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Smarter Buildings—An Unsung Hero in the Climate Fight
The increasing evidence that greenhouse gases created by human activity is driving climate change—including higher temperatures, more droughts, extreme weather and melting glaciers—has created a call to action for public and private-market solutions to slow these trends. Presently, the European Union is leading the way on climate change mitigation. In 2019, the EU proposed the European Green Deal—a set of policy initiatives aimed at achieving climate neutrality by 2050. Achieving this objective will undoubtedly mean prioritizing energy efficiency and developing a power sector based largely on renewable resources.
Exhibit 1: 2019 Green Deal Target Reductions of Greenhouse Gas Emissions for Key EU Sectors—Healthier Buildings Have a Role to Play
Source: Exane BNP Paribas, EU Commission
The COVID-19 pandemic has given the EU additional motivation to accelerate already planned green investments as it seeks to bolster the 27-nation bloc’s economy. A priority under the European Green Deal and the recovery plan is its Renovation Wave initiative aimed at accelerating the renovation of existing buildings to decarbonize the building stock. Buildings are the largest single energy consumer in Europe, accounting for roughly 40% of EU energy consumption and about 36% of greenhouse gas emissions. Further, 75% of building stock is considered energy inefficient. According to the European Commission, the Renovation Wave would aim to retrofit by 2050 approximately 220 million buildings or 150,000 buildings a week.
The labor-intensive nature of building renovation should help sustain millions of high-paying jobs to support the EU’s economic objectives while also aiding in the achievement of its climate goals. Building-focused capital expenditures are also attractive from a business perspective as they offer relatively quick paybacks.
Exhibit 2: Average Payback in Years and in Spending for 1Kg CO2 Reduction
Source: Redburn, company.
We believe these multiyear building renovation capital expenditures should serve as substantial tailwinds for companies involved in building automation. Additionally, in a post-pandemic world, we believe new air quality standards and demand for touchless technologies, remote monitoring and digital automation will drive a new investment cycle in renovating existing commercial office buildings. Johnson Controls estimates this market opportunity is likely between $10 billion and $15 billion and growing double digits over the next five years.
Like buildings, data centers are a large consumer of power globally. Just one data center can consume more electricity than a small city. In fact, approximately 2% of world electricity is being consumed by data centers. Considering the tens of billions of dollars annually invested by big tech companies like Facebook, Google and Alibaba, data centers will consume 10% of world electricity in 10 years, based on our estimates. And global data consumption is growing rapidly.
Exhibit 3: Global Data Consumed
Source: J.P. Morgan.
Companies that provide power and infrastructure management equipment and services to the structurally growing global data center market should have an important role in addressing the environmental implications of data center industry growth.
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