Heating and Cooling: Heat Pump Revolution! Or is it?

we needed to fill. And the reason it was a gap is that heating and cooling are actually a huge part of total energy demand buildings alone account of global energy consumption. She's going to speak with us today regarding two pieces of research her team has written, the Greening of Heat and Decarbonizing US Heat Getting Started. These have a lot to do with gas and electricity and what options we might have in the future to pivot between

the two for heating and cooling. Okay, cool. So both of these reports are available at benf dot com and b NF go on the Bloomberg terminal for our subscribers. If you're interested in becoming a BEANF client, reach out to us at Sales dot BNF At bloomberg dot net, we write about a wide range of topics, including clean energy,

advanced transport, digital industry, innovative materials, and commodities. Please note that Bloombergunny does not provide investment or strategy advice, and you can hear a full disclaimer at the end of the show. Meredith, thank you for joining us. Hi Dana, Hi, Mark, thanks very much for having me such to day. We're going to talk about heat because that's what you spend pretty much all of your time focused on, isn't it. Yeah, pretty much that's new for you, right it is. Yeah.

I've been at Bania for a number of years now, but we only started the team looking at heating and cooling at the end of last year because for us, it was really about finishing the puzzle pieces around the carbonization. If we look around the circled high chart of emissions, we understand power at BENIF very well. We're understanding transport

better and better every single year. Our EV team is great, our autonomous driving team is great, but we haven't had as good of a picture of our solid picture of is buildings and industry. And that's where my team really comes in because it comes to building an industrial demand. A lot of that has to do with heating and cooling. There is a path to decarbonization. You outline this actually on a lot of the research that you do, and it seems to break down into just three areas. You've

got electrification, district heating, green gas. Can you explain to us what each of those three things actually are. Yeah, So when it comes to decarbonizing buildings, what you're looking at mostly is space heating and hot water and hot water provisions for like your showers or that sort of thing, and you need it to be kept at sixty degrees celsius at least so that it doesn't grow bacteria. So you do need heat to be put into that wherever you are in the world now right now, Traditionally we're

using fossil fuels to provide that heat. Very often around the world it's coal gas or oil being provided through a boiler or a furnace that is providing this heat to your home. When it comes to low carbon heating solutions, we do see three pathways, as you said, Dana. So one option is electrification um which is the you of heat pumps or direct electric heating in order to heat your home. What is a heat pump. It's a great question.

I think a lot of people think that they don't know what a heat pump is, but you actually do. It's just an air conditioner running in reverse. So if you imagine that, I don't have an air conditioner, right, So so then we explain it a little bit more. Um, as long as you are above absolute zero in the world, which we always will be, and if we aren't, we got other problems. Uh, You've got latent energy in the ambient environment around you. So even at zero degrees celsius,

there's still energy in the air outside. Even then in the ground outside, there's going to be energy. What a heat pump does is it sends a refrigerant out there and takes in some of that energy by boiling the refrigerant. A electric compressor then compresses refrigerant to put even more energy in the system, and all that gets released as

heat into your home. So you are using you're basically transferring heat from the ambient environment into your house using a very small amount of purchased energy and form of electricity, and this means that you have a huge amount of efficiency from it. So on average, in Europe we would expect that for one kill a lot hour of purchased electricity, a heat pump would produce three point five kill a watt hours of useful heat in your home. And just as a comparison, do either of you guys have gas

boilers in your home right now? I do, and it's broken at the moment. I've got a repairman coming today anyway. So, um, in comparison, those gas boilers that you have, for every one kill abott hour of gas that they're consuming, they're producing around point nine to kill a lot hours of useful heat. So you're just you have under efficiency for

a gas boiler because that's how physics works. But for a heat pump, because they take advantage of this latent energy in the ambient environment, you can have well over in terms of the Yeah, so district heating, what you're doing is you're moving hot water around a series of pipe, so you've created heat in a centralized look asian or

semi centralized location. Usually it's a c HP plant. It could be like waste heat from a facility, or it could be a heat pump, but you're heating hot water that's going around pipes, and then you have a heat transfer unit in your home that takes some amount of that heat into your home and then leaves a slightly colder fluid in the pipe afterwards. And then there's green gas. Now,

