Trust, Funding and Finance
This is a two-part series on the Ithaca Green New Deal. This part covers the current status of the plan, introduces BlocPower—Ithaca’s implementation partner—and how the current banking crisis is affecting both. Part II will look at alternatives.
The Decarbonization Revolution Comes to Ithaca
Advocates of decarbonizing America to address climate change estimate that over a trillion dollars of investment in electric home appliances will be needed. Critics have placed a $93 trillion price tag on the nation-wide cost of the Green New Deal.
Climate advocates are calling for state and local laws to set deadlines for converting gas furnaces and water heaters to electric heat pumps and water heaters. Even if local contractors and local banks were to scale up to meet this challenge, many low-income homeowners might not be sufficiently creditworthy to finance the mandated large investment. Homeowners may also need special guidance to make good decisions on how to decarbonize their homes.
Although the federal government, through the 2015 Paris Agreement, has set overall national goals for curbing carbon emissions, those have a 2050 net-zero carbon target. Climate activists have been pressing for quicker action, and in 2021, the City of Ithaca Common Council adopted ordinances with a 2030 target. Then-Mayor Svante Myrick ‘09 negotiated a deal with BlocPower, a Brooklyn-based firm, to finance and manage the conversion of at least 1,600 of the 6,000 buildings in Ithaca to electricity, especially those owned by low income and disadvantaged residents.
BlocPower and Myrick hoped that Ithaca would gain a first-mover advantage by being the first city to take this step. However, in August 2022, the Inflation Reduction Act was passed, providing $391 billion in federal funds to create new climate change programs. However, many of these programs have yet to launch, awaiting final regulations. So, there may be advantages to not moving quickly.
Under Ithaca’s ordinance, building owners will “not use fossil fuels for major building energy needs such as space heating and hot water heating, by 2026.” When commercial or residential buildings file building permits to build, expand or remodel, they must earn points based upon many factors, such as hotel room size and the number of EV parking spaces they have. The number of points increased on Jan. 1, 2023.
Basically, if a house replaces its furnace, in most cases it will have to use a new heat pump. Ithaca’s Code Enforcement officers will enforce the new sustainability rules. However, BlocPower will call upon homeowners to explain the rules and provide financing offers, just as a car buyer who talks to a dealership can learn how much it would cost to lease a car instead of paying cash for it. In some cases a proposal will result in a combined monthly bill that is lower than current NYSEG charges, but other cases might result in a higher bill.
Unlike most city contracts, the BlocPower agreement was not subject to the traditional competitive procurement process. Since then, Myrick left Ithaca to lead People for the American Way, a national non-profit. Then Luis Aguirre-Torres, the city’s director of sustainability, left Ithaca, and Myrick’s hand-picked successor as mayor, Laura Lewis, announced that she will not stand for re-election to a full term in the November 2023 election. In brief, some of the City of Ithaca’s biggest supporters for the rapid conversion of its buildings will not be in city government anymore.
The Common Council will appoint a new Sustainability and Climate Justice Commission at either its March or April meeting.
Meanwhile, to the extent that New York State’s electric grid must be upgraded, the New York Power Authority is issuing $600 million of tax-exempt green bonds to finance that investment.
BlocPower’s Rapid Rise
Donnel Baird, the founder of BlocPower, came to banking in a roundabout way. He grew up in Brooklyn, NY. After graduating from Duke, Baird worked for the 2008 Obama campaign as a vote canvasser. He worked as a community organizer, and then in the Obama Administration’s Department of Energy on retrofitting houses in Brooklyn to use heat pumps. While at Columbia Business School, Baird started a company that obtained a $2 million Department of Energy grant to decarbonize housing on a larger scale.
Baird founded BlocPower in 2014 to accomplish that goal. The company has since grown to 70 employees. A $5.5 million grant from the Bezos Earth Fund helped it expand. In 2021, the City of Ithaca was the first community-wide contract that BlocPower landed. Since then, BlocPower has signed up Menlo Park, CA to electrify 10,000 buildings. BlocPower has also started job training programs. BlocPower has held two rounds of major funding to bring it to its present scope, the second one, which closed on March 1, 2023, included equity from CNN host Van Jones and NBA star Russell Westbrook. BlocPower’s press release claims, “In recognition of its work to date, BlocPower is being honored as an Emerging Leader by Vice President Kamala Harris in Washington, D.C. at the Vice President’s residence.”
