Today’s energy ecosystem has, up until now, been characterised as a centralised, predictable, and vertically integrated system, demonstrating a linear process of energy generation, transmission, distribution and consumer use.

Yet grid power supply is increasingly intermittent. In the US, the frequency of blackouts has grown 4x since the early 2000s, driven by a combination of factors including peak load increases brought about by widespread electrification and uptake in smart devices; ageing grid infrastructure; and the growing frequency of extreme weather events.

Buildings will be at the heart of the future energy ecosystem

Addressing power reliability requires a combination of building electrification and integration of distributed energy resources(DERs). Building electrification entails swapping gas furnaces, water heaters and cookers for electric appliances such as heat pumps, induction stoves and hybrid water heaters. Among other benefits, these measures are up to 4x more efficient and facilitate decarbonisation as grids move towards renewable energy sources.

Once fully electric, buildings will need to harness distributed energy resources  (onsite and offsite) and storage systems (including EV batteries) to facilitate energy demand flexibility. In particular, the peak load shaving ability of energy storage systems mitigates grid instability and provides a backup power source during blackouts. Leveraging distributed energy resources also reduces the additional load on the grid brought about by the widespread adoption of IoT devices and their related applications (i.e., home automation, BEMSand EMS).

PwC’s State of Climate Tech 2021 highlights the low investor allocation to building level electrification and integrated distributed energy resources relative to other climate technologies. Investments in electric HVAC, electric appliances and building-level storage startups with over $1m total funding nearly doubled YoY to reach $201m. Comparatively, EV investment volumes grew 281% YoY to $58bn, with adoption expected to surge from 2% of global vehicle sales to 24% by 2030.

Yet with 64% of EV charging demand expected to come from home charging, around 55 million chargers will need to be installed in buildings worldwide. In this way, EV adoption is reliant on the ability of buildings to leverage distributed energy resources at scale.

This likely explains why, within built environment climate solutions, building level electricity and thermal storage was the fastest-growing vertical in H1 2021, registering a YoY growth rate of 181%.

Regulatory momentum will drive investment volumes in 2022

While building codes and economic incentives are applied at the hyper-local city level, they demonstrate ripple effects. This is clear in the growing regulatory momentum surrounding the electrification of new building stock. In 2019, Berkeley (CA) became the first US city to ban gas in most new buildings. Since then, 56 cities and towns across the US have followed suit. Most recently, New York Citybecame the largest city in the world to gradually ban gas in new buildings from 2023.

Regulations surrounding electrification of existing buildings, solar plus storage, and integrated EV chargers are nascent, yet there are emerging signs of building code adoption. According to Sara Baldwin, Director of Electrification Policy at Energy Innovation, “2021 was a hallmark year for electrification policy and market transformation”.

Notably, Ithaca (NY) became the first US city to mandate the electrification of all existing buildings by 2030. Meanwhile, California state updated their building code to require all new multifamily and commercial structures to integrate solar plus storage. The amendment comes into force in 2023 and requires storage capacity to cover c. 60% of a building’s electrical loads. For single-family units where storage remains cost-prohibitive, amendments require units to have compatible wiring and electric panel capacity for the later addition of battery storage once prices fall. Regulatory momentum seen in 2021 will change the constraints of building electrification in the US market in 2022 and beyond.

Market barriers and opportunities

For the most part, the hardware underpinning electric HVAC, water heating and appliances already exists, is readily available and is increasingly cost-effective. Meanwhile, solar plus storage adoption will continue to increase as PV and battery price points decline, time of use (ToU) energy rates become widespread, and local regulation develops.

As such, many of the hurdles will be seen in: access to capital; misaligned stakeholder incentives and fragmented decision structures; low standardisation of stock; consumer inertia; and low electrical capacity in buildings that were not built with full electrification in mind. At A/O, we are particularly excited about innovations that address these frictions, with potential applications across multiple real estate asset classes:

• Turnkey retrofit platforms. High upfront costs, low price transparency, long payback periods and limited financing options are exacerbated by labour shortages in skilled trades and component delays. Typically, appliances are replaced at the point of failure every 10-15 years. With more than half of new residential stock in the US still built with gas appliances, there are limited opportunities to replace incumbents. This is compounded by consumer and contractor misperceptions of the quality of electric alternatives. Turnkey retrofit platforms reduce decision making complexity and eliminate upfront capital costs by coordinating project scoping, lending and pricing with contractors.
• Simplified inspection and installation processes. Buildings, contractors and local regulations are heterogeneous, making it difficult to scale solutions beyond a given city or region. Many different hardware pieces are required in solar plus storage installations. Solutions that standardise equipment, pre-integrate components and reduce the amount of wiring work required by an electrician save time and associated costs.
• Integrated systems and sub-circuit level control. Fully electrified homes require electric panels with at least 200A capacity. With an estimated 59% of existing US homes and most new stock feature wiring and electric panels with 150A or less capacity, 77 million US homes (and counting) will require electric panel upgrades. Such replacements can be combined with platforms that enable buildings to optimise power supply within a bi-directional grid, managing electricity supply and the operation of storage devices and EVs. In 2021, A/O announced our investment in Span, a smart electric panel that, among other benefits, allows tenants to: monitor and control electricity usage at the appliance level; estimate off-grid capacity; charge EVs faster using a custom mix of solar, grid and storage; and control the order in which the battery will shut off circuits in the event of a blackout.
• Decentralised generation and storage. Regulation will drive the emergence of community-level distributed energy resources (including microgrids and virtual power plants), which improve grid flexibility through electricity demand management and resource selection optimisation. Solutions that facilitate distributed energy resources coordination and trading within a community will be essential for the operation of a stable renewables powered grid.

At A/O, we are actively investing in technologies that enable buildings to partake in a decentralised energy ecosystem. Are you tackling the electrification challenge? Get in touch!

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