Electrification is a key theme to Energize’s investment thesis. We invest in software and business model innovations, many of which directly contribute solutions towards decarbonization by means of electrification. In this blog series, we’ll explore this critical transition and the technologies driving and enabling it.
Every day, buildings consume more than 20 percent of the world’s total energy supply, according to BloombergNEF’s New Energy Outlook 2021. In fact, due to population growth, increase in global wealth, and increased economic development, global building energy demand is expected to grow by 42 percent over the next 30 years. While applications like lighting and air conditioning often require electrical energy, other equipment such as boilers and furnaces entail the combustion of gas, oil, or coal. When it comes to building electrification, it’s important not only to consider how we can transition our existing building stock to cleaner, more efficient energy use, but also how we integrate more sustainable approaches into the construction process. At Energize, we see two key strategies whereby software can be leveraged to reduce direct and indirect emissions from buildings:
Building stock changes very slowly. Only about five percent of the total building stock in the U.S. is constructed every year. This means that the vast majority of existing buildings must be retrofitted to make an immediate impact on carbon emissions. Today, reducing electricity use and fossil fuel consumption are the two quickest ways to minimize carbon emissions from buildings.
Let’s start with how we can make electricity usage more efficient. Throughout the U.S., electricity makes up roughly 25 percent of energy consumption in residential buildings and more than 50 percent of energy consumption in commercial buildings [BloombergNEF]. In total, buildings consume 75 percent of all electricity produced in the U.S. – and deploying energy-efficient building technologies (efficient appliances, LED lighting and load management technology) can reduce more than 150 GW of load from the grid. By making buildings more efficient, we can limit the total amount of electricity consumed and therefore reduce the amount of electricity generated by carbon-intensive processes.
However, selling energy efficiency to residential and commercial building owners is a challenge. Competing priorities between stakeholders (the tenant, the property owner, the building manager) create complexities in the sales process. Paybacks with energy efficiency products need to be quick (less than nine months, according to Energize’s analysis), and service needs to be guaranteed so that the tenants aren’t left high and dry if the new technology has issues. Furthermore, the building market is incredibly fragmented, and acquiring customers building-by-building is not easy. Energy efficiency companies must find leverage in distribution strategy to keep customer acquisition costs low. Starting small with a few properties and then expanding across a building owner’s portfolio can be a cash-efficient way to scale an energy efficiency business.
But, upgrading electrical appliances is still only the beginning. The majority of energy consumed in buildings is in the form of direct combustion of fossil fuels. In fact, because of this reliance on fossil fuels, residential and commercial buildings still account for nearly a third of the U.S.’s direct greenhouse gas emissions. And while we’ve been making progress in the U.S., globally we still have a lot of work to do. The rise in global wealth between 2012 and 2019 led to a 10 percent increase in direct building emissions from fossil fuels. According to BNEF, if we want to come close to achieving global net zero goals, we need to spend the next thirty years cutting these fossil fuel emissions by at least 42 percent each decade.
So how do we meet such lofty building emission reduction targets? Companies like Runwise provide a low-touch, quick payback solution for building owners to significantly reduce their direct emissions while also saving on energy costs. With the Runwise system, building owners can optimize heating through advanced controls and have full visibility into building performance.
“Runwise replaces legacy building temperature controls with a low-cost, fast-to-install, wireless monitoring and control platform,” says Lee Hoffman, Co-founder and President at Runwise. “Building operators that use Runwise save up to 21 percent on fuel and electricity costs with a payback in less than a year. Because of the immediate ROI, more than 4,000 buildings use Runwise to-date, and we have expanded across several of the world’s largest real estate portfolios.”
A second way to reduce the amount of direct fossil fuels consumed is to electrify building heating and cooling systems – and then power those systems with renewable energy. For example, heat pumps offer an energy-efficient, all-electric alternative to air conditioners and furnaces. With only one kWh of electricity, heat pumps can transfer three to six kWH of heating or cooling. Because heat pumps exhibit high efficiency and do not consume fossil fuels, they are often discussed as the cornerstone of building net zero targets. According to the IEA, heat pumps could satisfy 90 percent of global heating needs with a lower carbon footprint than gas-fired boilers.
But, like most technologies in the energy industry, economics often dictate the rate of adoption. To reach net zero by 2050, the world needs to add at least 18 million heat pumps per year. Only 10 million heat were pumps sold in 2021 [BloombergNEF]. Longer payback periods and relatively higher costs are currently deterring adoption. The relative capital intensity of heat pumps makes them a difficult sale to most residential and commercial building owners who are interested in immediate economic gains. After all, the building hold period for most real estate owners is only between five and seven years, so longer-term upgrades don’t always fit within their business strategy.
