A Breath of Fresh Air: How Johnson Controls is changing the future of air conditioning
As the climate change dialog continues, governments and environmental bodies in the US and internationally are developing and updating energy efficiency standards and chemical usage regulations, impacting the types of products that companies can create and sell. The Montreal Protocol recently mandated developed countries to ban the use of hydrochlorofluorocarbon (HCFC) refrigerants by 2030[1]. HCFC refrigerants have long been used in the manufacture of residential and commercial heating, ventilation, and air condition (HVAC) equipment. While HCFCs account for a small proportion of total greenhouse gas emissions, they are nearly 10,000 times as potent as carbon dioxide. Furthermore, without mitigating actions, HCFC emissions are expected to triple by 2030.[2]
Johnson Controls International Plc. (“JCI”) is a multi-industrial Fortune 500 organization, whose Building Efficiency business unit provides HVAC equipment, controls, and services[3], for commercial buildings (notably the Empire State Building[4] and the Burj Khalifa[5]). JCI has positioned itself to continue to lead the global HVAC production market, as the market transitions away from HCFC refrigerants. In response to the new regulations, JCI has expanded the availability of low global warming potential (“GWP”) refrigerants in its HVAC product portfolio and provides retrofitting services for customers that wish to convert their existing HVAC equipment to low-GWP refrigerants.[6] Furthermore, for customers that do not wish to immediately convert to HCFC-free refrigerants, JCI offers equipment that can be easily retrofitted with low-GWP options in the future. By providing this ease of product transition, and the optionality of future conversion, JCI has placed itself in a comfortable position to retain its existing customer base.
JCI is also well-positioned to capture new customers from increased global HVAC demand and new regulations. Global demand for HVAC equipment is forecasted to increase by 4% annually, reaching $122 billion by 2020.[7] Domestically, the US market is expected to grow by 7%.[8] (Some of this domestic demand may be spurred by the new regulations; the US Federal government is currently offering tax credits for replacing older HVAC equipment with more efficient systems). Although regulatory changes usually mean higher product costs, here both JCI and its customers stand to benefit from the new regulations. While the initial costs for these new low-GWP products may be higher, these are quickly offset by long-term energy savings. The profit margins for the high-efficiency, low-GWP systems may often be higher than conventional, less-efficient models[9].
As a long-time proponent of corporate sustainability, JCI has publicly established 2020 goals on greenhouse gas intensity and low GWP refrigerants. CEO Alex Molinaroli posted on the World Economic Forum blog: “[W]e aspire to be innovative, resource efficient, operationally excellent and therefore fully embrace the transition to a sustainable, low-carbon economy.”[10]
JCI is not alone in loudly supporting the reduction of GWP refrigerants in the HVAC industry. Daikin Industries Ltd. (“Daikin”), another of the world’s largest HVAC manufacturers, recently announced it will offer free access to 93 of its patents to its competitors, to encourage the development of low-GWP refrigerant technology. Bold moves like Daikin’s demonstrate that the HVAC industry understands the importance to move away from HCFC use, both for regulatory requirements and bottom-line justification.
While JCI has taken significant steps to transition from HCFC use, there are further opportunities. JCI’s Building Efficiency business should continue broader efforts to design buildings that are less dependent on external energy sources. Recent results from JCI’s 2016 Energy Efficiency Indicator Survey shows that interest in efficiency is at an all-time high, with 72% of companies planning to increase investments in energy efficiency and renewable energy in the coming year, compared to a third of respondents in 2013[11]. JCI should continue to position itself as a market leader in developing not just efficient HVAC systems, but energy efficient buildings.
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[1] Davenport, Coral (October 15, 2016). “Nations, Fighting Powerful Refrigerant That Warms Planet, Reach Landmark Deal”. The New York Times [Online]. < http://www.nytimes.com/2016/10/15/world/africa/kigali-deal-hfc-air-conditioners.html>. Retrieved November 3, 2016.
[2] Koch, Wendy (September 16, 2014). “Companies join Obama climate push to cut coolant use”. USA Today [Online]. <http://www.usatoday.com/story/money/business/2014/09/16/companies-join-obama-climate-push-to-phase-out-coolant/15713627/>. Retrieved November 3, 2016.
[3] “Johnson Controls Locations” <http://www.johnsoncontrols.com/location-finder>
[4] Ivanova, Irina (June 24, 2013). “Empire State Building’s energy savings beat forecast”. <http://www.crainsnewyork.com/article/20130624/REAL_ESTATE/130629951> Crain’s New York Business. Retrieved November 3, 2016.
[5] Hope, Gerhard (May 26, 2010). “Johnson Controls secures Burj Khalifa contract”. Construction Week Online. <http://www.constructionweekonline.com/article-8452-johnson-controls-secures-burj-khalifa-contract/>. Retrieved November 3, 2016.
[6] [unknown] (October 19, 2015). “United States: Obama Administration and Private-Sector Leaders Announce Ambitious Commitments and Robust Progress to Address Potent Greenhouse Gases”. Asia News Monitor.
