Supply, Not Just Demand Will Drive Low-Carbon Buildings

Energy Week 2023 Panel Outlines Clear Steps for Building Construction and Heating

The United Nations Environment Program’s “Building Materials and the Climate: Constructing a New Future” reports that the world builds buildings equivalent to the entire city of Paris every five days. That poses an ongoing problem because most buildings are constructed primarily of concrete and steel, both major contributors to global carbon emissions.

Members of the “Future of Buildings and the Impact on Climate Change” panel at TDK Ventures and Climate Investment’s Energy Week 2023 conference agreed that decarbonization in buildings must focus on several timelines.

Sam Foster, a Partner at Environment Resources Management (ERM) Ltd., observed most of the buildings the world will be occupying in 2050 have already been built. Near-term climate initiatives will center on reducing demand with the aim of reducing energy bills for consumers and reducing emissions, while also making them ready for low-temperature heating. He sees a combination of electric heat pumps and district heating and cooling networks bringing efficient heating and carbon-positive homes online.

“To get further savings and support the energy system, let’s get renewable generation into buildings and solar onto roofs to support the generation of low-carbon electricity to meet the heat pump demand,” he implored.

Raphael Scheps is CEO and founder of Converge, a construction technology company using AI and smart sensors to find ways to decarbonize the production and use of concrete. He believes the answer will come in three phases. Through the 2020s he says, “We have to use existing materials and we’ve got to use less of them. How do you optimize the existing chemistries? With the concrete we use today — cement, water, and aggregate — let’s use less cement because that’s where the carbon comes from.”

Cindi Bough, Managing Director of Ventures at Climate Investment, said there is progress to be made here. “There’s a lot of leakage of heating and cooling through windows, insulation, and the building envelope,” she said. “There are challenges around mismanaging efficiencies.”

She highlighted some of her firm’s portfolio companies working on building controls and sealing building drafts with an injected polymer. “(The importance of) efficiency should not be lost in our thinking about the built environment,” she cautioned.

The coming decade, Scheps said, is “the timescale we’re going to need to validate low-carbon concrete. Whether it’s SCMs (supplementary cementitious materials), bioconcrete that self-heals, nanomaterials that repair cracks, or injecting carbon into the concrete, there’s a whole new class of materials that are coming to market.”

By mid-century, he went on, “we can start thinking about novel designs of buildings and how we can optimize not only the material we use, but the properties of those new materials. We need the data to support that.”

For the world to attain these diverse decade-defined goals, governments likely must help generate demand for green products through incentives, mandates, and other policies, the panel agreed. Europe and the United States are taking somewhat opposite paths, with the US offering the industry a carrot, while the continent goes for the stick. America’s Inflation Reduction Act’s tax breaks and subsidies mean “there’s lots of funding now in those huge markets in the US,” Scheps said.

And while even more money is available in Europe, it’s more difficult for startups to access, making quotas more effective. Bough mentioned the REPower EU directive that by 2027 an additional 10 million heat pumps must be installed.

“That’s one of the big mandates being pushed, and some startups in Europe specific to the heat-pump marketplace (are taking up the challenge),” she said. “There are incentives in the US for consumers to buy, but the whole process around heat-pump customer acquisition is complicated.” The European market, she said, makes it easier “for consumers to determine which product to buy and the installer to use, and to determine the distribution and cost structure, and how to design the value chain.”

Foster said fuel-price rebalancing is one tool in Europe’s belt that “frustratingly is still not implemented in the UK and many other countries. Because gas is cheap and electricity is more expensive, consumers have little incentive to install heat pumps instead of boilers, even though pumps are as much as three times more efficient. That’s the single biggest thing that’s holding back greater deployment of low-carbon solutions,” he argued.

He wants Europe to either remove policy costs from electricity and project them onto gas or subsidize electricity through taxation.

“In countries like France, where the spot gap between gas and electricity is very different because they have no indigenous gas, but lots of indigenous nuclear (creating) low electricity prices, there’s been a huge explosion of uptake of low-carbon heating systems,” Foster said. “Roughly one in three heating systems installed in France last year was a heat pump. We’re an order of magnitude below that in the UK, largely due to the difference in pricing.”

There’s a similar scenario brewing in building materials, Scheps said.