what is what what comprises the green gas category? Yeah, so we're using green gas as a catch all term at BNF because there's no real industry standard for what it means. Usually it consists of two or three types of things biogas, so biomethane, hydrogen, and synthetic natural gas, which would be basically methane molecules, but they're cregated through a process like electrolysis. So, of these three, electrification, district heating and green gas, which is got the rosiest future

ahead of it. I think it depends on where you are. Actually, it's a very diverse field. Are in if you're lucky enough to have historic legacy district heating, that's really fortunate when it comes to the carbonization because it's relatively straightforward. Iceland, yeah, or or Denmark is usually the example that you would hear. Um District heating is source agnostic as long as it's operating within a certain temperature range um and that means that you can replace that c HP plant with lookhard

and sources in a pretty stat foremanner. You have to do some digitalization, you have to do some some optimization of the facility, but you can do it everywhere else. It's kind of an open field about whether it's going to be green gas or electrification. And it's kind of the battle that we're seeing in most countries regardless of whether they've got a strong gas grid or not today. So the rosy future kind of depends on the drive

for it. Absolutely yeah, And at the moment, policy is going to be a big determinating factor about where we see the growth opportunities today. The story in the US is a little bit different than the story in Europe. Looking specifically at the States, you identify the fact that in the South it might be more appealing to actually have some of these electrification solutions. Why why is a great question. So the South has a couple of things working in its favor. The biggest one is mild weather.

If you're imagining that heat pump again and it's taking let's say it's an air source heat pumps, so it is that means that it's sourcing its heat from the ambient air outside. What matters for its effectiveness at moving heat from the outside into your home is the temperature

differential between your home and the outside. So if I'm trying to move the water going around your radiators or the air coming out of your air ducts, depending on what type of system you've got in your house, is going to be somewhere around thirty five to seventy five degrees celsius and that temperature differential, So getting the ambient air outside up to that temperature is what the heat pump has to do, and that determines how much electricity

work you have to put into the system. So if you're starting from a point like in a cold climate where it can easily be below zero or negative five degrees celsius, that's a bigger temperature that you have to work over. And as we all probably know from just life experiences, temperature doesn't like to move from a low spot to a high spot. It likes to move the other way. So you're working against nature in that sense. You know, you're adding work to the system through the

electricity purchase. So the electrical demand is what's driving the class competitiveness. Then in these different geographies, half of it so this is half the story. So half the story is that because the winters are more mild and more days are more mild in the South, you're always going to have a higher efficiency for your system because the

system has to work less hard. The other half of the story, though, has to do with cooling, which is the other half of my team's focus, and that's the reverse air conditioner exactly, or the reverse heat pump as you will in this context. So a heat pump can work both ways. You need to add a fan maybe, but you know it can work both ways. As long as that's the case, you basically get too for the

price of one in terms of your upfront cost. And that's a huge deal because heat pumps have a very high upfront cost When you compare them to a traditional gas system, whether it's a furnace in the US or a boiler in Europe. Uh, they're usually out of the money in terms of upfront costs, and that puts off a lot of potential buyers. When you then add in

the price of an air conditioning system. Now in the southern US, you're looking at not just the cost of a gas furnace, you're also looking at a gas furnace and as some sort of central air conditioning system. Instead of getting both of those separate systems, you could just get a heat pump, and all of a sudden, heat pumps start to look really cost effective, both an upfront

cost and operational costs, you know. And just an in personal interest, just been hearing about the northern US and specifically in New York the company Dandelion from Google, So I have two questions about that, and that could help us dip into the players in this in this space as well and into retro for versus new build. But what I've heard from about them is, well, first can clarifies that district heating your heat pumps. It's heat pumps,

and they're specifically ground source heat pumps. So they're looking instead of using the air as their ambient environment, they're using ground so the soil. Okay. I was a bit dubious about it when I first heard of their venture, but it sounds like I got it wrong. It sounds

