The HVAC Dilemma

Experts discuss the 2020 deadline to phase out R-22 refrigerant and how it will impact commercial properties and their bottom lines.

Interview By Jaime Lackey & Katie Lee

If there’s one thing the HVAC industry can count on, it’s change. And the looming January 1, 2020, deadline for phase-out of refrigerants containing hydrochlorofluorocarbon (HCFC) is accelerating change within the industry. HCFCs are harmful to stratospheric ozone, but were adopted in the mid-1990s as a better option than their ozone-depleting predecessor, chlorofluorocarbons (CFCs). However, the Environmental Protection Agency (EPA) has deemed other options safer and is regulating HCFCs into extinction over time. Regulations limiting production of the HCFC-based R-22 refrigerant are causing a shortage of the refrigerant; as supplies dwindle over the next few years, prices will increase — significantly impacting the budgets for commercial, multifamily, retail and restaurant facilities.

Retail & Restaurant Facility Business recently interviewed three industry experts on this topic: Scott Cohen, senior marketing manager – HVAC, for Atlanta-based HD Supply Facilities Maintenance; Dennis Burke, president of Covington, Louisiana-based Responsive Service & Maintenance Company; and Ted Atwood, CEO of Brentwood, Tennessee-based trakref, Inc.

R&R: The EPA finalized the timeline for phasing out HCFCs nearly 2 years ago. How have commercial and multifamily real estate properties been affected by the annual decreases to date?

Scott Cohen, HD Supply Facilities Maintenance: We are seeing shortages of R-22 due to the phase-out. The current production of R-22 is only enough to satisfy about 25% of demand. And yearly mandated reductions in R-22 production will only make the supply situation worse.

Due to the high demand and low supply, R-22 has become very expensive and the price continues to rise. This makes HVAC repair costs higher and supply issues can lead to systems being down longer. In the multifamily space, this means more of your residents are hot and angry.

Ted AtwoodTed Atwood, trakref, Inc.: The phase-out for these gases began more than 20 years ago in 1994. During this time the EPA has been reducing the use and access to these gases, so the end has been in the works for a long time.

However, commercial buildings and properties still have a significant amount of these gases in use. No one knows the exact extent of the total installed inventory of these now obsolete refrigerants, and that’s one of the problems the industry is going to have to wrestle with. The estimated peak usage was over 1.5 billion lbs of R-22 installed and now — due to retrofits, replacements and some other mechanical changes — the number is likely lower (estimates suggest 1 billion lbs), but not that much lower.

To date, regulation details generally have been transmitted between technician and owner/manager. That trickle-through learning process means many owners/managers won’t know of impending requirements in time to plan adequately.

R&R: What is the anticipated impact through the next 4 years?

Dennis BurkeDennis Burke, Responsive Service & Maintenance Co.: We expect more unit change-outs when clients balance the costs of R-22 against the costs of a new unit. As R-22 rises in cost, each quoted repair involving refrigerant rises in price. This cost will quickly be the highest line item for quoted repairs. January 1, 2020, is the cutoff when no new or imported R-22 refrigerant will be allowed in the U.S. Suppliers are limiting the sale of R-22 to contractors, essentially preventing the contractors from “stocking up.” Shortages of R-22 as we get to 2020 will cause spikes in the price, likely to hundreds of dollars per pound.

Cohen: We know what the annual production limits for R-22 will be through the final phase-out in 2020. Recaptured and recycled R-22 increases the available supply slightly, but nowhere near enough to match the demand. R-22 users are likely to experience more frequent supply interruptions — regardless of where they buy — and the price is going to keep climbing.

Unfortunately, for some it will be an expensive and painful real-world example of how supply and demand impact price. At HD Supply we are working closely with our customers strategically to manage the transition to new refrigerants while helping them maintain their current installed systems using R-22.

Atwood: The average leak rate in the United States is estimated to be 15% to 25% — meaning the industry uses between 150 million and 250 million pounds just to keep units running. Availability issues will likely force changes in refrigerant use while equipment is in operation (called a retrofit). If the units are marginally adequate with the existing refrigerants, they might not have the capacity for the retrofit; in those cases, replacement is required.

When the 2020 cutoff comes around and the final pounds of HCFCs are produced, chemical companies will continue to sell alternatives, but many of these products have been fast tracked for banning their continued use [due to environmental concerns].

R&R: Who is affected by the phasing out of HCFCs? How do property owners and facilities managers know if their HVAC systems are impacted?

