DIY : It’s getting hot in here – Strategy Dynamics – Medium

How to stay cool in on an increasingly hot planet

Source: Google Images

Intro

The climate is warming. This isn’t a political statement, but an observation of the world around us. This increase in temperatures is causing an increased need for air conditioning. In 2015, the US spent $40bn on projects to install air conditioners in their homes.

It is unlikely at this point that the trend will change in the coming years and thus I’m interested in understanding what the future technology trends look like for air conditioning to improve the comfort of our homes and offices.

Air Conditioning is also one of the contributors to a warming climate. The chemicals used in refrigerants that are a core part of an air conditioner when released in the atmosphere can have an impact as high as 4000x the equivalent release of CO2. In addition, the exhaust released from your house as part of the process can create “heat islands” (most noticeable in dense areas).

This creates an interesting feedback loop where more air conditioning is required to handle the negative impacts of air conditioning.

On top of all of this is that we don’t pay the full cost of electricity and its impacts on the climate. In the State of Washington where I live we have low electricity due to hydropower that was built by the government. This creates incentives for me to be more wasteful with my energy use.

The evolution of air conditioning

As I started to evaluate the state of the technology I was a little shocked that the evolution of AC stops in the 1970s.

Source: Pinterest

This is a little bit of a stretch. Over the past few decades there have been some advancements, mostly in the refrigerants used to convert warm air to cool air. Some of these advancements have been in response to policy actions to limit the global warming potential (GWP) or ozone impacts of the chemicals. This led to the phasing out of CFCs (chlorofluorocarbons) and the weaning of HFCs (hydrofluorocarbons) to lower the negative impacts of air conditioning.

The future of air conditioning

There are two main technologies that I have seen that will impact air conditioning of the future, 1) Smart home and 2) Improved AC units.

1. Smart Home

There is a lot of press around the smart home. What I’m most focused on with the smart home is the ability to understand the needs of the homeowner to regulate temperature. Most people want to maintain a comfortable temperature when they are present in their home and are okay with variations while they are gone, especially if it saves money. We are in the early stages of smart thermostats, like the Nest.

Source: amazon.com

These thermostats can learn your behaviors and over time with a more connected home will know when you are present in the home. This will allow your system to optimize the temperature. These systems will also connect to your devices (car / phone) to know when you are headed home and make sure the temperature is set for your arrival.

2. Smarter / Better AC Units

The bigger unknown is around the technologies that will come out and fundamentally change cooling in the home. Here are a couple articles to your typical lists of new technologies that will keep you cool.

Centralized AC has been the most efficient way to cool a home, but with so many other technologies there is likely going to be a push for decentralized in the constant centralized vs. decentralized yo-yo effect.

Things that stood out to me with high potential:

  • Time shifting cool air — The temperature in many areas varies by tens of degrees each day (the US west can see 40F swings). There is a potential to harness this to create cold reserves during the evening to release during the day.
Source: Wikipedia
  • Decentralized controls — Sensors spread out through the house with mechanical controlled vents can create an effect of a decentralized air conditioning unit. In addition, would expect to pull air from different rooms to cool them faster, e.g. I want my kids room cool earlier than I need my room cool at night.
  • Shared heat control — integration of the heat system with all devices that produce heat or cool. There are many appliances in the home that fit this category. One to call out is a hot water heater where it would be possible to have the ducts pushing out hot air warm the water before it is heated. There is also a long-term potential to use thermoelectric generators to turn waste heat into energy, like what Alphabet Energy is doing.
  • Use the Earth — The ground is a great store of energy and doesn’t fluctuate in temperature like the air. There is a large opportunity to use the earth to cool and heat depending on season. There are geothermal heat pumps like the below, but there is much more that could be done.
Source: Google Images

The Market Strategy

I’m bullish on a warming climate given the unlikely response we’ll see from politicians and behavior change. The below graph from the BLS is the producer price index (PPI) for air conditioning which shows the price of air conditioning units has gone up 60% over the past 15 years. This trend will likely continue as demand increases.

In my analysis of the industry, the technology makes up 50% of the installation costs. Wages make up 30% of the costs, which have grown 33% since 2004. It is interesting that the product costs are up 60% during the same time frame. A key difference in the installation services vs. product manufacturing markets is that there are 100k+ businesses employing over 300k people on the installation side and there are a few key players in the manufacturing side that are able to control the margins.

I did an analysis looking across many different technologies to understand the value make up. For heating and cooling products there is a lot of value that amasses to the manufacturers of the units. This is largely due to the complexity of the assembly process and lack of highly differentiated inputs.

personal analysis

In closing

The market is positioned well for advancement in technology given the large and growing market conditions. Heating and cooling should fair well in the next economic contraction as it doesn’t see large impacts during recessions given the drivers of the need are largely decoupled. Customers can delay the purchase, but they have to experience a less comfortable environment as well. The tailwinds of the industry position it well and the rise of smart homes will usher in new models.

A counter that the industry will face are the headwinds of slowing rates of new construction of single family homes and increase in multi-family units. A large percent of sales are related to new construction.

Overall, I would grade the opportunity to enter this space as moderate attractiveness given large market size and growth drivers.

References

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