Are Current Government Regulations on HVAC Systems Moving in the Right Direction Regarding Sustainability for CRE and ESG?

The HVAC industry is undergoing a significant transformation driven by increasing awareness of environmental concerns and a growing emphasis on sustainability. Government regulations play a crucial role in this shift, pushing for greater energy efficiency and the adoption of eco-friendly refrigerants. This report examines current government regulations on HVAC systems in the US, focusing on their impact on commercial real estate (CRE) and Environmental, Social, and Governance (ESG) factors. It also explores proposed changes, international comparisons, and available incentives for sustainable HVAC systems.

Current Government Regulations on HVAC Systems in the US

Several key regulations govern HVAC systems in the US, primarily aimed at improving energy efficiency and reducing the use of harmful refrigerants.

Energy Efficiency Standards

The Department of Energy (DOE) sets minimum Seasonal Energy Efficiency Ratio (SEER) ratings for residential air conditioners and heat pumps. As of January 1, 2023, these standards were updated, requiring higher SEER ratings for new systems¹. In northern states, the minimum SEER rating for split systems increased from 13 to 14, while in southern states, it rose from 14 to 15². These changes are intended to promote energy conservation and reduce greenhouse gas emissions.

To better illustrate these changes, the table below summarizes the minimum SEER ratings for different regions and system types:

Refrigerant Regulations

The American Innovation & Manufacturing Act (AIM Act) of 2020 empowers the Environmental Protection Agency (EPA) to regulate hydrofluorocarbons (HFCs), potent greenhouse gases commonly used as refrigerants³. The EPA is phasing down HFC supplies by reducing their production and consumption over 15 years, beginning in 2022 with a 10% reduction and continuing with further reductions in subsequent years³. In October 2023, the EPA finalized the Technology Transitions Restrictions, establishing GWP limits for HFC applications⁴. This rule sets a 700 GWP limit for air conditioners and heat pumps by 2025, effectively prohibiting the use of R-410A, a common refrigerant with a GWP of 2,088⁴. Responding to industry concerns, the EPA issued an interim final rule in December 2023 allowing for the installation of higher-GWP HFC equipment manufactured or imported before January 1, 2025, until January 1, 2026⁴.

SEER2 and HSPF2 Ratings

Along with increased SEER ratings, the DOE introduced new testing procedures in 2023 to better reflect real-world HVAC performance². These tests consider factors like ductwork and external static pressure, leading to the introduction of SEER2 and HSPF2 ratings⁵. While the efficiency levels are similar to the original SEER and HSPF ratings, the new SEER2 and HSPF2 ratings use a different testing methodology and therefore represent a change in how efficiency is measured¹. This provides a more accurate measure of efficiency and a shift in how HVAC systems are evaluated.

Impact of HVAC Regulations on Commercial Real Estate (CRE)

The new HVAC regulations have significant implications for commercial real estate. Building owners and managers must navigate these changes to ensure compliance and optimize building performance.

Increased Costs

The transition to higher SEER ratings and new refrigerants will likely lead to increased upfront costs for new HVAC systems⁶. Building owners need to factor these costs into their budgets and consider the long-term energy savings that these more efficient systems offer.

Retrofitting Existing Systems

While the regulations primarily focus on new HVAC systems, existing buildings with older refrigerants like R-22 may face challenges in the future⁷. Although R-22 systems can still be serviced, the availability of components may decrease over time, potentially requiring costly retrofits or replacements.

Compliance and Record-Keeping

The new regulations place greater emphasis on compliance and record-keeping⁵. Contractors in certain regions must maintain detailed records of installed systems for a minimum of four years⁵. This requirement underscores the importance of proper documentation and adherence to the new standards.

Optimizing CRE Investments

Optimizing HVAC systems can significantly benefit CRE investments. By complying with air quality regulations, asset managers can meet building standards like WELL and BREEAM, making office spaces more attractive to tenants and boosting investment profiles⁸. Furthermore, efficient HVAC systems contribute to operational efficiency and help meet ESG goals by reducing energy consumption and carbon emissions⁸.

Impact of HVAC Regulations on ESG Factors

ESG considerations are increasingly important for businesses, and HVAC systems play a significant role in a building's environmental impact.

Environmental Impact

HVAC systems are major energy consumers in commercial buildings, often accounting for at least 40% of a building's total energy use⁹. By promoting energy efficiency, the new regulations contribute to reducing greenhouse gas emissions and minimizing a building's carbon footprint¹⁰. The phasedown of HFC refrigerants further supports environmental goals by limiting the use of potent greenhouse gases¹¹. In addition to energy consumption, HVAC systems impact ESG through water usage and waste reduction. Minimizing water usage in cooling towers and cooling systems directly improves sustainability¹⁰. Proper disposal of hazardous waste from HVAC systems, such as compressor oil, used filters, refrigerant, and cooling water blow-off, is also crucial for meeting ESG targets¹⁰.

Social Impact

Improved indoor air quality (IAQ) is a key social aspect of ESG¹². HVAC systems play a vital role in maintaining IAQ, and regulations that encourage proper ventilation and filtration contribute to a healthier and more productive work environment.

