SFV Perspectives: The Next Generation of Heating and Cooling
Our take on the opportunities to disrupt vapour compression, a centuries-old technology that powers a $200B industry
By Reid Carroll
Why should you care about the technology that powers heating and cooling, what’s the problem with today’s approach, and what technologies could come to the rescue?
It goes like this:
- As the world heats up, air conditioning is being added in places that have never needed it before
- This new air conditioning leaks refrigerants into the atmosphere and increases peak electricity demand (which typically means burning more fossil fuels)
- Global temperatures are pushed even higher
- Back to Step 1
It is a non-virtuous cycle that is getting a lot of attention, and it’s part of the reason that the IEA projects that 40% of the world’s electricity demand growth in the next 25 years will come from new space cooling loads.
Heating often gets a pass in these discussions, but heat pumps (among the best options for space heating today) use the exact same technology that air conditioning gets vilified for: vapour compression.
Vapour compression was invented nearly 200 years ago, and has powered almost all air conditioning for the last 120 years. The refrigerants inside have global warming potentials (GWPs) 1,000 to 10,000 times worse than CO2, and the technology hasn’t seen meaningful innovation in decades.
What if there was a better way? What if we could do the same heating and cooling more efficiently? What if we could get rid of refrigerants altogether?
At SFV, we’ve been pitched by a number of startups who are attempting to do just that.
On one hand, the opportunity for these startups is enormous. Air conditioning and heat pumps are both high growth, ~$100B+ markets, and essentially all of that equipment runs on vapour compression. If a new technology could credibly displace vapour compression with something better (even for just a subset of these markets) the scope of their opportunity would be massive. On the other hand, there are a lot of challenger technologies out there — many are unlikely to reach commercial scale.
To get our heads around where the best opportunities might lie, we’ve done a deep dive into the technologies vying to re-engineer the way we heat and cool the world.
As usual, our aim in publishing is to drive engagement and debate, so please comment, share, or tell us what you disagree with!
The biggest issue, by far, is the electricity demand at peak times from cooling and electrified heating. The solutions are twofold: (i) load shifting to reduce peak loads (several SFV portfolio companies are working on this), and (ii) higher efficiency equipment (more on this later).
Other than electricity demand, the most commonly cited problem with vapour compression is refrigerant leakage.
Estimates vary, but the cumulative GHG emissions associated with leaked refrigerants are projected to be the equivalent of 57GT of CO2 emissions over the next 30 years.
This is a big problem, but it comes with some nuance — this isn’t the first time that refrigerants have been circled as a problem:
- CFCs — an early refrigerant that was destroying the ozone layer — were replaced with HFCs in the 1987 Montreal Protocol
- HFCs were better for the ozone layer but much worse for the environment, so they are being phased down and replaced with HFOs after the the 2016 Kigali Amendment (an ongoing phase-down, but one ratified by 151 countries)
- As the climate intensifies, HFOs are now under scrutiny. Europe and US states including California, Washington, and Vermont are looking at phasing out everything other than natural refrigerants and refrigerants with a GWP below 750.
These increasingly stringent requirements are often cited by startups as a reason that their technologies replacing vapour compression will be primed for mass adoption.
The counterargument to this is the rise of natural refrigerants like propane, ammonia, and CO2. Each of these have a global warming potential of ~1 and offer the potential of increased efficiency compared to current refrigerants. Furthermore, implementing propane and ammonia only requires incremental changes to the way HVAC equipment operates today.
While these natural refrigerants do come with downsides (propane is flammable, ammonia is toxic, and CO2 requires high operating pressures), they’ve already been proven commercially. Viessmann, the German heat pump giant, is well on its way to transitioning entirely to propane as the refrigerant in its heat pumps.
The potential of natural refrigerants is one of the reasons that we invested in Gradient, a window heat pump startup that is well-positioned to switch to propane when regulations allow (thanks to a refrigerant loop that is entirely outdoors). Gradient’s unit is also designed to offer load flexibility to the grid.
The Next Frontier of Heating and Cooling
With all of this as context, we believe that new technologies (i.e. tech other than vapour compression) must do more than displace harmful refrigerants. They need to either (i) offer step changes in efficiency or (ii) unlock new performance, reliability, or cost characteristics.
Here are the companies that might fit the bill:
While there are many promising technologies in this map, two stand out in terms of (i) potential and (ii) quantity of venture-backed startups. The remainder of this piece will explore each in more detail.
Disclaimer — we’re going to get technical from here…you’ve been warned!
1. Desiccants (Efficient Dehumidification)
The context: The energy needed to run an air conditioning unit comes from two steps:
- Sensible cooling: this is the energy to reduce the temperature in a space. With sensible cooling alone, relative humidity would go up.
- Latent cooling: this is the energy to remove moisture from the air (which is coming from occupants and outdoor ventilation air). Keeping humidity at appropriate levels is essential for comfort and air quality.
The problem with current air conditioning processes is that both happen simultaneously — cooling coils are typically over-cooled (relative to the sensible cooling requirement) in order to condense the humidity out of the air. The companies in this category are working on novel ways to separate the latent cooling step so that existing cooling processes can be performed 50%+ more efficiently.