Cohen: Anyone running an HVAC system that uses R-22 as a refrigerant has the potential to be impacted whenever R-22 is needed for repairs or recharging. Property owners/managers will benefit from having a clear picture of how many units they have that are using R-22 and the age of each unit. That information can be used in the decision-making process to better manage the transition to alternate refrigerants and when to replace equipment.

Atwood: It is estimated that 50% of all equipment contains R-22. Most property owners will be affected, but they might not know the level to which they will be impacted. They should start with a simple inventory and learn three things: (1) How many systems do they own that use R-22? (2) How old are these systems? (3) What is the leak rate for these machines? Right now, the primary amount of refrigerant being used to keep filling leaks is coming from stockpiles that were built up over the past two decades, and these are dwindling rapidly. Training, tracking, inventory control and collaboration are keys to success. The regulations are different; the materials are new; and with more than 80 million units in service, the options will vary depending on size, impact and the regulations in each ZIP code.

R&R: What happens if existing HVAC units — using R-22 refrigerant — are still in use in 2020?

Cohen: If an older R-22 system is working properly and does not have any leaks, there is no need to add more refrigerant and no impact in terms of availability or price. However, as older systems start to require repairs and R-22 becomes scarcer, operators may have no choice but to convert to an alternative refrigerant, or replace the older R-22 units with new R-410A units.

Burke: I believe units with R-22 will still be in use and when major repairs are required where the freon comes into play, the unit will be converted to an alternative refrigerant. Keep in mind, only the production of R-22 will be phased out in 2020. It does not mean everyone needs to switch over by then.

Of course, refrigerant costs will rise significantly. Clients need a zero-tolerance policy for refrigerant leaks. Systems that are leak tight and well maintained can last for years without requiring additional R-22.

Atwood: Once they know the size of the problem, they can initiate a plan that includes retrofit, replacement and managing the life to its fullest extent using gas recovered from their installed inventory. 

First, each company should keep as much refrigerant as possible and although there are storage limits, the EPA has very specific regulations that require all used refrigerant to be recovered, then transferred to a certified reclaim operation, and then made available for repurchase. Companies have some options here: (1) they can send the gas off themselves and have someone clean it; (2) they can swap old gas for new gas; or (3) they can keep it and reuse it on the same premises, or if they own equipment in multiple buildings, they can reuse it in other equipment they own.

Present estimates suggest that more than 80% of all gas that is removed from old systems is reused without recycling. This causes problems because recovered gas is often full of oils, water, air and residues that can damage a well-running system. Without proper recycling, massive problems can develop.

R&R: What is the alternative to the current refrigerant? Are existing systems able to use alternatives? What is the process for switching?

Cohen: There are a number of alternative refrigerants, but the most common are R-410A and R-438A, better known as MO99. MO99 is a short-term fix that can be used in existing R-22 equipment with little drop-off in cooling performance in most cases. R-410A systems are the long-term solution when it is time to replace an HVAC system. R-410A offers comparable performance, no supply issues with the refrigerant, and the cost of R-410A is about 75% lower than R-22.

If you are considering using MO99 in an R-22 system, it is important to note that using MO99 in an R-22 system will void any product warranty, so it is best to take this approach with older systems that are no longer covered by a warranty. Also, it is critical to follow the correct process to convert from R-22 to MO99 in order to prevent contaminating the refrigerant or damaging the system.

Atwood: There has been limited research on the newest generation of refrigerants — called hydrofluoro-olefins (HFOs) — potentially they could lead to acid rain, so although this is not a value to consider, it suggests that eventually they will be controlled as well. The cost for HFOs is very high and if leaks persist, the impact financially will be significant (2-3x the cost of R-22). New alternatives like propane and ammonia might be an option, but OSHA has not weighed in on the handling practice requirements. Beyond EPA, agencies like OSHA have handling and tracking practice guidelines that impact use and application.

Burke: For more than a decade, the industry has migrated to higher-efficiency, newer units designed, engineered and manufactured to use R-410A, which is an ozone-safe refrigerant. There are no limitations on the use of R-410A, and newer units provide much higher efficiency ratings overall.

R&R: If companies are looking at replacing HVAC systems now, what do they need to consider regarding the refrigerant phase-out as they evaluate new equipment purchases?

Burke: A new, more efficient system utilizing R-410A has no real disadvantages. All refrigerant of existing units will be recovered and reclaimed by the contractor. Planned replacements are always better than emergency replacements.

