Navigant Research Blog

The Geopolitics of Energy Efficiency

— January 15, 2015

The crisis in Ukraine has put the country’s energy security at risk.  Among other threats to the country’s economic stability, natural gas supply is a lingering concern.  In December, Naftogaz, Ukraine’s state-owned gas company, managed to settle the $3.1 billion debt it owed to Russia’s Gazprom, averting the risk of gas supply being shut down.  Longer term, there’s a little-noticed solution: Investing in energy efficiency could help Ukraine avoid importing any gas from Russia.

According to the International Energy Agency, Ukraine’s energy intensity is nearly 3 times greater than the average for Organisation for Economic Co-operation and Development (OECD) countries and 25% greater than the average for non-OECD European and Eurasian countries.  Energy efficiency has not been a priority in the former Soviet republics.  Subsidies provided by the gas monopoly that were designed to keep the populace complacent also created a disincentive to upgrade Soviet-era equipment and controls.

After the Fall

After the fall of the Berlin Wall, many of the same problems plaguing Ukraine were faced by East Germans.  But, since reunification, hundreds of buildings with poor thermal characteristics in East Germany have been demolished and replaced with more efficient ones.  Additionally, in the buildings that remain, major upgrades were made to the thermal envelope and heating systems were replaced.  As a result, total energy use in Germany fell between 1996 and 2008.

To be sure, some modernization projects are happening in Ukraine.  In Odessa, upgrades to a district heating network provided total energy savings of 50%.  But antiquated heating systems in Ukraine suffer from years of neglected maintenance.  In addition to the equipment, heating controls are an issue.  Many systems only have basic on-off control, they are either heating at full blast or are off – a terribly wasteful limitation.    Easy efficiency investment opportunities with short paybacks are abundant in Ukraine.  But, as with many energy efficiency investments, financing is the hurdle.  The problem is especially acute in Ukraine, as loans from the International Monetary Fund are keeping the country afloat.

Future of Financing

Worldwide, major changes in financing options seem to be in store for 2015, aimed at lowering the cash needed for energy efficient investments.  By converting upfront capital investments into operating savings through innovative finance, more projects will get the green light.  To date, energy service companies (ESCOs) have served as the primary means of outside funding for energy efficiency improvement projects.  But new approaches, such as independent energy savings insurance products, are beginning to emerge.  Currently, private real estate fund managers have $110 billion of equity available for investment, an all-time high.  As the situation in Ukraine demonstrated, there are abundant opportunities for investment being overlooked.  The changing world of energy efficiency financing appears to be the clearest way to bridge that gap.


Variable Refrigerant Systems Set to Grow in 2015

— January 14, 2015

This could be a watershed year for variable refrigerant flow (VRF) systems in the United States.  Although it has constituted only a small fraction of the overall heating, ventilation, and air conditioning (HVAC) market since its U.S. debut in 2003, the technology continues to gain traction.  The VRF approach varies from traditional commercial chilled water or rooftop unit systems because it uses refrigerant to transfer heat in a building.  The first advantage of this system is that the pipes are smaller.  Because the refrigerant changes phase, less of it is needed to transfer a set amount of heat when compared to chilled water.  VRF systems are also more efficient, since VRF compressors are inverter-driven and can operate at variable speeds.  As a result, they are much more efficient in part-load conditions than the compressors in chillers or rooftop units.

Competitive Landscape

Companies in the U.S. HVAC industry appear to be positioning themselves for a growing 2015 VRF market.  Johnson Controls, for instance, announced in 2014 a joint venture with Hitachi to incorporate Hitachi’s VRF and inverter technology in Johnson Controls’ U.S. solutions portfolio.  But the deal may not be completed until the first half of 2015.  Also in 2014, Samsung Electronics America, Inc. agreed to acquire Quietside Corp., the North American distributor for Samsung’s HVAC products since 1997.  The move marks Samsung’s focus on building the U.S. market for ductless and VRF products.  Meanwhile, Trane further expanded its portfolio of VRF products through the addition of a water-source VRF system.

Competition Ahead

VRF systems are more efficient than conventional HVAC systems and have promising U.S. market potential for 2015.  But they may ultimately not be the best means of increasing efficiency and comfort.  Indeed, geothermal heat pumps (examined in detail in Navigant Research’s Geothermal Heat Pumps report) may be more efficient than VRF.

During the 2008 renovation of its headquarters, ASHRAE established the building as a living lab to evaluate new technologies.  A portion of the project included installing a VRF system in part of the building and a geothermal heat pump in another part of the building.  The results of a 2-year study of energy consumption indicate that the geothermal heat pump was more efficient than even the VRF system.  Moreover, geothermal heat pumps are more similar to conventional systems than VRF systems are.  They don’t entail the same changes in required installation skills, system design, and architecture.

