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BUILDING EFFICIENCY: The Largest Segment of U.S. Advanced Energy Keeps on Growing

Market Report Series - Building Efficiency-730

This is one in a series of excerpts from the Advanced Energy Now 2019 Market Report, prepared for AEE by Navigant Research.

Consistently the most reliable growth segment of advanced energy globally and in the United States, Building Efficiency continued to grow in 2017 and 2018, spurred by technology innovation, government climate and greenhouse gas (GHG) reduction requirements, and a move toward business models that produce recurring revenues. Globally, revenue reached $298.5 billion in 2018 after growing 9% from 2017 to 2018 and 1% from 2016 to 2017. In the United States, Building Efficiency revenue grew to $83 billion, up 10% from 2017, following an increase of 9% the year before. Counting only products for which we have data for all years, U.S. Building Efficiency revenue more than doubled from 2011 to 2018, for Compound Annual Growth Rate (CAGR) of 11%, while global revenue has more than tripled over the seven years, also for CAGR of 11%.

Globally, climate targets and consumption regulations adopted by national and local governments continue to drive adoption of efficient and intelligent building technologies. Buildings account for about one third of total global final-use energy, over half of electricity demand, and just under 10% of energy-related CO2 emissions.

Lighting remained the largest subsegment with $139.5 billion in revenue in 2018, up 4% from 2017, following 7% growth the year before. Since the commercialization of LED lighting technology, the growth of energy efficient lighting has been extraordinary. However, a greater penetration of the installed base and declining prices are beginning to temper the sustained double-digit growth the segment has experienced.

In other notable categories, revenue from Smart Appliances has begun to take off. Up 55% 2016 to 2017 and 60% last year, this small but growing product category reached $7.5 billion globally in 2018.

Intelligent building technologies are providing new and less expensive avenues to make buildings more efficient. Better collection and analysis of building data promises to improve efficiency and lead to significant energy savings. Almost every technology group utilized in energy efficient building projects, from HVAC systems to the building envelope, has been affected by digital control and optimization. This digital incursion has transformed many of the technologies and opened opportunities to realize greater whole-building efficiency and energy cost savings. The spreading adoption of these technologies can be seen in the growth of Demand Response & Enabling IT revenue, of which building management systems make up the bulk of revenue. Globally, revenue from Building Energy Management Systems grew 16% from 2016 to 2017 and 21% last year, reaching $4.4 billion in 2018. Home Energy Management Systems revenue grew 15% last year after 35% growth 2016 to 2017, reaching $3.6 billion in 2018.

In the United States, Building Efficiency accounts for $83 billion of revenue and has grown consistently since AEE began tracking in 2011, with total revenue more than doubling over that time. Building Efficiency revenue has grown at a compound annual rate of 13% from 2011 to 2018.

The regulatory environment has undergirded much Building Efficiency growth. While appliance standards and some tax incentives are set by the federal government, energy efficiency policy is mostly set at a state level, via building codes and utility-administered incentive programs.

However, recent growth in Building Efficiency is also being driven by new offerings enabled by the evolution of the built environment. Building digitization has enabled greater access to data and information that now spans the organization from operations to the C-level, proving deeper insights for understanding and managing the business better, tracking and promoting sustainability initiatives, and improving internal operations. This digitalization, in turn, has helped services provided by efficiency vendors gain market traction and increased presence in commercial and residential buildings.

Financing Aids Energy Efficiency Growth

Historically, financing energy efficiency initiatives has posed major challenges to the building industry. Lack of access to capital is often cited as a major barrier to the more widespread adoption of energy efficiency. Today, there are an increasing number of sources of capital for energy efficiency, including the greater adoption of as-a-service delivery models, which keep project expenses off of business’s balance sheets.

Energy service companies (ESCO) have been instrumental in providing access to energy efficiency technologies and services in market segments that would not normally be able to consider or afford these types of capital-intensive projects. By using energy performance contract (EPC) or energy savings performance contract (ESPC) financing structures, ESCOs remove the financial risk of the project for an end-use customer. Specifically, municipal, university, school, and hospital institutions have taken advantage of the opportunity to save on energy costs via ESPCs. 

U.S. ESCO Services Revenue, 2011-18

ESCO revenue

(Navigant Research)

As a result, U.S. revenue from ESCO services has grown 46% from 2011 to 2018, with increases of 8% in each of the past two years, reaching $868 million in 2018.

