Last year was a pretty good one for manufacturers, according to Air-Conditioning, Heating, and Refrigeration Institute (AHRI), which reported shipments of HVAC equipment increased in 2014. Year-to-date combined shipments of central air conditioners and air-source heat pumps increased 11.1 percent, and U.S. shipments of gas warm air furnaces increased 5.1 percent over the same period in 2013 (oil warm air furnaces increased 8 percent).
While it's good news sales are in positive territory, there is still concern the economy is not growing at a particularly brisk rate. “This has not been a robust recovery, and it will not be a robust recovery,” said Ed Purvis, COO of Emerson Climate Technologies Inc. and chairman of AHRI. “We’re in our third or fourth year now of seeing mid-single-digit growth, and I think that’s going to continue. I don’t think we’ll see double-digit growth in this marketplace — it’s going to be strong single-digit growth for the foreseeable future.”
Returning to Normal
Even though growth remains modest, manufacturers are beginning to see signs the market may be returning to prerecession conditions. “We believe the industry will exhibit more normal growth patterns in 2015,” said Shawn Laskoski, vice president of product management — residential HVAC, Ingersoll Rand. “Residential new construction still lags by historical measures of production and should continue to recover. On the flip side, multi-family new construction production is now slightly above average, but is supported by favorable conditions.”
One reason why the multi-family new construction market is growing is due to the fact that even with strong new construction and ultra-low interest rates, it’s still difficult for new, first-time home buyers to purchase a home, said Kelly Hearnsberger, vice president of marketing, Daikin North America LLC. “We are cautiously optimistic about 2015, though. New housing starts dropped from their high in 2005, but have been on the rise ever since, which is great for the HVAC new construction sales.”
Commercial construction has also been healthy over the last two years, and there are expectations of continued growth in 2015 and 2016, said Hearnsberger. “Office and retail are expected to lead the growth, but the revival of the institutional sector will also play a big role, due to growing demand for new health care and educational facilities. The commercial rooftop replacement market also continues to be strong and new opportunities, primarily in new construction, have provided significant growth for VRF/VRV [variable refrigerant flow/variable refrigerant volume] products in 2014.”
In fact, according to at least one recent report, VRF systems and ductless mini splits and multi splits are the fastest-growing segments in the HVAC market today, said Allan Dziwoki, senior vice president of sales, marketing, and operations, Mitsubishi Electric US Inc. Cooling & Heating Division. For these segments, growth has been strong across all applications.
Geothermal sales are also increasing across all sectors, said Tom Huntington, president and CEO, WaterFurnace Intl. Inc., with the residential, commercial, industrial, and institutional sectors all experiencing significant growth in 2014. “We expect residential single-family installations to be particularly strong in 2015, although we will keep a cautious eye on those states that rely on the oil and gas industries. When people experience growth in wages and see a rebounding economy, it increases their confidence levels. Those increases in consumer confidence help fuel growth in the HVAC market.”
Purvis believes as the economy continues to improve, the recovery will become even more broad-based than it has been to date. “But, so far, this continues to be a market where consumers only buy a new unit when the old one breaks, and they’re typically buying lower efficiency equipment, which will continue to be a challenge for the OEMs. I think we’re going to continue to see people who’ve deferred repairs come back into the marketplace, but it’s not going to be a wave. It will happen slowly, over time, as wages increase and unemployment drops, but we’re not going to see the market jump 10 or 15 percent.”
One issue that could hinder growth this year is the Department of Energy’s (DOE) new regional efficiency standard that went into effect Jan. 1. The standards increased the minimum cooling efficiency requirements for split-system central air conditioners and heat pumps in the South and the Southwest as of the New Year, but it is too early to tell what effect they might have on the market.
“Regional efficiency standards are a good idea, but the problem we see is the enforcement of those standards,” said Dziwoki. “While an 18-month grace period has been granted, the underlying problem is that the implementation is based on the date of installation instead of the traditional date of manufacture. This may cause the inventories of old models to be stranded instead of allowing that inventory to be used up during the first few months of the new standards’ implementation.”
The new efficiency standard has clearly created some short-term complexity for dealers, said Laskoski, in that homeowners will be offered both the newer efficiency units and the previous minimum efficiency units for much of the cooling season. “But, moving to a higher efficiency is definitely a benefit for the building occupant. While the initial cost will be higher than the previous lower-efficiency units available, the gap has closed enough to make the energy savings return attractive in almost every instance.”
There are complexities involved for manufacturers, as well, in that they had to make changes to the Energy Guide labels. “We added a secondary label to help identify products subject to the regional standards, and we provided training to employees, distributors, and dealers, said Hearnsberger. “But changing from 13 SEER to 14 SEER is not as significant as the 10- to 13-SEER change was in 2006, and, overall, it will be good for the U.S., as it will further reduce energy consumption.”
Along with the new regional efficiency standards, the DOE is also implementing new energy-efficiency standards for reach-in/walk-in equipment and ice machines, which are very problematic, said Purvis. “They are demanding dramatic efficiency improvements that will ultimately mean products will become more expensive, causing end users to make different decisions about what they buy, which will have negative impacts on the industry. We’re disappointed in the position DOE is taking in implementing these new standards.”
Other legislative matters that manufacturers are watching closely include the 30 percent federal tax credit for geothermal installations, which is set to expire in 2016. Huntington expects the tax credit to be extended, “However, we see utilities and states being much more active and, in our estimation, they can help offset the negative impact of a tax credit expiration, if it were to happen.”
He is also watching the Shaheen-Portman Energy Savings and Industrial Competitiveness Act, which is a bill whose goal is to increase the adoption of off-the-shelf efficiency technologies in order to save businesses and consumers money, make America more energy independent, and reduce emissions. “It has favorable language for geothermal, and, thanks to bipartisan support, we hope to see it become law by summer.”
Another issue that could impact the market this year is the Environmental Protection Agency’s (EPA) plan to phase out hydrochlorofluorocarbon (HCFC)-22 by 2020, which includes a drastic cut this year. Should there be a resulting shortage of R-22, the primary challenge will be the potentially high cost to replace refrigerant in older equipment that is just reaching the age where it may need to be repaired, said Jeff Staub, application engineering manager, Danfoss.
“For homeowners, that added expense could not only shift the balance of when to service and when to replace equipment, but also could have implications associated with the improper use of non-virgin or non-reclaimed R-22 to save costs,” noted Staub.
The issue becomes more complex when the decision is made to replace R-22 equipment, since — with a lot of regulatory movement to phase down or de-list certain commercial refrigerants that have high global warming potential (GWP) — it will also be necessary to choose, or even predict, which refrigerant will be the best long-term option, said Mark Menzer, director of public affairs, Danfoss. “We expect the EPA will issue a rule on this through its Significant New Alternatives Policy (SNAP) program by midyear.”
Purvis hopes the EPA will let the industry help decide which refrigerants can be used to meet their targets, but he doubts that will happen. “The EPA is pushing back hard, basically mandating which refrigerants we have to use, and that is a mistake. The industry has always supported phasing out high-GWP refrigerants, but when they start telling us how to do it, and which refrigerants can be used in which applications, the ultimate goal of reducing global warming or increasing energy efficiency becomes less achievable. We want to work with them on setting proper targets and standards, but then we’d like them to get out of the way and let the industry do what it does best — which is find the right solution.”
Publication date: 3/16/2015