Despite being the second most populous nation, the annual room AC market in India was at 4.2 million units per annum during FY16 versus 38 million units per annum in China. The average ticket size of room AC in India is 1.5 ton unit versus
1 ton unit in China, hence adjusted for this, the Chinese AC demand will still be at 25 million units per annum despite having much higher penetration level (~80 percent as on FY17). India is at 5 percent of the global demand in terms of volume.
Hot and humid climate in addition to underpenetration to aid demand. The current Indian room AC penetration at 4–5 percent stands at where China was in the 1990s. Additionally, the cooling degree days (CDD) for India is higher compared to China, hence room ACs are the first appliance people want to buy when they cross a certain income threshold. Urban Chinese purchased 200 million room ACs in the past 15 years whereas India is currently in the same stage where China was in 1995. Additionally, with higher CDD, the domestic room AC market growth outlook continues to be robust.
Most densely populated country in one of the severest heat zones. India has a tropical climate; weather profile of 54 major cities shows that 65 percent of the total number of hours in a year has a temperature above 24°C (5778 hours out of 8760). Indian cities like Chennai, Mumbai, Kolkata, and Delhi are the top five in CDD terms. This along with underpenetration, improving affordability, and availability of electricity provide good recipe for secular growth.
Domestic AC and HVAC Market
The domestic air conditioning market is `160 billion in value terms; of this, room AC has witnessed a growth of 14 percent CAGR over FY12–16. During FY17, the room AC market grew by ~15 percent implying current room AC market size of `116 billion. However, during the same period, the domestic central AC market has stagnated at `60 billion. Given the growth in disposable income, better availability of electricity, higher propensity to spend coupled with hot and humid climatic conditions, the room AC segment will continue to grow at 12–13 percent CAGR for the next 5–6 years.
Channel checks indicate shifting of current landscape to inverters. The Indian room AC market is going through a transition toward energy efficiency. Consumer awareness has improved and they have become more informed of the benefits of energy efficiency, longer lifecycle advantages, and lower noise of inverter ACs.
Domestic room AC market breakup. The domestic room AC market is currently dominated by three-star fixed-speed ACs. The overall room AC market has grown at a CAGR of 12–13 percent from 1.3 million units per annum in FY05 to ~5 million per annum in FY17. This growth rate is expected to continue given the low penetration, rising disposable incomes, and increase in availability of electricity. The overall total room AC units sold during FY17 are expected to be at ~5 million per annum. Shift to inverter market will be a key development and companies that are able to adapt themselves and cater to this with more inverter SKUs are likely to dominate in the medium- to long-term perspective.
No visible near-term impact from e-commerce; however, it can provide an alternative channel in the longer term. There has been a shift in the way room ACs are sold with the advent of modern trade and multi-brand outlets. Room ACs were previously sold largely through direct dealers/distributors or sales and service dealers (SSDs). E-commerce is now emerging as a new channel of trade; while some companies are betting big on this format; others are not keen to risk their relationship with dealers. Given the touch and feel requirement for room ACs and collective decision-making by family members to purchase the product, the e-commerce format has not been able to make any major dent in the near term. However, most companies do not ignore e-commerce and sell certain models through this channel that are not sold through dealers. Companies are also closely watching this development and will change their strategy if sales volume through e-commerce increases. In a long-term perspective, e-commerce can emerge as an alternative channel and would reduce the time to reach specific markets for companies, especially new entrants.
Huge Growth Potential
Penetration of room ACs in Indian households is just 4 percent, against 77 percent for televisions, 33 percent for refrigerators, 17 percent for air coolers, and 13 percent for washing machines. Low penetration implies considerable scope for growth of the domestic room AC market. Despite growing faster than the other segments, Indian AC penetration levels are low due to growth occurring over a much smaller base.
Rising incomes improving affordability in a big way. As disposable incomes rise, an aspirational populace would increasingly view an erstwhile luxury like AC as a necessity. This provides a large pool of opportunity, which can be tapped for consumer durables.