“It’s harder to relate to building materials when you buy and move into a home,” he explained. “You relate to energy because you’re paying your utility bills every month. But when we talk to construction companies, on the demand side, there’s a bigger drive to use low-carbon materials here (in Europe). For the most part, demand from companies in the US is centered on the East and West coasts. In California and New York, there’s a lot going on with lower-carbon materials. There’s a lot of funding from IRA to build better ways of making these materials, but there’s not yet that drive from construction companies to pay more for lower-carbon material.”

Consumers and developers aren’t the only ones shying away from low-carbon steel, concrete, and heating solutions. Bough said four factors nudge climate-tech venture capitalists and private-equity investors away even though the building sector accounts for 40% of the greenhouse gases emitted:

1. Building stock for homes and buildings is wildly disparate. “TAM is shrinking, making scaling difficult if you make a single product like roof shingles or boilers for retrofit heating systems.”
2. The ecosystem involves “a deep value chain including manufacturing, distribution, installation (with labor challenges of its own). That creates a lot of mouths to feed” from a margin-stacking perspective and makes it difficult to generate investment returns.
3. A competitive market “full of incumbents that can manufacture high volumes and relatively thin margins.” Often, successful startups are the ones that can work with incumbents even when they view the technology as a disruptor.
4. Financial returns and exit opportunities are not obvious. “I don’t see many industrial heat-pump companies that are going to go IPO. The public market doesn’t have a strong appetite for HVAC and built-environment products. (Investors) are thinking mostly about acquisitions, which leads back to the incumbents. How they think through build-vs.-buy” determines the potential investor exit point.

Bough said Climate Investment and its portfolio companies mitigate these factors by “bringing along some of the large incumbents on our cap table or as partners. We encourage our companies to do that. The understanding of how the whole market works educates them on where startups should be focusing on.”

Scheps said industry fragmentation also hampers building and construction-technology startups’ efforts to generate demand.

“When we sell our product, we have to deal with the specialist contractor, general contractor, owner or developer, structural engineer, concrete testing lab, and the material supplier,” he explained. “As a 60-person startup, where do I focus my sales and commercialization resources when there are six stakeholders?”

Thankfully, that problem is starting to work itself out. Scheps said he believes low-carbon building investments will follow five years behind energy, but follow a similar path — one blazed by the mobility and electric vehicle market.

“In the last couple of years, (green) concrete has become hot,” he said. “We started our company eight years ago, way too early for the market. Nobody was thinking about decarbonizing concrete and building materials. With governments as clients for many concrete-intensive projects now insisting on greener structures, the demand component is starting to align. There’s a lot more investment in concrete and cement than there used to be.”

That is welcome news, Foster said. Because legislating and incentivizing the decarbonization of existing buildings requires a robust policy environment. Governments’ more overt signals as to the direction of structural energy and materials enable building owners, operators, and investors to develop long-term plans. They not only need to stimulate demand for solutions that currently may not be commercially viable in a free market, but also to ensure sufficient supply when those market-making efforts gain traction.

“Signaling includes minimum energy and carbon performance standards for both existing and new buildings,” he said. “Existing buildings have been behind new building regulations for some time but it’s coming together. Phase-out dates for fossil-fuel heating for new builds in 2025 still stand, while for old buildings, it’s more like the mid-2030s. There’s going to be some regulatory teeth — a mandate that forces us off these (unsustainable options), so everyone needs to plan forward with enough lead time to make it work.”

TDK Ventures and Climate Investment hosted Energy Week 2023 at London’s Goldsmiths’ Center to highlight the efforts of industry entrepreneurs, investors, and the scientific community in solving the world’s energy challenges and finding sustainable paths to decarbonization.

Energy Week 2023 featured industry leaders, experts, and visionaries, who are shaping the future of the energy landscape to help explore the latest advancements, challenges, and opportunities in sustainable energy solutions.

TDK Ventures Inc. invests in startups to bolster innovation in materials science, energy/power, and related areas typically underrepresented in venture capital portfolios. Established in 2019 as a wholly-owned subsidiary of TDK Corporation, the corporate venture company’s vision is to propel the digital and energy transformations of segments such as health and wellness, next-generation transportation, robotics and industrial, mixed reality, and the wider IoT/IIoT markets.

Climate Investment is an independent organization founded by members of the Oil and Gas Climate Initiative, specializing in accelerating capital-efficient decarbonization in high-emission sectors. Since 2017, they have curated a portfolio of over 30 innovative technologies and business models, resulting in a cumulative reduction of 57 MT CO2e in greenhouse gas emissions from 2019 to 2022.