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In recent years, the cost of HVAC equipment has increased significantly, driven by factors that include rising raw material prices, supply chain disruptions, higher consumer demand, and labor shortages. Regulatory changes are also a factor, as stricter environmental rules have necessitated the adoption of new low-GWP refrigerants and energy-efficient technologies, which are often more expensive to produce.

The introduction of mildly flammable (A2L) equipment is a prime example of the new regulations. As part of the AIM Act, manufacturers will no longer be allowed to produce R-410A systems after December 31, 2024, prompting the rollout of new A2L units this year. While these systems promise a reduced environmental impact, they will likely come with a higher price tag, putting additional pressure on consumer budgets.

Going Up, Up, Up

REPAIR OR REPLACE: In 2024, Empire Heating & Air Conditioning is seeing more replacements than repairs. (Courtesy of Martin Hoover)

Homeowners are already experiencing some sticker shock when it comes to buying new R-410A systems. Since the beginning of 2020, equipment prices have gone up roughly 40%, but more importantly, the average system price has gone up almost 100%, said Martin Hoover, co-owner of Empire Heating & Air Conditioning in Atlanta, Georgia. He noted that the average system was just over $6,000 for a residential replacement at the beginning of 2020, but today, the average price of a new residential system replacement is closer to $12,000.

“Part of that increase has been the equipment pricing, but more importantly, it’s all the other issues to take into effect,” he said. “The implementation of the new EPA minimum efficiency standard and the cost of refrigerant has quadrupled, mostly due to the phase down and the coming transition to A2L refrigerants. The peripherals that go with the system have increased greatly as well. Copper line sets, PVC piping, glue, tape, mastic, ductwork, screws, condenser pads -- almost everything involved with the installation has increased. Add to that huge increases in insurance of all types, labor that has to keep up with inflation to maintain a solid workforce, benefits, training, and more have all resulted in big increases that result in higher consumer prices.”

Click graph to enlarge

FIGURE 1: The red line shows the annual change of the PPI for the HVACR industry, and the dark line shows the annual sales growth for HARDI distributors. (Courtesy of HARDI)

Hoover has not yet heard from his vendors about the pricing for the new A2L units, but he is assuming that prices will increase and that, most likely, the remaining supply of R-410A units will become more expensive as supplies dwindle. And he would be correct. During their first-quarter earnings calls, several manufacturers confirmed that A2L equipment will not only be more expensive than R-410A units, but that they are also likely to increase the price of any unsold R-410A systems in 2025.

That said, when the management of publicly traded companies are asked about pricing strategy during these conference calls, they often answer in a diplomatic range that will not compromise their competitive position, said Loftus.

“The general theme has been the new equipment has additional components to satisfy the new regulatory requirements so will be priced higher to cover the cost of those components,” said Loftus. “It sounds like the net effect of those component costs will produce an increase higher than the long-term annual increase of the PPI. So we expect the PPI to have a modest upward bias from the historic range during the transition period. Those price increases will be passed through, as seen in Figure 1, but the net effect will be a curve that is significantly more subtle than what we experienced in 2021 to 2022.”

OEM Expectations

During its first quarter earnings call, Lennox CEO, Alok Maskara, stated that the company is fully prepared and on schedule for the upcoming refrigerant transition, adding that the new R-454B equipment will be more expensive.

“We are currently transitioning our raw material inventory to facilitate the product launches, and we plan to start shipping the new low-GWP refrigerant product later this year, in time to meet expected demand,” he said. “We anticipate a price increase of 10%-plus for the new product line…Looking ahead, we foresee 2024 as predominantly an R-410A refrigerant year. As we move into 2025, we expect the demand for the new low-GWP product to reach approximately half to two-thirds of the end market.”

The price increase for the A2L equipment is in line with what the company stated last year, said Maskara, noting that in 2023, Lennox indicated that the price increase for its R-454B equipment would be about 15% over two years, 2024 and 2025. The company implemented increases in the first quarter of 2024, he noted, so nothing has changed in terms of their pricing strategy.

Lennox CFO, Michael Quenzer, added, that as always, Lennox will come out with a new price increase next year on the R-410A systems. “Depending on where the cost of that gas goes, which we expect to go up significantly, it could also have a pretty large increase similar to the R-454B product, but we're monitoring that. And there will be another price increase on that next year for the 35% of the [R-410A] demand.” He added that rising costs for copper, aluminum, and steel could also affect the cost of all equipment next year.

At Carrier’s first quarter earnings call, David Gitlin, chairman and CEO of Carrier, noted that the company expects a price increase of 15% to 20% over two years. That includes low double-digit base price increases, R-454B versus R-410A, as well as a few percent of base price this year and next, he said.

“We’re already selling the R-454B units -- we shipped our first in the first quarter [of 2024],” said Gitlin. “Obviously, it won’t be that much over the short term, but we already have a price point in the marketplace for them, and we feel confident in the 15% to 20% over two years. I had previously said that we thought that about 20% of our mix this year would be R-454B, but I think it’s going to be less than that. To the extent we ship less R-454B, I think that for the year, will be offset by probably a little more pre-buy than we thought on the R-410A.” He expects market share for A2L products in 2025 to be higher than 60%.

Gitlin added that Carrier’s strategy with the A2L transition is to get way out in front, as the company does not want any technical, producibility, or capacity issues as the end of the year draws near. “Our number one priority is to support our customers to make this a seamless transition, so we are getting way out in front, not only on shipping the product, but on training our dealers,” he said.

Trane chairman and CEO, David Regnery, commented in their first quarter earnings call that the company does not yet have a lot of R-454B product in the Americas. “We'll be launching those products as we go through the year, but we're not anticipating a lot of volume in 2024, and we'll see how the year progresses for 2025. But I just want to make sure everyone's clear. We've been using R-454B in Europe for over two years now, so this is not a new refrigerant for Trane Technologies. We're very comfortable with the refrigerant and we've had in our portfolio for some time.”

As for the cost of the new units, Regnery said that Trane will announce pricing when products are released, saying that, “What you've heard from others is probably in the ballpark as to what to expect from a pricing standpoint. We're going to see how the year plays out. We don't see a big pre-buy happening at the end of the year for R-410A. Nobody wants to get stuck with inventory. We have to watch and see how the balance plays out, and we'll give you an update as we move through the year.”

Obviously, the rising cost of new equipment has also been a concern for contractors, who are worried that higher prices will cause some customers to repair rather than replace their systems. Both Lennox and Carrier stated in their earnings calls that they have not yet seen that happen, and Hoover agrees.

“In 2023, we did see a trend towards more repair than replacement, but in 2024, we are actually seeing a trend toward replacement more than repair,” said Hoover. “This may be driven by the impending change in refrigerant and anticipation of more increases in the near future. I do anticipate an increase in equipment pricing but don’t have hard data on that just yet.”