Improvement in availability of electricity to enable swifter adoption of room ACs. The overall power deficit has recently reduced and this will aid in improving the demand for room ACs. Government is focused on rural electrification in states with low penetration of electricity. Power Grid Corporation of India is also focusing on creating infrastructure in the form of HVDC lines, which will enable interstate transmission of power through long distances. Thus, in addition to the amount of power, the quality of power will also improve, which will propel demand for electric appliances like room ACs in tier-II and rural areas.
Adoption of Inverter Technology
Electricity consumption on household appliances. Room ACs constitute 50 percent of the electricity consumption of a normal household. Energy consumption can be reduced by 30 percent on switchover to inverter AC. At full load, a typical room AC consumes about 150 times the power of an LED light and 20 times that of a regular ceiling fan.
Room AC is the major contributor to peak load electricity demand. High electricity consumption during summer is largely attributable to wide usage of room ACs. Air conditioning accounts for 40–60 percent of the summer peak load in large Indian cities, hence adoption of inverter technology can result in 30 percent reduction in peak load demand. With increase in penetration, the contribution of air conditioning toward the peak load demand is poised to increase. Hence, the government will be keen to push for various schemes to increase the penetration of energy-efficient inverter ACs.
How inverters improve energy efficiency of room ACs. Multiple options to improve energy efficiency of air conditioners include the use of more efficient technologies and components such as inverter/variable speed compressors, fans, heat exchangers, expansion devices, and refrigerant fluids. These improvement options could save between 60 and 72 percent of energy compared to a base case model. Variable frequency drive (VFD) is the most effective as the compressor consumes approximately 60 percent of the overall energy requirement of room AC.
ISEER will be a Game Changer
The Bureau of Energy Efficiency (BEE) has made labeling of household appliances mandatory for split and window fixed-speed room ACs in 2012, in keeping with the Energy Conservation Act. In June 2015, Indian Seasonal Energy Efficiency Ratio (ISEER), was introduced by the BEE for inverter ACs, in which ACs with a one-star label correspond to an ISEER of 3.1, whereas the minimum ISEER required for an inverter AC to be rated as five-star is 4.5. BEE has been progressively improving the efficiency of room ACs from 2008 by setting higher labeling standards. The weighted average EER of Indian ACs has increased from 2.6 in 2006 to 3.26 in 2015, an increase of 25 percent. The regulatory minimum EER (one-star label) for room ACs increased by about 35 percent from 2011 to 2016 (5 percent CAGR) as a result of BEE’s tightening of energy ratings.
January 2018 – New Rating System
Ratings based on ISEER have been introduced on a voluntary basis for variable speed (inverter) ACs since June 2015; this has been proposed to be merged with fixed-speed ACs during the mandatory regime change from January 2018. The ISEER rating methodology will bring in higher energy efficiency of appliances and reduce energy consumption. The new standards have been developed taking into consideration the changing Indian temperature. This will be a litmus test for the Indian room AC market and will pave the way forward in understanding the consumer preference toward inverter ACs. This will imply the current three-star fixed speed EER rating of 3.1–3.3 will be ISEER one-star rating of 3.1–3.3, which is a two-stage increase in rating requirement.
Why Inverter ACs Cannot Comply with Current EER Rating
The way cooling happens in fixed-speed ACs is different from the way it happens in inverter ACs. Fixed-speed ACs have fixed cooling capacity and fixed input wattage whereas inverter ACs have varying cooling capacity and input wattage. BEE was able to divide all the fixed-speed models in the market into five groups of different star ratings. However, this works well when there is fixed output wattage and fixed input wattage. Defining the same for inverter AC was very difficult as both the input and output wattages vary.
ISEER to be Adopted from January 2018
The world over the method of defining energy efficiency of ACs is not EER, but SEER. SEER calculation involves defining annual temperature profile and usage patterns. SEER standards have to be different for different countries as every country has a different climate profile. Thus, BEE has defined ISEER.