Energy efficiency in buildings is also converging with the broader mix of distributed energy resource (DER) technology and software solutions that are disrupting traditional utility electricity procurement and delivery models. A broader competitive environment is emerging consisting of a disparate set of third-party vendors, utility services companies, and new entrants deploying niche technical, financing, or procurement solutions, energy services performance contracts, and deregulated electricity market retail brokerage services. Financing innovation sits at the heart of this Energy-as-a-Service (EaaS) shift and enables the delivery of building efficiency as a new utility customer choice option.

Lighting Shifts to Controls

Lighting has historically been the low hanging fruit of efficiency in commercial buildings, since lighting upgrades are cheaper than other efficiency improvements, such as an updated HVAC system or building energy management system. In 2018, as in every year since 2014, Lighting provides the largest share of U.S. Building Efficiency revenue, at $30 billion.

LEDs have experienced a continual price decline each year, making them more competitive with other lighting technologies. This trend, coupled with increased lifespan, improved efficiency, and superior controllability (which allows integration with lighting controls), has primed LEDs to become the leading lighting technology. Although reducing energy costs has been the primary driver for adoption, better light quality, longer lifespans, and improved controllability have helped push LED adoption.

However, the longer lifespan of an LED is leading to a plateau in revenue growth due to slower replacement cycles. As was seen in global Building Efficiency, annual growth in U.S. Lighting revenue overall has come down to single digits: 8% from 2016 to 2017; 6% 2017-2018. As a result, many lighting vendors are expanding into control products as an alternative revenue source. U.S. revenue from Intelligent Lighting Controls has grown at double-digit rates each year since 2011, with growth of 17% 2016 to 2017, 15% last year. Intelligent Lighting Controls accounted for $1.6 billion of U.S. revenue in 2018, up 122% from 2011.

Several market sectors are showing high interest and increasing demand for intelligent lighting products: Retailers are using intelligent lighting systems to mesh the online and offline (in-store) customer experience with innovative use cases. Health care facilities are utilizing intelligent lighting systems to make the physical environment part of the patient healing process, as well as increasing the efficiency and safety of hospital staff.

Additionally, indoor positioning systems (IPS) that use connected lighting systems are gaining traction. While location-based services and mapping via global positioning systems (GPS) are commonplace in the outdoor environment, these functionalities have not always been available indoors. There are various technologies that enable IPS, ranging from Wi-Fi to Bluetooth beacon technology. Visible light communication (VLC) and Bluetooth Low Energy (BLE) are the two most common technologies available for a lighting-based IPS.

VLC is an advanced communication technology using visible light. Data is communicated wirelessly when a light is switched on and off and received by a transmitting device. This data is fed to a light bulb using signal processing technology, including a pulse generator and modulator. From there, the data is embedded in the light beam and sent at rapid speeds to the receiver. The receiver contains a photodetector with a photodiode that converts light into current. The data is also sent through a signal filter and conditioner and a demodulator that converts the current output into a pulse signal.

The most notable use of lighting-based IPS is in the retail segment. For this use case, VLC often works in conjunction with BLE. Indoor positioning using VLC and/or BLE is obtained by a building owner or manager using LED lighting that is VLC software-enabled or that incorporates a BLE beacon. A retail customer downloads an app that allows the VLC software to connect to the user’s smartphone camera to access their location. In the case that only BLE is used, permission of a user’s smartphone camera is not required. The ability to pinpoint the exact location of a customer and provide them with targeted coupons, product information, reviews, or in-store help by a sales associate offers an improved shopping experience. This experience is also more comparable to online shopping, where additional product information and discounts are a click away.

Smart Appliances Poised for Growth

Smart appliances refer to major household appliances or white goods that have communicating capabilities to send and receive data to a hub or cloud service for ongoing monitoring and control. The benefit of smart appliances can vary from the ability to remotely view refrigerator contents via connected camera to automatically running clothes washers and dryers during times when electricity prices are cheaper.

For years, the smart appliances market has been waiting in the wings for a “connected home” revolution that had yet to materialize. Few buyers were willing to pay a premium for major appliances embedded with high tech capabilities and internet connectivity when the benefits provided by the refrigerator, washer, or dryer on its own were either unclear or minimal.

But a recent wave of adoption of smart home products has occurred among consumers seeking greater automation, energy savings, and convenience in their homes. Products like smart thermostats, connected lights controlled by voice activation, and smart locks have gained a foothold among consumers. Home Energy Management Systems has been one of the fastest growing categories in Building Efficiency since 2011, reaching $1.8 billion in 2018 on 10% annual growth, after 32% growth from 2016 to 2017. This has set the stage for smart appliances to take off – and there are signs that they are poised to do so.

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