White Paper: Managing a New Dynamic in Climate Control

Managing a New Dynamic in Climate Control A White Paper by Ted Atwood, CEO

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New Regulations in Washington and California driving record keeping requirements

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Restriction on availability of refrigerants

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Shift in manufacturing to Asia from the US

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Increased energy expenses create new dynamic in managing positive outcomes that drive profit

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FCs and the value they provide from their safe removal and destruction

Climate control affects us all.

As recently as February 16, 2012, the EPA and State Department have been developing treaties and regulations to reduce the impact to the Environment caused by HCFCs and HFCs, otherwise known as potent greenhouse gasses. Presently there are six (6) regulatory rules that effect refrigerants and their use as well as several significant market issues that this paper intends to define the scope and scale of these events and their potential impact to service requirements.

1. Clean Air Act – EPA issued two memorandums dated May 3, 1995 and August 16, 1996 to provide guidance to the regulated community concerning the applicability and interpretation of the safe disposal regulations under Section 608 of the Clean Air Act. This Act regulates the trade, production & use of refrigerants. The ACT originally was

the result of the USA’s participation with the Montreal Protocol, touted as the most successful environmental treaty of its kind. The Montreal Protocol was originally intended to support action intended to reduce the hole in the Ozone layer. However the Supreme Court determined in 2004 that EPA had the responsibility to manage green house gasses as well and since refrigerants had evolved from Ozone depleting products to Global Warming Gasses, so the regulations evolved as well.

2. The Montreal Protocol on Substances That Deplete the Ozone Layer (a protocol to the Vienna Convention for the Protection of the Ozone Layer treaty designed to protect the ozone layer by phasing out the production of numerous substances believed to be responsible for ozone depletion. The treaty was opened for signature on September 16, 1987, and entered into force on January 1, 1989, followed by a first meeting in Helsinki, May 1989. Since then, it has undergone seven revisions, in 1990 (London), 1991 (Nairobi), 1992 (Copenhagen), 1993 (Bangkok), 1995 (Vienna), 1997 (Montreal) and 1999 (Beijing). It is believed that if the international agreement is adhered to, the ozone layer is expected to recover by 2050. [Due to its widespread adoption and implementation it has been hailed as an example of exceptional international co-operation, with Kofi Annan quoted as saying that "perhaps the single most successful international agreement to date has been the Montreal Protocol". [2 It has been ratified by 196 states and the European Union.

3. California Regulations under Assembly Bill 32 is a California State Law that fights climate change by establishing a comprehensive program to reduce greenhouse gas emissions from all sources throughout the state. AB 32 was authored by Assembly Speaker Fabian Nunez (D-Los Angeles) and signed into law by Governor Arnold Schwarzenegger on September 27, 2006.

4. Rule 1415 of the South Coast Air Quality Management District The purpose of this rule is to reduce emissions of high-global warming potential refrigerants from stationary air conditioning systems by requiring persons subject to this rule to reclaim, recover, or recycle refrigerant and to minimize refrigerant leakage. This rule is applicable to any person who owns or operates an air conditioning system, as defined in this rule. This rule is also applicable to any person who installs, repairs, maintains, services, relocates, or disposes of an air conditioning system; to any person who services or maintains recycling and recovery equipment; and to any person who recycles, recovers, reclaims, or sells high global warming potential refrigerant 5. Rule 1103 - & - Rule 531: California – An Energy Data Tracking & benchmarking management requirement. Starting in 2013 buildings over 50,000 feet and then in January 2014 buildings over 5,000 feet, this includes owners, managers, tenants, lessees, and prospective buyers. The rule requires that all mechanical systems be inventories and listed and disclosed and then rated for their energy consumption and efficiency.

6. Mandatory Reporting of Green House Gasses (40 CFR Part 98) On October 30, 2009, the US Environmental Protection Agency, published a rule for the Mandatory reporting of green house gasses, also referred to as 40 CFR part 98 and referred to as the GHG

reporting Program. This comprehensive nationwide, federal data collection program is intended to provide a better understanding of where GHGs are coming from and will guide in the development of Policy and programs to reduce emissions. Direct greenhouse emitters reporting 25,000 metric tons of CO2 emission per year are required to register and report all emissions including refrigerants. Approximately 10,000 facilities are covered by this rule.

7. Department of Energy 10 CFR, Parts 429 – 430 Energy Conservation Program: Enforcement of Regional Standards for Residential Furnaces and Central Air Conditioners and Heat Pumps. See Docket EERE 2011-BT-CE – 0077. Via this stringent protocol and regulatory action, the DOE has entered the refrigerant regulatory environment indirectly by suggesting they can limit or control the types of systems available for sale and the manner they are sold and installed. This is a very new regulatory action and it must be noted that the Department of Energy regulations will have a long and significant impact on the refrigerant industry and they must be considered in every decision that involves investment in climate control equipment.