Under these arrangements, BlocPower will arrange with individual homeowners to assess the economics of new appliances as well as insulation upgrades. If the homeowner agrees, BlocPower will lease the new equipment to the homeowner for no downpayment and an internal interest rate of 6% to recover the investment over 15 years. The homeowners’ lease payments are added to its utility bills.
BlocPower also has a subsidiary which is crowdfunding some of its investments, but the webpage notes that the parent company “does charge a 0.4% annual management fee” on the crowd funded assets that it will install in Ithaca and Menlo Park. To be clear, BlocPower and its investors will make a return on these deals, assuming that a significant portion of the residents pay the rental fees that will be added to their utility bills for the life of each lease.
BlocPower is relying upon its large customer base and loan guarantees to avoid the need to price each lease on the basis of the homeowner’s credit rating. This means that creditworthy homeowners will be subsidizing those who can’t afford their upgrades. Because the terms were negotiated in the master agreement with the City, homeowners may be paying more than if they had paid cash or borrowed from their local bank.
BlocPower is moving us to a world where a lender does not have to know and evaluate its customers, and its investors do not have to know the people being financed.
Silicon Valley Bank Run
For unknown reasons, Brooklyn-based BlocPower chose Silicon Valley Bank (SVB) to hold much of its money, according to Business Insider. SVB is protected by federal deposit insurance, but each account is only covered for the first $250,000. Most large depositors can for a small fee pay for a service that automatically splits up the accounts into $250,000 insured chucks to place with different banks, but BlocPower did not take steps to keep all of its funds insured. From March 8 to 10, SVB faced a run on its bank, with large depositors demanding their money, and the Federal Deposit Insurance Corp (FDIC) put SVB into receivership on March 12. SVB has since filed for bankruptcy. SVB was destroyed in just three days.
As the SVB panic spread, Baird was in Paris, and learned of SVB’s crisis just before boarding a commercial jet to return to the US, according to Business Insider. He tried to wire transfer BlocPower’s funds from SVB to other banks, but some of the transfers required his verbal verification. According to the Business Insider report, Baird got the flight attendants to restore a bad wifi connection, and he locked himself in the plane’s bathroom to finalize most of the wire transfers. However, over the weekend, the FDIC decided to protect all SVB deposits, even those above $250,000, so his moves were ultimately unnecessary.
Also, BlocPower’s latest $24 million funding round and $130 million line of credit were with First Republic Bank. First Republic, the nation’s 14th largest bank, is facing a similar bank run and stock price collapse. However, a group of banks are trying to prop up First Republic, so the impact on BlocPower is undetermined.
Ultimately, the FDIC bailout of SVB comes from a fund that the FDIC collects from all insured banks paying annual premiums, and not from taxpayers. To make up for bailout costs, the FDIC may raise its premiums charged on each bank’s deposits, including Ithaca-based banks.
Cornell’s Dilemma
Students who rent from Ithaca landlords or live in fraternities or sororities are impacted by all of this. The Ithaca ordinance requiring a full conversion by 2030 is still in effect, and the cost of the conversion (whether financed through BlocPower or otherwise) will be passed to students as rent increases.
Cornell bases the housing costs in its financial aid packages upon its dorm rate for a double room. So, if students who live off-campus face higher rents, they will be squeezed to pay the increases out of their own pockets. Many students may be forced to rent less expensive housing outside the City limits.
Although Cornell finances its dorm construction by low-cost borrowing from the New York State Dormitory Authority, Cornell will not make such “green bond” funds available to finance the decarbonization of even the Cornell-owned small living units. Because Cornell owns those buildings, those groups can’t use traditional mortgages to finance the upgrades, which may cost $1 million per house.
Effectively, this would leave the Cornell-owned small living units with no alternative to BlocPower.
Given the number of alumni active in the financial industry who understand that Cornell housing should not carry the high credit risk of low income Ithaca homeowners, there must be some way for a better deal to emerge.
Correction: an earlier version of this article misstated the name of the Ithaca Common Council.
