The convergence of ratings would lead to a faster shift from fixed-speed ACs to inverter ACs, share of inverter ACs increasing further from the current ~30 percent.
India accounts for about 28–30 percent of the Asian (excluding China and Japan) RAC market and 4–5 percent of the global market. Variable-speed ACs that account for about 10 percent of wall-mounted split AC products are the fastest-growing category, achieving a 41 percent growth rate in sales. R-22 is still the dominant refrigerant for fixed speed ACs in the market. In line with the country’s effort to increase energy efficiency of RACs and phasing down HFCs, Japanese manufacturers and a few Indian manufacturers are launching R-32 RAC models and the pace for the deployment of high-energy efficient technologies and transforming the markets is being accelerated.
New Ratings and Their Impact
The Bureau of Energy Efficiency (BEE) has mandated new energy ratings from January 2018. The new ratings would imply a 2-star upgrade across the ratings table alongside a convergence of fixed-speed and inverter AC ratings. New energy ratings will impacting multifold on pricing, volumes, and market share. With the impending rating change from January 2018, pre-buying is likely in 3QFY18. Volume growth for 3QFY18 would also be boosted by a weak base – demonetization had led to a decline in air conditioner (AC) sales in 3QFY17.
On the flip side, there could be some destocking by dealers, starting 3QFY18, as they begin clearing old stock before the new ratings come into effect. A logical outcome of price hikes following rating changes is subdued volumes post the price hikes. The subdued volumes are both because of pre-buying in the earlier quarter and impact of higher prices on demand. A similar situation is expected to play out this time as well. While it is too early to call out the industry volume growth for CY18, there are downside risks such as both CY16 and CY17 had strong summers, which is unusual – empirically, a good summer season is usually followed by a weak summer, and price hikes are likely to dampen consumer demand.
Most companies have already started working on the introduction of revised models and prices. While the new energy norms can be met using both fixed-speed and inverter compressors, the key difference is in space requirement. Fixed-speed ACs require more space; this is why inverter ACs are dominant in South East Asia, where space is a constraint. Primary sales for manufacturers typically pick up from February, as dealers stock up for the upcoming summer season in March (South India) and April (West/North India). Among the AC manufacturers, they will face the least disruption, who have already switched their product range to inverters. Moreover, the Japanese brands have historically dominated the inverter AC segment. Most Indian brands have focused on fixed-speed ACs and transition would be relatively more disruptive in their cases.
Kigali Amendment in Progress
Kigali Amendment has received wide support from businesses, with several transition projects already planned in India. It is estimated that phase down of HFCs under the Amendment could avoid up to 0.5°C of global warming by the end of the century. Under the terms of the Amendment, India has about 10 years to prepare its industries and governing institutions for HFC phase down. In reality, the available time period will be much shorter due to the nature of the phase down and the large projected growth in HFC consumption in India. Nonetheless, India has already introduced policies to begin a successful transition to low global-warming potential (GWP) refrigerants. Furthermore, many Indian manufacturers are already experimenting and switching to low and medium GWP refrigerants. Major AC manufacturers have committed to manufacturing ACs with R32, a medium-GWP refrigerant, in addition to their regular AC series.
However, there are three key issues of interest to India in implementing the Kigali Amendment.
Integrating energy efficiency with refrigerant transitions. With a rapidly growing domestic demand for air conditioning, India recognizes the HFC phase down as an opportunity to redesign room ACs to be more efficient and alleviate the strain on its electric grid. The Montreal Protocol’s Technology and Economic Assessment Panel (TEAP) estimated that it is feasible to achieve AC efficiency improvements of 30–40 percent beyond the currently best available technology in the world. Financial and technical support for energy efficiency that could lead the path forward toward a more climate-friendly cooling is being discussed. India and other parties have called for financial support from the Montreal Protocol’s funding arm, the Multilateral Fund for enabling these efforts.
Multilateral fund replenishment and financing. The parties will also finish their negotiations over replenishment of the Multilateral Fund for 2018–2020 for assistance to developing countries in achieving their previously agreed reduction commitments. More than USD 500 million in funding would be required over the 3-year replenishment period. Funding could be provided for Group 2 countries, of which India is a part. In the current agreement, Group 2 countries have opted for freezing and reduction of HFCs over a longer time frame than countries in Group 1. An accelerated phase down presents significant advantages for the Indian cooling industry in leapfrogging to the best alternatives and may provide an increased access to multilateral funding.
Safety standards. Several low-GWP refrigerants are more flammable than the chemicals they are replacing, and India and other parties have articulated the need to address safety concerns. The Montreal Protocol and its implementing agencies are working with countries to understand these safety issues. The role of international safety standards is being discussed along with Multilateral Fund support for funding efforts on incorporating safe refrigerants.
The convergence of ratings would lead to a faster shift from fixed-speed ACs to inverter ACs. The share of inverter ACs is already ~30 percent and should increase further from January 2018. Post January 2018, all 4/5-star ACs are expected to be inverter ACs and 3-star or below to be fixed-speed ACs. The share of inverter ACs will rise to 50 percent by FY20. Manufacturers need to make a strategic choice between: (a) the industry rapidly moving to inverter ACs and aligning their portfolio/marketing strategies accordingly to retain and gain share; and (b) fixed-speed ACs continuing to dominate and aligning their portfolio accordingly. Bulk procurement programs are also helping in market transformation to energy efficient appliances.
While these actions are commendable, there is extensive need for concerted action supporting the transition from HFCs toward climate-friendly refrigerants. This includes R&D, skill development and training of technicians, standardization and safety specification of technologies, incentivizing these climate-friendly technologies, and other regulatory measures. Thus, India aims to achieve a high economic growth rate in coming decades, and ensuring energy security to sustain the growth rate is of utmost importance.