8. State Of Massachusetts – 2008 Global Warming Solutions Act: Like the AB32 Act in California – this regulation is already in place and the details for its deployment are already under consideration and soon the public review period will begin.

The rules listed here comprehensively provide a well-structured environment to manage and police the use of refrigerants and climate control equipment. These rules redefine the manner in which decisions need to be made and they also redefine the timeline for amortization and use of equipment. System owners must know be aware of their responsibilities under each of these requirements, since ignorance or lack of awareness will not absolve you from responsibility to meet the requirements defined in each of these actions. A licensed technician will not be fined for leaks or improper use of refrigerants but may find that they are liable under the Department of Energy actions under 10 CFR. Historically a system owner may have defined a successful HVACR contract by the price of the bid that may no longer be the case, as most bids presently do not include responsibility to manage and report refrigerants usage or leaks. The stakeholder group impacted by this may not even be engaged in the development of existing solutions and issues such as phantom emission and an inadequate system of controls and/or an inability to actually measure your existing usage.

This guidance document is intended to provide an outline of the problem, offer solutions to address the problems and tools to measure and manage activity in this evolving sector.

I. PRODUCTION A major consideration in selecting or considering refrigerants has been the continued development in refrigerant production in Asia, while domestic production has shrunk as a percent of overall supply.

Item 1998 2003 HFC Production by Region

2008

2013

2018

North America

654

605

587

585

595

West Europe

440

416

393

395

390

China 229 HFC Demand by Region

501

1030

1365

1795

North America

542

486

493

516

553

West Europe

129

123

120

113

106

China

209

396

785

1000

1285

In 1998, the USA was a producer and an exporter of refrigerants, however stringent regulations, globalization and a growing demand for climate control equipment has lead to a shift in production and demand. The chart in the upper right corner shows the transition.

This shift has had a significant impact on inventory storage, as lead times are long and complicated by weather, cultural events and logistic challenges. As well since government heavily regulates international commerce it is yet one more challenge in insuring a streamlined delivery from source to user.

In 2011, two major issues exemplified the impact trade can have on the supply chain: 1) hard to find 134a – a major component in many new HFC blends – led to use of low quality replacement that had a fatal outcome when several people perished servicing units installed with this material. 2) Heavy demand for R-125 strained the supply chain leading to a shortage of new environmentally preferred blends.

II. Consumption The amount of R-22 consumed will exceed the amount imported and produced throughout the period 2012 – 2020. This chart assumes the most positive outcome – however recently the EPA reduced the allocation to the lowest level and so the gap has been much wider.

III. Blends: Alternatives and replacement refrigerants Any transition from well-established and well-understood products to new products that are less well understood is going to require some investigation and a healthy does of skepticism.

EPA established a program called the SNAP, The Significant New Alternatives Policy (SNAP) Program is EPA's program to evaluate and regulate substitutes for the ozonedepleting chemicals that are being phased out under the stratospheric ozone protection provisions of the Clean Air Act (CAA).

The program evaluates refrigerants and rates them based on safety, potential to replace an existing product and impact to the environment. The Administrator has determined a large number of alternatives exist that reduce overall risk to human health and the environment. The purpose of the program is to allow a safe, smooth transition away from ozone-depleting compounds by identifying substitutes that offer lower overall risks to human health and the environment. As well AHRI hosts a site that is supported by industry to share information and updates on refrigerant regulations and rules PhaseOutFacts.org is your source for information about the U.S. strategy to phase out the use of ozone depleting refrigerants in central air conditioning and commercial refrigeration equipment, the next generation of refrigerants and the responsible use of the chemicals.

In addition to these organizations are the equipment companies that supply the compressors that also have to rate the performance of the refrigerant – often to insure continued safe and maintenance free operation. Often a blend may meet 1 or 2 but not often all industry requirements.

Be aware that new blends can also increase energy demand by as much as 15% this can have a significant long term impact to the bottom line. As well many alternatives suggest no oil change, yet in many cases read the tine print and oil change might be advised. As time evolves energy use will likely become a significant key to any decision.

IV. If you cannot measure it, you cannot manage it.

Despite differing views of the market, all stakeholder groups acknowledge the gap between opportunity and implementation, recognizing that a standardized method of measurement, verification and enforcement would help create market transparency, a more stable environment and an up- scaling of investments. This should be considered of high priority going forward.

But the challenge is, where to start – and the answer can be complicated since all of a sudden all the government bodies of the world want us to start managing and tracking and reporting usage of refrigerants. The problem is that most people categorize refrigerants as an expense.

