This post is one in a series of excerpts from the Advanced Energy Now 2021 Market Report, prepared for AEE by Guidehouse Insights.
Over the past decade, Building Efficiency has remained a consistently reliable growth segment for advanced energy globally and in the United States. Global Building Efficiency revenue reached $341.7 billion in 2020 after growing 5% in 2020 and 9% in 2019. In the United States, Building Efficiency revenue grew to $94.5 billion, up 5% in 2020, following an increase of 9% in 2019. Over the period 2011-2020, Building Efficiency revenue grew at a compound annual growth rate (CAGR) of 11% globally and 10% in the U.S., counting only products for which we have data for all years.
COVID-19 caused disruption within the Building Efficiency segment globally and in the U.S., with mixed effects. While Global Building Efficiency revenues grew by 5% in 2020, this is a notable drop from the 9% growth in 2019 and 11% CAGR over the 2011-2020 period. Each Building Efficiency subsegment experienced a decline in year-over-year growth between 2019 and 2020. The impact was more heavily felt in commercial and industrial product categories due to shifting work environments and reductions in construction investment. This was somewhat offset by an increase in residential home construction and home improvement spending, which helped to buoy overall Building Efficiency revenues (see “COVID-19 Remote Work Experience Points to Enhanced Residential Customer Engagement,” below). Residential Energy Efficient Homes & Services grew by 15% in 2020 to nearly $34.4 billion globally.
The largest segment of U.S. advanced energy revenue, Building Efficiency has grown consistently since AEE began tracking it in 2011, with total revenue nearly tripling over that time. U.S. Building Efficiency accounted for $94.5 billion of revenue in 2020, growing 5% in 2020 despite disruption of many utility-administered efficiency programs by COVID-19 restrictions.
Products and services that support building electrification and energy conservation, such as high efficiency HVAC systems (including air-source heat pumps), associated controls, building envelope improvements, and installation and commissioning services, are poised for continued growth in the coming decade. Heat pumps have emerged as a central solution to decarbonizing buildings through electrification. Other forms of electric heat are available to customers, including resistance heating (such as electric furnaces and baseboard heaters). However, heat pump technology has risen to the top of the list due to lower energy consumption.
Technology innovation adjacent to traditional energy efficiency offerings, such as intelligent building management systems (BMS), energy storage, and onsite generation, are the primary forces driving change in this market. With new technologies entering the market, vendors and customers are seeing opportunities for building-wide and building-to-grid solutions that address multiple building operational needs beyond energy savings.
Large corporations, primarily, are adopting full-building solutions, with a big gap between market trailblazers and the rest. Corporations with multiple buildings in their portfolios and sustainability commitments to fulfill are primary adopters of new technology. The rest of the market remains largely inhibited by traditional barriers to growth, adopting new building technologies mainly when replacement is necessary.
Controls Drive Lighting as LEDs Transform the Market
Building owners are moving toward improved energy efficient technologies due to changing building codes and standards, corporate sustainability initiatives, utility incentives, and falling technology costs. Nowhere is this more evident than in the Lighting market. These drivers have led to an increased penetration of LEDs across all sectors. The technology for LEDs has improved in quality and price since LEDs first became available, making them more competitive with other lighting technologies. The improved efficacy, efficiency, and lower costs have driven adoption of LEDs in the commercial and residential building market globally. Government regulations for reduced energy use in commercial buildings have also helped propel LED deployment.
The lighting controls market is driven by proliferation of LEDs, increasingly stringent building codes, and pursuit of energy savings; growth of Internet of Things (IoT); and the desire for increased controllability and data collection and insights. Lighting controls are the next frontier in this evolving market. LEDs are more controllable than their legacy lighting counterparts, which provides the foundation for increased adoption of lighting controls and, in turn, connected lighting systems in the commercial market.
