Source: Viessmann media library
The heating industry in Germany has seen a turbulent ride in the last 3 years not least due to the COVID-19 pandemic, war in Ukraine, rotations in regulatory frameworks, and material bottlenecks from China and Taiwan. While these events have caused the industry to think on its feet; they have also paved the way for climate friendly solutions and developing circular business models.
Heat pump systems have gained traction in Germany as the go-to technology for heating since natural gas prices have spiked in the past few years. Heat pumps have also been labelled as a “climate change mitigation technology” given that it is less CO2 intensive than natural gas boilers, especially as the electric power grid is becoming progressively “greener”.
A major challenge that remains from switching from boilers to heat pumps is that heat pumps are more material intensive. A heat pump consists of Steel, Copper, Aluminium, insulation, refrigerant, electronics, and plastics as the major materials – incorporating critical and strategic raw materials along with rare earth magnets and 3TG (conflict) minerals. An average heat pump might last between 12-17 years in the use phase, however, the growing population increases demand which leads to the decoupling of business growth from resource use and environmental degradation. This is the fundamental reason for establishing circular business models. Moreover, oscillations in the geo-political landscape leading to supply chain bottlenecks catalyse the need and keep propelling the European Commission’s efforts to close the loop.
Germany is a special market for heat pumps where the air-to-water technology dominates – unlike the rest of the world – and tends to be more expensive on an up-front cost basis. Closing value chains is a big challenge as there are multiple stakeholders involved during the end-of-life treatment of the product such as end-customers, refrigerant technicians, disposers (the person or entity discarding the product), and recyclers. Sometimes the heat pump might simply just skip this chain and end up on a resell platform being sold as a secondary product.
Heat pump specifics
Heat pumps are complex products that take thousands of components and tens to hundreds of suppliers to build. The depth of manufacturing capability plays a critical role in determining the circularity of a heat pump. The more OEM (Original Equipment Manufacturer) components (could be water pumps, heat exchangers, compressors, evaporators etc.) are involved in the development of the product, the more upstream supply chains will become available that need to be connected to end-of-life treatment streams to eventually close the value chains.
So to establish a circular business model, it is crucial to identify the components which will determine appropriate end-of-life streams. Instinctively, ensuring the return of heat pump components to the OEM manufacturer will also enable more efficient repair/refurbishment practices, and recovery of materials. These practices, will ultimately keep raw materials in circular value chain loops on a macro level.
The circularity of the heat pump needs to be incorporated right from the design phase. The accessibility, ease of replacing, dismantling of components needs to be incorporated from the conceptualization stage. Likewise, lifetime and quality of components along with risks of failure should be analysed early on, enabling their strategic placement at assembly levels for ease of replacement. New designs should always consider repair and refurbishment options.
In product sales based business models, which currently hold dominance, a heat pump manufacturer cannot independently establish a fully integrated circular value chain. Effective collaboration and co-creation between upstream and downstream supply chain partners are essential.
The active participation of upstream suppliers in the collection of materials and OEM components (like a water pump) from end-of-life products significantly bolsters the circular economy. However, a prerequisite to this is that the product is handled and dismantled correctly and the value of the materials/OEM components is retained. The partner/stakeholder that treats the heat pump at the end of its life must be aware of the processes involved in dismantling the heat pump (to a certain assembly level), which valuable materials are present in the product, and what streams should follow. For example, the water pump could be returned to the manufacturer which could then be forwarded to the OEM supplier. Similarly, metal sheets; detached and sorted, need to be rerouted to the recycler. Recycling withour proper knowledge is often counterproductive: imagine shredding a water pump only to demagnetise and consequently lose its rare earth magnets forever.
Electronics in heating systems carry great importance considering both their cost implications and environmental impact. While electronics, printed circuit boards in particular, barely make ~1% of the mass share of the total materials used in such products, they have a high environmental impact due to the materials contained in them such as Gold, Silver, Tin, Lead, or thermoplastics etc. Closing the value chains of electronics not just reduces environmental impacts such as CO2 footprint, water usage, ecotoxicity, ozone formation but also keeps critical raw materials and 3TG minerals in the value chain loops through reusing, repairing, and recycling. It equally provides a lifeline when unforeseen events such as global supply chain bottlenecks, a pandemic, or a war hinder production.
The difficulties associated with reusing or refurbishing printed circuit boards continue to pose a significant challenge. The electronics involved in the heat pump that is to last somewhere between 12 to 17 years (potentially 20) in the use phase will be outdated by the time the pump reaches the end of its life. Thus, the how of refurbishing, reusing, or remanufacturing old parts in new heating systems remains an open question.
Looking at it from an economic perspective, re-processors (reuse, refurbishment, recycling etc.) also remain a pain point for heating system manufacturers. First, to achieve a circular business model, the development of an effective take-back system is essential. However, a take-back system requires complex planning and can end up being too cost-intensive. Moreover, there are multiple actors involved in this process who might be competitors with different goals in mind. Hence, to retain the value of each product, stakeholders must find a way for cooperation with or without incentivisation.
That being said, a massive opportunity lies in developing product-as-a-service business models allowing the manufacturer to have a grip on the product and collect it at the end-of-life. This would enable the reintegration of components into the value chains following the 5R (refuse, reduce, reuse, repurpose, recycle) while providing a steady revenue stream. Manufacturers, at last, would be able to repair, refurbish, remanufacture, or recycle components accoridng to their own standards.
There is evidently a strong business and environmental case for the heating industry to implement circular business models. Working with circular business models shields them from geo-political turmoil, price uncertainties, and provides resilience to their supply chains – making businesses financially viable. In addition, businesses can significantly lower their impact on land, air, and water through designing products that adhere to circularity principles.
Heat pumps installed today will offer a massive mine to extract materials for the manufacturing of new heating technologies in the future just as decommissioned boilers became an “urban mine” for steel and copper in today’s heat pump. The question is: how quickly will this opportunity be monetised?
CE-RISE supporting the transition
The CE-RISE information system based on block-chain technology will enable communication among all stakeholders in the life time of the product. For example, a water pump OEM manufacturer will be able to indicate that they are interested in taking their product back at end-of-life then discover the routes through which the product may be returned to them. Stakeholders at the end-of-life (disposer or recycler) will be informed that a heat pump has more value than a water pump (coming from the heat pump) thus can be returned to the OEM. At this point, incentives could be in place already as well, ultimately accelerating the exchange. Effectively speaking, the CE-RISE information system will enable circular processes across the entire value chain.