The minute a refrigerant is bought to repair a leaky AC or refrigeration system, the material falls into an accounting category called – expensed maintenance items or your refrigerant usage presently may fall under bundled services, tangible personal services or Real Property services. Regardless the refrigerant you are using is likely not even on your accounting people’s radar.

Traditionally you would look to a responsible person in the organization to take responsibility: perhaps a maintenance person. Once you provide them with the responsibility to come up with a plan to track usage, where should he or she start?

1. Find out which of the rules if any apply to your facility. The best way to do that is to perform an analysis of Installed inventory. Installed inventory analysis is simple, make note of all the assets you have on your property, which cool or heat and then check out a few key items •

Size of the unit – tonnage of cooling

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Type of refrigerant installed in the unit

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Year the unit which year the unit installed

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Serial number of unit

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Location of unit

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Last maintenance on unit

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What does unit cool

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Who is service provider

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Other data may be important but this is a great start.

2. Begin reading and call your service provider. You will need to do your own homework. In an informal survey of more than 140 companies in 2011, not one service provider believed they were responsible for leaks or emission or violations related to refrigerants. The respondents were not callous to the needs of you the system owner nor were EPA setting system owners up to fail, but since system owners hold the purse strings and decide the outcome of their equipment – this is a logical and normal situation.

Often service providers are required to provide a low bid for service work and they are not authorized to perform any work that is not approved by the system owner and this restricts their ability to fix leaks on their own, from here on out, make sure your provider is part of team that keeps you compliant. Most reputable providers will be a terrific resource throughout the process – choose carefully and always choose a reputable and

licensed provider.

V. How do I choose a reputable service provider?

Licensed by a state agency, EPA certified technicians are abundant – but so are unlicensed and uninsured technicians. Several accreditation groups exist such as NATE and ACCA as well as associations such as RSES. As well your local wholesale supply house that sells HVACR equipment can be a terrific source of reliable information. New benchmarking techniques are proving to be valuable tools in the effort to maximize return on climate control investments & also in choosing a reputable provider.

Massive shifts in refrigerant availability have resulted in up to a 1300% increase in storage needs for refrigerants – however storage can also be misleading since inventory attrition is common when it is not supervised and monitored by third party support personnel. Many examples of fraud and loss exist from the CFC transition of the 90’s.

Benchmarking is helpful in understanding how your system operates compared to others with the same conditions: •

What is the average life expectancy of my system?

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How many hours per day should the system operate

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What is my plan policy if I exceed my leak rate?

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Are there alternative refrigerants if the system leaks or if I cannot find the refrigerant I need & how will it impact my electric rate & cooling needs?

With all the questions and responsibilities, it’s important that your service tech work with you to develop a plan that is cost effective and compliant.

VI. Scope out your objective.

Compliance based goal setting will likely not be enough. If a program does not intersect with the goals of the company and work within financial boundaries, it will likely fail.

Evaluate the existing workflow and examine the corresponding paper trail. Likely you already have some process in place they could include; issuing purchase orders for work, the work could have the gas bundled in with the service. Or you may have a system in place where you buy the refrigerant or your service provider buys it for you, regardless don’t overlook existing system function they may provide value and insight in the implementation of your new plan.

Start with the facts and see how much of the data you already have access. Break down the workflow into: •

Strategic activities – like contracting, budgeting and bidding

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Tactical activities – like service work, inventory control, leak detection.

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Once the existing processes have been defined and the workflow evaluated, take a look at what the regulations require you to keep track of:

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Installed inventory

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Gas purchased & installed – there is a difference

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Gas removed for reclaim

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Decommissioned systems

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Location of leaks

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Size of system

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Refrigerant contained in each system

Then take a look at the existing regulations and any pending regulations and include their impact on your planning for the next 1-5 years.

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Will availability curtail ability to continue to meet climate control needs

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Will regulations require faster write down of existing assets?

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Which leaky systems will require repair or replacement?

VII. Develop a plan. Now that you have identified the stakeholders in your group and you know the responsibilities you have and you are taking a look at regulatory impacts on your assets and investment – it’s time to develop a strategy that will work.

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Standardize your documents

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Existing equipment

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New installations

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Service records

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Reclaim

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Purchases

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Inventory of gas

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Define the record keeping procedure, manual or electronic

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Set your refrigerant Policy in place

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Define the Policy

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Establish the organization chart to support the policy

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Provide a role for every participant from employees to vendors and make sure to include in any contracting.

Once the Plan is established now focus on implementation. Training and support is the key to implementing any plan: •

Plan

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Act

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Follow up

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Review

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Amend

Insure that you have the right communication tools and ask your vendors to be involved; they can provide documentation – likely they can be helpful on key aspects of successful and not so successful programs elsewhere.