At Energize, we believe that solutions enabling a light-touch, quick payback period will rapidly grow adoption and make the most near-term impact to minimizing carbon emissions at scale. Additionally, if technology installers can implement creative business models or provide unique financing options to their customers, we may also see acceleration in the adoption of longer payback period solutions.
At Energize we believe if you’re long electrification, you’re long construction. Whether it’s a new commercial building or a residential retrofit, electrification will require mass amounts of construction materials. Suppliers of resources like conduit, cable, electronics and solar panels will need to ramp up throughput to meet the demand for electrification initiatives.
However, most of the providers of these supplies are inelastic manufacturing and distribution companies. These companies are currently ill-equipped to manage the influx of this new demand. For example, we’ve learned through our research that when electrical suppliers reach a volume of 30 projects at once, they often become bogged down in back-office soft costs of accounting, finance, and cash management. These functions fail to scale with sales, and the electrical supply company often finds itself struggling to balance credit applications, lien waivers and other essential deadlines.
Software company (and Energize investment) Handle provides a solution by helping electrical equipment suppliers manage the increased demand for electrification products.
“At Handle, we help material suppliers and specialty contractors maintain their payment rights and reduce days-sales-outstanding. Because our platform helps trade partners get paid sooner, the suppliers of electrical, building materials, equipment, and other construction products can now respond to demand and scale their organizations efficiently,” said Chris Woodward, CMO of Handle. “Handle is now processing billions of dollars of invoices with some of the largest construction subcontractors and material suppliers in the world. And, as we continue to see demand increase for green building materials and electrification products, Handle can help the suppliers of these materials manage their cash flow and grow their businesses.”
Reducing the carbon intensity of construction and construction materials will play a key role in making net-new buildings more efficient. Products like cement, steel and aluminum are critical to the buildout of new buildings across the world but are often manufactured in very carbon-intensive kilns or furnaces.
For example, cement is mixed with aggregates to produce concrete – a cheap, yet strong building material that provides the foundation for most of the world’s real estate and infrastructure. However, cement production is highly carbon intensive. A 50-story skyscraper requires over 60,000 tons of cement, which emits 42,000 tons of CO2 emissions in the manufacturing process, according to Energize’s analysis. And, for reference, four billion tons of cement were consumed worldwide in 2019 [BloombergNEF].
So, how do we decarbonize such a vast yet carbon-intensive industry? One solution is carbon capture. Companies like CarbonCure Technologies are injecting recycled CO2 into concrete at the build site. Once injected into the concrete, the CO2 undergoes mineralization to become permanently embedded and sequestered from the atmosphere.
Other technologies are working to reduce the amount of cement and other materials used in construction. Converge.io is embedding smart sensors into concrete slabs to measure temperature and strength during the drying process. The combination of hardware and software helps construction firms optimize concrete usage, saving time, money and emissions. Marketplaces like Reibus helps material suppliers and distributors purchase and sell scrap metals, monetizing excess materials and reducing metal waste. Finally, companies like Modulize are advancing prefabrication to reduce embodied carbon. Offsite manufacturing of prefabricated buildings improves the efficiency of construction and enables builders to leverage new, low-carbon green building materials in the process.
“Modulize is building the single collaborative software for offsite construction,” says Lucas Carstens, the company’s Founder and CEO. “The construction industry currently produces 40 percent of the waste and 40 percent of emissions across the globe. With Modulize, offsite manufacturers will be able to break down project designs more easily into individual building elements that can be manufactured away from the jobsite. This new ability to easily prefabricate projects will reduce time, waste, and emissions, while enabling everyone to more easily integrate green materials into the design of buildings.”
Buildings and construction are a highly capital-intensive, asset-heavy and carbon-exhaustive industry. At Energize, when we see this type of profile, it represents a major opportunity for software solutions to unlock new efficiencies, lower costs and enable more sustainable business operations. When it comes to electrifying and decarbonizing building infrastructure, the key is in balancing economics with ready-to-scale solutions. Software and asset-lite tools that address existing building stock, create rapid payback, and embed in existing distribution are the easiest way to manage building operation incentives while rapidly scaling building volume. As heavy emitters, buildings represent a crucial cog in the race towards decarbonization, and the electrification of buildings through technology will prove essential in meeting global net-zero goals.