Though a study of a single building in a single climate zone may not be rigorous enough to provide substantial conclusions, it certainly indicates that competing technologies, including both VRF and geothermal heat pumps, have a bright future.


Energy Efficiency Transforms HVAC

— December 2, 2014

The federal requirements for heating, ventilation, and air conditioning (HVAC) systems are about to become much stricter.  Starting January 1, 2015, residential split system heat pumps, single package air conditioners, and single package heat pumps in the United States must have seasonal energy efficiency ratios (SEERs) of 14, an 8% increase in efficiency over the current SEER requirement of 13.  The SEER rating is used to gauge the operating efficiency of cooling systems.  It is the ratio of the cooling output of equipment over a cooling season divided by the electrical input.  Indeed, driven in part by tightening regulations but also by a larger push toward greater energy efficiency, HVAC equipment is undergoing substantial changes.  When minimum SEER requirements increased in the United States from 10 to 13 in 2006, innovations in compressors, refrigerants, and system design drove efficiency improvements.  Today, several air conditioner options provide efficiency in excess of 20 SEER.

Unfortunately, there are natural limitations on efficiency gains that can be made on current equipment.  As a result, new, more efficient HVAC equipment, such as variable refrigerant flow (VRF) systems, is gaining market share in the United States.  VRF systems represent a paradigm shift in how heat is transferred throughout a building and can provide energy savings of 34% compared to current HVAC solutions.  Originally developed in Asia, the technology is now gaining market share in the United States.  Though Asian-based companies dominate VRF manufacturing, the landscape is shifting through joint ventures, such as Johnson Controls’ yet-to-be-finalized tie up with Hitachi, and through the establishment of manufacturing operations in the United States, such as Daikin’s American manufacturing line in Houston.

Further Changes Ahead

Future gains in efficiency can still be gained through better control and wider adoption of currently available equipment.  However, some are looking even deeper at reducing the energy consumption of HVAC systems.  Currently, HVAC equipment ejects heat from a building into its surroundings.  Dr. Aaswath Raman, a research associate at Stanford University, is developing technology to dump unwanted heat into outer space.  Dr. Raman has engineered a material capable of manipulating the energy levels of the light it reflects so that sunlight can be reflected and transformed to a wavelength that sends it out of Earth’s atmosphere.   In effect, it can transfer the heat generated in a building by the sun to the much larger and much cooler heat sink of outer space.  Initial tests have demonstrated that Raman’s material can maintain a 4.9°C temperature difference between a box coated in the material and the outdoors.  If deployed in buildings, the impact on HVAC requirements would trigger a new wave of innovation in HVAC equipment.

For a more detailed look at how the HVAC market is changing, please join Navigant Research’s free webinar, Innovations in Heating, Ventilation, and Air Conditioning, on Tuesday, December 9, 2014 at 2 p.m. EST.   Click here to register.


Smart Building Startups Continue to Flourish

— November 17, 2014

Like the “Harvard of the [insert region here],” “the Next Silicon Valley” is a term so trite that it has become meaningless.  You may have heard of the Silicon Hills, the Silicon Strip, Silicon Wadi, or even the Silicon Valley of the East.  It seems that anyone with a pulse is trying to woo tech entrepreneurs into the next Silicon cluster.  Nevertheless, tech activity is not limited to Northern California.  A recent analysis by the Financial Times found that 60% of “unicorns” (tech startups that reach a $1 billion valuation) were created outside of California’s Bay Area.

Indeed, many local governments are trying to establish startup ecosystems to rival Silicon Valley, including the government of Washington, D.C.  Recently, Mayor Vince Gray announced the awarding of grants to tech startups totaling over $800,000.  Several of these companies represent the wave of innovation occurring in smart buildings.  Aquicore, a real-time energy management software for commercial real estate and industrial facilities, received $122,500.  And Azert, the developer of Smart(er) Socket, wall sockets integrated with Apple’s iBeacon technology and Wi-Fi, also received $122,500.

Other People’s Stuff

It might seem strange to think of wall sockets communicating, and even stranger to think of any building infrastructure using an Apple technology.  What’s more, the idea of a software startup that relies entirely on building controls hardware made and installed by other vendors was until recently unthinkable.  In the past, building systems were specifically designed not to work with other vendors’ products in order to ensure a long-term market for replacements and upgrades.  But the convergence of building technology and information technology, the adoption of open protocols, and greater integration between building automation systems have lowered the barriers to entry in the smart building market.

These startups demonstrate that the competitive landscape of smart buildings is changing.  It’s easier than ever to get building data, meaning that a wider pool of competitors is emerging.  What’s striking, and hopefully indicative of future trends, is that these companies are springing up in Washington, D.C., away from the established tech hub of Silicon Valley and away from established global building controls manufacturers.  Future innovation in smart buildings can be driven by anyone, anywhere.


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