Globally, energy efficient lighting has grown from $121.5 billion in 2016 to $141.3 billion in 2020, though the rate of growth has declined in recent years as LEDs have begun to saturate the market. Growth from 2019 to 2020 was just 1% globally and in the U.S.
As controls continue to advance in sophistication, the drive toward increased building data will push forward the connected controls market, increasing adoption of all controls, especially within commercial buildings. Lighting systems in commercial buildings have started to shift from manual controls – the basic on-off of a luminaire from a wall switch – to IoT lighting applications. Revenue from Intelligent Lighting Controls has grown from $3.3 billion globally in 2016 to $5.2 billion in 2020, and from $1.2 billion to 1.9 billion in the U.S.
Lighting control strategies in commercial buildings are deployed to help reduce energy consumption used by a lighting system, including scheduling, occupancy sensors, daylight harvesting, task tuning, or load shedding (DR), among others. Some strategies, such as personal control and task tuning, can also provide an improved occupant experience. In recent years, there has been a growing trend to focus on the occupant experience, such as improved productivity, and health and well-being. Lighting control strategies are already supporting this trend and are expected to do so in the short and long term.
In addition to managing consumption and control, integration with other building automation systems can help coordinate HVAC systems, security and access, facility scheduling, and maintenance. The ubiquitous and granular nature of a lighting system enables connected lighting to serve as the foundation for IoT value-add applications, such as space utilization, asset tracking, indoor positioning, and others. These additional solutions expand the capabilities of a lighting system to add value beyond illumination.
Although these advanced applications show promise for market growth in the Lighting segment, their adoption is constrained by the tendency of building developers to choose the lowest-cost controls that meet building codes, whereas the benefits of advanced controls generally accrue to the building operator or long-term occupant. Greater attention to building performance by building owners and their commercial tenants would facilitate faster growth.
Working from Home Puts Focus on Residential Energy Use and Customer Engagement
Due to COVID-19 orders, homeowners spent more time at home in 2020, resulting in an increase in residential electricity consumption. With rising home utility bills and energy load shifting from commercial and industrial sites to the residential segment, engaging residential customers has become increasingly important for utilities and other electricity providers.
Demand side management (DSM) is key to saving money for households and reducing strain on the grid from residential load. can help achieve this stability as energy loads shift towards the residential segment. But during the pandemic, many energy efficiency programs were paused or stopped, forcing utilities and providers to adapt quickly. The industry has attempted to pivot by reducing reliance on onsite visits, embracing digital tools, and finding new ways to help residential customers save money.
Some utilities are turning to enhanced behavioral demand-side management approaches using new technologies. These technologies enable improved prediction, microtargeting, realization, and verification of energy savings. This is also giving utilities added value for customer engagement through app and web portals, as customer engagement via mobile, online, and social network channels has become a top priority. Improved digital interfaces and analytics are enabling utilities to provide timely and relevant information related to saving energy.
The growth of the smart home device market is expanding the energy monitoring and usage control capabilities available to homeowners. For instance, as of 2020, smart thermostats have become common, providing greater control of HVAC systems while facilitating cost savings and tie-ins to utility demand response (DR) and load-shifting programs. U.S. revenue from Home Energy Management Systems has grown from $1.3 billion in 2016 to $2.2 billion in 2020, rising 10% last year alone.
The COVID-19 pandemic has demonstrated the value of engaging with residential customers. As home improvement spending has increased, residential customers have begun to realize the potential for residential energy management solutions to reduce home energy consumption. The coming period should see a proliferation of offerings, by utilities and third-party vendors, especially as states and potentially the federal government establish standards for access to customer data that could be used to develop new products for home energy management.
Smart Appliances Poised for Growth
Smart appliances have also continued to make inroads as a segment of the growing smart-home market. The effects of COVID-19 did very little to dampen the growth as many consumers, stuck at home but still working during 2020 lockdowns, focused money and energy on upgrading their homes, with smarter products like appliances part of the mix.