like they're kind of killing it. What is interesting to me what I've heard is basically that they're putting these into new developments, right so new communities, new build homes, and using it as a marketing tool to bring people to these new communities, right, so they'll say, hey, you know, come to this new community where you're heating and cooling costs basically zero and people are moving to these these new homes. So is that we're gonna be seeing in

this space more and more? What's the future there? Well, So we are actually working on a case study right now that's looking specifically at Dandelion's business model. I didn't know that beforehand, folks, I know that was a perfect plug. So Uh. An analyst on my team, em A Coker, is currently working on that report. Should be on in a couple of weeks. Very exciting to have the chance to plug it in here. Uh. And Dandeliane is really cool. Uh. My understanding is that they do retrofits as well as

honestly is just what I hear. Literally, the thing that there's a couple pieces to unpack there specifically within Dandelion, And the thing that we find really innovative about Dandelion, aside from the way they're working to modularize the way that they do ground source heat pumps, is um the financing model that they provide, so they're providing private sector loans that you pay off over twenty years in order to reduce the upfront cost of a ground source heat pump,

and that can remove that barrier. Because these systems can be eight thousand dollars equivalent in Europe a ground source heat pump, you're talking closer to fifteen sixteen thousand dollars in Europe. These are a huge cost to take. So if you can remove the upfront cost, then you're great. The biggest thing, though, that you're pointing on is about why a new billing would be going for them, And actually this is something that we're seeing across the board,

not just with Dandelion. Across the board, heat pump sales are stronger, probably and often driven by new builds. So um in the southern US you could have six depending on where you are in terms of census region of new build homes that are opting for heat pumps instead of any other heating system at all. And the US on average new builds have a heat pump instead of

any other type of heating system at all. This is not a particularly new business model because we've actually seen this in the solar industry, where I'm hearing comparable upfront costs and My question really is are the payback periods in terms of equal or roughly the same. So that's something we're also working on for this summer, because they're

doing a great job hitching my pipeline um. In terms of how it works compared to solar, they're both very similar in terms of a high upfront cost that you earn back over their operational lifespan. The way that tends to work in solar is that you're reducing your electricity bill. The way that that works with heat pump is that you're using less fuel total than you would have with

your other system. And so what you have to look at is the ratio between the electricity price and the gas price and the efficiency of each of your heating system. So it's a bit more completely complicated of a calculation to do than first solar, which makes it a little bit harder, I think for the average homeowner. But with a new build home, you're almost always going to be having a lower operating cost um and that's usually what

a new bill developers worried about. They're less worried about the upfront cost of the system, They're more worried about the lifespan of this building. And how operational costs are going to be affecting the future tenants or future buyers over time, because having a home that's new with lower

energy bills is more attractive from a bious perspective. Well, I guess the difference is you're going to need a heating and cooling system in a home regardless, but the solar panels seem to be fairly optional because you've got the grid connection exactly and on that. Actually, let me ask you guys a question. Do you know off the top of your head what the hence per kill a

watt hour is? Because we're in the UK for the electricity that you buy versus the gas that you buy, I gotta go well, and this is the thing most people don't write, so most people aren't thinking about this. But depending on where you are, that ratio could be

really high or really low. In the UK, actually the ratio is really off putting for a heat pump, usually because you're probably paying I think the average in the UK is about sixteen pence per kill a lot hour on electricity compared to eight pence per kill a wat hour on your gas. So you would need a very efficient heat pump to make up worth your while in terms of operating costs? Can we go back to policy though in that vein? Is there going to be a time where I'm going to be forced to retrofit my

my house? You know? Regardless am I in trouble in in UK or anywhere else? Maybe in the UK more than anywhere else. Uh So this is a really like you hit on a really serious, Paul, the point that that governments are thinking about today, Like, honestly, this is a core part of the Net zero report in the UK is trying to decide how we're going to incentivize this transition. Historically, the way that incentives for heat pumps

of work has been very similar to solar. You get a subsidy for the upfront cost, or you get a subsidized tariff for the electricity consumed by that system, which would be the equivalent maybe of an export tariff for the solar, and that's the way that you would earn it back. So it's all financial mechanisms that are driving these markets forward right now. What the Committee of Climate Change report is saying is basically is that the best way to go, Because there's a couple of problems with that.