Atwood: The EPA is rapidly evolving right now in order to stay ahead of treaties and agreements, but that is only part of the challenge. New commercial equipment available on the market will have at least a 10-year life span, but most equipment will not live to the life cycle that uses its full depreciation because the IRS depreciation tables are in conflict with environmental compliance demands. This means smaller units that have a life expectancy should be paired with the schedule for the refrigerant they intend to use. So think about the gas, not just the hardware.

It is hard to make a prediction about the post-2030 timeframe; that is very far out there and the science might come back that these new gases will have to be phased out.

R&R: Leading up to 2020, what are best practices for commercial real estate companies for dealing with the phase out?

Cohen: It’s important for companies to be proactive in managing their HVAC systems to lower their exposure to R-22 price spikes and supply shortages. By replacing older R-22 systems with R-410A systems before they fail or converting older units to use MO99, they can recapture the R-22 and use that to maintain their newer R-22 systems that have more years of service remaining.

R&R: How do commercial real estate operators/facilities managers work with their HVAC and procurement companies over the next 4 years to ensure a smooth — and cost-effective — transition leading up to 2020?

Burke: First, take an inventory and make a plan to replace units and/or be prepared to convert units to a new refrigerant. This will be a costly venture so looking ahead now is very important. Keep in mind that continuing to service products with R-22 is not good in the long term. Any short-term savings will be forgotten when the end-use client realizes his or her equipment has refrigerant that is no longer supported by equipment manufacturers.

Atwood: Business as usual is not an option. This is a complicated period, with limits being placed on supplies, rapidly evolving regulations, unproven alternatives and a deepening awareness of the impact to energy from HVAC/R. It is easy to get drawn into investing in a technology or solution that might have limited serviceability or have its life cycle shortened from one of the evolving regulations.

In the 1990s when the first phase of regulations went into effect, short-term replacement gases caused confusion and, after a costly period, they were terminated. The early retrofit leaders were impacted by heavy upfront costs. Those who waited benefited by not making early investments in short-term solutions, but, in this evolution, we will have significantly more demand, and, presently, there is no clear winner in either the fluid or mechanical space.

There is no silver bullet here — we are now in a new generation of management and accountability. Historically, HVAC installations were made and then forgotten about, but going forward, regardless of the type of gas or systems type, track the usage, monitor activity and be aware that HVAC and refrigeration systems have a complex impact on your business and operations.

R&R: What else do property managers or asset managers need to know about the refrigerant phase-out?

Cohen: In recent years many people have been doing whatever they can to keep older R-22 systems running, because replacement was significantly more expensive than repair. But with the current R-22 prices, in many instances it makes more sense financially to go ahead and replace an older system — the price differential between repair and replace has almost entirely disappeared. Plus, that takes the supply risk and future R-22 price spikes off the table.

Burke: By law, owners of large equipment (e.g., supermarket systems, commercial air conditioning units) have to ensure that the equipment is maintained and leaks are repaired by certified technicians. During your next HVAC maintenance visit, talk to your technician about your options. This will allow you to develop a strategy and budget for life without R-22.

Property owners will either pay to replace the equipment now, or wait. If they wait, the budget for future operating expenses must factor in increased repair and maintenance costs, as each service request becomes more costly due to the cost of R-22.

Atwood: The R-22 phase-out regulations are not creeping up on us; the EPA has done a terrific job of releasing regulations 2 to 20 years before they are effective — giving us enough runway for people to prepare. But additional regulations will kick in soon. In 2019 new leak rate thresholds from EPA 608 go into effect, and they require reducing the leak rate dramatically.

Furthermore, the EPA is enacting requirements for reporting anything energy- and waste-related to all operations in many types of buildings. The agency has new tools to perform audits through a program called Next Generation Compliance, which aims to improve compliance and environmental outcomes; promote the use of advanced pollutant detection technologies; and employ a shift toward electronic reporting to help make environmental reporting more accurate, complete and efficient. In addition, California has moved past the federal regulations and deployed more stringent 0% leak rate requirements, and more states are preparing to move in a similar direction. More than 25 cities have launched programs that require property owners to register assets as well as properties in order to benchmark and compare activity with other major cities competing for growth. The regulations are often not synced up and they conflict or overlap in unintended ways. The emergence of these growing regulations means that you likely have to expand the resources you use to support and manage your HVAC/R systems.

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