To calculate the total annual electricity consumption, the assumption is that the AC will be used for 1600 hours through the year. With changeover to the new rating, information available to customers from manufacturers is also expected to be more detailed. The following will be the key information shared by manufacturers to customers:
Rated cooling capacity (100 percent load). This is the marketing tonnage or marketing cooling capacity. Inverter ACs have variable cooling capacity and a 1 ton inverter AC may vary its tonnage from 0.2 ton to 1.2 ton. But they are marketed as 1 ton inverter ACs. Rated cooling capacity for a 1 ton inverter AC would be 1 ton. As per BEE standards, there is a tolerance of ±5 percent for this value.
Rated cooling capacity (50 percent load). BEE has asked manufacturers to provide power consumption data at 50 percent capacity. This is not the minimum cooling capacity, but 50 percent of the total capacity. In the case of a 1 ton AC, it would be 0.5 ton, but this does not mean that it cannot go below 0.5 ton.
Maximum cooling capacity. This is the maximum cooling capacity which, as in the above example of a 1 ton AC, would be 1.2 ton.
Rated power input (100 percent load). This is power consumption in watts when the AC runs at 100 percent load or at the marketing tonnage.
Half power input (50 percent load). This is power consumption in watts when the AC runs at 50 percent load or at the marketing tonnage.
Maximum power input. This is power consumption in watts when the AC runs at the maximum tonnage that the air conditioner can achieve.
Cooling seasonal energy consumption (in kWh). This is the annual power consumption as measured as per BEE standards.
ISEER. This is the ratio of total heat removed and total energy consumed. This is the ideal number to compare two ACs as one’s usage of AC may vary and thus the electricity consumption may not be the same as cooling seasonal energy consumption.
The ISEER metric and the star labels (June 29, 2015–December 31, 2019) are due to become mandatory for all ACs (fixed-speed and inverter) in 2018. This will imply the current three-star fixed-speed EER rating of 3.1–3.3 will be ISEER one-star rating of 3.1–3.3, which is a two-stage increase in rating requirement.
The minimum energy performance standard for room ACs increased by about 35 percent through 2006–2016, that is, at about 3 percent per year. Market-average room AC efficiency has typically been slightly higher than the one-star level and has improved similarly. Even with these efficiency improvements, inflation-adjusted room AC prices, measured by the wholesale price index (WPI) relative to the basket of all commodities, fell by nearly 35 percent during the same period. Although the MEPS and the five-star level for inverter ACs will be ISEER 3.1 and ISEER 4.5 respectively, until 2019, the most efficient room AC already commercially available in India has an efficiency of ISEER 5.8 (with cooling capacity of 1 ton); moreover, several brands have models with efficiency between ISEER 4.5 and 5. Hence, there would not be any major increase in price with increasing energy efficiency. With higher volumes, the economy scale improves leading to drop in cost of production.
Favorable Government Initiatives
Energy Efficiency Services Limited (EESL) – to push inverter AC penetration. EESL has been successful with their scheme of LED bulbs. They are gearing up to present to the Indian market a similar shift toward inverter AC. Initially, EESL plans to tap the institutional market like bank ATMs in which AC consumption is high. As per its plan, EESL will replace the old inefficient ACs without charging any upfront capital cost. The savings due to the use of inverter AC will be charged for a particular time period instead of the upfront capital cost. EESL will do this only with large institutions that run ACs for longer time periods. This will also influence the prices of inverter ACs over a period given large-scale procurement leading to reduction in prices. EESL has recently come out with a tender to procure 1,00,000 inverter ACs. The current government is trying to incentivize energy efficiency with EESL procurement and introducing ISEER rating system, among others.
Given the low penetration, increasing affordability, and better availability of electricity, the domestic room AC market is poised to witness secular growth over the next five years. Relatively higher energy consumption of room AC compared to other household electrical appliances will prompt consumers and government toward energy efficiency. The contribution of inverter ACs is expected to grow at a faster rate compared to fixed-speed compressor AC with the former’s share estimated to increase from the current 13 percent to 50 percent over the next five years. Government’s energy efficiency program run by EESL will accelerate adoption of inverter ACs while keep pricing competitive. With focus shifting toward energy efficiency, the companies oriented toward manufacturing with better appetite for R&D will benefit in the longer term. Adoption of ISEER rating by BEE will be a game changer.