Why We Like HVAC?

In developing a HVAC and electric infrastructure thesis, one factor stood out immediately.  Relative to many sectors where government policy is at best indifferent or at worst obstructive, HVAC and more broadly electric infrastructure, enjoys a very favorable long term backdrop, especially here in New York state. We consider this an extremely compelling long term tailwind for the sector.

Let’s start with the obvious, warmer summers and shorter, warmer winters create the need for efficient dual-purpose heating & cooling equipment. This wasn’t always the case. New York isn’t Florida or Texas where air conditioning was always a need not a want. Older homes in our state virtually never had AC beyond the stray window unit. Twenty years ago one could do without and focus on the heating side of the equation. That’s no longer attractive and creates a strong foundation for growth and customer education on an increasingly complex product array.

Changing refrigerant and residential fuel standards help drive unit replacement. Concern about global warming and heightened air quality concerns continue to produce changes in refrigerants at the Federal and state levels.  This amounts to a government-sponsored replacement cycle that should drive customer dialogue and education. Whether one agrees or not with the regulatory direction, New York State is on the cutting edge of climate regulation. This began in 2019 with passage of the Climate Change & Protection Act. In 2022 the New York DEC published a report on greenhouse gas emissions.  The report estimated 32% of total emissions were tied to buildings. In addition, the report noted, methane, a key component of natural gas has 80x as much warming power as carbon dioxide. These characteristics put a target on the back of natural gas as a heating and cooking fuel. In May 2023 New York became the first state to pass legislation banning the sale and installation of gas-powered stoves and furnaces. The measure requires all-electric heating and cooking in new buildings shorter than seven stories by 2026 and in taller buildings by 2029!  Huge changes to be sure.  While one may not agree with the decision or its implications, for businesses serving the space, it creates a multi-decade replacement cycle. This will also likely hasten adoption of home-based solar and geothermal solutions as some howeowners try to mitigate their own grid consumption. Longer term it will be not only an ideal customer solution but a value enhancing one for our platform to integrate these newer technologies into a single platform.

Changing power gen requirements. Triggered by the change in fuel standards which will increase dependence on electric power, New York’s power grid requires substantial upgrades. Without these upgrades, there outages could be the result, as customers in Texas and California already experienced.  Also, as oil and coal fired powerplants are phased out, the grid requires substantial changes in layout.  The existing framework transmitting energy from a handful of large power plants must be repositioned based on these newer distributed energy sources.  This result is a huge need for additional transmission capacity in new locations. All this is great news for infrastructure companies working with state utilities. These companies tend to be larger and more capital intensive making them a longer term play for us but something which very fits in with our thematic investment approach.