aquel Natalicchio/Houston Chronicle via AP
Ed Newby, owner of All Star A/C and Heating, works on an air-conditioning unit on June 26, 2023, in Houston.
Over the past two decades, Jeff Howard, a heating, ventilation, and air-conditioning (HVAC) engineer in Indiana, has been trying to outrun corporate buyouts in his rapidly consolidating field.
Howard worked at Airtron in Indianapolis when it was acquired by U.K.-based Direct Energy. The new owner would push employees to put in 16-hour days, he said, so after a stint at a smaller company, Howard joined One Hour, only to have it promptly acquired by Direct Energy, too. (Direct Energy has since been acquired in turn by its former rival, the energy and home services company NRG Energy.)
Howard was optimistic when he moved to Williams Comfort Air, a regional firm he had long admired. But it was soon acquired by the Wrench Group, a private equity–owned rollup of home services companies.
“You saw this big shift in focus to just replace more boxes, and not care about the clients, not care about the employees,” Howard told the Prospect, after leaving earlier this year. “There was a mass exodus of talent and technicians.”
Market analysts predict double-digit growth in energy services over the next decade, with commercial, industrial, and residential clients seeking to reduce their energy consumption and become more resilient to extreme weather. Also stimulating interest are uncapped subsidies pouring into clean-energy technology, such as heat pumps.
In that fragmented and high-growth market, private equity infrastructure investors have defied the overall slowdown in leveraged buyouts to double down on what was already, even before the clean-energy subsidies of the Inflation Reduction Act (IRA), an aggressive spree of acquisitions. HVAC engineers including Howard describe a sector increasingly buffeted by rapid buyouts, as Wall Street eyes a historic growth opportunity in energy services.
Bernhard Capital Partners, a mid-market private equity company whose founder specialized in being awarded no-bid government contracts for cleanup after emergencies like Hurricane Katrina, acquired energy software company Optimum Energy in June. A month earlier, Blackstone completed a $14 billion acquisition of Emerson Electric’s heating and air-conditioning unit.
Meanwhile, manufacturers of heat pumps are acquiring regional distributors at a rapid clip, and prices have risen dramatically. The production, distribution, and installation of heat pumps is fast becoming a test of American political economy, running up against labor force bottlenecks and industry consolidation.
Manufacturers of heat pumps are acquiring regional distributors at a rapid clip, and prices have risen dramatically.
A paper published today by the American Economic Liberties Project, a group that fights economic concentration, finds that consolidation, rising prices, and surging investor compensation in the heat pump market could blunt the effectiveness of federal spending.
The paper finds that troubles in the market for heat pumps could afflict other priority areas of industrial policy, from semiconductor production to infrastructure spending, where, AELP argues, the federal government has unleashed demand-side incentives without enough attention to underlying market structure.
“In our view, heat pumps are, and will likely continue to be, considerably more expensive than conventional gas furnaces and air conditioners—both in terms of manufacturing and installation,” AELP writes. “By primarily depending on demand stimulation, industrial policy is left relying on wishful thinking for how costs will come down with time.”
HEAT PUMP SALES OVERTOOK GAS FURNACES in the U.S. last year. The all-in-one heating and cooling units have become a celebrity technology among Democrats, with Washington Gov. Jay Inslee recently calling them “an almost miraculous solution.”
The IRA includes a tax credit of up to $2,000 per year for heat pumps, on top of doling out some $9 billion in incentives to be distributed by states.
The total cost of a heat pump can vary by an order of magnitude, from the low thousands to the high tens of thousands, and national price data is scarce. But manufacturers have recently raised their prices by 30 percent or more, according to AELP, and installation is becoming more expensive, with labor sometimes accounting for more than half of the total cost.
AELP found that some customers are already seeing price increases that exceed the $2,000 IRA tax credit. Rising demand and constrained supply explain some of the cost increase, but the report argues that heat pump proponents also created an unrealistic narrative about the product, which obscured complexities and downplayed costs.
Heat pump advocates promoted what AELP calls the “inevitability thesis,” arguing that with mass production and deployment, the costs of clean-energy technology would inevitably fall, making greener options more competitive than their fossil fuel forerunners. But while per-unit costs have fallen dramatically in other clean-energy sectors, AELP points out that heat pumps are both design-intensive and require customized installations that vary widely from home to home, making it hard to standardize deployment.
REVENUES, PROFITS, AND SHAREHOLDER COMPENSATION are all up at four major “pure-play” heat pump and HVAC manufacturers identified in the report: Carrier, Daikin, Emerson, and Lennox.
AELP focused on these manufacturers, rather than heat pump–producing conglomerates like Mitsubishi and Samsung, because it is hard to isolate profits from heat pump sales at these larger firms.
“Unless policymakers can facilitate investments in production and labor training and promote robust price rivalry among manufacturers, wholesalers, and installers, we are likely to see inadequate investments in productive capacity,” AELP found.
The report is echoing a common criticism of shareholder compensation: that firms could take extra public cash and pass it back to shareholders, in the form of buybacks or dividends, rather than spending it to deploy the subsidized good.
That’s a risk, but it’s not yet clear that it is happening. The IRA uses tax subsidies, which are allocated in direct proportion to how much product is delivered. If companies are passing extra profits back to shareholders, then, they would be returning whatever portion of the subsidy remains after manufacturing expenses. In other words, shareholder payments could increase in absolute terms, without signaling that public dollars are being passed to shareholders.
The profit margin could depend crucially on competition in the heat pump industry. Since the heat pump credit is a consumer-side credit, in theory, the manufacturer could just raise their price by $2,000 and capture all of the subsidy as profit. The main check on that would be competitor prices, which is why consolidation represents such a risk.
Michael Murray, who authored the AELP report, said it is not yet clear whether manufacturers’ buybacks and dividends have increased as a percentage of revenue after the IRA, which would suggest that they could be forking over public subsidies to shareholders.
But the report identifies other major bottlenecks to scaling the heat pump market, including workforce constraints and private equity buyouts. Those buyouts are often financed with debt loaded onto the portfolio company, which usually prompts the company to slash labor costs, not add to them. And private equity managers use various forms of financial engineering to extract more cash from the companies they purchase, like dividend recapitalizations and management fees.
All of this could prove dangerous to what is supposed to be a growing industry. The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) projects just 6 percent growth in HVAC installers over the decade to 2032, and actually predicts a 10 percent decline in HVAC manufacturing jobs by 2031.
The problem of rollups and the aging workforce of HVAC engineers and electricians may be linked. That’s the case for Howard, the Indiana-based HVAC engineer, who says he left the industry partly as quality deteriorated after his firm was acquired by Wrench Group.
“When Wrench took over, it was hey, we now have all these problems from installs we’re just throwing in,” he said. He estimated that warranty calls doubled.
He ended up in a spat with leadership, he said, after going on several warranty calls for equipment that had been badly installed. “They upsized the equipment, oversold it, said it was going to take care of all their problems … I ended up going in, ripping it all out,” he said. “They didn’t like that at all, so that’s when they started trying to demote me.”
Ultimately he left, he said, with multiple other employees fed up with new management. Of the private equity management, he said, “They abuse the people that actually know how to do things and fix things.”