Over the past three years, global smart appliance revenue has mushroomed from $8.1 billion in 2018 to $15.3 billion in 2020 at a compound annual growth rate (CAGR) of 37% over two years. In the U.S., revenue attributed to smart appliance sales more than doubled, from $2.2 billion to $4.5 billion over the same two-year period, for a CAGR of 45%.
Until recent years, many consumers found the value proposition of a smart appliance to be vague at best, and demand was tepid. But as appliance OEMs have continued to push these smarter products, their marketing efforts have started to resonate. Then, as the pandemic unfolded, the stars started to align for smart appliance.
New appliance features have helped. For instance, LG’s line of InstaView refrigerators includes a door that opens via voice command and has a water dispenser that uses UV light to sanitize drinks. Similarly, Sharp is promoting a microwave model that is capable of performing more than 70 voice commands and up to 50 more food presets.
Price remains the biggest barrier to wider adoption of these high-end appliances. Nonetheless, over the coming years, appliances with smarter features are expected to move down market as commodity pricing takes hold and the segment expands.
Growing Role of Heat Pumps for Electrification & Decarbonization
Regulations and pending policies in California, New York, Washington, D.C., and other states and cities are stressing the role of electrification in decarbonizing the built environment. Although multiple options exist to decarbonize heat in commercial buildings, such as integrating renewable natural gas into natural gas supply, electrification is widely considered the most commercially viable pathway to decarbonizing the buildings sector.
Technologies such as electric heat pumps – specifically variable refrigerant flow (VRF) systems – are available to meet heating needs and help meet greenhouse gas (GHG) targets in most climates in the United States. These technologies have already seen sustained growth in adoption over the past five years, with incentives offered through utility energy efficiency programs in some U.S. states. The market is reaching a tipping point, with new climate-related targets spurring added growth and competition among market players in VRF, heat pump, and heat recovery products.
Europe is the most mature market for building decarbonization technologies; VRF systems enjoy widespread adoption in commercial buildings throughout the region. The United States represents the biggest market opportunity for heat pump and VRF OEMs. The market is not yet saturated with VRF and heat pump solutions, customers are getting more familiar with the technology, and local governments across the region are supporting a rapid adoption of decarbonization targets. In Asia Pacific, policy and technology markets primarily focus on energy efficiency targets rather than explicit GHG reduction goals in the buildings sector. Any future electrification in Asia Pacific countries is likely to follow the European scenario and emphasize district systems given their role in heating supply. Latin America and the Middle East & Africa still suffer from limited demand and weak regulatory support for building decarbonization, energy efficient systems, and electrification
As the market matures, significant competition amongst market players is expected, with concentration in several geographic areas. In the U.S., heat pumps have the biggest market opportunity in regions with moderate temperatures. For instance, California, which has a mild winter season, is headed toward adopting heat pumps. The California Air Resources Board voted to support all-electric building policies in November 2020. Heat pumps still have technical limitations for use in the northern U.S., although cold-weather models that are more effective at low outdoor temperatures are increasingly available. In Germany, the Renewable Energy Heating Act permits new building constructions only if the space and water heating come from renewable sources, such as solar, solar thermal, biomass, and efficient heat pumps. In Asia, Japan has supported heat pump water heaters with an incentive program, and China has a guide and policy for electric power substitution. These policies drive electrified heating and cooling market growth.
Guidehouse Insights estimates that U.S. spending on commercial heat pumps will grow at a rate of 13% between 2020 and 2029, slightly higher than the 8% anticipated Global growth rate.
The value proposition for heat pumps in space and water heating improves when coupled with enhanced insulation, which reduces system sizing required. Household decarbonization can be further optimized with EV use and solar power (onsite or community). To contribute to overall decarbonization, electrified water heating, pre-cooling of buildings, and EVs providing flexible charging and discharging could minimize grid purchases of electricity, especially during high demand periods.
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