As the world encounters another hot summer, cooling is becoming an even hotter topic. Cooling demand is skyrocketing, driven primarily by the Global South and fueled by rising income levels, population growth, urbanization, and increasing global temperatures.

For investors, a booming future market — with most AC purchases yet to be made — opens the opportunity to invest now in superior sustainable cooling solutions that will shape our future.

One such solution is solid-state cooling — a technology class with the potential to revolutionize the cooling industry. Why? Solid state cooling technology can offer improved efficiency, reduce emissions and energy costs, and eliminate the need for super-polluting refrigerants compared to incumbent century-old vapor-compression technology.

In our first article of this series, we explained what solid-state cooling is, the promise it holds, and why it can be an important solution to the cooling challenge. In this article, we’ll dive into its market potential, market drivers, and what it will take to get these innovative cooling solutions to commercialization and scale.

Since the advent of modern air conditioning in the late 19th century, vapor compression has remained the dominant technology powering the global cooling market. This refers to first compressing and condensing a refrigerant, releasing heat in the process, and then expanding and evaporating it to absorb heat and produce a cooling effect. Today, approximately 95 percent of all cooling equipment relies on the vapor compression cycle.

The efficiency improvements associated with this technology have been slow and incremental and are effectively capped by the “Carnot Limit” — determined by the temperatures of the hot and cold reservoirs used by the cooling system.

Because they are not dependent on moving heat between reservoirs, solid-state technologies have already demonstrated much higher potential performance ceilings. The graphic below shows that some solid-state technologies can have a coefficient of performance (COP) above 10, almost double the COP of incumbent AC systems, where the best score is roughly 5.5.

The challenge, of course, is to translate this potential into reality. Innovators are working to do just that (i.e., to achieve system-level performance comparable to or higher than their vapor compression counterparts). The team at Pascal, for example, has recently demonstrated that barocaloric materials can deliver effective cooling and heating at pressure levels comparable to those used in conventional air conditioners.

This is an exciting breakthrough in terms of material performance, and it offers a potential pathway toward cooling systems that are energy efficient and easier to design and integrate over time with standard components. Similarly, thermoelectric systems can achieve precision cooling without moving parts — no pistons, compressors, or hydraulics — simplifying the components needed.

The other major advantage of solid-state solutions is that they do away with refrigerants, which often have very high global warming potential (GWP) (for example, R-134a, one of the most common refrigerants used today, has a GWP 1,430 times more potent than carbon dioxide) and are increasingly subject to regulatory phase-outs.

In sum, while industry incumbents will likely continue to move the needle on vapor compression systems in response to regulatory and market pressure, solid-state cooling has the potential to outpace these improvements. There is step-change potential associated with its refrigerant-free operation, higher performance ceiling, and streamlined system design.

The global cooling market is undergoing a dynamic transformation, creating unprecedented opportunities for sustainable cooling solutions, like solid-state technologies. The global active cooling sector, which includes air conditioning (AC), refrigeration, and mobile cooling, was valued at an estimated $633 billion in 2023 and is expected to top $1 trillion by 2050. Much of this growth will be driven by developing economies, which will comprise 60 percent of this demand, creating a $600 billion market in 2050 — more than doubling from its $272 billion size today.

The global cooling market is large enough and segmented enough that solid-state cooling startups could find sizeable beachheads (starting markets). Take two Third Derivative portfolio companies as examples. MIMiC, based in New York, is developing thermoelectric solid-state systems that can replace the standard packaged thermal AC (PTAC) units you often see in hotel rooms and many multifamily buildings. For US hotels alone, this could be a market worth more than $7 billion. Magnotherm, based in Darmstadt, Germany, is developing magnetocaloric refrigerators for supermarkets, grocery stores, and food and beverage retail. In Europe alone, this is an estimated $17 billion market. Even carving out a niche and targeting a few specialized segments in this market presents a multi-billion-dollar opportunity for young, innovative companies.

While the market for cooling solutions is booming overall, some dynamics are creating particularly favorable conditions for solid-state cooling. For example, there is a push in the regulatory landscape that may support the advancement of solid-state cooling technology. Most directly, regulations that tighten allowable refrigerant GWPs — largely being driven by the EU (building on the accelerating global effort to phase down high-GWP synthetic refrigerants)  — would benefit solid-state as it’s free of potent, high-GWP refrigerants.

Additionally, efficiency standards and incentives, including minimum energy performance standards (like Japan’s Top Runner program which sets performance standards for a range of appliances — labeling the most efficient AC and refrigeration models on the market, encouraging competition between companies to be the “Top Runner”), can support efficient solid-state cooling systems. Cities, states, countries, or regions with strong efficiency standards or incentives could become strong beachhead markets for solid-state cooling startups.

All in all, there is a perfect storm brewing to disrupt a global cooling market that has not witnessed a radical and environmentally sustainable innovation for nearly a century — either though innovations in vapor compression systems or alternative approaches, like solid-state cooling.

