trusted recommender to the building owners about what is going to be the best decision for them.
Cody Simms (47:30):
Peter, this has been super insightful for me. I feel like I've learned a ton. Hopefully people listening have too, and I know we're coming up on an external obligation you have. And so I guess the last thing is, you've announced recently you guys raised a Series A of financing a little bit ago. What are your big priorities at the moment? Feel free to share whatever you'd like about your Series A, and then what are you looking to deploy that capital into from a growth and investment perspective into the company?
Peter Light (47:55):
Sure. We did raise this Series A earlier this year and we've been really fortunate to have an awesome group, investors and partners in Lower Carbon Capital, and Ajax Capital, and Designer Fund. And then we were also joined by some real estate groups. Nuveen is a very large commercial real estate holder and has seen the challenges of decarbonizing their buildings portfolio wide. And I think that's what really sparked their interest. As well as Bridge Investment Group through our work with them, I think saw the opportunity to invest on the company itself.
(48:25):
We've been delighted to complete that raise. And I think where we are is, and our promise to investors and the team was to really commercialize this Auto PPA. And in talking with people who've been in spreadsheets for energy project finance, they're like, "That is a hard gnarly problem." So we're really thrilled to be able to now release that to customers. We just did that in early September. And so what we're doing now is just really getting the word out and making it more and more accessible. I think there's this continuous two sides of what we do, is have deeply rigorous detail on being able to vet all the numbers and trust them with a very simple workflow that's as easy as possible to make the onboarding smooth.
Cody Simms (49:11):
Peter, I'm super grateful that you came on and not only shared what you're building at Lumen, but helped us understand the broader context of a very complex ecosystem that you and Lumen work within. What else should we have covered? Anything else I should have asked or topics that are important to make sure we all understand?
Peter Light (49:30):
I would just say to your listeners that at Lumen we love decarbonizing buildings, and yet I would say just more broadly to the climate space, there's something here for everyone. Climate touches every part of the economy. If you're starting to think about, "How might I get involved? How might I make a difference?" There's software, there's hardware, just there's every industry. So it's a tremendously exciting time, I think, to be part of the revolving climate landscape and anyone can reach out, reach me at our website if you want to get in touch with me. Thank you.
Cody Simms (50:01):
Super appreciate you, Peter. Thanks so much for joining.
Peter Light (50:04):
You bet. Thanks, Cody.
Jason Jacobs (50:06):
Thanks again for joining us on My Climate Journey Podcast.
Cody Simms (50:10):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (50:19):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter @mcjpod.
Yin Lu (50:32):
For weekly climate op-eds jobs, community events, and investment announcements from our MCJ venture funds, be sure to subscribe to our newsletter on our website.
Cody Simms (50:42):
Thanks and see you next episode.
