As most people know by now, last December, Congress passed the American Innovation and Manufacturing (AIM) Act, which gave the Environmental Protection Agency (EPA) the authority to phase down HFC refrigerants to 15% of their baseline levels by 2036. The cuts start next year, as the industry must reduce production of HFCs by 10%, and then a steep cut comes in 2024, when production must be reduced to 60% of the baseline established by EPA.
As a result, the cost of HFC refrigerants is predicted to rise, and it is important to remember that this is a feature of the legislation: the HFC phasedown is designed to create an economic supply imbalance with demand. In terms of basic economics, that means that there will be a reduced supply, scarcity, and subsequently, increased prices.
For grocers, replacing high-GWP refrigeration equipment with low-GWP options such as CO2, ammonia, or R-290 is an expensive proposition, which is why many are choosing to retrofit to lower-GWP solutions such as R-448A or R-449A. But in California (and likely additional states in the near future), if they build a new store — or significantly remodel an existing one — they will have to install refrigeration equipment that has a GWP less than 150, which means investing in more expensive systems.
In the U.S., grocery stores are considered to be one of the least profitable industries, with an average profit margin of about 2%. For small, independent grocery stores, which often operate in underserved communities, profit margins are barely 1% — in a good year — and replacing refrigeration equipment is just not in the budget. Even the less-expensive option of retrofitting to a lower-GWP solution may be out of the question. That is why small grocers will likely continue to repair their existing equipment for as long as possible, although that will become a bigger struggle once the cost of HFCs starts to increase.
This was the subject of one of the presentations held during the North American Sustainable Refrigeration Council’s (NASRC) recent online summit. Aaron Daly, principal at the Ratio Institute, an independent, non-profit organization dedicated to accelerating sustainability in food retail, noted that there are 21,000 independent grocers in the U.S., many of which serve rural and inner city communities.
“Independent stores are a lot less capable of responding to the policies designed to address the phase down of refrigerants,” he said. “In fact, they may be negatively impacted just by the AIM Act itself, which will drive up the cost of refrigerant prices. But if we're going to layer in additional requirements on top of that, such as what California and other states are doing, it could certainly strain their ability to comply.”
That’s because most independent stores not only lack the cash to perform the retrofits, they may not have the option to finance them. These stores have much smaller balance sheets and operate at marginal profitability, which makes it very hard for them to secure low interest financing. Ultimately, if the cost of compliance becomes too high, independent stores could end up closing, which would have a negative impact on the communities they serve.
“If independent markets close, it could lead to the expansion of food deserts, as well as a decrease in the availability of jobs, which would exacerbate economic inequalities,” said Daly.
We don’t know how much HFCs will cost once the production cuts kick in, but in another presentation held during the NASRC summit, the speaker noted that when Europe started phasing down high-GWP refrigerants a few years ago, the cost of HFCs spiked as much as 1000%. Contractors had to scramble to find refrigerant at any price, and a thriving black market for illegally imported refrigerants continues to be a problem in Europe.
Industry experts seem to think that the U.S. will not go down the same path as Europe, but any significant price increases in HFCs will likely hurt small grocers. And if they close their doors, their customers will lose ready access to fresh, healthy food to feed their families, which would be a real tragedy.