Governance

Compliance with HVAC regulations demonstrates a commitment to good governance¹². By adhering to these standards, building owners and managers demonstrate their responsibility towards environmental sustainability and the well-being of occupants. Failing to maintain a sustainable and efficient HVAC system can be viewed as a failure of corporate governance by ESG-conscious investors, potentially impacting shareholder trust and investment decisions¹².

Set Point Management and Maintenance

Effective set point management and regular maintenance are essential for optimizing HVAC systems and achieving ESG goals¹³. Adjusting the chilled water outlet temperature by even 1 degree can significantly impact energy consumption, affecting a building's energy optimization targets¹³. Regular maintenance of various HVAC components, such as cooling towers, pumps, chillers, and air handling units, ensures efficient operation and minimizes environmental impact¹³.

Proposed Changes to HVAC Regulations and Their Potential Impact on Sustainability

The HVAC industry can expect further regulatory changes in the coming years as the focus on sustainability intensifies.

Transition to A2L Refrigerants

The EPA is likely to require a transition to A2L refrigerants by 2025¹⁴. These refrigerants have a lower GWP than current alternatives but are mildly flammable¹⁴. This shift will necessitate training and safety measures for HVAC technicians and may influence the design and installation of new systems. It is important to note that while new systems will be required to use these refrigerants, service parts and refrigerants will remain available for existing R-410A systems¹⁵.

Continued Focus on Energy Efficiency

The DOE is expected to continue raising energy efficiency standards for HVAC systems¹⁶. This ongoing trend will drive innovation in HVAC technology and encourage the adoption of more sustainable solutions.

International Comparison of HVAC Regulations

The US is not alone in its efforts to regulate HVAC systems for sustainability. Many countries have implemented their own regulations, with varying levels of stringency.

Europe and Asia

While the US is making progress in HVAC efficiency, other countries, particularly those in Europe and China, are ahead in adopting variable-speed technology for residential AC units¹⁷. These units typically achieve higher SEER ratings and offer greater energy savings compared to traditional systems. This suggests that the US could further enhance its regulations by promoting the wider adoption of variable-speed technology.

Global Collaboration

The Kigali Amendment to the Montreal Protocol, supported by the US and 196 other parties, requires an 85% phasedown of HFCs by 2036 for developed nations⁷. This international collaboration demonstrates a global commitment to addressing climate change through refrigerant management.

Varying Standards

Even within regions with common standards, like Europe, individual countries may have different local regulations covering aspects such as air leakage ratings, fire resistance, and ductwork quality¹⁸. This highlights the complexity of international HVAC regulations and the need for manufacturers and installers to be aware of specific requirements in different markets.

Benefits of New HVAC Regulations

The new HVAC regulations offer several benefits, contributing to both environmental sustainability and economic savings.

Positive Environmental Impact

By increasing energy efficiency and phasing down HFCs, the regulations help reduce greenhouse gas emissions, mitigating the impact of HVAC systems on climate change¹⁴. This contributes to a cleaner environment and supports global efforts to combat global warming.

Reduced Utility Bills

Higher SEER ratings and more efficient systems translate to lower energy consumption, resulting in reduced utility bills for building owners and occupants¹⁴. This can lead to significant cost savings over the lifespan of an HVAC system.

Incentives and Rebates for Sustainable HVAC Systems

Various incentives and rebates are available to encourage the installation of sustainable HVAC systems.

Federal Tax Credits

The federal government offers tax credits for energy-efficient HVAC systems through programs like the Residential Energy Efficiency Tax Credit¹⁹. Homeowners can claim a percentage of the cost of qualifying equipment, up to a certain limit¹⁹.

State and Local Rebates

Many states and local governments offer their own rebate programs for energy-efficient HVAC systems¹⁹. These programs vary in their eligibility requirements and rebate amounts.

Utility Rebates

Utility companies often provide rebates for customers who install energy-efficient HVAC systems²⁰. These rebates can help offset the upfront costs of upgrading to more sustainable equipment.

Manufacturer Rebates

HVAC manufacturers also offer incentives to promote the sale of their energy-efficient products²⁰. These incentives can include rebates, trade-in allowances, and special promotions.

Conclusion

Current government regulations on HVAC systems in the US are moving in the right direction regarding sustainability. By promoting energy efficiency and phasing down harmful refrigerants, these regulations contribute to reducing greenhouse gas emissions and improving IAQ. The impact on CRE and ESG is significant, with building owners and managers facing both challenges and opportunities in adapting to these changes. Increased upfront costs for new systems and the need to retrofit existing buildings are among the challenges. However, the long-term benefits include lower operating costs, improved building performance, and enhanced ESG profiles.

While the US is making progress, international comparisons reveal that other countries are ahead in adopting certain technologies, such as variable-speed AC units. This suggests potential areas for improvement in US regulations. The transition to A2L refrigerants, while environmentally beneficial, also presents challenges related to safety and installation practices. Continued focus on energy efficiency and increased international collaboration will be crucial for driving further progress in sustainable HVAC solutions.

Stakeholders in the CRE industry should proactively engage with the evolving regulatory landscape and embrace sustainable HVAC solutions. By taking advantage of available incentives, investing in energy-efficient equipment, and prioritizing proper maintenance, building owners and managers can contribute to a more sustainable future while optimizing their investments and meeting ESG expectations.

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