Air conditioners and the 'counter Covid-19 cyclical,' clean energy play

The UK's first listed investment trust focused on energy efficiency sees a billion new air conditioners coming online in the next five years 

By Jonathan Maxwell, CEO, Sustainable Development Capital, LLP (London), Peter Hobson, investment director and head of sustainability for SDCL (London); and James A. Maguire, partner, SDCL (Hong Kong).

LONDON (Callaway Climate Insights) — Providing and using energy in an efficient and sustainable manner is one of the most critical issues of our time. According to the International Energy Agency, “the growing demand for air conditioners is one of the most critical blind spots in today’s energy debate.” Therefore, it is essential that we improve the efficiency of air conditioning and other cooling technologies to minimize further stresses on the energy system or the environment. 

Cooling accounts for approximately 20% of the total electricity used in buildings around the world today — or 10% of all global electricity consumption. Rising demand for space cooling in buildings, particularly in Asia, is putting an enormous strain on electricity systems, as well as leading to increased greenhouse gas emissions.

In the next five years, we will see a billion new air conditioners come online, with global demand for cooling set to triple by 2050. If we do nothing, this will result in an increase in energy demand equivalent to all the energy used by China and India today. The demand for cooling increases as incomes rise and populations grow. This is especially prevalent in Asia where increased use of air conditioners will soon represent one of the top drivers of global electricity demand.

By 2050, around two-thirds of the world’s households will have an air conditioner, with China, India and Indonesia together accounting for half of the total. The Economist Intelligence Unit calls this “the cooling imperative” — essentially, the convergence of rising temperatures, population growth and income levels (notwithstanding Covid-19) accompanied by greater urbanization. Mitigating the impacts of the cooling imperative through improvements in efficiency and performance, presents the biggest addressable opportunity for mitigating future greenhouse gas emissions globally. 

Meeting increased energy supply demand whilst simultaneously decarbonizing, within the broader context of population growth, a growing middle class, urbanization and GDP growth, presents significant challenges. The majority of Asia’s current energy supply is based on fossil fuels especially coal, a situation that is unlikely to change in the near term. To effectively address this, all available options must be deployed to develop a pathway to decarbonization, underpinned by large-scale investment in cooling and energy efficiency, to counterbalance rising energy demand.

To meet the significant challenge of rising demand for cooling, investment in the following key areas have been identified as offering significant cooling efficiency improvements: 

  • Supply of energy for chilling — including decentralized generation of sustainable, renewable power (e.g., with rooftop solar photovoltaics)

  • Reducing demand for chilling — respective measures to reduce chilling demand

  • Generation of chilling — efficient generation, low global warming potential refrigerants, different generation technologies and potentially integrating sustainable energy sources

  • Distribution of chilling — especially for central cooling, e.g., optimized cold water sets including variable speed pumps

  • Usage of chilling — efficiency in use e.g., by adapted temperature settings etc.

The cooling imperative will require that cooling and energy efficiency undergoes a paradigm shift in respect of the scale of investment required. A recent report by the IFC estimates the Green Building investment opportunity at $24.7 trillion globally, $17.8 trillion of which is in Asia where greater than 50% of the world population will live by 2030 and 70% by 2050. 

Notwithstanding the long-term impacts that Covid-19 will have on the global economy, cooling and energy efficiency projects represent an important instrument for returning corporates and asset owners back to profitability, whether in the manufacturing, healthcare, real estate or property sectors. SDCL views cooling and energy efficiency projects as “counter Covid-19 cyclical” and as having the potential to play a fundamental role in jumpstarting economic recovery. 

The impacts of Covid-19 may serve to delay cooling and efficiency projects in the very short-term, but the environmental, infrastructure and performance improvements derived from these projects can potentially represent a key part of any regional, municipal or national recovery plan. Responding to the challenges presented by the demand for cooling is critically important if we are to achieve our climate change goals and keep the increase in global temperatures to less than 1.5°C. above pre-industrial levels. Whilst global markets are seeing significant Covid-19-related volatility, projects that deliver essential services at lower costs and produce cleaner and more reliable energy remain appealing to investors.

Sustainable Development Capital LLP is a multinational investment and financial advisory firm, which specializes in environmental infrastructure.