Extreme heat: Opportunities for investors

Levers to reduce the costs and dangers of extreme heat

Heat is an invisible, and ever-increasing danger for the 210 million Americans (or 2/3 of the U.S. population) who live in counties vulnerable to threats posed by extreme heat–ranging from health issues to declining productivity to agricultural losses. Extreme heat killed over 2,000 people in the U.S. in 2023, and could cost the U.S. economy $100 billion annually in the future.

In this briefing, we profile six levers that private capital allocators can leverage to reduce the cost and danger of extreme heat:

1. Fortify our electrical grid to better withstand extreme heat
2. Fortify our built environment to better withstand extreme heat
3. Advance alternative cooling innovations that build heat resilience
4. Develop public-private partnerships that drive investments in cooling infrastructure
5. Finance cooling infrastructure with blended public and private capital
6. Scale insurance innovations that preemptively address extreme heat

Lever #1: Fortify our electrical grid to better withstand extreme heat

We can fortify our electrical grid to better withstand extreme heat. Summer 2024 was the hottest summer in world history, but the U.S. electrical grid was up to the challenge. As residents increased their demand for electricity with more air conditioning usage, the grid—boosted partially by renewable energy—avoided rolling blackouts. Increasingly, private sector innovations in more efficient renewable energy (like solar) and new forms of battery storage are fortifying the electrical grid by reducing blackouts, increasing reliability, and enabling the grid to meet demand during peak times.

Private capital has numerous opportunities to invest in innovations that can fortify the grid, and it has been incentivized to invest by recent legislation like the Inflation Reduction Act (though it is unclear how the new Administration might influence these policies). Here are five opportunities for investment:

• Invest in power generation through renewable energy systems: Renewable energy sources like solar, wind, and virtual power plants can reduce the demand on the grid during heat waves. According to the Solar Energy Industries Association (SEIA), there are 7,290 large scale solar projects in their database across the United States.
• Invest in transmission technologies through large-scale and small-scale transformers: The efficiency of transmission lines is reduced during heat waves, and upgrading such hard infrastructure to be heat resilient can lessen the impacts of heat waves.
• Invest in energy storage at the grid level: SEIA is tracking 1,040 energy storage projects across the U.S., with private capital deploying billions of dollars every year to finance such projects.
• Invest in small-scale modular nuclear reactors: Small-scale nuclear reactors can diversify energy sources and reduce grid strain from non-renewable power sources. Mike Goff, acting assistant secretary for the Office of Nuclear Energy at the Department of Energy in the outgoing Biden Administration, said that the U.S. needs to triple its nuclear fleet to keep pace with demand by 2050. Small modular reactors can cost a fraction of the cost of conventional reactors. One company, GE Vernova, estimates a small modular reactor will cost $2-4 billion, compared to the $10-15 billion for a large nuclear plant.
• Invest in grid hardening to protect poles and power lines:  Hardening can include switching to concrete pools, putting power lines underground, and clearing trees away from lines, which helps with speed to restoration of power. Data-driven grid hardening approaches from companies like AIDash provide insights on creating a grid hardening plan. And, innovations in materials can help reduce costs and resources needed to stabilize the grid. For example, composite poles produced by RS Technologies have an 80-year service life with little to no maintenance.   

Lever #2: Fortify our built environment to better withstand extreme heat

We can fortify our built environment to better withstand extreme heat, and the private sector has a number of levers to pull:

• Use materials that redirect heat: Cool roofs are designed to reflect, instead of absorb, more sunlight than a conventional roof, leading to lower building temperatures. Conventional roofs can reach temperatures of 150°F, but under the same conditions, a reflective roof can stay more than 50°F cooler. Companies like Enviroshake and Landmark have developed roofing products with cooling technology. Likewise, Nantoech’s Cool Roof Coat has the potential to deliver an 88% reduction in heat roof transfer, lowering indoor temperatures by 25-45°F, resulting in a 49% reduction in HVAC costs.
• Design buildings in ways to keep spaces cooler: For thousands of years, buildings have been designed to keep residents cool, but much of western architecture has forgotten architecture, building materials, and cooling techniques still common in the Middle East aimed at reducing indoor and outdoor temperatures. For example, many structures throughout the Middle East use passive cooling techniques that harness wind, like barajeel wind towers. John Onyango, a professor at the University of Notre Dame School of Architecture, said that barajeel wind towers can lower temperatures by up to 50°F depending on how they are designed and the level of wind. Around the world, passive cooling architecture is catching on, and offers opportunities for ground-up development projects.
• Install cooling systems where none existed before: For today’s existing built environment, there are opportunities to expand the installation of cooling products across the market: from single-family homes, to schools, to warehouses. The Compound Annual Growth Rate (CAGR) for the HVAC market in the U.S. is projected to grow at a rate of 7.4% between 2024 and 2030. Meanwhile, as cooling systems are installed more widely, there is also an imperative to implement cooling systems that use less energy.

Private companies also have a duty to their employees to ensure they’re able to work in safe conditions. As individual states begin to enforce laws aimed at protecting workers from extreme heat, corporations have a responsibility to upgrade their existing commercial and industrial facilities to protect workers from heat-related health risks.

Lever #3: Advance alternative cooling innovations that build heat resilience

New cooling technologies can build heat resilience without major public or private investments. The private sector is showing that localized, low-tech innovations can be instrumental in keeping people cool, while also using less energy and costing less money.

