Focus on Natural Market Cycles for Building Decarbonization Investments

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This article is the third in a series referencing a paper Sue Coakley and I authored for the Electricity Journal. This special edition of the Electricity Journal titled “Energy Optimization is the Key to Affordable, Reliable Decarbonization” was coordinated by the Regulatory Assistance Project. NEEP’s contribution, Transforming our Buildings for a Low-Carbon Era: Five Key Strategies, discusses the most promising areas to advance building decarbonization and presents initial strategies to begin the transition to a low-carbon built environment.

The following extract from NEEP’s paper focuses on working with the market to expand decarbonization. The Electricity Journal paper provides more details, data, and references, but the extract below captures the basic strategies and is followed by some additional discussion of key points.

Strategy Three: Focus on Natural Market Cycles for Building Decarbonization Investments 

Building electrification and decarbonization can require significant investments, particularly for existing buildings that need thermal shell improvements. In that context, natural market cycles of building construction, renovation, and equipment replacement are the best and most economic opportunities to invest in home and building electrification to minimize GHG emissions. Leading programs and policies offer incentives and technical assistance to accelerate market adoption and build market capacities, as well as accelerate the timing of investments through building energy performance standards. 

New Construction

Fundamental building efficiency features (e.g., architectural massing, solar orientation, natural ventilation, insulation level) can last the lifetime of the building. Similarly, building equipment or building shell elements (HVAC system type and windows, for example) can easily last 20 years or more. As a result, it is most economical, and sometimes only possible, to get the deep efficiency elements of a building right the first time, in the initial design and construction of homes and buildings.

The pathway to deep efficiency has been developed and demonstrated through Zero Energy Buildings, Zero Energy Ready Homes, and Passive House. The market progresses as these leading building concepts are included in design guidance; supported by training, technical assistance, and incentives; and then incorporated into building energy codes. This has already happened in a few leading states and cities.

Existing Homes with Central Air Conditioning

Homes with central air conditioning (CAC) and fossil heating can be great candidates for advanced air source heat pumps (ASHPs) when either of the incumbent systems requires replacement. Expanding a CAC system to a heat pump can be a relatively inexpensive switch in existing homes and have even lower first costs and greater efficiency in new construction. With the advent of cold climate air source heat pumps (ccASHPs), the heat pump option that is already strong in many southern markets for new construction can be expanded into cooler climates where central air conditioning is becoming more common.

Water Heater Replacements

The consumer economics of electrifying water heating vary significantly based on climate, fuel type, electric rates, and housing type, but in many situations consumer economics support changing to heat pump water heaters (HPWHs) when incumbent equipment fails. In addition to reduced energy consumption, high efficiency HPWH’s also provide flexible, controllable loads needed to match the timing of energy use with variable renewables or to shift demand to lower cost time periods.

Consumer-Driven Air Conditioning Retrofits

Across the country, as climate change-driven summer heat waves increase, residential consumers without CAC are deciding to upgrade their air conditioning strategy from a couple of aging window units to a system that offers more comfort. Ductless heat pumps are the most frequent choice and are certainly much more efficient, but some consumers also move to CAC. Ductless heat pumps, of course, include heating, which comes as a surprise to some consumers who care more about cooling. Similarly, moving to a CAC could simply be extended to moving to a central ASHP, displacing the existing fossil system. ASHP incentive programs in several Northeast states (e.g., Massachusetts, Rhode Island, and Connecticut) began with a focus on advanced ASHP for air conditioning before incentives for efficient fuel switching were approved.

Additional Discussion

The good news is that working with natural market cycles, and perhaps more importantly, existing market actors (as they are called in the industry) is Market Transformation 101. Natural market cycles are when consumers are already engaged in decision making, when retailers are ready to grab their market share, and when manufacturers are promoting their most competitive products in the marketplace. It’s hard to get consumers to care about water heaters when their current tank in the basement is working fine. It is really hard to reinvent sales infrastructure (although Amazon has for many consumer products). Natural market cycles are also the most economic time, from both a consumer and a societal perspective, to incorporate technically-advanced products.

The bad news is that if a product lasts 20 years, only five percent of existing ones require replacement each year (plus new construction, additions and renovations). Looking at it from hindsight – a decision made today to put a new fossil fuel appliance into a building is a decision that likely lasts for 15 or 20 years. So, to decarbonize buildings, that “natural market” decision-making process really needs to change now, but it is nowhere near changing. More that 90 percent of today’s decisions maintain the incumbent technologies, because the newer, more-efficient technologies are not well understood in the market.

Many see “existing market actors” (sales and installation, wholesalers, manufacturers, and trade associations) as the problem, but truly, they need to be viewed as critical allies. Generally, they stick with close-to-normal market practice because that is how they survived and/or prospered for years. They change when they need to change or when they see a market opportunity to exploit. Increasing codes, standards, and product labeling/specifications create threats. Incentives, joint marketing opportunities, co-branding, and training and support create new opportunities.

I have spent more than two decades in the market transformation business from light bulbs to zero energy buildings, and it is much, much easier to build relationships than it is to recreate elements of the industry. It may start in Japan or Europe, or it may start with a disruptive technology, or it may start with leading architectural and engineering firms, but there is always a place to start working with the industry. You need to find that place or places, or you will be battling for years to gain any kind of market traction. Been there, done that.

The manufacturers of ccASHPs are disrupters in the U.S. market. They are very large Asian companies that have a different type of product that is dominant in many areas of the world, but not in the U.S. Given the right business case, they are prepared to surge more aggressively into the U.S. market. The traditional HVAC manufacturers in the U.S. certainly understand the threat. The increasing globalization of manufacturing means that sometimes the two are already becoming one, but at a minimum, there are competing products in the marketplace or in development by U.S. manufacturers.

In water heating, the long-term dominant U.S. water heater manufacturers already have HPWH products, but they have yet to see the kind of market growth that would make these higher priced (but much more efficient) products dominate in the marketplace.

One thing that will be a bit different in the marketplace is the need for smart controls that work to better integrate buildings with the grid. The ability of domestic water heaters to store energy and the need to charge EVs either at home or at the workplace mean that smart controls are required to balance loads as well as provide consumer benefits of low-cost electricity.

Working with the market is almost certainly the pathway forward. Both carrots and sticks will be required. The pathway developed will be complex. There are examples of pathway leadership in multiple places around the country, and part of the purpose of Building Decarb Central is to identify and highlight those leaders. There is also a continued need for innovation and experimentation to see how to bridge the gap between the decarbonization potential of current products and the state of our current marketplace. There’s plenty of work to do!

This blog is part of Building Decarb Central, a series of blogs and other resources aimed at providing a constant flow of information on building decarbonization. Be sure to check out our web portal for more stories, resources, and information.

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