As a nascent technology, solid-state cooling systems are still relatively scarce in the market. While the efficiency potential is significant, there remains a wide gap between having an efficient material and building an efficient, integrated system. Startups often face challenges when it comes to system integration — combining materials with components like heat exchangers, controllers, and power supplies, without significant losses in efficiency. For example, the most efficient elastocaloric materials right now have a material efficiency coefficient of performance (COP) above 10, but once fully integrated into a cooling system, COPs will likely be more comparable with vapor compression systems to start (a COP of around 3).

Material fatigue is another critical hurdle for some approaches, namely barocaloric and elastocaloric, which generate cooling through the repetitive stretching or compression of materials. Consumers expect their air conditioners and refrigerators to last 15 years or more, and solid-state systems must demonstrate long-term reliability under continuous cycling.

Supply chain limitations — particularly for magnetocaloric systems, which rely on rare earth materials for permanent magnets — pose additional challenges. However, several solid-state startups are proactively working to leverage existing supply chains for components, reducing supply chain risks and offering a pathway toward sustainability in the future.  AI can play a role in material discovery, identifying new, more promising materials for solid-state cooling. One Third Derivative portfolio company Matnex is working on just this — identifying and scaling new materials using AI and machine learning — which could support solid-state innovators as well.

Above all, the most significant challenge facing solid-state cooling today is cost. Like many emerging technologies, solid-state systems will initially come at a premium price, though starting at a higher cost is typical for new technologies.

Solar panels, for example, were once over 100 times more expensive than they are today. With economies of scale, optimized manufacturing processes, and improvements in the cell technology itself, costs fell dramatically. The historical “learning rate” — the fall in costs associated with each doubling of production volumes —  for solar panels is 20 percent.

Given the urgency of climate change and the global need for efficient, sustainable cooling, there are strong reasons to believe that market forces will drive adoption and therefore open a path for cost reductions for solid-state cooling technologies in the near future.

Some startups are already demonstrating cost effectiveness. For example, UK-based startup Anzen Walls, supported by Third Derivative ecosystem partner Carbon 13, is developing thermoelectric heat pumps for homes that target a price comparable to or lower than traditional heat pumps.

Some recent partnerships between solid-state cooling startups and original equipment manufacturers (OEMs) such as Carrier, Copeland, and Trane show opportunities to cut costs and make solid-state more affordable. OEMs are very experienced in system and cost optimization and have access to large-scale distribution networks that would rapidly streamline this process. If startups can demonstrate performance and reliability, OEM partners can help drive down costs while offering access to established distribution networks, manufacturing infrastructure, and customer relationships, thereby paving the pathway for commercialization and scaling of these technologies.

There is a collection of exciting startups in the solid-state cooling space. The typical path to market holds true for solid-state cooling as well:

1. Refinement: continued product performance refinement with grant and VC support.
2. Validation: startups will build pilot manufacturing facilities on their own to validate performance with real-world pilots. Alternatively, early partnerships with manufacturers builds confidence and can open doors for future investment or even acquisition. This approach isn’t new to this sector. In 2020, Emerson acquired 7AC – a startup developing more efficient air conditioning technology through liquid desiccants – after collaborating with the company to commercialize the new technology.
3. Demand: market interest indicated through demand signals. This is already appearing in the space – Walmart and IKEA have both committed to significantly reducing, or using no, GWP refrigerants.
4. Partnerships: a faster, scalable path necessitates partnerships with manufacturers through licensing, direct sales or components, joint ventures, or acquisition to bring their innovations to market. Manufacturers in the cooling space are rather consolidated and very well-established – they not only take up major market shares, but they also have deep expertise in system design, cost reduction and market access. Additional partnerships with testing bodies will need to be established for standards to be developed for solid-state cooling and integrated into existing standards.

Solid-state’s potential has not gone unnoticed—established manufacturers are actively monitoring and engaging with the space. For example, Carrier Ventures recently invested in elastocaloric startup Exergyn, while Copeland has backed thermoacoustic heat pump startup BlueHeart Energy. These moves signal growing industry confidence in solid-state technologies as the next frontier in sustainable cooling.

Solid-state technologies are emerging as a potential frontrunner to disrupt the cooling market, but what gives solid-state a “right to win” or an unbeatable edge in the market? Some aspects are yet to be fully proven, but there are two exciting edges that solid-state offers: the elimination of potent refrigerants, and the potential for very high-performance ceilings. If the performance is actualized (for example, achieving system COPs of at least 3), solid-state will likely have a right to win in certain beachhead markets, and use those footholds to scale beyond.

For investors, this presents a timely opportunity to place an early bet on a rapidly evolving technology with major promise. Interest from major OEMs signals strong industry momentum toward a new era of cooling. Looking ahead, two key areas to watch are how startups improve performance and drive down costs — with effective systems integration being key to both. We see a clear opportunity for early-stage capital — especially pre-seed and seed investments — to play a pivotal role in supporting startups as they scale and commercialize their innovations.

The authors would like to thank Blue Haven Initiative for funding this research, and Ankit Kalanki, Chetan Krishna, and Shruti Naginkumar Prajapati for their contributions.