Training will likely set the tone and be the first point of impact you share with the tactical people that will be responsible for deployment – here is where vendors can play a key role.

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Insure that periodic reviews are scheduled

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Set specific goals that everyone can participate

VIII. CFCs: destruction and marketplace impact Beginning in 1997, many countries around the world began to pay attention to the impact refrigerants caused to the atmosphere as well as the ozone. Immediately it was recognized that newer refrigerants were going to need to be managed – as well as older refrigerants – and the new paradigm looked beyond the ODP and the began to measure the GHG impact.

Immediately policy makers, environmental NGOs and GHG markets embraced a series of market programs to manage the impact of these high GHG products on the marketplace.

From the Chicago Climate Exchange to the Climate Action Reserve [CAR - California], many programs were started: all but one has failed (CAR is presently thriving). Millions of dollars and millions of pounds of destruction were managed before a successful protocol could be adopted and accepted by industry.

The concept is to remove CFCs from active systems and then destroy them. Once destroyed high-level consumers of carbon – such as energy plants that derive their fuel source from coal and others – purchase these ‘carbon credits’ and then use them to keep their plants operating in a restricted market. Restrictions are in place in California in an effort to reduce carbon consumption state wide to levels found in 1990.

Since R-12 and R-11 have large carbon footprints, their destruction is desirable. These projects need successful management and implementation, but this new dynamic approach to refrigerant management can be a valuable tool in justifying the transition from older to newer refrigerants.

IX. Technology as an aid in developing and supporting solutions Computers, smart phones and the cloud are all evolving at both a fast rate and with reasonable ease of use. 3G, 4G WIFI, all allow us to maneuver the Internet from anywhere.

Refrigerant management software exists today that does not require download or difficult training to get up and running.

Although software is not an automated solution at start up – it is an ongoing platform that is always supporting the effort and never goes off line or takes a day off.

The platform is important and you must make sure to track everything. Some systems only track interaction between system owners and the service provider – it is essential to count, manage and support all aspects of the transaction – from purchases, to disposition to a reclaimer and end of life options for gas and equipment.

Your Software solutions should include several key features to insure not only a place to put the data but also 1. Transparent flow of information 2. Simple to operate

3. Multiple user levels for all members of your team – including vendors, employees, service providers and reclaim sites 4. Easy upload to the R3 platform for California – where applicable 5. Multiple reports that meet your workflow demands 6. Ability to track refrigerants that enter and exit your systems 7. Ability to track refrigerants that are in inventory: a. Installed B. In cylinders C. In service provider possession D. At reclaim e. Pending destruction 8. Track transfers between systems and cylinders 9. Provide functionality that allows for reporting of leaks and the reasons for the leaks 10. A dashboard to alert key personnel when they must take action 11. A scheduling tool to insure maintenance is recorded properly and follow up visits are scheduled 12. Document management tools to insure access to data when and where you need it 13. Portability and mobility that enables use at any computer or mobile device 14. Simple uploads of data 15. Simple exports for sharing with authorities, management or in developing budgets and reports.

16. Notifications to alert you when compliance events are in jeopardy 17. Credentialing tools to insure proper and certified persons are working on the system and that you can document to authorities or in government installations (or other sensitive environments) for security reasons.

18. All necessary documentation to support your compliance goals

19. Expandable platform that can grow with your business.

X. In 2013, expanded Government regulations will reduce the amount of R-22 from roughly 100MMlbs to 45 MM LBS. It is estimated that servicing needs will require approximately 78 – 80MMlbs. A shortfall of this magnitude will be made up in part with surplus inventory in the market, aggressive retrofits and reclaim of existing used refrigerant – for eventual reuse. Regardless inventory will be tight and in some situations may not be adequate to meet all the needs for all the equipment.

At the same time, there is a convergence of regulatory events both federally and locally in California, which are forcing industry to pay attention to the leaks and account for their refrigerant usage.

A simple refrigerant management program with a robust IT tool as its hub can provide a platform to manage the transition through this evolution. Polar Technology and our partners have developed solutions to provide both the software and the logistics to insure a smooth transition that supports compliance and system up time (aka the longest operational horizon for your climate systems to function effectively).

Along with a versatile software platform, Polar has developed a system called Trakref to support the transition of the refrigerant from liability to asset with unique identifier tags to serialize historically unregistered assets in the system – these tools are available through our nationwide authorized dealer network.

Government regulations aside, refrigerant tracking and monitoring are more good ideas that insure a healthy bottom line. Industry will continue to find ways to reduce the impact that waste has on the bottom line. Waste can come in many forms – from unregistered losses to undocumented consumption, it is now essential to understand the metrics and deploy a system to insure accountability – so that you can insure longevity to climate system functionality, meet compliance goals and reduce waste.