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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.
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%.
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.
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:
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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