Jamie Melrose, investment analyst, Guinness Global Sustainable Energy fund comments on the energy outlook as spending on building efficiency and electrification could be set to increase to $600billion.
Buildings account for around 30% of global emissions, with space heating, water heating, and space cooling accounting for 60% of their energy use. Decarbonising buildings will require investment into heat pumps to electrify space and water heating; insulation to improve thermal efficiency; and efficient cooling to help inhabitants cope with rising outdoor temperatures. We see spending on building efficiency and electrification increasing from $340bn in 2022 to $600bn per annum from 2026-30, driven by energy security, economics and tightening building standards.
Heat pumps are a vital tool for electrifying and decarbonising heat and reducing reliance on natural gas imports, especially in the EU, where over one‐third of natural gas is used for heating in buildings. European heat pump sales have grown strongly in recent years, increasing by 35% and 39% in 2021 and 2022 respectively, bringing total sales to over 3 million units. This expansion was primarily driven by high gas prices and increased policy support as a result of Russia’s invasion of Ukraine. Heat pumps remain a vital tool to secure Europe’s energy independence from Russia. The EU’s target to install 60 million additional heat pumps between 2023-30 is expected to reduce the bloc’s household gas demand by 40% and would require installations to grow at around 20% per year.
Insulation can help reduce energy consumption from heating and cooling by up to 40%, offering payback periods as short as 1-3 years. We see economics and ratcheting regulation continuing to drive strong growth out to 2030. The industry’s consolidation (>70% share held by nine companies) and regulatory hurdles help to create barriers to entry, allowing them to defend high returns on capital and translate 5-7% revenue growth into earnings growth of 10-15% per annum.
Space cooling is the largest driver of building electricity demand. The number of air conditioning units in operation globally has increased by 2.5 times in the past 20 years and is set to grow by a further 50% by 2030. Thanks to a consolidated industry (the top six players in any market hold 90% share) and a fragmented customer base, air conditioning manufacturers enjoy strong pricing power. Price increases of 1-3% per annum and improved operating leverage have historically allowed them to outpace unit sales (4% per annum) to grow revenues at 6% per annum and profits at 10-12% per annum. We expect a similar pattern out to 2030, with efficiency leaders capturing a disproportionate share of growth.
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