• Heat pumps: Heat pumps, an alternative to air conditioning that uses less electricity, has grown in popularity in the US in recent years and are growing in market share, but roll-out and adoption remains constrained by high costs.
• New cooling innovations: There are a number of new innovations in the cooling space. One example is thermoelectric technology, in which cooler temperatures are generated by moving heat from one side of a thermoelectric chip to another. Another is bladeless outdoor fans. Both innovations come from a company called Phononic, a cooling innovation company. Researchers are exploring air conditioning without refrigerants, and 3-D printed bricks that draw heat out of an area to cool it. 
• Everyday products: Everyday products like mattresses and t-shirts also have a role in keeping people cool during extreme heat. For example, Eight Sleep has developed a (pricey) mattress that can keep people cool regardless of the ambient temperature. LifeLabs has developed thermally efficient textiles that can reduce body temperature by up to 3°F.

Lever #4: Develop public-private partnerships that drive investments in cooling infrastructure

At a city and neighborhood level, public-private partnerships are turning heat islands into greener and cooler environments. To combat extreme heat, municipal governments can build green spaces, plant trees, reduce the effects of heat islands, and build cooling centers, but private capital has a role to play in contributing to public-private partnerships positioned to reach greater scale. Here are two examples:

• Distributed district cooling: In Singapore, public and private actors came together to pilot a Distributed District Cooling system. In a distributed district cooling system, a central chilling plant cools water that is then distributed throughout the district for cooling.  The project leveraged private capital to retrofit 14 existing buildings’ infrastructure to be able to accommodate this shared water resource. As the water warms, it is then sent back to the plant for closed-loop reuse and re-cooling—an elegant and equitable solution rooted in the principles of collective action. A feasibility study found that the site could reduce its energy usage by up to 17%.
• Tree & Shade Master Plan in Phoenix: Phoenix has developed a master plan to expand its tree canopy and shade cover across the city, and it’s partnering with the private sector to get it done. For one urban reforesting project, they leveraged $500M of private capital to transform 595 acres of deteriorated river bottom and adjacent land into a lush riparian corridor with miles of paved and dirt trails. Phoenix joins a number of other major American cities leveraging public-private partnerships to expand tree coverage across a city and reduce urban temperatures. They cite as inspiration public-private partnerships like Chicago’s Master Plan for trees 2050, New York City’s MillionTreesNYC, and the Million Trees in LA initiative.

Lever #5: Finance cooling infrastructure with blended public and private capital

Blended finance tools can unlock private capital to invest in cooling infrastructure. In a report by Duke University from earlier this year, Confronting Heat Challenges—Cross-Sector Strategies for National Resilience, researchers recommended using a variety of blended finance tools to support heat mitigation strategies:

• Bundle smaller projects together: By bundling smaller projects together, researchers identified a path to get more heat mitigation strategies, programs, and infrastructure funded. Smaller projects often don’t get funded because they’re too small to justify the time and due diligence costs needed for public and private capital to move off the sidelines. 
• Expand State Revolving Funds (SRFs): SRFs can now be expanded into “soft” infrastructure, including community-based heat resilience projects. SRFs are most commonly used to provide capital for “hard” public infrastructure projects, but the Safeguarding Tomorrow through Ongoing Risk Mitigation (STORM) Act of 2021 established a new fund specifically for climate resilience, which includes extreme heat mitigation. SRFs can be a powerful tool in funding such soft programs tied to extreme heat resiliency.
• Leverage green banks: Green banks are financial institutions designed to accelerate private investment in clean energy and climate resilience. They represent important partners to SRFs in mobilizing capital. According to the report, “this collaboration can help bridge the gap between public funding and private investment, ensuring that communities have the financial tools needed to protect themselves from the increasing risks associated with extreme heat.”

Lever #6: Scale insurance innovations that preemptively address extreme heat

New insurance models can preemptively address extreme heat. The researchers from Duke also identified parametric insurance innovations as another crucial strategy in heat resilience. Unlike traditional insurance, which relies on claim assessments, parametric insurance offers quicker payouts based on predefined triggers, like exceeding a certain temperature threshold. 

• Adopt parametric insurance products: In advance of an extreme heat event, a parametric insurance product could be tied to a trigger where a municipality would receive funds to support cooling centers, prepare healthcare response systems, and other interventions. Such anticipatory insurance payouts can be important stopgaps until additional post-event insurance payouts make their way through the system. So far, there have been a few examples of such innovations internationally.
• Scale community-based insurance: Community-based insurance pools represent another strategy where a community decides to collectively contribute to a shared, self-insured insurance pool that can invest in proactive heat mitigation strategies, establish a buffer against financial losses, or complement existing insurance that might not be as comprehensive as a community determines is necessary. Such community pools have been used in other disasters—like fires—but could be adapted to extreme heat.

Conclusion

Across all the strategies outlined above, federal policies have a role to play to incentivize private sector investments and innovations. From revolving loan funds to government rebates, there are opportunities for the government to build heat resiliency into communities. This can start with policies that set clear standards for building codes, energy efficiency, and urban planning. Such low-hanging-fruit can drive private sector investment in the most proven heat mitigation technologies.

Extreme heat deserves greater attention as an increasingly common and dangerous type of disaster. While its impacts and costs are predominantly health related, its prevention levers are tied to critical infrastructure, the built environment, and public-private partnerships. The first step to cooler communities will require an honest recognition of the danger heat poses and a willingness amongst public and private capital allocators to invest in proven solutions.

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