First of all in the UK, it hasn't actually led to a dramatic rise in the optake of low carbon heating. But also there's a big concern around governments about the social costs here because as you get to poor and poorer communities, a larger portion of their income is being taken up by energy bills. So should you be offering financial attentives, should you be offering standards and then paying for those through kind of a national tax program. That's

kind of the ongoing question. So how do you remove the financial barriers and burden from the individual and what do you get a bigger chunk of the change if you went for commercial first, No, because commercial there's fewer commercial buildings, and commercial buildings use heat differently, right, so you have more space heating in commercial buildings, but or space coin depending um on on the type of building

that you're in. For instance, in Bloomberg, we've got a lot of servers in our building, so really all that we have to do is cool the building because we get passive heat provided by most of our servers. Um So it gets a lot more complicated. But you don't have hot water, which around the world tends to be the biggest source overall, because if you think about milder climates, especially developing countries, you don't really need space heating. You

do need hot water. That's not an issue in commercial buildings. So commercial buildings also have a challenge be has Generally speaking, retrofits are more complicated with a low carbon system, and and that has to do with basically the output temperature the system and how fast you can eat your heat your building and how much of a what's called a U loss a heat loss coming out of the buildings,

like a load of factors that affect this. But if you're going to have to retrofit your building in order to have a low carbon heating system, that's harder to do for an office space that it is for a home. So you need to do both. You need to address both, but there's probably different ways that you get to both. The UK is often looking at using tendency agreements and

mortgage agreements as a way to do this. So commercial buildings in the UK, it's either a current policy or soon to be that if you're building has a energy performance rating EPC code below an F you're not going to really be able to resell that kind of commercial building. What they're talking about is looking at the same thing

the tendency laws. So in a right private building, potentially saying that okay, you can't wint out this building if it's below you know, be or whatever on the EPC rating, which is the energy efficiency ratings here in Europe. And so that could be a way that you do with your standards, which kind of takes the financial question out of the hands of the individual buyer, but you do

have to find a way to fund that. From a decarbonization standpoint, Let's say you've got this finite pot of money and you want to spend it on solar or

on your heat renovating your heat system. Which one is going to give you more bang for your buck in terms of decarbonization, it depends on the carbon content of your electricity credit because right now, if your electricity grid is mostly coal, then you know coal's got the highest carbon intensity of any of these In electrifying your heating systems doing no good because you're now switching to coal instead of gas essentially too like really generalize, but if

you're in a region, and this is why we put electrification as one of the pathways to decarbonization. If you're looking at a country where the grid is carbonized, then your electricity isn't the issue. The issues you're heating At that point, Can we go back to the players for a minute. Is this the startup play like Dandelion or are we going to see bigger names? You know, familiar names come into the space right now. There's kind of

like the big five heat pump companies always a big five. Um, I'm not entirely clear on who's in the list of the Big five, but you always hear the big five. But it's it's going to be your typical like Mitzubig Electric di can the big makers of air conditioners are the big players in heat pops? Are they also the installers? Do they have installing installations? Installers tend to be very much like solar, where it is going to be mom

and pop bands doing the installation. A lot of these companies will run training program because installations complicated with a heat pump, and so you need to make sure that someone's installing it properly otherwise it doesn't work. Um, but but it'll still usually be a mom and pop shop that's doing the installation. That said, there are smaller players in this space as well, like the Dandellions of the

world who are doing innovation right now. There's a lot of lack of transparency around the heat pump space, and that allows room for a lot of players, a lot of distributed players, a lot of different types of design, the business models that may or may not be fully competitive with each other because people just have a lack of information to do that comparison. So there's space for

new entrants, yeah, and consolidation. What we're expecting is that as these sectors continue to grow, and we've been seeing some pretty remarkable growth rates for heat pumps in recent years compared to where they were before. They're still a very small portion of total homes, but their growth rates in terms of annual sales of heatpumps have been rising

in Europe in the US. As that continues, you would expect to see the space continue to evolve with new players, entering, players consolidating all of the normal stuff that happens when you start to increasingly commoditize a relatively non transparent sector. What sorts of innovations would help accelerate this, and specifically from cost competitiveness standpoint, So the big conversation right now