Types of technology:
- Liquid Desiccants utilise a liquid solution with an affinity for water to passively absorb humidity from the air. The desiccant then needs to be “regenerated” so that it is ready to absorb more moisture, a process that is usually done using heat. Liquid desiccants typically offer more dehumidification control than their solid desiccant counterparts, and regeneration efficiency tends to be a bit higher. This isn’t a new concept though, and historic issues have included corrosion (from the solution getting into ductwork) and cost / complexity (including efficient regeneration). Several companies have working test units targeting the rooftop air handler market and are planning to launch commercially in the next two years.
- Solid Desiccants are similar to liquid but take advantage of the fact that solid desiccants can be smaller and do not come with the ductwork corrosion risks of liquids. The issue has been deploying them in cost-effective and scalable ways — the main use case today is in energy recovery ventilation units. For other applications, which could include any class of air conditioning, commercialisation is still a couple of years away.
- Membrane dehumidification leverages membranes to separate water for efficient latent cooling. There are a few early-stage startups in this space, but commercialising this technology is still a number of years out.
Companies to know:
- Transaera (solid desiccant) is using a material class called metal organic frameworks to extract moisture from the air, which is then regenerated by the compressor heat. Their material offers a step change in adsorption capacity compared to other solid desiccants.
- Blue Frontier (liquid desiccant) is using a concentrated salt solution to perform dehumidification efficiently and store energy. By regenerating the solution — using a heat pump — when energy is cheap and green, Blue Frontier can reduce peak energy demand by up to 90%. Their rooftop air handlers also leverage “free” evaporative (sensible) cooling to further increase efficiency.
- Mojave (liquid desiccant) is combining a proprietary desiccant absorption/desorption process with two regeneration techniques. The first is a thermal regeneration that takes advantage of otherwise-wasted compressor heat, and the second is an even more efficient electrochemical process.
Takeaway: With several companies well on their way to solving issues around reliability and first cost — and thus unlocking huge efficiency gains — we believe there is significant potential for a breakout company in this category.
2. Solid State Technologies
The context: This is the “materials science breakthroughs” category. Vapour compression takes advantage of the fact that traditional refrigerants change temperature at different pressures. Solid state technologies work similarly — they leverage solid materials that change temperature in response to various external fields, such as magnetic fields or pressure. Compared to vapour compression, solid state technologies have a tantalising potential — they could be quieter, greener (no refrigerants to leak), safer (compared to natural refrigerants), more reliable (fewer moving parts to break down), and even cheaper (simpler designs).
Types of technology:
- Barocaloric materials change temperatures in response to changing pressures. These materials are affordable and could lead to heat pumps that are cheaper, greener, and safer than those based on natural refrigerants like propane. Startups still need to crack the high pressure requirements and prove that they can deliver efficiencies on par with vapour compression. This technology is potentially applicable to any HVAC use case or capacity, but is likely a number of years from commercialisation.
- Thermoelectric materials change temperatures in response to changing electrical fields. Because thermoelectric heat pumps will involve no moving parts, they hold promise to be significantly more reliable than their vapour compression counterparts. The issue with thermoelectric has always been efficiency, particularly at high temperature lifts. Phononic, a North Carolina-based startup founded in 2008 has successfully commercialised this technology in refrigeration applications, but thermoelectrics are still at least a few years away from being commercialised in HVAC.
- Magnetocaloric materials change temperatures in response to changing magnetic fields. The potential efficiency gains from magnetocaloric cooling are compelling — anywhere from 25% to 40% — but many technologies depend on expensive rare earth elements and tend to be quite heavy. Products to-date have primarily been beverage coolers, so it remains to be seen whether anybody will be able to scale magnetocaloric products to HVAC-level capacities, but refrigerators are on their way to market imminently.
Companies to know:
- Pascal (barocaloric) has figured out how to dramatically reduce the pressures needed to activate barocaloric materials, and are aiming to produce heat pumps that are cheaper and more efficient than vapour compression.
- Mimic Systems (thermoelectric) is using advanced power electronics controls to achieve efficiencies that have thus far eluded thermoelectrics in the HVAC sector. Mimic’s team aims to disrupt the residential heat pump space with units that are quieter and last longer than vapour compression units.
- Magnotherm (magnetocaloric) is on the verge of bringing magnetocaloric solid state technology to market, starting with beverage coolers, refrigerators, and, eventually, hydrogen liquefaction.
Takeaway: Time-to-market and de-risking of R&D are key concerns from a venture perspective. Our belief is that the commercialised versions of these technologies will need to come with clear and indisputable adoption drivers, whether that be cost, efficiency, or reliability. We’re excited to see strong teams working in this space and will be watching their progress closely.
This opportunity fundamentally comes back technical innovation — disrupting vapour compression hasn’t happened for a reason, and there will be compelling outcomes for anybody who pulls it off.
Beyond this obvious technical risk, our concerns largely centre around (i) go-to-market, and (ii) competition:
- GTM: technology licensing approaches can be problematically slow, while the alternative — producing packaged units in-house — comes with manufacturing, supply chain, and capital efficiency challenges and therefore requires a team with a very particular set of skills.
- Competition: heating and cooling is dominated by a handful of large OEMs who aren’t sitting idly (the two winners of the Global Cooling Prize were Daikin and Gree, two of the largest air conditioning manufacturers in the world). We’re particularly interested in startups with technology that makes them attractive partners for these large manufacturers.
Despite the challenges, heating and cooling is a huge global market that is ripe for disruption, and we’re optimistic that these next-generation technologies will produce a couple of significant venture winners.
If you’re building a company in this space, please reach out. We’d love to meet you!