California’s Refrigerant Incentive Program and What it Means for Retailers
An incentive program is in the works in California that would make it easier for food retailers to prevent harmful refrigerant emissions. If approved, the Refrigerant Incentive Program will be the beginning of the end of supermarkets’ struggles with endless refrigerant phase outs, regulations, and government refrigerant dictates.
Where Does the Money Come From?
California’s greenhouse gas cap-and-trade program collects a significant amount of money each year from the state’s greenhouse gas emitters. The money collected must, by law, be invested in programs that fight climate change. The pot of money that California collects is allocated to climate change programs in three-year increments. The first investment plan started in 2013, and it will end in June 2016. California is currently considering which projects will receive money from the investment fund for the next three-year period (July 2016-June 2019).
The program is supported by the North American Sustainable Refrigeration Council (NASRC), a nonprofit group that is dedicated to advancing the use of natural supermarket refrigerants. Supermarket end-users can weigh in as the California legislature considers the merits of the incentive program.
The Rationale for a Refrigerant Incentive Program
The supermarket industry realized a long time ago that it is impossible to solve environmental problems related to refrigerant leaks using a repair-based approach (i.e., with policies that focus on leak repair and record-keeping). Yet, the federal EPA’s main program to reduce supermarket emissions of harmful refrigerants to the lowest achievable level (zero) reflects a repair-based policy. A repair-based policy will never result in zero emissions, because in order for the policy to kick-in, one must first leak refrigerant.
Some might ask why supermarkets themselves can’t pay for environmentally-friendlier technologies, including those that use natural refrigerants. Let’s first consider small grocers, which as a group are struggling for their very existence. Refrigerant leaks do not make that struggle any easier. A small supermarket has to sell about $100,000 worth of groceries to pay the cost to replace a 100 pound refrigerant leak (at about $10 per pound). Now consider that, on average, a typical supermarket in the U.S. leaks about 1,000 lbs. of refrigerant each year. That means a grocer has to sell about one million dollars in groceries just to pay the cost of replacement refrigerant. Small grocers realize that refrigerant emissions are a waste of money, and most grocers would love to replace their old, leaky systems with something better. The problem is capital.
Some grocers, especially small grocers, wind up paying for refrigerant leaks constantly throughout the year. Even though they know that they could avoid that ongoing cost entirely by investing in advanced refrigeration technology, they cannot come up with $1 million - 1.5 million dollars in capital to purchase a new advanced refrigeration system. It is similar to people who pay exorbitant monthly rent on an apartment, even though they know that it would be better to invest that money in monthly mortgage payments. Because they have that exorbitant rent payment every month, they can’t save for a down payment on a mortgage.
Even larger grocers who might have the capital to invest in refrigeration technology that eliminates their direct greenhouse gas emissions face a problem: The preferred systems, ones that use refrigerants that don’t harm the environment, are often much more expensive than a standard system. Supermarkets are for-profit entities, so they have a responsibility to shareholders to make financially sound decisions, especially when it comes to major capital investments like new refrigeration systems. It is difficult to justify spending 20% to 100% more for an advanced system when industry profit margins are as low as 1% and new technology is often perceived as risky.
The Kick-Start Needed for Naturals
Why are prices so high for environmentally-friendlier technology choices? Systems manufacturers claim that the additional expense is a matter of scale. Because these technologies are new to the U.S., manufacturers have not yet achieved the sales volumes that allow for economies of scale. Some components still have to be imported from Europe and Japan because foreign companies don’t see a large enough market in the U.S. to justify opening manufacturing facilities here. Installation and maintenance costs are high in the US because contractors have little experience with these new systems. They often struggle to estimate how much a contract is going to cost them to fulfill, so they estimate high and then add extra on top of their bids “just in case.”
The brilliance of California’s proposal is that, if successful, it will create enough volume to allow manufacturers to achieve economies of scale and encourage them to set up shop in the US. Equipment prices will come down. Service contractors will have more opportunities to bid on projects and gain experience with these types of systems. Organizations like the NASRC can gather data on system performance and share information across companies. This leads other supermarket companies to invest in these technologies, ultimately creating a self-sustaining cycle. The effects of this cycle will be nationwide — not just in California.
So where does the proposal stand now? The Governor of California has submitted his proposal to the legislature, along with a lot of other proposals on how to spend the money in the investment fund. As one can imagine, every organization and special interest in California that can claim to fight climate change is angling for a piece of the fund. And so the battle continues to make sure that the Refrigerant Incentive Plan makes it through the legislative process intact.
Keilly Witman is a founding member of the North American Sustainable Refrigeration Council, a nonprofit that promotes the use of natural refrigerants in the grocery sector. Prior to starting her own firm, KW Refrigerant Management Strategy, she ran the EPA’s GreenChill Partnership, which grew to encompass more than 8,500 supermarkets during her tenure.