within heat pumps is around variable motors. I think I probably have the terms lightly wrong, but it's essentially that the idea is that you can operate your heat pump and your refrigerant flow at multiple speeds. And the reason that you may want to do this is because you don't have to have the heat pump operating all the time. And you can imagine that this can improve the performance of the heat pump dramatically, both in terms of heating your home, but also in terms of like what it

can provide in terms of flexibility to the grid. So if you had to demand response portfolio with a lot of heat pumps and all of them are on variable speed, instead of turning them off and on, you can just ramp them up and down and use that to smooth your grid, for instance. So that's a big exciting conversation right now. Uh. The other one isn't really about costs, are about market size, and that's noise reduction. So heat pumps have a motor, they have a fan, they tend

to be a bit noisy. Uh. They are always designed to be compliant with noise regulations. But how noisy like annoy me? Noisy outside the house noisy you would think we're talking about split systems right now. Um, for the people on listening to the podcast who know what that is. That means that you've got an outside piece as well as an insect piece, and those are generally what you're

talking about when you've got a centralized heat pump. Otherwise you're talking about a package system, which is kind of like a window mountain air conditioner, right um, and those ones they will be about as noisey as a refrigerator. I believe. If you take a look at our barriers to heat pump adoption in Europe, note then we actually

show where heat pumps fall on that scale. Now that means where they're you know, that's the standard operating of them, but they're designed to hit a point for two decibel because that's the noise regulations require of them. So it

adds costs. So there's a lot of investigation being done about what you can do to reduce noise in order to have heat pumps in more concentrated locations, which as multi family housing units with multiple heat pumps, or just to you know, have them become more popular because that is something that a lot of people worry about making heaps exactly. So I'm actually doing a bunch of home retrofits at the moment to try and make my house more carbon friendly. And I want to know how am

I going to find out about these companies? How does one stumble across them or intentionally come across them? And what are the business models that they have for going to market? Yeah, it's a great question. So, and this is something that that is a big topic right now within heat pumps. His education because oftentimes if you can just go to your installer, they may or may not know about a heat pump or be familiar with them.

They may not be trained in how to install them because it's a mom and pop shop and most of their revenues probably come from gas boilers and replacements. So what the heat pump manufacturers do is they work with mainly two types of companies. Well, they first of all, they can just sell them directly themselves. They can also work with a real estate developer, so trying to find real estate partners that they can work with. And this comes back to your question or mark with how the

operating costs work. So they'll work with the building designer to incorporate. He comes right at the start um, so you're seeing more and more conversations between those. And the last is to go with your utility or with a bulk supplier, and both of those are almost distribution venues for these companies, so they can advert basically be the preferred partner for Eon or for E d F or or for whoever. Uh. And that's how you can find out about the heat hump. So the benefits utilities as well.

It does. Yes, for utilities, it can be looked at as a way to increase their relationships with their customers, bringing new customers, have longer customer relationships, have an extra revenue stream coming in from their customers. If it gets combined with a smart home or a flexibility solution. Yeah, there's a lot of interesting conversations happening on that front too. What I find most interesting about this is all these existing massive incumbent players that are going to benefit from this.

Because we talk a lot at the company about potential disruption, but I'm seeing this is more of an opportunity for utilities and potentially you're even saying water companies. Yeah, And I think the question is really around how the gas companies deal with it, probably because some of them are are moving more and more oil and gas companies. You know,

they're increasingly the same thing. But some of them are meeting more into electricity, some of them are looking into heat pumps, and if they do that, then this can be a benefit for them to or it could almost be a challenge because we would expect that a Europe with more electrified heat would also have reduced gust demand. Even if there's more gas band in the power sector than there is today, it would still be less overall gas demand. And so how do you deal with that?

Do you then kind of push for green gas hydrogen as your solution? Do you look for and extremely efficient gas provision of heat, such as an absorption heat pump which uses gas burning as the heat source. What do you do is basically the open question. Meredith, thanks for joining us, no problem, Thanks for having me, Mark and Dana Anytime. Bloomberg any f is a service provided by

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