[7] The Freedonia group. (June 1, 2016). “World HVAC equipment demand to reach $122 billion”. PR Newswire
[8] Ibid. 7
[9] Ibid. 6
[10] “Johnson Controls attends World Economic Forum annual meeting” Johnson Controls < http://www.johnsoncontrols.com/insights/2016/enterprise/features/wef-2016>. Retrieved November 3, 2016.
[11] Walton, Robert. “Getting to net zero: Organizations are looking beyond lightbulbs to smart energy technology” (July 6, 2016) Utility Dive <http://www.utilitydive.com/news/getting-to-net-zero-organizations-are-looking-beyond-lightbulbs-to-smart-e/422108/>. Retrieved November 3, 2016.
What strikes me most is Daikin’s decision to offer free access to 93 of their patents. It is surprising to find that in a highly competitive industry, a player is giving away some of their competitive edge to allow other companies to help reach worldwide goals. It shows both a sense of urgency and a priority for the future.
On the JCI front, it is admirable how they have developed technology which is easily retro-fitted to allow for the new low-GWP refrigerants. It is interesting how the new regulation afford JCI the opportunity to install new equipment at a high initial cost with long-term savings to the customer. While we may be conditioned to think of environmental friendliness being more expensive, in this case, we see that it is both saving the customers money and providing JCI with a nice return at the moment. I wonder how this shifts the balance of costs between installation and maintenance.
This was a really fascinating overview of an industry where economic and climate considerations seem to align quite favorably—there is clear rationale for Johnson Controls to be part of the solution given that there are not daunting economic strings attached. This was particularly clear when it comes to the central thrust of the post: the case for shifting away from HVACs.
However, when it comes to driving the shift to more energy efficient buildings (as discussed in the final paragraph), the calculus is likely more complex from a financial perspective. It is one thing to sell more energy efficient components in existing air conditioners; it is quite another if boosts in energy efficiency must come from a shift away from individual air conditioning units over to centralized solutions. Initial research does not reveal the value proposition to Johnson Controls for working on centralized building solutions at the expense selling a larger quantity of individual units in a given residence. But it is very interesting to note the following comment from a Johnson Controls sponsored white paper on this very issue:
“First, the industry is quickly approaching the theoretical limit of how much efficiency can be expected from individual components. Granted, HVAC equipment manufacturers have made great strides in the past 25 years, increasing the efficiency of components by as much as 40%. But we can’t expect the same gains in the future. Moving forward, engineers and building owners will have to look beyond the component level to reach increasingly aggressive energy-efficiency goals… Secondly… today’s high-efficiency components are designed to work optimally when they are part of a networked, interrelated system. For both of these reasons, the focus is beginning to shift away from component-based efficiency targets toward a broader, holistic approach to achieving persistent, peak performance. This emerging, ‘whole-building’ philosophy is known as Central Plant Optimization.” [1]
In this vein, my follow-up question to this thought-provoking post would be the following: as the bar for improved energy efficiency thankfully gets higher and higher, can Johnson Controls continue to be part of the solution and do so in an economically viable way?
[1] “Seven Steps to Maximizing Central Plant Efficiency,” David Klee (Director of Channel Marketing & Strategy, Johnson Controls) & Gary Gigot (Vice President Business Development, Optimum Energy LLC), 2011 http://www.johnsoncontrols.com/-/media/jci/be/united-states/services-and-support/optimization-and-retrofit-services/files/be_wp_centralplantoptimization.pdf?la=en, accessed Nov 2016
Interesting topic! It is terrifying to consider how detrimental HCFC’s are to the environment and climate change, and I appreciate the comparison to CO2. Rising temperatures will put an additional demand on HVAC, and low GWP refrigerant technology will help meet demand without worsening the problem. Additionally, I agree with Daniel and believe it is incredible that Daikin offered free access to 93 patents.
Fay, thanks for the post on Johnson Controls…as you know it’s a company that is close to my heart! I think the commitments they made as part of this announcement are a step in the right direction.
I wanted to comment on the interesting question Daniel posed re: Daikin’s sharing 93 patents. My take is that Daikin is doing this in order to solidify the market leading position of their previously proprietary low GWp R32 refrigerant technology. They are the only air conditioning manufacturer who is vertically integrated into refrigerant supply. Each time you change the refrigerant material, you have to change the architecture of the air conditioner system. The two businesses collaborated over the past 5-10 years to develop low GWP R32 refrigerant and air conditioner units, and they released this to the market about two years ago. Now, as additional refrigerant manufacturers continue to introduce advanced refrigerant, Daikin is seeking to capitalize on their upfront investment by generating network effects around R32: it is actually better for them to convince other manufacturers to design R32 systems to ensure demand for R32 refrigerant. Releasing patents for R32 air conditioners enables this.
I believe there are traditional capitalist intents behind this move, but fortunately it is also a good move for the planet.